2015Q1 Pershing Square Holdings, LTD., Q1 2015 Earnings Call, May 18, 2015

CONTENTS
CALL PARTICIPANTS
PRESENTATION
QUESTION AND ANSWER
Pershing Square Holdings, Ltd.
ENXTAM:PSH
FQ1 2015 Earnings Call Transcripts

Monday, May 18, 2015 3:00 PM GMT
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S&P Capital IQ Estimates**
**Estimates Data not available.
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COPYRIGHT 2015, S&P CAPITAL IQ, A PART OF MCGRAW HILL FINANCIAL.
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PERSHING SQUARE HOLDINGS, LTD. FQ1 2015 EARNINGS CALL MAY 18, 2015
Call Participants
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EXECUTIVES
David Klafter
Jordan Rubin
Paul C. Hilal
Partner
Ryan Israel
Unknown Executive
William Albert Ackman
Chief Executive Officer and
Portfolio Manager
William F. Doyle
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Copyright 2014, S&P Capital IQ, a part of McGraw Hill Financial.
Presentation
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Chief Executive Officer and Portfolio Manager
Okay. The purpose of the call is really to update you on the portfolio in terms of portfolio events and give
you an opportunity to ask questions. We will not be able to take questions with respect to Pershing Square
Holdings because this is a call that's open for U.S. investors as well.
Briefly on performance. First quarter, the funds were up between 3.4% and 3.5%. Month to date, month
to date, why is that a relevant number, Tony [ph]? You're confusing me. Year-to-date, about 6% to 6.3%.
That's through May 14. Our portfolio today is largely fully invested. The biggest contributors for Q1 were
Allergan, 3.9%; Howard Hughes at 150 basis points; Zoetis, 80 basis points; Air Products, 70 basis points;
Platform at 60 basis points, for a total of 150 basis points of gross performance, positive performance,
offset by about 350 basis points of losses. The majority of that came from a short position in Actavis,
which was a hedge against the Actavis shares we were to receive -- or some of the Actavis shares we were
to receive in the Allergan merger; 140 basis points from the appreciation of Herbalife; and some nominal
changes in other positions. Today, we are approximately 87% long, about 5% or 6% short, net exposure
about 81%. That's actually as of the end of the quarter on March 31.
In terms of significant close positions, we exited our position in Allergan and covered our short position
in Actavis with Actavis shares that we received when the merger between Valeant and Actavis closed. We
originally intended to hold about 1.35 million shares of Allergan, but the uncovering of a new investment
and the requirement for additional capital, we exited the rest of our Actavis position after the end of the
quarter.
What I'm going to ask the team to do is go through the portfolio with a fairly brief summary of significant
events during the quarter. We have received a large number of questions from investors, and we're going
to spend a majority of the call answering those questions.
And with that, I'll turn it over to Jordan for an update on Valeant. Valeant, obviously, we spent last year
working very closely with Valeant. We expected to become a very shareholder of Valeant by making a joint
bid to acquire Allergan. That was cash and stock, and Pershing was going to take 100% cash, freeing up
liquidity for other shareholders. Ultimately, Actavis bought the business, and we did not become a Valeant
shareholder. But the moment that we were able to, we began building a stake shortly after the turn of the
year in Valeant and then used the liquidity behind the announcement of the Salix acquisitions to buy our
entire position at cost approximately 20% of capital.
With that, Jordan, why don't you tell us about Valeant.
Jordan Rubin
Sure. Thank you, Bill. So Valeant is an approximately $80 billion market cap specialty pharmaceutical
company with leadership in ophthalmology, dermatology and gastroenterology. We first built [ph] the
relationship with Valeant, as Bill mentioned, in 2014 during the Allergan process.
Historically, Pershing Square is not investing pharmaceutical companies because in general, these
companies have products which are not durable and growth which is not predictable. With the opportunity
in early 2014 signaled [ph] extensive diligence on Valeant as we were considering partnering with the
company. It was during this diligence that we first realized that Valeant is very different than a traditional
pharmaceutical company. So for example, the majority of its products are durable. The company has a
track record of organic growth, and the company has a strong culture of cost discipline. In addition, we
learned that the pharmaceutical industry is very fragmented and efficient and that Valeant has done a
good job over time of using acquisitions as a tool to extend its unique operating model across additional
assets.
Unfortunately, however, as Bill mentioned, during the Allergan process, we were unable to acquire shares
in Valeant. However, following the conclusion of the Allergan process, we acquired shares in the company
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earlier this year. And in February, we acquired our first shares of the company at approximately $161
per share and bought the shares, of course, with the comments of our initial diligence. But in addition,
we had the benefit of seeing the business since performance over the course of 2014 validate our initial
thesis. So for example, we watched the company successfully complete the integration of Bausch + Lomb.
We watched cash accounting adjustments decline significantly. We saw the company receive approval
and successfully launch several important products. And we saw organic revenue growth accelerate
significantly.
In terms of recent events, as Bill mentioned, on April 1, the company completed or closed the $16 billion
transaction to acquire Salix. We're very excited about the transaction. We actually acquired the majority
of our shares following the announcement of the acquisition. Also, in April, the company reported first
quarter earnings where they reported among other items 15% organic revenue growth, marking the
third consecutive quarter of at least 15% organic growth, revenue growth. Also on the quarterly call,
management reiterated their confidence in achieving at least $7.5 billion of EBITDA in 2016, which
translates into roughly $16 of earnings per share in that year.
In terms of valuation, our view is that investors today are paying something -- a modest discount to fair
value for the Valeant-based business, which means they're getting Valeant's drug pipeline and the value
of all future acquisitions, which we call the company's Platform Value for free. For more information on
how we value the company's platform, please review a presentation that Bill gave earlier this month at
Ira Sohn. So today, we own about 20 million shares in the company or 5.7% of the business. We're the
second-largest shareholder, and we look forward to working with management to continue to improve the
value of the business.
Thanks. Paul, if you can just give us a brief update on CP. Obviously, it's well known to our investors.
We've owned it for 4 years. Significant events going forward.
Paul C. Hilal
Partner
Sure. All right. Thank You, Bill. Fundamentally, during Q1, we saw continued progress on Canadian
Pacific's operational transformation. We saw a major strike that could have been crippling avoided. We saw
volume growth with pricing strength. We saw strong financial performance, and we heard the company
reiterate its 2015 guidance and its 2018 targets.
In terms of operational progress, train speeds this quarter were up 22%. Train lengths were up 8%,
terminal dwell clients 14%, and fuel efficiency improved 5%. This is -- we're all very heartened by this
progress, but perhaps the most important thing that happened in the quarter was the problem that
management succeeded in avoiding, which was the potentially crippling strike of the train conductors
and engineers. The Teamsters union of conductors and engineers represent about 20% of CP's entire
workforce. And without those guys on the job, the railroad can't operate. Canadian Pacific, over the
past 3 years, has been preparing for expiration of this union contract and had trained a lot of nonunion
employees to operate the trains. Thus, when these employees went on strike, CP was able to operate and
ship a full 70% of its normal volume.
CP has generally excellent union relations. With every other union other than the Teamsters, CP has
renewed its union contracts early. It's renewed them for unprecedented lengths of time, often 5 years.
