BiglariHoldingsFY2013AnnualMeeting4/24/2014

WhatisBH?
o Foundedtobeacapitalallocationvehicle
o Norestrictionsoninvestments,capitaliscaptive,receivesliquidityfromoperating
businesses
o Notjustinvestorsentrepreneurs/operatorstoo
Givestheflexibilityforeitherdecentralizedoperationsoractiverole
o Planistocontinuediversifying
o Notdriventobeunconventionaldriventobelogical.Unconventionalityisasymptom
FirstGuardAcquisition
o GotfinancialsonDec.20
th
.FlewdowntomeetmanagementinVenice,FLtwodayslater
o Co.isadirectunderwriter
o Shorttailmeaningclaimsarepaidoutalmostimmediately
o Companyisuniqueinthatitdoesnotgeneratefloat
Combinedratio2013:76.4,2012:79.7,2011:90.1,2010:80.1,2009:65.4
o ManagementisfantasticEdCampbell(inhismid50s)
DidntwanttoselltoaPEfirmorsynergisticbuyer
Whatmarginsshouldbeexpectedonfranchisingbusiness?
o 50%marginsareexpected.Putin$15.5mmintofranchisingandrevenuehasgrown
from$4mmtoover$10mm.
Roughcalc:$7mmchangeinrev@50%margins=$3.5mmcosting$15.5mm=
~20%+ROIC
FirstGuardGrowth
o FirstGuardusedtoreinsureallnontruckingliability.Goingforward,willbeassuming
someofthatliabilityforthefirsttime
o Recentlyincreasedprices
o BHhasmadea$.5mminvestmentintomarketing
Whereisfranchising$beingspent?
o BHwillnotbeincreasingitsfranchisinginvestments.Costshaveplateaued
o LasttwoyearsBHhashadtoinvestmoreupfrontoninfrastructure
o Morehasbeenspentinternationallyascostofexpansionissignificantlyhigher
o Seespotentialfor~1000SteaknShakesdomestically,couldbemuchhigher
internationallybutitstoosoontobetalkingaboutthesenumbers
Maxim
o Perfectexampleofopportunisticapproach
o Feb14
th
wasreadingaboutMaximsproblemswithDardenJr.Tookonlyafewhoursto
seetheopportunitypresented
o NamealoneworthmorethanwhatBHpaid
o Lookingatitasabrandandnotapublishingcompany.
o LookstothePlayboybusinessmodel(notcontent!)oflosingmoneyonpublishingand
makingmoneyonlicensingandbranding
Publishingisthebillboard
MaximalreadyhasarestaurantandcreditcardsinRussia
Co.hasnothadalicensingperson.Theresponsibilityformanaginglicensesfell
tothecompanysgeneralcounsel.
o InvestmentswillneedtobemadethatwillimpactEPSnegatively
o Ask100guysiftheyveheardofmaxim.Maybe1or2willhaveasubscriptionbutallof
themwillhaveheardofitandwanttoattendaMaximparty.
o Couldnotbuildthesamebrandawarenesswith$100mm
o Thetrickismonetizingthebrand.Thiscouldeasilytakeatleast2yearsand$30mmof
investmenttobecomeprofitable.
o OpportunityisnotlinearlikeFirstGuard.Theupsideismuchhigher.Couldmake$100
$150mm.
o Thepublishingneedstobemademoresophisticated.Willnotbeascandalragbutwill
containpositiveupliftingstories,cleanerliterature,higherqualitypaper,etc
o In2007aPEfirmboughtMaximfor$250mm($160mmindebt)
o Revenueshavedeclined~$10mmayearsince2009.
Mightnotevengetto$20mmthisyear
o Therewasnoupsidetoadvertisers.Theydidntknowwhatwashappeningtothe
magazinewasitturningintoPlayboy?
900pagesofadvertisingin2007,willbeluckytoget200thisyear
o BHalreadybeenofferedmorethantheypaidjustforpublishingpart.Publishingwould
havebeenhandledbyanothercompanywhileBHhandledlicensing.
