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Ryan:
(1:03) Good afternoon, and thank you for joining us today. We would like
to welcome you to the third quarter 2014 webcast for the FPA International
Value Strategy, including the FPA International Value Fund. My name is
Ryan Leggio, and Im a Senior Vice President and Product Specialist here
at FPA.
The audio, transcript, and visual replay of todays webcast will be
made available on our website, fpafunds.com.
In just a moment, you will hear from Pierre Py, the Portfolio
Manager of the Strategy, as well as Jason Dempsey and Victor Liu, both
Senior Vice Presidents and Analysts on the Strategy
Initially we would like to highlight the key Fund attributes for those
who may be listening in for the first time, and well quickly mention a few of
these attributes. First, the Strategy is run with an absolute value
philosophy. The teams starting position is cash, and they seek genuine
bargains in the equity markets rather than relatively attractive ones.
Second, the Fund has a broad benchmark-agnostic mandate. The team
can invest in both developed and emerging markets, and can own stocks
across market caps and sectors. Finally, the Fund is relatively
concentrated, as the team focuses on only high-quality companies that
trade at significant discount to the teams estimate of their intrinsic value.
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Thank you, Ryan, for the introduction, and thank you all for taking the time
to be on the call today. During the third quarter of this year, the Fund
declined 8.70% compared to the MSCI All Country World Index decline of
5.27%. Year-to-date that translates into a total return of negative 5.98%
versus n Index thats essentially been flat. More importantly, since
inception on December 1st, 2011, the Fund has appreciated 12.36%
annualized versus 10.29% for the Index. (3:08) Its worth pointing out that,
while our cash holding has fluctuated along with the opportunity set over
the past almost three years now, it has averaged in excess of 35% since
the inception of the Strategy.
This was another bad quarter for the Fund from a short-term
performance standpoint. That said, the underlying situation this period was
quite difference than from the previous quarter. In the past, we complained
about the lack of investment opportunities, the disconnect between
valuations and pending business development, and the market distortions
largely created by government actions around the world.
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At the end of the last quarter, at June 30, 2014, our cash exposure
had hit an all-time high of about 40%. We were struggling to keep up
with the continued run-up in market prices overall and more importantly to
even maintain the average discount to intrinsic value of our holdings in the
mid-20% range, which was also one of the lowest levels since the
inception of the Strategy for the discount to intrinsic value.
In the past three months, however, the market presented us with
opportunities to invest in a number of companies. Some were companies
we had followed for a long time that were either on our focus list and
experienced some element of positive change, or on our best-of-breed list
and experienced price correction. Some were companies we had newly
researched as well.
As a result, our cash balance came down significantly throughout
the period. At the end of the quarter, it had reached about 30%, again
down from about 40% only three months ago. As weve mentioned several
times in the past, our cash exposure is not a function of our top-down view
of the state of the world economy or that of capital markets. (5:01) Rather
it is a residual output of our bottom-up investment approach. Because of
the relatively concentrated nature of the Strategy, as well as its smaller
size, it is possible for our cash exposure to come down materially in a
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short period of time, all else being equal. A few good investment ideas
suffice to bring it down.
Combined with opportunities to reduce exposure to names that
performed well intra-period and in that respectfor instance SAP was
actually up close to 10% in local currency in July aloneas well as
opportunities to redeploy capital towards names offering higher
prospective returns, that meant we deployed about a quarter of the Funds
assets towards newly built positions during the quarter. That included the
three names that we started buying towards the very end of the previous
quarternamely Adidas, TNT, and Fenner, which we didnt disclose back
in Juneas well as the six new names that we added to the portfolio this
quarter, which include ALS, Christian Dior, Hypermarcas, KSB, and
Prada, with one name that we keep undisclosed at the time for a variety of
reasons similar to what we did with Fenner last quarter. We also revealed
a meaningful position in LSL, company that weve had in the portfolio ever
since the inception of the Strategy, albeit at very different weighting levels,
as the share price reversed back to what we consider to be highly
attractive levels.