And the contracts, as negotiated with those unions, were voted in with approval rates from the union
members at levels that have never been seen before in the company's history. So generally, very solid
union relations. The Teamsters has been a trouble point, but the members of the union, in the context of
the constructive deals, CP has negotiated with the other unions, and in the context of seeing how well CP
was prepared for a strike, ended the strike just 2 days after it began, sparing CP a huge disruption. So
sometimes the news is in the noise. Sometimes the news is in the silence. And in this case, it was in the
silence.
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Despite the union disruption and other challenges, CP saw volumes grow 5% over the quarter in the
context of strong pricing of up 4%. And combined with the operational progress, reducing costs, we saw
impressive financial performance from the company. Revenue was up 10% year-over-year. And despite the
company moving 5% more freight than it did the prior year, it saw FX-adjusted operating expenses down
a full 900 basis points. Combined, this translated into an operating ratio of just 63.2%. This is the lowest
in the rail industry. It's the second consecutive quarter that CP has operated more efficiently than every
other railroad in North America. Very impressive considering they were by far the least efficient railroad
just 3 short years ago. On the bottom line, CP delivered an earnings per share of $2.26.
Management has reiterated its 2015 guidance of 78% revenue growth and a 62% operating ratio or better
and 25% EPS growth. They also reiterated their 2018 targets, which called for $10 billion of revenue in
2018 and an operating ratio of between 58% and 63% -- 58% and 63%. If you run that through your
model, that gets to a $17 earnings per share number in 2018, and that's before the effective buybacks.
As most of you know, CP is continuing its share repurchase program. CP repurchased about 6% of the
company last year at CAD 199. This compares favorably with the average prices over the course of that
year and today's $215 share price. We believe that CP is run -- like a number of our other companies, is
run by a superlative management team and at these prices presents an attractive risk-adjusted return.
Thank you, Paul. Brian [ph], update on Air Products.
Unknown Executive
Sure. So Air Products continues its transformation under its new CEO, Seifi Ghasemi. As a brief reminder
for the folks on the call, the company aims to improve its operating margins from about 15.5% to 22.5%,
which is a 700 basis point improvement in operating margins. And half of this is expected to come from
SG&A and overhead and the other half from operational and productivity-related improvements.
Performance thus far under Seifi's brief tenure has been very impressive. During the first 3 quarters that
the company has announced, results earnings per share are up in the mid-teens percentages, including
their fiscal Q2 numbers, which were just announced several weeks ago. During fiscal year second quarter,
which ends in March, the company grew earnings per share 17% despite a 7% headwind from FX.
Underlying improvements in the business were thus 24% year-over-year. And with an operating margin
of 18.3%, margins are already at the highest level in decades in Seifi's first 9 months on the job. So, so
far, the performance has been fantastic. But notably, 60% of the EBIT improvement in the business over
the last 6 months has actually come from the company's noncore Performance Materials business, and
we think the vast majority of the $700 million of profit improvement potential from the company's core
industrial gas business remains.
The company has already taken actions to reduce headcount by 1,100, most of which is coming out of
the bloated corporate infrastructure at the company's Allentown headquarters, but much of these actions
have not yet fully flowed through to the P&L of the business given the notification that the company has
given employees and given the delays in actually executing on these headcount reductions in places like
Europe where the Works Councils require 6 to 9 months to work out severance and to actually terminate
employees that its positions will no longer be needed.
So importantly, the progress has been very good thus far, but a lot of the opportunity for improvement
remains. The company reaffirmed its earnings per share guidance for the year, which calls for 10% to 13%
earnings per share growth despite a 7% headwind. So at the higher end of its guidance, the company will
have shown underlying improvement in the business of 20%. And frankly, the benefits of its restructuring
are just now starting to ramp into the P&L. So we believe the near-term and longer-term future for the
company remains incredibly bright, and we're really excited about the transformation underway.
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So Brian [ph], stock price took off a few points or more than a few points on the earnings announcement.
Why did the market react negatively?
Unknown Executive
I think it could be a couple of things. I think -- Seifi produced extraordinary results in the first 2 quarters
of his tenure, and there was an expectation that he would always sort of massively outperform the
guidance that the company had put out. Obviously, during this quarter, the company faced some
headwinds that they hadn't previously been experiencing, including from foreign exchange, which has
really sort of picked up in the last quarter as compared to the prior 2 quarters of Seifi's tenure. But
notably, I'd say after the stock declined modestly on the earnings announcement, Seifi actually bought $3
million of stock, taking his out-of-pocket purchases to date to $17 million in total. He remains confident,
as we do, in the longer-term story year. The results for the quarter were good, I would say, but it didn't
blow out expectations. And perhaps short-term trading was taken place, hoping that Seifi would massively
outperform The Street's expectations.
Great. Thanks, Brian [ph]. So Bill, just a brief update on Zoetis. Obviously, Bill is on the board of
Zoetis. Paul and I are on the board of CP. We obviously keep our remarks to just the publicly available
information. Go ahead, Bill.
William F. Doyle
Sure. So just to remind everyone, at $4.8 billion in revenue last year, Zoetis is the largest manufacturer
of medicines for animals. That business is split about 60-40, 60% for livestock, 40% for the veterinary
market for pets.
We like this business for a lot of reasons. First of all, strong underlying trends in the industry as population
grows and protein consumption rises. The only way to create that protein is to put animals closer together,
and that means they require more medicine. And secondly, as populations emerge into the middle
class, they buy more pets, which means more vets and more pet medication. Like Valeant, this is a
pharmaceutical business that is much more durable than a typical business. It's not particularly subject to
patent cliffs. The products are very durable, and there's very little generic competition in the market.
We started acquiring our stake last summer, and we announced our position in November. We began
meeting with management and working with them. And ultimately, as Bill mentioned, I joined the board at
the beginning of the year. And further, we work with management to add a second new independent board
member. We announced that Paul Bisaro, the Executive Chairman of Actavis, joined in that role.
Importantly, in May 5, the company announced its Q1 results in another very strong quarter. The
currency-adjusted organic growth was 6%, and the adjusted net income growth was 14%. But perhaps
more importantly, the company also announced a new comprehensive initiative to simplify operations and
improve its cost structure.
This is sort of a natural evolution of the company. It was created as a spinout from Pfizer in 2013. For the
first 2 years, management focused on building the infrastructure required to stand as a separate company.
That effort is largely complete. And now they're very focused on making the sorts of changes that one
would expect now that they are stand-alone and can focus on their own operations.
So as part of that announcement, they will be eliminating about 40% of their SKUs. These are largely lowmargin, low-velocity SKUs that have just built up in the business over time. They're going to sell or exit 10
manufacturing sites around the world as they rationalize their manufacturing separate from Pfizer. They're
going to change their go-to-market model in 30 smaller markets where they'll no longer support a direct
infrastructure that might have made sense as part of Pfizer. But they'll go indirect or exit in these small
markets. They plan to streamline their workforce, principally non-customer-facing roles, by about 25% by
2017. This simplification will also allow them to focus their R&D on the smaller, more profitable portfolio.
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And the plan is projected to generate $300 million of cost savings by 2017. This, by the way, is on top of
about another 200 basis points improvement that will come from previously announced manufacturing
initiatives. All of this will leave the company with exit margins that will grow from today's 25% to
approximately 34%, which will be the highest in the industry. So we're quite pleased with the progress
both in terms of the underlying performance of the business and management's initiatives to improve the
efficiency of the operations.