TurneddowndealbecauseBHwantstomanagethebrandandcontrolling
publishingisessentialforthis
DoesLionFundhavehighwatermark?
o Compensationatholdingco.is0and25%over6%hurdlew/highwatermark
Lessthanhecouldchargerunningahedgefundw/hisrecord
o PhilCooley:Thetermsaregenerous,verycompetitive
Doesthelockonthefundshurtinvestmentflexibility?
o Lionfundhasaverywideinvestmentmandateandisveryflexible
o Ifinvestmentswereinaninsurancearmtherewouldberegulationstodealwith
WhodecidedthepriceoftheLionFundtransaction?
o Theboardofdirectorscameupwiththenumber
Theyhiredaprofessionalvaluationfirm
o BHshareholdersearned$3mmnetfromtheentiresale/buybacksetoftransactions
o Questionercontinues:SoyoupaidBH$1.6mmandgot$14mminfees
Ifyouwantreturnswithoutpayingforthemyoucanlookelsewhere
Werecapitalistsnotacharity
(PeridotCapital)WhatwouldyousayisalongtermnormalizedoperatingmarginforSnS?
o Wevehiredseveralnewpeopleforthenextphaseofgrowth:supplychainmanager,
abovestoremanagers,etc
G&Ashouldntbethoughtofasa%ofrevenue
o Notfocusedonmargins,focusedonprofit
o Actuallytryingtominimizeprofitpercustomerandmaximizenumberofcustomers
o AgreatbusinessisonewithahighROIC.Thesefallintooneoftwobuckets:
Brandequitypower
Lowcostprovider
Iftheresaclosecompetitoracrossthestreetyoubetterbethelowcost
provider
o HaspulledallthecashtheycanfromWesternSizzlinandisnotreinvestingthere
o Thethingaboutrestaurantsisthatalotofthemarerunbyidiots
WhydoCBRLshareholderskeeprejectingyourproposals?
o PhilCooley:Theinmatesareinchargeoftheasylum
Theylikeourideas,apparentlywedontcare,notlookingforcredit
Dontfeelsorryforus,butthereisanopportunitycostofholdingCBRL
CBRLhasflatsamestoresaleswhereasSnSwasup3.7%
CBRLmanagementblamestheweather
Wearenotintheexcusemakingbusiness
Managementshouldtakeresponsibilityformistakesandcreditfor
successestoo.
ExpandingmultiplesintherestaurantspacehavebailedoutCBRLmanagement
ISSfocusesonTSR(totalshareholderreturn)andaslongastheshare
priceperformswellISSwilladviseshareholderstovotewith
managementregardlessofthebusinessoperatingperformance
o CBRLlikeabunchofChihuahuaswithbacksagainstthewall
o Managementstartstomakethingsupandcontradictthemselves
o ISSbelievesintheefficientmarkettheory(byemphasizingTSR)andsoyoureessentially
talkingadifferentlanguagewiththem
Thesecognitivestupiditiesareripeforourexploitation
o InvestmentsarelikeRumbleintheJungle(Alivs.Foreman,1974)
8roundsofbrutalfighting.CBRLisinround4.
Areyoulookingintorefranchisingcompanyownedstores?
o Onlyifitmakessense(itgenerallydoesnt)
o Usuallydontbecausetheoperatingleverageonrisingrevenueforcompanyowned
storesistoohigh.
Mostcompaniesdontthinktheycancapturethatgain
Howdoyoudecidewhatwillbepurchasedwhere(HoldingCovs.LionFund)?
o LookatwhatIvedoneinthepast
o HowmuchmoneyIwill(personally)makeisnotmychiefconcern
o WillbuyholdingswhereitmakessenseFirstGuardandotherpermanentholdingswill
beintheholdingco.andlesspermanentholdingsintheLionFund
Whatwastheproblemwiththewaythingsweresetup(questionerconcernedw/removalof
compcap)?
o Regulatoryandlegalexpensesassociatedwiththewayitwassetupwereenormous
o Theaccountingwastakingupalotoftime
o CouldntjustclosetheLionFundaspromisesweremadetoinitialLPsthattheLionFund
wasalongtermopportunity
o Werenotgoingtostartconformingtoconventionbecausewhatwedoisunpopular
o Idontsitaroundthinkingabouthowtopaymyexecutivesaslittleaspossible
Thepointistoincentivizethemsothatwecanmakemoneytogether
Ex:EdCampbellhasthepotentialtomakemoremoneyrunningFirst
Guardthanhereceivedfromthesale
LookslikeSnSwillsoonbeSnSbyBiglari
o Wearetryingtobuildabrandfortheholdingcompany
o BHisamuseumforbusinesses
FirstGuardstillhasapainterworking
Maxim:Imgoingtohavetopaintthewholedamnthingmyself
o Thebrandoftheholdingcompanyhasalargeeffectontheholdingcompanysabilityto
sourcethesekindsofdeals
o ReadJohnPaulGettysHowtobeRich,page36,rule#9isapplicabletoallbusinesses
[Nothingbuildsconfidenceandvolumefasterorbetterthanareputationfor
standingbehindonesworkorproducts.Guaranteesshouldalwaysbehonored
andindoubtfulcases,thedecisionshouldalwaysbeinthecustomersfavor.