The reason why weve typically been purchasing these names
obviously is because theyve become attractively priced. While the market
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as a whole is only down 5%, these companies have seen their share price
correct by 1545% in the past three months. And these declines often
came on the back of previous bad performance as well, so that some of
these stocks have effectively declined by 3050% in the past few months.
If you take ALS for instance, the stock was down about 45% since June at
the end of the quarter and close to 60% since the high in the first quarter
of 2012. TNT was down about 50% since its spinoff from PostNl and 30%
since March. Adidas, Fenner, and Prada were all down about 35% since
last December. Christian Dior was down only about 15%, but it was
enough to push the stock into buy-range nonetheless. And LSL was down
more than 25% over the past six months.
Now with these declines against what we consider to be relatively
stable business values, we believe that market prices no longer
adequately reflected the underlying fundamentals of the individual
businesses, and thus weve become active buyers of these companies.
Now our investment discipline dictates that we purchase stocks that
trade at at least more than a 30% discount to intrinsic value and that we
weight them in the portfolio based on the discount to intrinsic value they
each offer relative to the existing holdings. Unfortunately, or fortunately
maybe depending on how you look at it, stocks which come to offer such
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This is clearly a disappointment, and the company was one of our large
holdings. And thus its been a meaning detractor for quarterly
performance. But we will provide some additional thoughts on the
company specifically in our key performers section.
In terms of key investment takeaways, a few things I want to
highlight. The first one is, however painful it may seem to see the Fund
down 9% even for the long-term-minded investors, theres some
interesting lessons to be learned or taken away from this past quarter.
The first lesson is that we, or I, havent sold a single share of the
Fund since the inception of the Strategy and have still essentially all of my
net investable wealth committed to the Fund.
The second thing, to the point about currency, is that our cash file
which is denominated in dollars has regained some of its value, and were
taking advantage of this restored purchasing power. Were buying more
companies that happen to be based in Europe with stock often
denominated in euros or in British pounds.
The third thing is that prices are finally coming down. As mentioned
earlier, there are specific sections of the markets where prices are coming
down significantly. Now a function of our bottom-up, unconstrained, and
concentrated approach is that we dont need the whole market to correct
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30% to be able to deploy capital with a high margin of safety. Being small
and nimble is also a key in being able to take advantage of market
volatility, as we only need to find a handful of new names to come down to
act.
What we have seen is that businesses with underlying exposure to
sectors like mining, oil and gas, or luxury goods in markets like Australia,
Europe broadly speaking, or Brazil have experienced some meaningful
correction. (13:12) While we recognize some of the short-term challenges
many of these businesses are facing, we think market values now do not
adequately reflect their long-term profit-generating power. In contrast,
intrinsic values are a function of long-term free cash flow and based on the
normalized through cycle of economics that the business can generate.
With that, we are doing precisely what were wired to do, which is to
buy as things get cheap and to buy more as things get cheaper. Thats
why weve added so many new names, further building recent positions,
and why weve been adding back to some of our existing holdings like
LSL. Weve also constructed a meaningful pipeline of next-best
opportunities that we think are within ten percentage points of a buy
range. And assuming share price continues to come down, were likely to
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deploy incremental capital and add more names to the portfolio going
forward.
The fourth thing to understand is that were not market timers. What
this means is that we have no ability to predict when a stock is going to hit
bottom. So we do not try and guess. Once a name trades at a discount to
intrinsic value in excess of 30%, we invest. If it gets cheaper, which it often
does, thereby negatively impacting performance, we buy more. Similarly
we do not put our toes in the water and start slow, so to speak. The
weighting is set based on relative discount to intrinsic value at the onset
and achieved as soon as liquidity permits. We do not play a game and try
simply because we cant to maximize our discount. And the same thing is
true on the sell side. We do not try and maximize return by holding on to a
rising stock. We consider it a fools game either way that could only lead
us to miss out on opportunity or worse to permanent losses.
(15:06) Last but not least, we typically invest over several years,
and we do not consider a quarter as particularly meaningful. We say it
now like weve said it repeatedly when short-term performance was much
stronger than it is now. We recommend shareholders to evaluate the
Funds returns over the medium to long term. As mentioned in past
commentaries, we expect the Fund to experience short-term volatility at
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Ryan:
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attractive from a risk/reward standpoint. Now that being said, its quite
possible that the Fund will trade at a discount of more than 40% before the
completion of the current market cycle.