Thank you, Bill. I'll just make a couple of brief comments on Howard Hughes. Howard Hughes is really not
a quarterly earnings story business. The way we think about it company is really the progress, think about
the value as it relates to progress towards the redevelopment sale, leasing and/or refinancing of existing
assets. And with respect to all of the above, the company made meaningful progress during the quarter.
In terms of things that are a little more quarterly sensitive, land sales, the company's operations in Las
Vegas were extremely strong. And I would say Houston was weaker than previous quarters because of
uncertainty about energy prices and implication for new office development in Houston. We own, I would
say, the best real estate in Houston. The Woodlands is the most desirable office market and one of the
most desirable residential market as well. Exxon is just in the process of completing a several million
square foot campus within a very short distance of The Woodlands, which will be a big demand driver long
term.
The stock has been somewhat volatile based on energy prices. We do not think that energy prices have a
particularly meaningful effect on the overall intrinsic value of the company and certainly on the long-term
basis and not even materially on a short-term basis.
The company's made a lot of progress selling condominiums in Hawaii, 80% plus or minus sold in the 2 -first 2 towers. The company is just now opening a marketing office for a new tower designed by Richard
Meier, kind of a globally recognized architect. This is an on the waterfront, right on the beach, kind of
high-end tower that will -- the company is going to start pre-marketing in the next very short period of
time.
Continue to have tremendous confidence in the team. They are starting to look at some new potential
investment opportunities beyond the existing portfolio. And we do think of Howard Hughes in many ways
as a platform similar to how we discussed about Valeant, the company with a very talented team that has
the capability to manage more assets than they currently do. And as they make progress with existing
portfolio and generate cash with existing assets, we expect they will find other things to do with their
capital.
So Randy [ph], why don't you just update us on Restaurant Brands.
Unknown Executive
Sure. So Restaurant Brands is a leading quick-service restaurant around the globe, and we think it has
a wonderful fully franchised business model, the opportunity to meaningfully expand its unit count and
restaurants around the world. And it's backed by its controlling shareholder, 3G, which we think is one of
the best in the business. After 3G acquired Burger King in 2010, they made numerous amounts of increase
in the restaurant units as well as significantly decreasing operating costs. After doing that, last year, they
announced the acquisition of Tim Hortons in August and completed that acquisition last December.
Tim Hortons is a leading quick-service restaurant in Canada with a particularly dominant brand and market
share in coffee. We think that Tim Hortons has the opportunity to meaningfully expand its unit count from
5,000 to something much greater than that in the future, particularly in the United States where it has
about 1/10 of the number of restaurants as its closest competitor, Dunkin' Donuts. And for perspective
internationally, Tim Hortons outside of the U.S. and Canada only has about 100 stores, whereas, for
example, Burger King has 7,000. So we think there's a lot of opportunity that the company can improve
upon in terms of its unit growth. In addition, we think that 3G can both improve the capital efficiency of
the business as well as reducing overhead costs.
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Just a few weeks ago, the company reported its first quarter 2015 results, which is actually the first
quarter that included the entirety of Tim Hortons for the quarter. The results were terrific on a lot of levels.
Same-store sales growth were at record levels for several years. The company continued a strong net unit
expansion. And at the same time, cost discipline was very great. With Burger King, one thing to note is
that same-store sales growth is actually 7%, which is at the highest level they've had in many years and
we think demonstrates that Burger King is finally starting to close what have been quite a gap between its
nearest restaurant peers in the U.S. So we're excited about that.
In addition, the company also dramatically reduced operating costs at Tim Hortons headquarters.
Operating costs were actually down 30% versus the prior year in just the first year of ownership, and 3G
also continue to reduce overhead costs at Burger King nearly 5 years after making that acquisitions. So we
continue to be very impressed with the progress they're making both at Burger King and how off of quick
start they are with Tim Hortons.
Overall, EBITDA growth as a result of the sales growth and cost controls were up nearly 20% on an
underlying basis, which is extremely exciting. However, because of the strengthening U.S. dollar, the
reported results weren't quite as impressive. Reported EBITDA growth is about 7%. So we continue to
monitor the currency situation. And fortunately, the company is making such tremendous progress that
overall, earnings are still growing at quite a rapid pace despite some of the headwinds with currency
they're facing.
What gives us confidence that Tim Hortons can grow in other markets around the world? Why does
3G believe -- they haven't made a lot of progress under the previous management. Why under 3G's
ownership can that change?
Unknown Executive
Yes, I think there are 2 things. First of all, 3G has implemented at structure at Burger King that was
very helpful, which is it partners with local operators who understand the markets very well. One of the
strategies that Tim Hortons had in the U.S. was they wanted to actually take on all of that development
themselves, both in terms of selecting the locations, building the restaurants, expending the capital. And
then they couldn't move nearly as quickly, and they also didn't know the market nearly as well as their
partners. In Burger King, 3G has been able to grow the unit cap by more than 30% over the last 4.5
years. And that's primarily resulting with having partners who they know around the globe that they can
work well and who know the local markets. And the advantage Tim Hortons has is that it can already take
advantage of the relationships that 3G has built with the Burger King. And anecdotally, the information 3G
is getting is that a lot of their partners are excited to expand into Tim Hortons restaurants.
It doesn't matter that Tim Horton was a Canadian hockey player? That's still going to play well globally?
Unknown Executive
Yes, I think it increases the market acceptance to appeal to an even wider variety of customers than the
Burger King.
Okay. Ryan, update us on Platform.
Ryan Israel
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Sure. So Platform's strategy is to allocate a large amount of capital to high rate of return by acquiring
a collection of specialty chemicals portfolios that will operate more efficiently under a large industry
platform.
Since the company began its life in the middle of 2013, Platform has made 4 acquisitions for a total of
about $7 billion. Last year, the company made 3 acquisitions for a total of about $5 billion, all of which
were focused on the agricultural solution segment. We think that the agricultural business has some
secular trends that are very attractive. The amount of farming land is flat, but the world's population
and food needs are growing tremendously, which means that the type of specialty chemicals that the ag
businesses that Platform has acquired sell will be increasingly important because they need to improve the
productivity of the available farming land.
The businesses that Platform has acquired make insecticides, herbicides and fungicides, and they focus
on niche markets and particularly emerging markets around the globe. And what's interesting about
that market focus is it is outside of the focuses in the largest players in the industry which focus on row
crops and rather than niche crops and focus primarily on the developing markets instead of the emerging,
which means that the high-returning assets that Platform has purchased have very favorable competitive
dynamics because they're playing away from some of the largest competitors we're focusing on.
Last quarter, for 2015, just a few weeks ago, Platform reported its results. And they were tremendous
for the first quarter of ownership with these assets. Revenue growth was up about 10% versus the prior
year on an underlying basis with strength that was both in the agricultural business as well as the first
acquisition of MacDermid, which is the industrial specialty chemicals business. And EBITDA growth was
about double that level as some of these synergies on the cost side came through on the Agricultural
Solutions business.
So the results were very strong on an underlying basis. Similar to the Burger King and Restaurant Brands
results, currency played a tremendous -- had a tremendous negative impact on the results. So while
EBITDA growth was about 20% organically, after taking into account the strengthening dollar versus
the local markets where Platform sells its products, reported EBITDA growth was only low single digits.
