Biglari Holdings‐ FY 2013 Annual Meeting 4/24/2014
What is BH? o Founded to be a capital allocation vehicle o No restrictions on investments, capital is captive, receives liquidity from operating businesses o Not just investors‐ entrepreneurs/operators too Gives the flexibility for either decentralized operations or active role o Plan is to continue diversifying o Not driven to be unconventional‐ driven to be logical. Unconventionality is a symptom First Guard Acquisition o Got financials on Dec. 20th. Flew down to meet management in Venice, FL two days later o Co. is a direct underwriter o Short‐tail meaning claims are paid out almost immediately o Company is unique in that it does not generate float Combined ratio‐ 2013: 76.4, 2012: 79.7, 2011: 90.1, 2010: 80.1, 2009: 65.4 o Management is fantastic‐ Ed Campbell (in his mid 50s) Didn’t want to sell to a PE firm or synergistic buyer What margins should be expected on franchising business? o 50% margins are expected. Put in $15.5mm into franchising and revenue has grown from $4mm to over $10mm. Rough calc: $7mm change in rev @ 50% margins = $3.5mm costing $15.5mm = ~20%+ ROIC First Guard Growth o First Guard used to reinsure all non‐trucking liability. Going forward, will be assuming some of that liability for the first time o Recently increased prices o BH has made a $.5mm investment into marketing Where is franchising $ being spent? o BH will not be increasing its franchising investments. Costs have plateaued o Last two years BH has had to invest more upfront on infrastructure o More has been spent internationally as cost of expansion is significantly higher o Sees potential for ~1000 Steak n Shakes domestically, could be much higher internationally but it’s too soon to be talking about these numbers Maxim o Perfect example of opportunistic approach o Feb 14th was reading about Maxim’s problems with Darden Jr. Took only a few hours to see the opportunity presented o Name alone worth more than what BH paid o Looking at it as a brand and not a publishing company. o Looks to the Playboy business model (not content!) of losing money on publishing and making money on licensing and branding
“Publishing is the billboard” Maxim already has a restaurant and credit cards in Russia Co. has not had a licensing person. The responsibility for managing licenses fell to the company’s general counsel. o Investments will need to be made that will impact EPS negatively o Ask 100 guys if they’ve heard of maxim. Maybe 1 or 2 will have a subscription but all of them will have heard of it and want to attend a Maxim party. o Could not build the same brand awareness with $100mm o The trick is monetizing the brand. This could easily take at least 2 years and $30mm of investment to become profitable. o Opportunity is not linear like First Guard. The upside is much higher. Could make $100‐ $150mm. o The publishing needs to be made more sophisticated. Will not be a ‘scandal rag’ but will contain positive uplifting stories, cleaner literature, higher quality paper, etc o In 2007 a PE firm bought Maxim for $250mm ($160mm in debt) o Revenues have declined ~$10mm a year since 2009. Might not even get to $20mm this year o There was no upside to advertisers. They didn’t know what was happening to the magazine‐ was it turning into Playboy? 900 pages of advertising in 2007, will be lucky to get 200 this year o BH already been offered more than they paid just for publishing part. Publishing would have been handled by another company while BH handled licensing. Turned down deal because BH wants to manage the brand and controlling publishing is essential for this Does Lion Fund have high water mark? o Compensation at holding co. is 0 and 25% over 6% hurdle w/ high water mark Less than he could charge running a hedge fund w/ his record o Phil Cooley: The terms are generous, very competitive Does the lock on the funds hurt investment flexibility? o Lion fund has a very wide investment mandate and is very flexible o If investments were in an insurance arm there would be regulations to deal with Who decided the price of the Lion Fund transaction? o The board of directors came up with the number They hired a professional valuation firm o BH shareholders earned $3mm net from the entire sale/buyback set of transactions o Questioner continues: So you paid BH $1.6mm and got $14mm in fees If you want returns without paying for them you can look elsewhere We’re capitalists not a charity (Peridot Capital) What would you say is a long‐term normalized operating margin for SnS? o We’ve hired several new people for the next phase of growth: supply chain manager, above store managers, etc
G&A shouldn’t be thought of as a % of revenue o Not focused on margins, focused on profit o Actually trying to minimize profit per customer and maximize number of customers o A great business is one with a high ROIC. These fall into one of two buckets: Brand equity power Low cost provider If there’s a close competitor across the street you better be the low cost provider o Has pulled all the cash they can from Western Sizzlin and is not reinvesting there o The thing about restaurants is that a lot of them are run by idiots Why do CBRL shareholders keep rejecting your proposals? o Phil Cooley: The inmates are in charge of the asylum They like our ideas, apparently‐ we don’t care, not looking for credit Don’t feel sorry for us, but there is an opportunity cost of holding CBRL CBRL has flat same store sales whereas SnS was up 3.7% CBRL management blames the weather We are not in the excuse making business Management should take responsibility for mistakes‐ and credit for successes too. Expanding multiples in the restaurant space have bailed out CBRL management ISS focuses on TSR (total shareholder return) and as long as the share price performs well ISS will advise shareholders to vote with management‐ regardless of the business operating performance o CBRL like a bunch of Chihuahuas with backs against the wall o Management starts to make things up and contradict themselves o ISS believes in the efficient market theory (by emphasizing TSR) and so you’re essentially talking a different language with them “These cognitive stupidities are ripe for our exploitation” o Investments are like Rumble in the Jungle (Ali vs. Foreman, 1974) 8 rounds of brutal fighting. CBRL is in round 4. Are you looking into refranchising company owned stores? o Only if it makes sense (it generally doesn’t) o Usually don’t because the operating leverage on rising revenue for company owned stores is too high. Most companies don’t think they can capture that gain How do you decide what will be purchased where (Holding Co vs. Lion Fund)? o “Look at what I’ve done in the past” o How much money I will (personally) make is not my chief concern o Will buy holdings where it makes sense‐ First Guard and other permanent holdings will be in the holding co. and less permanent holdings in the Lion Fund
What was the problem with the way things were set up (questioner concerned w/ removal of comp cap)? o Regulatory and legal expenses associated with the way it was set up were enormous o The accounting was taking up a lot of time o Couldn’t just close the Lion Fund as promises were made to initial LPs that the Lion Fund was a long‐term opportunity o We’re not going to start conforming to convention because what we do is unpopular o I don’t sit around thinking about how to pay my executives as little as possible The point is to incentivize them so that we can make money together Ex: Ed Campbell has the potential to make more money running First Guard than he received from the sale Looks like SnS will soon be SnS by Biglari o We are trying to build a brand for the holding company o BH is a museum for businesses First Guard still has a painter working Maxim: “I’m going to have to paint the whole damn thing myself” o The brand of the holding company has a large effect on the holding company’s ability to source these kinds of deals o Read John Paul Getty’s “How to be Rich”, page 36, rule #9 is applicable to all businesses [“Nothing builds confidence and volume faster or better than a reputation for standing behind one’s work or products. Guarantees should always be honored — and in doubtful cases, the decision should always be in the customer’s favor. A generous service policy should also be maintained. The firm that is known to be completely reliable will have little difficulty filling its order books and keeping them filled.”] o SnS started selling gift cards that now generate $8mm in float o Cooley: It’s underappreciated that when the company acts, people interact with the CEO What do you think about multiples in the market and the new trends with MCD? o We are situational investors o When evaluating investments, Biglari can understand in 5 min what would have taken him 5 hours 5 years ago. o Our idea of a strategic plan is to read the newspaper o We are always looking for businesses that are comprehensible and MCD is a great business BH capital expenditures o SnS cap ex has been minimal. If you had said five years ago that the company would only spend $26mm on cap ex over the next five years with 40% growth in foot traffic no one would have believed you o When we took over SnS the product was fine except for the bun and the produce o People don’t understand the causality between the value proposition and foot traffic
Value proposition has three components: Quality, Price, and Service o Quarter Pounder used to cost $5.42 and the comparable hamburger at SnS was $2.00 more expensive. Today it is $5.79 at both MCD and SnS while SnS has lower food cost o Cooley: Bureaucrats like to hire experts. We don’t function like this o CBRL is one of the best brands in America. Despite management it’s going to do OK. o Cap ex for the rest of the business: Just bought new HQ building for $3.2mm, had to improve it, all in $8mm for the company’s two buildings Has bought $6.5mm of real estate over the best 6 years IT costs What do you see for First Guard given the lack of float? o SnS generates float with gift cards but our insurance operations do not o Need to first build up a track record with regulators, rating agencies, etc. o Cooley: Getting involved in a regulated industry is more difficult than you think First Guard only earns 1.3% on assets; could you improve that? o Yes, but we probably won’t because we want to maintain our conservatism o We think a lot about catastrophe risk‐ situations unseen in modern times All debt is non‐recourse to the parent o Keeping AM Best rating and reputation is too important to be aggressive here What are the two new subsidiaries in the company filings? o Both are corporate entities that own the real estate Do you intend to purchase public common stocks/what is your succession plan? o Cooley: Board talks about succession planning once a year. Board has a plan and insurance on Biglari o Biglari deeply involved at both Maxim and SnS making this a real risk o Public common stock investments are very concentrated As was Biglari’s investment partnership pre‐SnS State of Maxim’s Balance Sheet o The income statement is ugly and the balance sheet will look ugly No long‐term debt o Cooley: Maxim is like sausage. You don’t want to see how it’s made. Original Biglari incentive agreement was signed when book value was far understated allowing Biglari to transfer $100mm from shareholders to himself. “I just want shareholders to think about this.” o “We’re thinking. And it’s not doing any good.” o Book value was not understated. It was something like $200mm while the company was essentially bankrupt Sale leasebacks were not even a plausible option We were at the edge. Prudential stopped giving us waivers on our debt.