Second, we hope shareholders will use the estimated discount that
we publish to maintain reasonable expectations. When discounts are
narrow and there is complacency in the market, declines are quite
possible over the short run, as weve seen recently.
Third, weve delivered strong performance over the last 2.5+ years,
whether measure in an absolute or relative or risk-adjusted basis. (19:10)
Despite having approximately 65% of the Funds capital at risk on average
over the period, we have been able to deliver a low double-digit
annualized return that exceeded the Index by close to 20%.
No Ill hand it back to Pierre, who will discuss some of the portfolio
metrics.
Pierre:
Thank you, Ryan. Beyond some of these comments that are encouraging
or more back-looking in nature, another thing that we find encouraging are
the portfolio metrics at the end of the quarter, which are reflective of what
we own and how we expect to build returns going forward.
So first in terms of valuation, even though we do not think price-toearning ratios are very meaning metrics, we note that the portfolio traded
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at a price-to-earning ratio of 14.8 times at the end of the period, which was
down significantly from 16.7 time as at the end of the second quarter. That
means the Fund remained somewhat more richly valued than the Index.
But as we pointed out in the past, however, the Index includes
businesses that typically trade at lower multiples and to which we continue
add little exposure, such as financials. On an equal footing, we think our
companies are materially cheaper than the market and that our portfolio of
holdings is now more attractive than it was three months ago or at any
point in fact over the past couple of years. Specifically, as I previously
mentioned, we have estimate that our holdings trade at a weighted
average of 34%, up from the 26% at the end of the last quarter.
More importantly we think our businesses generally have greater
staying power, stronger earning-generation power per dollar invested, and
superior management teams relative to the market. In fact, our portfolio
holdings generate a weighted average return on equity of over 18%
versus about 15% for the Index. While this is down from over 21% at the
end of the second quarter, (21:03) this remains an elevated level, in
particular considering that many of the newly added names are cyclically
challenged businesses at the moment and/or are businesses that are
going through material operational adjustments.
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owned in the past. (25:06) Both short-term and long-term solution exist for
the struggling businesses, and they are being actively pursued. The
groups balance sheet is solid and provides flexibility to run successful
turnarounds.
While things have changed several times in various ways for
G.U.D. over the past decade, the group has consistently deliver low-tomid-teen margins, returns on capital employed in excess of 35%, and
pitch-perfect cash conversion rates. In addition, G.U.D. was a small,
somewhat remote company. At the time of purchase, the stock was not
well researched with little institutional shareholders involved. The
companys specifics are somewhat difficult to analyze, with several
businesses jammed under one umbrella and the challenged parts typically
retaining most of the attention.
Lastly we identified an agent of change in the high-quality new
management team. And with that, we found the opportunity to be quite
compelling, and we originally took a large investment in the company
effectively making the Fund one of G.U.D.s larger shareholders at the
time. However, the share had rallied in the months that followed our
original purchase, which caused us to significantly reduce the positions
weighting down to its current levels. G.U.D. still displays many
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the quality of the managers in charge, and the free cash flows that these
companies should be able to generate over the long run.
While we do not wish to share further details of our investment
thesis on all of these names, we would like to highlight a few points on the
Hypermarcas, as it is our first investment to date in Brazil, a market where
we actually have been finding more intriguing opportunities following
repeated visits over the last couple of years. And for this, I will now pass it
over to Victor.
Victor:
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Pierre:
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Despite the increased activity during the period, the overall profile
of the portfolio now really didnt change dramatically from quarter to
quarter. The Funds main geographic features are broadly similar to what
they were at June 30, although we have some Latin American exposure
now with our investment in Hypermarcas. The addition of ALS also didnt
suffice to upset the reduction in weightings of our other Asia-Pacific-based
companies. So our exposure to the region came down as a result. And
with that, we are still primarily geared towards companies that are based
in Europe.