I think over time, as we price in the local markets to be able to offset some of the currencies and as
we continue to have increasing cost synergies, we think that we'll still be able to develop a high level of
EBITDA growth, which the company has publicly stated should be in the high single digits over time.
In addition to the quarterly results, a couple of other noteworthy items happened in the quarter. First,
management increased the synergy target just 1 month after it completed the last of the Agricultural
Solutions acquisitions, about 40%. So after getting inside the assets and really doing detailed study,
recognize there's more opportunity than initially thought on the cost side. And secondly, the company
held an Analyst Day in March, which really explained the detailed performance and competitive position
of the agricultural businesses, and that has resulted in a flurry of Wall Street coverage, which we think is
increasing the investor understanding of the story.
Thank you. So while I've got you, just a couple of notes on Fannie, Freddie, both business performance
and maybe kind of political status, trend, legal status.
Ryan Israel
So we continue to think that Fannie and Freddie are vital to allowing for the widespread and low-cost
access to the 30-year mortgage. 80-year history of success in that business and their market share has
actually continued to grow as private capital pulled away from the market ever since the financial crisis.
One thing that's interesting is while several years ago there was a flurry of calls for political reforms
ending Fannie and Freddie business models and then bringing in private capital, that has really died down
over the last several years. And we think the reason is that there's a growing acceptance that these
companies are here to say, that there is no alternative to the way that Fannie and Freddie have provided
credit guarantees for the average American. And so we think that the continued improving results of
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Fannie and Freddie further bolster that trend. While results have improved dramatically over the last
several years, the improvement in profits hasn't actually allowed Fannie and Freddie to shore up their
balance sheet and create a fortress balance sheet like they normally would be able to. And the reason
that the government has been taking 100% of all of their profits in the form of a net worth sweep since
the beginning of 2014. So the position this leaves Freddie and Fannie and it's despite improving results
and being the largest financial institution in the world collectively, they actually have the least amount of
capital with any financial institution in the world. We think that puts taxpayers at grave risk, and we also
think this is an untenable economic arrangement that is an unlawful taking of shareholders' property. Over
the recent months, there's been a growing chorus of media reports and even congressional investigations
into the actions that the government has taken in effectuating the net worth sweep. And we think that
this will continue to go over time as people recognize that Fannie and Freddie are here to stay and that
the situation is both -- for the net worth sweep is both legally and economically untenable. In the legal
front, there've been several positive developments in the Federal Court of Claims under Judge Sweeney as
there continues to be new documents that suggest that the government hasn't turned over all documents
that was required and also seems as if the plaintiffs are making progress in moving forward to continuing
with the trial. There was one small item earlier in the year that I think was misinterpreted by the media,
and that was there is a legal case in Iowa that was dismissed. And the reason why it was dismissed was
because it was very similar to a case under Judge Lamberth in a D.C. District Court that was dismissed
last September but is on appeal. So effectively, while there were 3 cases originally, the way to think about
it they're now 2 cases, one of which is on appeal and the other in front Judge Sweeney is progressing
nicely. In terms of an economic results for Fannie and Freddie that they reported last week, they continue
to improve their underlying performance. The core credit guarantee business of Fannie and Freddie
continues to be extremely strong. At the same time, their reported earnings of the businesses aren't
nearly strong, and that's because there's a mark-to-market loss on some derivatives they have that are
hedging their fixed income arbitrage portfolio. Now what's interesting is the net worth sweep is paid off of
reported earnings. So the government is taking in less cash today, which some people view as a negative.
But the associated asset with those derivatives is actually growing in value, but that is not reported in the
economic -- that is -- well, its economic earnings is not reported in the financial results yet. And so the
business continues to improve, but the way the net worth sweep is set up means that the government is
taking less money because Fannie and Freddie are reporting less profits even though the companies are
doing quite well. As the fixed income arbitrage portfolio shrinks, we think that the underlying strength in
the business model continue to show through.
Thank you. So Ben [ph], why don't you give us a brief update on Herbalife's quarter. And then David
Klafter, if can you update us from a regulatory point of view where things stand.
Unknown Executive
Sure. So a brief update. Earlier this month, Herbalife reported Q1 earnings, which reflected a 12.5%
decline in net sales year-over-year, which is actually a slight beat on guidance. That decline was driven
by declines in some of its most mature markets, including North America, Mexico and South Korea, but
was offset by 21% growth in China. That resulted in a beat on EPS in the quarter. And they increased their
guidance from $4.10 to $4.50 to $4.30 to $4.60 for the full year 2015. But for context, back in March of
2014, analysts were predicting $6.65 of 2015 earnings. So the current kind of midpoint is about 1/3 lower
than what analysts were predicting just a year ago.
Interestingly, they also announced an amendment to the credit facility where they extended the maturity
date of the revolver from March 2016 to 2017. They highlighted that as a positive for the quarter. But
in doing so, they had to make a number of concessions. One was that they had to reduce capacity on
revolver from $700 million down to $425 million. Second, they had to make some material principal
payments to reduce the amount of debt outstanding. Third, they had an increase in the rate for the
March 2016 to 2017 period by 2%. And they also imposed some additional limitations on buybacks and
dividends. All in all, while they tried to characterize that as a positive, we certainly think that, that was not
exactly a vote of confidence.
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David Klafter
On the regulatory side, the most significant development in the quarter was new disclosure in the
10-Q from Herbalife. And I'll quote this for you, "The Department of Justice recently saw information
from the company, certain of its members and others regarding allegations being made about the
business practices of the company and its members. In prior disclosure, Herbalife had said that SEC
and FTC were investigating and it would not be making any additional disclosure unless they were
material developments." I think we and Herbalife would agree that the DOJ's activities now are material
developments.
The other facts continue to confirm our thesis. Over the last 10 months, 4 independent directors have
stepped down, including the Lead Director and the Chairman of the Audit Committee who stepped
down right after the audit in February. Herbalife has spent over $77 million defending itself against the
disclosures we've been able to make about the company. Yet they still refuse to collect any data showing
real retail sales at the suggested retail prices, which we think is a big gap in their defense.
Last week, there was a settlement announced in a class action brought on behalf of distributors. The
settlement was expected. The class actions are really not a great way to vindicate the rights of consumers
who have been victimized. The plaintiffs' counsel quickly has a conflict of interest because they want to
get paid, and each victim has a fairly low stake. In the settlement, the -- most of the victims will receive
$20, while the plaintiff's counsel receives $5 million. The court, in approving it, noted that this does not
address the merits of the claim and that the government actions are not in any way affected by this. And
from what we understand, the FTC knows that consumer class actions are not the way to address systemic
fraud, and we don't think this will in any way change their thinking about Herbalife.
Yes. The judge seemed take a lot of comfort in the Nielsen survey that Herbalife has still yet to share with
the public, which said that 73% of the members actually signed up to be members to get a discount on
the products, which is, in my view, a total farce. What's your -- I found that fairly disappointing, that a
sophisticated judge would read a survey in that manner, accept it as evidence of the fact.