Agenerousservicepolicyshouldalsobemaintained.Thefirmthatisknownto
becompletelyreliablewillhavelittledifficultyfillingitsorderbooksandkeeping
themfilled.]
o SnSstartedsellinggiftcardsthatnowgenerate$8mminfloat
o Cooley:Itsunderappreciatedthatwhenthecompanyacts,peopleinteractwiththeCEO
WhatdoyouthinkaboutmultiplesinthemarketandthenewtrendswithMCD?
o Wearesituationalinvestors
o Whenevaluatinginvestments,Biglaricanunderstandin5minwhatwouldhavetaken
him5hours5yearsago.
o Ourideaofastrategicplanistoreadthenewspaper
o WearealwayslookingforbusinessesthatarecomprehensibleandMCDisagreat
business
BHcapitalexpenditures
o SnScapexhasbeenminimal.
Ifyouhadsaidfiveyearsagothatthecompanywouldonlyspend$26mmon
capexoverthenextfiveyearswith40%growthinfoottrafficnoonewould
havebelievedyou
o WhenwetookoverSnStheproductwasfineexceptforthebunandtheproduce
o Peopledontunderstandthecausalitybetweenthevaluepropositionandfoottraffic
Valuepropositionhasthreecomponents:
Quality,Price,andService
o QuarterPounderusedtocost$5.42andthecomparablehamburgeratSnSwas$2.00
moreexpensive.Todayitis$5.79atbothMCDandSnSwhileSnShaslowerfoodcost
o Cooley:Bureaucratsliketohireexperts.Wedontfunctionlikethis
o CBRLisoneofthebestbrandsinAmerica.DespitemanagementitsgoingtodoOK.
o Capexfortherestofthebusiness:
JustboughtnewHQbuildingfor$3.2mm,hadtoimproveit,allin$8mmforthe
companystwobuildings
Hasbought$6.5mmofrealestateoverthebest6years
ITcosts
WhatdoyouseeforFirstGuardgiventhelackoffloat?
o SnSgeneratesfloatwithgiftcardsbutourinsuranceoperationsdonot
o Needtofirstbuildupatrackrecordwithregulators,ratingagencies,etc.
o Cooley:Gettinginvolvedinaregulatedindustryismoredifficultthanyouthink
FirstGuardonlyearns1.3%onassets;couldyouimprovethat?
o Yes,butweprobablywontbecausewewanttomaintainourconservatism
o Wethinkalotaboutcatastropherisksituationsunseeninmoderntimes
Alldebtisnonrecoursetotheparent
o KeepingAMBestratingandreputationistooimportanttobeaggressivehere
Whatarethetwonewsubsidiariesinthecompanyfilings?
o Botharecorporateentitiesthatowntherealestate
Doyouintendtopurchasepubliccommonstocks/whatisyoursuccessionplan?
o Cooley:Boardtalksaboutsuccessionplanningonceayear.Boardhasaplanand
insuranceonBiglari
o BiglarideeplyinvolvedatbothMaximandSnSmakingthisarealrisk
o Publiccommonstockinvestmentsareveryconcentrated
AswasBiglarisinvestmentpartnershippreSnS
StateofMaximsBalanceSheet
o Theincomestatementisuglyandthebalancesheetwilllookugly
Nolongtermdebt
o Cooley:Maximislikesausage.Youdontwanttoseehowitsmade.
OriginalBiglariincentiveagreementwassignedwhenbookvaluewasfarunderstatedallowing
Biglaritotransfer$100mmfromshareholderstohimself.Ijustwantshareholderstothink
aboutthis.
o Werethinking.Anditsnotdoinganygood.
o Bookvaluewasnotunderstated.Itwassomethinglike$200mmwhilethecompanywas
essentiallybankrupt
Saleleasebackswerenotevenaplausibleoption
Wewereattheedge.Prudentialstoppedgivinguswaiversonourdebt.
o Thesearethekindsofquestionsthatcomeupwhenyouresittingbehindadeskreading
GAAPaccountingandnotthinkingabouttherealoperations
o Questionercontinues:WhatyearwereyougoingtofileChapter11?