These are the kinds of questions that come up when you’re sitting behind a desk reading GAAP accounting and not thinking about the real operations o Questioner continues: What year were you going to file Chapter 11? In October of 2008 we were losing the most money I don’t start thinking about what’s in it for me from day 1 When people hear the name Biglari Holdings what do you want them to think of? o That we’re long‐term, truthful, logical, value creators, and that we stand for excellence Could you have handled the CBRL situation in a different way? o It’s their decision to engage with us o Look at our board: William Johnson from Fremont Insurance Co, Ruth Person from SnS, Jim Mastrian from CCA—why do these people work with us and others are turned off by us? We are focused on creating value and they get that o When Sandra became CEO she should have embraced the company’s new ownership. It was the perfect time for a reset o We’ve met with management and there is a certain tone that comes through in these proxy contests. Now they’re claiming we’re harassing them and that is bizarre o At some point the TSR won’t be there and the tables will turn‐ but our purpose is to make money, not to win o Operationally CBRL is not doing well SSS down 14% from 2005‐2011, and down 1% since then Meanwhile advertising/store is up from $80k to $90k+ COGS has gotten worse‐ lost 40 BPs since Sandra took over o Company claiming that all of these expenses don’t matter is bizarre o Old CEO was really cannibalizing old stores with new stores which is why the company never entered into new markets o Imagine someone is willing to sell you a house for $500k that has a vault of diamonds in the basement. But the seller doesn’t know how to unlock the vault. We can save $30‐$50mm a year in expenses at CBRL Traffic can grow at 5% (and we’ve done it before) People go through life sleepwalking o Only way we exit stock is if it becomes dramatically over valued o Cooley: It’s always management’s fault for failure. (Forrest Capital) What other owner operators have influenced you? o Henry Singleton because of what he achieved Overthrew conventions Had a flexible mind‐ was still growing organically in the 2nd decade o Further back in time you go the more owner‐operators you find Wasn’t until the 1920s that owner/operator roles were separated o In public equity market, management and shareholders are aligned with short time horizons. o
o John D. Rockefeller o Willard D. Oberton at Fastenal Co. What’s the deal with CCA? o Position is a rounding error (“I will focus on the word rounding and you will probably focus on the word error”) o Company has lost its CEO and needs an entrepreneur o Has not been one of our better investments o We take cumulative gains and losses and look at the ratio of gains to losses. We’re over 200‐1. Uniform Pricing o It is highly advantageous for customers to expect the same menu and prices no matter the location o We are willing to accept lower gross margins but we are still doing better than MCD on food costs o We want a lot of customers but the question is how to convert them to profitable relationships Burgers & Fries bring them in, working on other ways of gaining revenue o Won the first lawsuit concerning a franchisor enforcing uniform prices Don’t sign our contract if you don’t agree with it o Lost a lawsuit where the franchisee had an existing agreement pre‐dating Biglari’s arrival to SnS o Cooley: Once met Sam Walton before he passed away. He had a simple idea and what we’re doing is similar in a lot of ways o Sam Walton is fantastic In 1971, 8 regional CEOs meet up to discuss retail strategy. Sam’s doing $44mm in annual sales. They go around the table and each CEO says what they think their revenue will be in 10 years. Sam says $2 billion. JCP was doing $4 billion at the time He had a belief and he stuck to it “High expectations are the key to everything” Unico American o No comment Recommended books o Creativity, Inc by Ed Catmull about Pixar o Cooley: Titan by Ron Chernow, Killing Lincoln/Kennedy/Jesus by Bill O’Reilly What else can be done to increase the price‐value proposition? o SnS has spent $20k/store to update o New menu Months 1‐7 of 2013 was up ~1% After new menu, was up 3.8% during the remainder of the year Break at 4:40PM