David Klafter
Yes. Well, what she was doing is saying, is this a fair way for the plaintiffs' counsel to stop the case? And
she said that, that fact could contribute to making a fair way to withdraw the claims. What she didn't
mention is that 8 months earlier, Herbalife had told the public in an SEC filing that only 27% seek a
discount. And so the numbers directly flipped in the course of 8 months based on the survey. It never
released the survey. It's all retrospective. If they really want to know who wants a discount, they should
offer a discount consumer, customer option, which they don't.
Okay. So with that, that sort of covers the portfolio. We have 2 new investments that we have yet to
disclose: one, a smallish position, a couple of percentage points of capital, which will have a little more
update on, I expect, by probably the end of this month, early part of June; the second is a large position
that we're building, approaching 15% of capital that it could be a couple of months before we're required
to make a disclosure.
With that, why don't I go to questions. And there are a fair number of them. And I will do my best to cover
all of them if possible.
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Question and Answer
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The executive compensation warrants use for Howard Hughes' executives has clearly been effective.
However, they expire in November 2017 as the company enters its next phase. Given the success of this
compensation tool on Howard Hughes' case, do you foresee it being used in future situations?
So to remind our investors, David Weinreb, Grant and other members of senior management wrote a
check when they became CEO or CFO of the company, president and so on. And they bought for fair
market value, long-dated warrants that could not be sold or hedged for 6 of the first 7 years. It was a
great way to gInnov8e management a leveraged upside in the outcome but with their putting their own
money at risk and differentiating the structure from your typical option structure where you could see
a pop in the stock price, options can vest, management can sell; the stock price goes back down and
shareholders are in a worse place, management walks with a lot of money. This, we think, is a much
better mechanism, and we would've liked to use it in future cases. Since we really built Howard Hughes
from scratch, we were able to design this compensation structure. Now it expires in November 2017. At
some point, we'll probably sit down with the Howard Hughes team and design something for the next 7
years.
As a shareholder -- okay, I have followed the case we've been making to expose Herbalife for the pyramid
scheme that it undoubtedly is. Although I agree with your findings, the thing that concerns me is that
having gone through a relatively small percentage of world's population over the past 32 years, it's now
actually 35, why can't Herbalife in the almost certain absence of any regulatory demand to close the
scheme down continue to chew up and spit out the similar percentage of the world's population over the
next 32 years?
So the point here is, which is a good question, Herbalife cycles through a lot of distributors every year,
about -- they've got 4 million and something like 2.1 million will quit this year. And then just to stay in the
same place, they need to find another 2.1 million, 2.2 million. And in order grow, they need to find more.
First of all, you have to ask yourself, what legitimate business loses half of its customers every year that
sells real products. As they do on the -- they have to turn to these distributors.
And the question is 2 million sounds like a large number, but 7 billion people of the company in 91
countries, why can't this scheme go on for a very long time?
Well, the answer is it has. And the explanation for why Herbalife has existed for 35 years is really the
premise of this question, which is that you can fool a small number of a very large population and still
keep the scheme going. It does become more difficult and, it certainly becomes more difficult with
transparency, which is why we believe the U.S. market is declining, Mexican market decline, South
America, other markets, with more visibility around the issues about this company, it gets harder for
them to recruit people. And today, a distributor trying to recruit someone into the scheme probably has to
make a lot more than one phone call to recruit someone. So for every 2 million that's brought in, there's
probably 100 million of people that are contacted. I think that gets more difficult in -- as -- with more
exposure on the company. But it can go for a very long time. And regulatory intervention, we think, is
important. And if regulators do nothing, there is a risk that Herbalife continues to defraud people over an
extended period of time. And I think -- hopefully that motivates regulators to do their job.
Let's see. What kind of impact to the portfolio can we expect when the Fed increases interest rates?
I don't expect to see a material impact. The businesses we own for the most part are not extremely
interest rate sensitive. Stock prices today with the S&P at, call it 16x, 17x earnings or 15x, 16x earnings
is not trading at a multiple that reflects a 2.2%, 10-year treasury. So embedded, if you will, on the
market multiple, I think, is an expectation of higher interest rates. I think the same thing is true for our
companies. But the businesses that we own generally, we own them at what we believe to be a pretty
deep discount to what their worth as is. On the margin, higher rates means the business is -- everything
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else is staying the same, the businesses will be less valuable. But we believe higher rates will probably be
an indicator of more positive economic progress, GDP growth, et cetera, which -- it's probably a more than
offsetting factor. We don't expect a meaningful impact.
Can you clarify how big Herbalife position is right now including put options?
It's about 6.5%, 7% of the portfolio.
How much would you gain if, in percent, Herbalife went to 0 tomorrow?
It's about $1.5 billion profit, about 7.5%, 8% gain.
You're not talking so much about Zoetis. How close were Pershing Square involved in the restructuring
they just announced? Where are you seeing Zoetis long term?
It's part of another big company or stand-alone company. Just briefly on this one. We're not really
permitted to discuss details at a board level with respect to the company. We are very supportive of the
plan that was announced. Long term, Zoetis will either justify its value as an independent company or it's
-- there's been people who have -- other companies who have expressed interest in acquiring Zoetis. So
I think like any other business, you can go deliver attractive returns to shareholders as an independent
enterprise or substantial synergies are available when combined with someone else. And if that's a better
alternative for shareholders, I'm sure the board will look at that carefully.
Okay. This is 10 questions from one investor. Let's see if I can -- what are the merits of extending a
consolidation strategy through buying equity in Endo or Actavis?
We really selected Valeant, if you will, as our horse here. We like the Valeant product portfolio, I would
say, and we got a real familiarity with the management team. We did not know the management. We're
not a huge fan of the product portfolio at Endo. But Valeant, it's really our -- where we focus on energies.
Let's see here. In fact [ph], the ownership profile of Valeant is a massive competitive advantage. Has
Valeant considered using owners as source of financing, in a similar way to Constellation Software.
I don't know the answer to that.
Okay. Is there a -- I'll give another investor chance to ask some questions. A few questions on Fannie,
Freddie I hope you might address. When will shareholders finally have their day in court as Judge
Sweeney has promised? David Klafter, when do you think there'll actually be a trial on the merits in Fannie
and Freddie on the Court of Claims?
David Klafter
My guess is that it will take at least until the end of the year to get through discovery, and the government
is attempting to withhold documents on the basis of various executive privileges. That can take a while.
The judge is going to -- is likely to address those things very seriously and allow the DOJ a lot of time on
that. So it could be 1 year, 1.5 years before they get to trial.
Okay. And then how long does a trial take? When do we get a decision on the Court of Claims issue,
realistically? It's a very important question.
David Klafter
May 12, 2017. I don't know.
Well, likely, it's later than that. That's your midpoint of the range?
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David Klafter
I think that's probably a good date.
Okay. Wow, it's impressive.
David Klafter
2 years.
2 years. What's the ultimate catalyst or appeal to the amendment? Congress and Director Watt, any of the
conservatorships?
I think it can be any and all of the above. I do think a decision in a court, a favorable one, will be a
catalyst for bringing parties to the table. So the litigation, I would say, is the stick, the carrot is the
opportunity to negotiate with the owners of the business, a resolution that's in the best interest of the
taxpayers, shareholders and the housing finance system. We'd love to help if we can.
Okay, next. Why doesn't the legal team request Judge Sweeney to suspend the third amendment profit
sweep until the trial is complete? It seems to me once government can't receive this income, they have no
incentive not to settle. I don't know that we have the ability to do that.