Larger cap companies also continue to account for a sizable portion
of the Funds assets. However, the Strategy is currently more balance
towards smaller cap companies with lower weighted average market
capitalization, (33:02) as well as a lower median and more sizable
exposure overall to smaller companies. ALS, KSB, Fenner, LSL, TNT,
which together represent more than 15% of the portfolio now, all have
market capitalization within a 500 million to 3 billion range. And this is
simply a reflection of where we found compelling opportunities, as our
approach is agnostic to size, as it is to geography for that matter.
We still have no exposure to companies based in Japan where we
find that management teams typically lack the financial discipline we look
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Thank you, Pierre. Our case study for the quarter is Accenture. Domiciled
in Ireland, Accenture is a leading consulting and outsourcing business
specializing in IT services. It generates over $4 billion in operating profit
on 30 billion in sales, with a 14% margin and a very high return on
investment since its invested capital base is less than 5 billion.
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this is one of the reasons why strategy, execution, and communication are
all transparent and sensible. Managements track record in allocating
capital has been admirable, with a majority of excess capital returned to
shareholders, and there has been no attempt to artificially boost growth
rates by dilutive and questionable acquisitions.
Lastly, we like their policy on the balance sheet, which they keep at
a moderate net cash level. At the time of purchase, we invested in
Accenture at a high single-digit free cash flow yield and multiple of
normalized EBITDA. Our assumptions for the normalized margins of the
company are backed by our own research on dozens of industry
competitors.
Pierre?
Pierre:
Thank you very much, Jason. Very quickly conclude, and then well jump
into Q&A after a quick pause. Wed like to wed like to reiterate, as we do
each quarter, the key tenets of our investment philosophy. Were absolute,
not relative, long-term value investors with a strong bias towards quality.
We look for well run, financially strong, high-quality businesses with stock
we can purchase at a significant discount to our estimates of their intrinsic
values. And we only invest when presented with such opportunities and
will hold cash in the absence of such opportunities.
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And with that, with no further prepared remarks for today, wed like
to open it up for questions.
Ryan:
Thanks, Pierre. For those who are listening in, please feel free to submit
your questions on line. Were going to pause for just a moment as we
compile those questions. Please stand by.
Okay, were going to go through the questions that were submitted
ahead of time first. (41:01) So for those of you who submitted questions
during the call, please stand by. Were going to try to get to most, if not all,
the questions that were submitted during the call.
So the first question that was submitted beforehand was: Pierre,
would you estimate what the current discount to intrinsic value is? And
what do you think may be the effect of QE in Europe on earnings and
valuation multiples, if you care to speculate?
Pierre:
All right, and well start going through these questions in order. And
depending on time, I may just take it over and just answer them all at once
without necessarily going through individual or reading each individual
question.
With respect to that first question, first, as I mentioned earlier in our
prepared remarks, we estimate that an average discount to intrinsic value
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of our holding is 34%. So in PV terms, this means a little under 0.7 time or
66%.
With respect to the question on QE, I think theres been and
continues to be a significant impact on market prices, and I think its
affected markets globally rather than within the limits of a specific
geography. The same QE policies have the same effect everywhere
theyre implemented, and obviously they have implications far beyond
their specific place of origin.
Im not sure about earnings though, or maybe it is a good thing for
premium car manufacturers maybe, for real estate businesses, for luxury
good companies, and auction houses. Maybe its also allowed some
companies ironically to invest in hard asset as a substitute for labor or to
rejuvenate equipment, thereby helping margins and possibly returns. But
generally speaking, CapEx spending hasnt been quite elevated, so I
cannot say for sure in general terms like this.
Arguably its actually been a negative for many businesses because
of lower rates and what they mean for many savers, as well as the weak
recovery weve generally seen since the global financial crisis. In some
cases, its increasingly highly inflationary. Think about the ballooning
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student loans and the rapid increase in tuition rates. And some instances
its deflationary, as the middle class is getting squeezed.
(43:01) So net-net in general terms, I guess I just dont know. Im
not an economist, and I dont want to be one. From an investment
standpoint though, at the end of the day we have to look at the specifics of
individual businesses.