InOctoberof2008wewerelosingthemostmoney
Idontstartthinkingaboutwhatsinitformefromday1
WhenpeoplehearthenameBiglariHoldingswhatdoyouwantthemtothinkof?
o Thatwerelongterm,truthful,logical,valuecreators,andthatwestandforexcellence
CouldyouhavehandledtheCBRLsituationinadifferentway?
o Itstheirdecisiontoengagewithus
o Lookatourboard:WilliamJohnsonfromFremontInsuranceCo,RuthPersonfromSnS,
JimMastrianfromCCAwhydothesepeopleworkwithusandothersareturnedoffby
us?
Wearefocusedoncreatingvalueandtheygetthat
o WhenSandrabecameCEOsheshouldhaveembracedthecompanysnewownership.It
wastheperfecttimeforareset
o Wevemetwithmanagementandthereisacertaintonethatcomesthroughinthese
proxycontests.Nowtheyreclaimingwereharassingthemandthatisbizarre
o AtsomepointtheTSRwontbethereandthetableswillturnbutourpurposeisto
makemoney,nottowin
o OperationallyCBRLisnotdoingwell
SSSdown14%from20052011,anddown1%sincethen
Meanwhileadvertising/storeisupfrom$80kto$90k+
COGShasgottenworselost40BPssinceSandratookover
o Companyclaimingthatalloftheseexpensesdontmatterisbizarre
o OldCEOwasreallycannibalizingoldstoreswithnewstoreswhichiswhythecompany
neverenteredintonewmarkets
o Imaginesomeoneiswillingtosellyouahousefor$500kthathasavaultofdiamondsin
thebasement.Butthesellerdoesntknowhowtounlockthevault.
Wecansave$30$50mmayearinexpensesatCBRL
Trafficcangrowat5%(andwevedoneitbefore)
Peoplegothroughlifesleepwalking
o Onlywayweexitstockisifitbecomesdramaticallyovervalued
o Cooley:Itsalwaysmanagementsfaultforfailure.
(ForrestCapital)Whatotherowneroperatorshaveinfluencedyou?
o HenrySingletonbecauseofwhatheachieved
Overthrewconventions
Hadaflexiblemindwasstillgrowingorganicallyinthe2
nd
decade
o Furtherbackintimeyougothemoreowneroperatorsyoufind
Wasntuntilthe1920sthatowner/operatorroleswereseparated
o Inpublicequitymarket,managementandshareholdersarealignedwithshorttime
horizons.
o JohnD.Rockefeller
o WillardD.ObertonatFastenalCo.
WhatsthedealwithCCA?
o Positionisaroundingerror(Iwillfocusonthewordroundingandyouwillprobably
focusontheworderror)
o CompanyhaslostitsCEOandneedsanentrepreneur
o Hasnotbeenoneofourbetterinvestments
o Wetakecumulativegainsandlossesandlookattheratioofgainstolosses.Wereover
2001.
UniformPricing
o Itishighlyadvantageousforcustomerstoexpectthesamemenuandpricesnomatter
thelocation
o WearewillingtoacceptlowergrossmarginsbutwearestilldoingbetterthanMCDon
foodcosts
o Wewantalotofcustomersbutthequestionishowtoconvertthemtoprofitable
relationships
Burgers&Friesbringthemin,workingonotherwaysofgainingrevenue
o Wonthefirstlawsuitconcerningafranchisorenforcinguniformprices
Dontsignourcontractifyoudontagreewithit
o LostalawsuitwherethefranchiseehadanexistingagreementpredatingBiglaris
arrivaltoSnS
o Cooley:OncemetSamWaltonbeforehepassedaway.Hehadasimpleideaandwhat
weredoingissimilarinalotofways
o SamWaltonisfantastic
In1971,8regionalCEOsmeetuptodiscussretailstrategy.Samsdoing$44mm
inannualsales.TheygoaroundthetableandeachCEOsayswhattheythink
theirrevenuewillbein10years.Samsays$2billion.JCPwasdoing$4billionat
thetime
Hehadabeliefandhestucktoit
Highexpectationsarethekeytoeverything
UnicoAmerican
o Nocomment
Recommendedbooks
o Creativity,IncbyEdCatmullaboutPixar
o Cooley:TitanbyRonChernow,KillingLincoln/Kennedy/JesusbyBillOReilly
Whatelsecanbedonetoincreasethepricevalueproposition?
o SnShasspent$20k/storetoupdate
o Newmenu
Months17of2013wasup~1%
Afternewmenu,wasup3.8%duringtheremainderoftheyear
Breakat4:40PM