David Klafter
That's the ultimately relief. The judge won't grant that on an interim basis.
Here's a good one. First of all, big thanks to the team because of your hard work, dedication, confidence,
conviction, careful research, able to retire in my 40s due to an investment on GGP [ph]. Me and family are
grateful to you and your effort to help unlock vale for shareholders. Okay. Questions, is it possible to know
what percentage today Pershing Square holds in Fannie Mae and average cost?
Our average cost is about $2. Our stake is above 10% of both Fannie and Freddie.
We've covered the next question. Can you comment on how Fannie Mae is affected if Starr wins in the AIG
litigation?
The AIG litigation is -- really the lawsuit here that Hank Greenberg has filed is that basically the
government was unduly harsh in the terms it obtained in providing finance to AIG during the crisis. We
are not challenging the expensive preferred and the 80% warrants that the government received. I do
think if the AIG case were to get ruled in the favor of Starr, it's on the margin positive, I would say, but
not directly relevant.
Please discuss the impact on earnings of the strengthening dollar in the portfolio of the company? Please
also include discussion on the impact to earnings from recent commodity moves.
Most of our businesses -- Fannie and Freddie really do not have a foreign earnings component, but
many of our other businesses do. In some cases, we hedge that kind of exposure. In other cases, we
don't. It's judgment call. In some cases, we hedge exposure. In the case of Canadian dollar, we have
forward contracts we have effectively locked in for the portion of CP's revenues that are Canadian dollar
exposed. We hedge that exposure. We own some options that protect us from a more meaningful decline
in the euro. But we are, in some cases, completely unhedged with respect to currency. And we think
our businesses will be harmed by the U.S. dollar appreciating. Again, all things staying the same, our
business would benefit U.S. dollar depreciating. But the reality is the U.S. dollar doesn't appreciate all
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things staying the same. Usually, it appreciates because the economy is improving and other factors. But
we do not think that currency will have a particularly material impact on the overall portfolio, particularly
in light of the headwinds that we have.
Okay. Questions on size versus performance. I'll try to summarize this one. How has your current size of
$20 billion of capital affected your ability to achieve returns going forward? That's basically this overall
question.
We believe that for this strategy, scale is a significant asset. We have more ideas than capital today.
I think the best ideas are the biggest companies. Our ability to own a large percentage interest in a
company versus a smaller one, we think, is a positive. And even the kind of businesses we like, these
stable, simple, predictable businesses, often, these are the largest companies. That's how they get to be
very highly valued businesses. They have very high-quality, simple, predictable businesses. We did kind
of a very brief analysis of what percentage of the S&P 500 was sort of within our universe. I would say,
something in the order of 300 of the S&P 500 companies are certainly companies we'd looked at and could
possibly own in terms of business quality and market cap. The portfolio does not turn that meaningfully.
We add 1, 2 or maybe 3 investments a year. So we do think the market opportunity is very large versus
the size of Pershing Square. If that would change, if we became large relative the market opportunity and
we felt that capital was no longer a competitive advantage, we would return capital or pay dividends. But
now I would say we are literally out of capital and could consume meaningfully more. The, I guess, best
evidence of scale contributing to performance, last year was one of our best years ever with the largest
capital base.
This person's other questions are about PSH. If you have PSH questions, please contact the IR team
directly who can answer them.
Why do you believe CP remains an attractive investment today. We can earn $17.25 per share in 2018
with a P [ph] of 15 to 20. 3-year CAGR is 12.5% to 33%.
Is this in line with your thinking?
I think these are within the relevant range, and we think those kind of returns are attractive over the next
several years.
Understand commodities are a big part of the Canadian economy. As commodities are not doing well, how
does it impact CP cargo volume and pricing power? Paul, do you to comment?
Paul C. Hilal
Partner
Sure. Bulk-related freight is about half of CP's business. So this is just -- we're talking about just half of
the story. That's one thing to keep in mind. The other thing to -- so focusing on the commodity side of
things, a 1% drop in the commodity price doesn't mean that CP's volumes go down 1%. In fact, it often
means that CP's volumes don't move at all. A lot of CP's freight customers are among the lowest-cost
producers of their commodities in the world. For example, Teck coal mines is -- thermal coal is in the
bottom quartile of the cost curve, and the potash producers are also very efficient. So prices for these
commodities will have to drop pretty far for these volumes to be materially impacted. But freight volume
on the commodity side is only part of the story. You also have to recognize that there's another issue of
how much CP can charge for those commodities and also CP's market share in those commodities. And
one of the things that you have to ask as a third party is whether or not the CP's current market share and
the prices they can charge for its services have kept up with the dramatic improvement in service quality
that CP now delivers to its customers. Customers value service. If CP can deliver goods from Toronto to
Vancouver in 3 days rather than 4 like it used to, that deserves a higher rate and you have very happy
customers glad to pay that rate. If CP can deliver cars in a very narrow delivery window rather than a
broader one, that commands a higher rate and customers are glad to pay for that enhanced service.
And finally, if cars are more available than they ever were such that if a customer gets a large order,
they can get the cars they need to fulfill the order on a timely basis, that's also worth something. So as
you analyze the commodity side of the picture, you should keep those dimensions in mind. On the nonWWW.SPCAPITALIQ.COM
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commodity side of the picture, one also has to ask whether or not CP's market share and pricing reflects
the dramatic improvement in service levels, and that's something we'll leave to you to consider. And then
finally, the commodity -- the Canadian's economy is a commodity economy. It's an export economy. And
the Canadian dollar is closely linked to commodity prices. Another thing for you to think about is the
correlation of their currency with commodity prices. And when you recognize that Canada's #1 trading
partner in the world is the United States, a devaluation of the Canadian currency like we saw earlier this
year, one would expect would be tailwind for demand for Canadian Pacific's shipments into the United
States.
Thank you, Paul. Why don't -- instead of just dealing with one person's questions, I'll come back to this
person if we have more time.
As Pershing Square transitions from 1.0 to 2.0, a transition which should we expect to receive reduced
turnover and long-term investing and a somewhat Berkshire way of investing, what is Pershing Square's
viewpoint on the current fee structure? We think the current fee structure is fair.
Maybe a different question is, which I received from someone else, has our -- as the transition -- does the
transition mean we expect to earn lower returns going forward than we have in the past?
The answer is no to that. I mean, as a commented in the letter, this is the reference to Pershing Square
1.0 versus 2.0, we think being a longer-term investor, being in a position of more influence with board
representation and otherwise, owning high-quality businesses, is a way to earn high returns over
long periods of time comparable to what we've achieved in the past. Again, past performance is not a
guarantee of future success, but we think we've got a number of meaningful competitive advantages,
including a much larger base of permanent capital, which we believe should enable us to invest a higher
percentage of the capital in the core strategy, and as a result, earn more attractive returns going forward.
Given that 3 portfolio of companies, Valeant, Platform, Burger King, are highly levered, how do you think
about leverage across the portfolio and the risk associated with it with debt maturities beyond 2020? This,
of course, does not imply immediate risk. But we'd be keen to hear your thoughts.