On the valuation front, given the markets that weve experienced
over the past almost three years here within the International Value Team,
I think that what we can say is that theres supporting evidence QE has
fueled significant inflation in multiples, and earning expectation possibly for
that matter, as investors who were typically relative in their approach
adjusted their cost of equity to artificially low, if not zero, interest rates, and
as many fear now that the economy just couldnt operate without free
money, which incidentally may be true in the case of consumer spending
without real income growth like the U.S.
But generally speaking I think this impact has been actually quite
and maybe more dramatic in the U.S. It could be a function of scale, the
fact that European is that Europe is not as integrated as the U.S. and
maybe not as directive as China, and arguably because in Europe
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course theyre far more eager to do acquisitions and buybacks, which they
can show as accretive to earnings pretty much at any price given the
very low rates on some of the cash sometimes sitting idle on their balance
sheet.
The last thing that we can say is, while we can speculate on all of
this, we cannot let ourselves be held captive to this from an investment
perspective. It could go on for a long time. And I dont think it can go on
forever, but it could go on for a long time. And we cannot play this. We
cannot time the markets that way, or at least we dont think we can, so we
dont try. The only thing we can do is stay the course and follow through
with our bottom-up absolute value discipline no matter what it means in
the short term. In the long term, we think thats the only way to build value
for ourselves and for our shareholders.
Ryan:
Pierre:
Okay, the answer to that question is: to what extent to the full extent, but
so long as we can invest in high-quality, well run, financially robust
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Pierre:
Yeah. And Ill maybe revert back to some of these questions later because
many coming through, and I want to try and address as many as I can.
The question was with respect to the largest oil and gas majors like
Shell and Total having been clear about their intent to use exploration
spending, and the question is why were investing capital in Fugro in this
environment, which doesnt appear to be a great business, with returns on
capital have been historically in low double digit and with a surveying
business being a notoriously cyclical business.
So to begin with, many of these comments are true, but some need
to be nuanced. So Fugro was historically in the seismic survey business. It
was the bigger part of their portfolio in the past, and it is a low return
business by nature, at least for the companies who actually participate
with the assets on the balance sheet, as most do. Even though Fugro still
has some actual surveying activity, however, they sold out of the seismic
business prior to our investment in the company.
It remains true nonetheless that Fugro has exposure to oil and gas,
in particular offshore and high exposure to exploration spending. As you
know, commodity prices in oil in particular have been coming down, which
means exploration spending has also been coming down as well. This is
not new; this is not an intention thats being stated. (49:02) Its a reality
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now for these businesses. Its been a reality now for these businesses for
some time. And that doesnt mean they can no longer grow or generate
good profit, but it does mean lower growth and more challenges to
preserve margins and returns in the short term.
Its also true that Fugro is not a great business. The companys
returns have indeed been as low as in the low double digit. That said,
theyve also been well in excess of 13%. In fact theyve average north of
20% in the past 1015 years, including the current downturn in oil and
gas, as we just talked about. That may not be the sign of a great business,
but it is a business that creates value even relative to a normalized cost of
capital, which is how we think about it.
Lastly, its true that not only surveying but most commoditized
businesses including oil gas service businesses like Fugro are cyclical
businesses in nature. However, whats important to understand is we dont
invest in businesses only when they are, only when they are not cyclical,
and only when the environment is good. That means that to me seems
like a challenging formula to buy cheap stock and generate excess returns
doing that. None of the abovewhether thats softening market condition,
just okay business fundamentals, and cyclicalitymakes a business noninvestable. Its a question of what we believe is factored into the share
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price relative to the long-term free cash flow that the business can
generate because it can exist in perpetuity or at least for a very long
period of time.
So first, we dont invest only in great businesses. We invest in all
quality businessesthat is it say, businesses that are sustainable in the
long run and can durably generate average returns in excess of their
normalized cost of capital because of their fundamentals. Within that,
there are some great businesses and theyre work 15 time normalized
operating profit, which mean we want to buy them at 10 time at the most.
And there are some businesses that are just okay, and they can be worth
as little as eight time and still be own-able. But we need to buy them at the
most at five or six time profit.