Valeant is a BB-rated credit but probably deserving of an investment-grade credit profile in light of its
people tend to look at the business on an EBITDA multiple -- debt to EBITDA multiple basis when they
compare it with other companies. But the fact that it's a very modestly capital-intensive business, it has a
very low tax rate. Those kind of comparisons, I think, can lead to kind of an overstated view of the lookthrough leverage of the business. Valeant generates enormous free cash flow and can delever very quickly
to an investment-grade profile. In light of Valeant's size, it's now an $80 billion, $75 billion, $80 billion
market type company. We do expect the company will migrate to being an investment-grade company
going forward simply because the non-investment-grade credit markets are really not large enough to
continue to finance the company doing large transactions. So much the same way that Heinz started out
as a BB credit and then became an investment-grade credit -- or will become an investment-grade credit
with its acquisition of Kraft, it would not surprise us to see Valeant become an investment-grade company.
So it has better access to capital. And Platform is in a very high growth stage. It does use a fair amount of
financial leverage, but we think that Martin and the team are prudent about that use of leverage. Platform
is a relatively small investment for us as a percentage of capital. Burger King is an extremely high-quality,
low-risk business. And we think the amount of leverage that they're using is appropriate. And again,
a simple EBITDA leverage multiple, we think, is not the right way to think about the business. What's
interesting about Burger King is the company has almost no CapEx. All -- almost -- effectively all of the
CapEx is spent by the franchisees. So what you own in Burger King is a gross royalty on, we call it, 14,000
Burger Kings growing to hopefully 30,000 Burger Kings around the world. Same thing with Tim Hortons.
It's a gross revenue royalty, almost no corporate CapEx. One of the most stable cash flow streams in the
world and we think appropriate to use a fairly high amount of leverage as measured on a multiple EBITDA
basis. Ryan, do you have any further comments on that?
Ryan Israel
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Agree.
Agree. Okay, that happens rarely. Thank you, Ryan.
Okay. The funds have been fully invested, 98% long, 93% net. Special royalty to the historic 40% cash
position. None of the existing positions seemingly near their harvesting period. Under these positions, how
do you think about researching, initiating new positions? Would you consider selling additional shares?
Okay. So we are very close to being, if not entirely, fully invested. I'm not allowed to comment about
Pershing Square Holdings, but our choices in terms of if we have an idea and we -- that's better than one
we currently own and we need more capital is we can sell an existing holding or we can raise capital. And
we will do 1 of those 2 things if we believe that the new idea is better than an existing one. But what it
should be telling you is, as I said maybe earlier in the call, we believe we are, if you will, capital-starved
and we could consume a lot more capital than we currently have.
A question about portfolio sizing. I know it's related to risk reward. How do you arrive with the various
sizing of various investments? How do you come up with roughly 20% sizing for Valeant?
If we think about position sizing in terms of how much we can lose and how much we can make, open
to losing 500 or 600 basis points on any one investment, permanent loss of capital. What that means
is something like Fannie and Freddie where we can lose our entire investment because of legal, political
leverage and other uncertainty. That's a small investment, collectively 3% of our portfolio. Something like
Valeant, a strong credit, BB, but we think deserving to be a higher credit. Diversified, very durable product
portfolio, cheap valuation. We think Valeant has, in terms of the big cap things we own, probably the most
upside of the things we own and relatively modest amount of downside trading at a relatively low multiple
-- reasonable multiple for kind of its base business. So is it possible we could lose 25% of our investment
in Valeant? It's certainly possible. We think unlikely. Is it possible we would make multiples of our capital
on Valeant? We think that's certainly possible. And therefore, it's our largest investment because the risk
of loss versus the opportunity for profit is large.
Okay, next. Another question on portfolio sizing. Some of the positions in the portfolio seemed quite
expensive. Zoetis trades at a 27x, 12-month forward PE, 21x, 2017. What are the main valuation metrics
upsides in order to take it into consideration?
So I wouldn't look at absolute multiples of next year's earnings to value pretty much anything we own.
That is a relevant metric for a business that's in a very stable form, but one that's going through a major
cost takeout, it is probably not the right way to think about the business. You also have to think about
business quality, growth rates and thinking about what's appropriate. But we like the businesses we own
at the prices where they trade, otherwise we'd sell them.
Howard Schiller, resignation of CFO of Valeant seems like a big loss. What are your views? How does it
impact the investment case?
We think very highly of Howard. We were disappointed that he chose to retire as CFO. He's going to stay
on the Board of Directors. I understand he intends to retain his stock in the company. But I think he has
other ambitions that at 53 he decided he wanted to pursue. My guess is he'll buy a business and be a
CEO of the business. And with Mike Pearson signing on for another 5 years, I think there wasn't really an
opportunity for Howard to run Valeant. And I think that drove part of his thinking.
Still I can't believe [ph] the Common Securitization Platform developed for Fannie and Freddie is in the
best interest of the company. This could be used as a means to replace them. I think it's a good idea
because to have Fannie and Freddie -- actually, their securities trade at slightly different spreads because
the liquidity, having a common platform that can be more liquid, reduce the cost of housing finance.
It does not, however, replace -- make it easier to replace them because you still need a guarantor to
guarantee these security that's acceptable to the marketplace.
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Will the split of the company's long business lines, rental, multi, single, will be beneficial to shareholders?
No.
Could you speak at a high level about the nature, active, passive sector geography of the undisclosed
investments?
No. I was looking at the March risk reported list 12 long for the 13F list to 8 [indiscernible] the risk
mitigator hedge was taken off.
Okay. So the hedge was a hedge against Allergan, and we collapsed the hedge when the transaction
closed. The 13F -- 13F is only for 13F securities. 13F securities is for the U.S. only. So it doesn't include
non-U.S. companies and it doesn't include derivative transactions. Very often, when we're acquiring a
stake in a company, we're required to use some form of derivative. So that was not included in the 13F
security.
I'm interested for the details and your thoughts on the Platform company's potential risk of the strategy,
particularly about the ability to successfully integrate acquisitions, merits on focusing on one business
line versus diversifying. How do you think about this company's ability to leverage and implement the
strategy?
I spent a fair amount of time talking about that at our -- the Ira Sohn presentation in the actual
presentation. The risk of this strategy really relates to the quality of the management team, the
opportunity in terms of the size of the market and then their ability to execute. It's not so easy to go by a
large number of businesses in a relatively short period of time, integrate those acquisitions, not overpay
for them, finance them correctly, and get the balance between equity and debt correct. I think that is a -that is why there are very few platform companies that are deserving of the platform valuation because
there are some bad stories. We do believe the ones we own, call it Valeant, Restaurant Brands, Platform,
the quality of the team, and we have some meaningful oversight in these companies as well. We can be
helpful if we can help.
Any thoughts or comments you can share on the deal between Kraft and Heinz?
Not at this time.
Okay. Is there any reason that the combination of Valeant and Zoetis would not make sense?
I would ask Valeant that question.
Can you discuss the investment rationale for your new investments in Actavis? We received Actavis shares
as part of the transaction. We like Brent Saunders. We think he's got a very good business model. He
owns some very good assets. It has less of a durable portfolio. It's more reliant on pipeline and drugs that
are going to going to go off patent, if you will, a little bit more so than Valeant, but we like the business.
We are no longer a shareholder because we needed capital for something new.
$20 billion of assets under management, do you think the next 10 years would be harder than the first?
I think the next 10 years will have different challenges than the first 10. In many ways, the first 10 were
harder because we were starting the business from scratch. We didn't have an existing team. We don't
have -- no one knew who we were. We had a lot less experience. We had a lot less brand equity. We had
a lot less stable capital. Next 10 years, we have the benefit of a much stable -- more stable capital base.
We've got an organization that's been through a lot together and a very stable team. I think the new -the future will have some more challenges than the past, but we feel very good about the future.
Okay. I lost my spot here. When you mentioned estimated EPS for Valeant, did you take into account
potential equity dilution?
Yes, we didn't assume -- yes, we did in our -- the way we rolled out the model.
Anything about position sizing?
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We did that.
Thank you for hard work and extraordinary transparency, your investment in Fannie and Freddie like all
your investments require risk-reward analysis before making an investment. In that light, what are you
handicapping the odds for success in courts. If in fact, the court is favorable, what upside in the security
would you expect?
We think it is likely that we will win in the Court of Claims or in appeals of the Court of Claims decision
much more likely than not. And in that case, we expect very significant upside for Fannie and Freddie.
Has Pershing Square considered a more comprehensive Street-level marketing campaign against
Herbalife?
Not really.
Let's see. I think that's it, remarkably. Does everyone here feel we've answered enough questions? Or
would you like me to see if there are some that I've missed? Again, try to be comprehensive. This was the
guy I promised to come back to. Hold on. A little overtime.
Valeant, accounting. How much accounting due diligence did you do on Valeant?
A fair amount.
Do you feel comfortable with its accounting?
The answer is yes. In fact, one way to get comfortable with Valeant's accounting is really look at 2014 and
how quickly cash -- Valeant's cash earnings conformed to GAAP earnings as they stopped making material
acquisitions.
How durable is Valeant's business model in 5 or 10 years?
We expect it will continue to be durable because of their focus on durable products.
How much is relying on acquisitions for growth?
With 15% organic growth, they don't have to do an acquisition to grow. But we do think they will do
acquisitions to grow.
[indiscernible] commented on Valeant.
Valeant is like ITT. Harold Geneen come back to life. Only the guy is worse this time.
So interesting little side note here. As I did the communicate with Mr. Munger and asked him about his
comments. And he said, "Look, I don't know Mike Pearson and I hear very good things about him from
people I respect. But call me old-fashioned. I don't like companies with low tax rates that use a fair
amount of leverage and make a large number of acquisitions quickly. Call me old-fashioned." So we'll call
Mr. Munger old-fashioned. But his comments are fair. We think -- let put it this way. Where he's not fair is
Valeant is not like ITT. ITT was a roll-up of a very diverse collection of businesses, largely driven by a highpriced stock that was used to make acquisitions. Harold Geneen was considered to be a good operator. But
there wasn't a lot of business logic between the businesses he acquired. And eventually, the business was
broken up. In this case, Valeant is a very strategic company in its approach to the pharma sector, sectors
it invest in. I mean, Bill, do you want to comment? Or Jordan, any thoughts on Valeant?
William F. Doyle
Its acquisitions are highly strategic. They use cash and they have a unique operating model in the industry
that has a combined culture of cost discipline and a decentralized operating philosophy that's allowed them
to achieve industry-leading margins and has allowed them to accelerate growth at every major company
they've acquired.
Jordan Rubin
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Yes, Mike Pearson ran the pharmaceutical practice at McKinsey for 23 years. He perfected the elements
of the strategy. Again, they're not trying to be all things in all markets. They're very focused on branded
generics and markets where that make sense, consumer products and markets where that make sense,
ethical pharmaceuticals and markets where that make sense. This is not a casual assemblage of assets.
Thank you. What's the investment case for Air Products at the current price? Can Air Products become
another CP? Does it have the pricing power of a railroad. Brian?
Unknown Executive
Sure. I mean, I mean, I'd say the investment case is really the same as it was from when we initiated
our position. Obviously, the stock has done quite well in our nearly 2 years of ownership. But most of
that has frankly come from, as I mentioned during my remarks, the improvements in the non-core
performance business, which was frankly something that we had not underwritten in our initial analysis of
the company and a second variable which is the closing of the discounted valuation or sort of credibility
and performance gap, if you will, between Air Products and Praxair. So at the initiation of our position, the
company traded at about 16x, 17x earnings, while Praxair traded at 21x. And you've seen that multiple
close. But as I mentioned on my remarks, the vast majority of the $700 million of profit opportunity from
closing the structural gap between Air Products' performance and Praxair's remains, and the company
continues to bring onstream a lot of its multibillion of growth CapEx that has occurred over the past
several years and is continuing to occur over the next several. So the combination of those 2 variables will
lead to very significant earnings upside from here.
Zoetis, is the good news already priced into the stock with the revised guidance between -- 2015 guidance
between $0.79 and $1.02? What are the other catalysts besides cost-cutting?
I think there is a fair amount of the value of the company that is priced into Zoetis stock.
What are the other catalysts besides cost-cutting?
This is again a company that there's been a lot of speculation about potential takeovers largely because of
buyers' comments about being interested in the animal health space. So I think there are some amount of
acquisition premium in the Zoetis stock.
Platform, how confident are you about management team's capability, especially Mr. Leever and Mr.
Hewett? Ryan?
Ryan Israel
We think they're both terrific operating executives. I think one of the best ways to judge them is by
looking at their track record in the previous companies before they were part of Platform. Dan Leever, our
CEO, has been with the MacDermid, the first acquisition of Platform, for 40 years. He's been CEO for the
last -- over the last 20. I've gone back and I've read all the annual letters. I've looked at the performance,
and the track record there is simply amazing. Wayne Hewett, a little bit shorter tenure with Arysta, which
is Platform's most recent Agricultural Solutions acquisition, similarly very positive track record. So I think
the people themselves, when you speak with them, when you look at what they'd like to do there , I think
they're high-quality people -- high-quality executives and they both have great track records.
Okay. Thank you. And with that, let's see if any more questions have rolled in. There is, in fact, one more.
You seem to set very high standards on your investments. For example, I like to invest in companies I like.
In the past you've said you don't like Pepsi. You said you -- only long comers are good for America. Short
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20
comers are bad. You said you're doing God's work on Herbalife. The valuation for Amazon is very high. Will
you short it or since the company is good for America, you wouldn't consider shorting it?
Okay. I do think Amazon is probably good for America, but we will short very few stocks, and we won't
short stocks purely on valuation. Not clear to me that valuation of the Amazon is very high if you think
about the future progress of the business. I haven't done the work, but I think it's an incredibly dominant
franchise where they're spending most of their profits on building more dominance. I think it's a very
interesting company, but I have no view as to whether the price is high or not high.
With that, we are out of questions. And I thank you very much of your time and attention.
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2015Q1 Pershing Square Holdings, LTD., Q1 2015 Earnings Call, May 18, 2015

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2015Q1 Pershing Square Holdings, LTD., Q1 2015 Earnings Call, May 18, 2015

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CONTENTS

QUESTION AND ANSWER

Pershing Square Holdings, Ltd.

FQ1 2015 Earnings Call Transcripts

S&P Capital IQ Estimates**

**Estimates Data not available.

William Albert Ackman

Question and Answer

William Albert Ackman

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