(51:05) Second, we dont invest based on how good the
environment currently is for a business. Now is arguable not a good time
to invest in luxury goods or businesses with exposure to mining, China,
Brazil, or Europe. 2009 wasnt a good time to invest in many businesses,
But I have never seen a better one in my lifetime as an investor, with all
the limitations that that implies. While short-term environment may dictate
sentiment and share prices, they do not command long-term free cash
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flow generation. Thats often why were able to buy these businesses at
discounts to intrinsic value.
When oil prices were north of the $100 a barrel and all related
businesses were over-earning and they were all trading at huge multiple,
we had no interest in buying them. Same with emerging markets today, by
the way for the most part, if you could go back to some of my earlier
comments. Or try and buy luxury car manufacturers now as demand is
booming on cheap financing. Were sellers of this business nowin fact
recently sold out of our position in Daimler. But we were buyers in 2009,
and we were buyers in the first quarter of 2012 for that matter. Businesses
that are faced with short-term challenges are often hated. It doesnt mean
theyre bad businesses, it doesnt mean we dont need them, it doesnt
mean they wont be around in 50 years, and it doesnt mean they cannot
deliver good profits and return over the cycle. But very often it does mean
that their stocks are cheap because the short-term view I think is more
prevalent in capital markets than what the long-term nature of business
value would dictate.
With all that being said, its clear that, in hindsight with Fugro stock
being down by more than 40%, we would have much preferred not to be
invested in the company or not investing in the company when we did.
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But thats the past. But then our question now is what do we do now? Now
its a decent portfolio of niche-y businesses that should do well longer term
as business condition improves. And the companys trading at one time
book and 8% dividend yield, 7.5% earning, and one time revenue on last
disclosure numbers. Thats probably a price at which we should be
buyers, not sellers, and thats exactly what were doing.
Ryan:
Thanks, Pierre.
Pierre:
(53:10) Yeah, okay, so Ill start just going through questions, and Ill try to
take down as many as I can. Do you feel that the current portfolio is
overexposed to highly cyclical business, which I think a very valid
question? So as you know, we do not build or manage portfolio like that
based on exposed to one thing or another it ends up looking. Were also
not entirely clear on what overexposed actually means. I think were of
the view that if you think you have a massively asymmetric situation and a
large outlier in terms of prospective return, youd want to be as
overexposed to that opportunity as you possibly can. And for reference, to
us that means 10% of our assets at purchase. And historically weve
actually had more than 10% of our assets in one name, and that was LSL
when the shares were trading in the 200 P/Es.
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That said, its true that we have effectively added exposure to some
businesses that are more cyclical in nature. And while we are bottom-up
investors, we also try and remain mindful of what our exposure ultimately
is if you think back to how we approach currently exposure for instance.
Thats the case of ALS for example. Its clearly a cyclical business and it
was the case of LSL originally, as U.K. real estate transactions were down
by more than 50% even from their long-term average. But ALS samples,
volumes were down 35% last year, and they were down 27% in the first
half of their fiscal year 2015.
Like I said for LSL at the time, I dont know for sure that things
wont get worse from here, but they seem dire and sustainable longer term
at this stage. In the meantime similar to LSL, margins have been holding
up, as management is aggressively adjusting staff levels, with labor being
the higher cost item in the lab. Even with that, the returns are now half
what theyve been historically, and yet theyre still north of 20%. (55:03)
The network of labs that ALS has built is a superb asset, extremely difficult
to recreate. The balance sheet is relatively healthy at 2.2 time net debt to
EBITDA, and the free cash flow generation remain strong. But because it
is cyclical or at least in part because of this, the share prices have come
down from $12 a share to $5 a share, which means were able to buy this
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business at 1.3 times book value and we think a material discount to what
it would cost to even recreate this network, not to mention the multiyear
ramp-up period that would be needed to even get it to break even.
Fenner, too, has similar underlying exposure to mining, and it is by
definition a cyclical exposure. And I dont want to roll out the entire
investment thesis here, but a vast majority of the business is aftermarket,
so its more recurring in nature than cyclical. And the market for conveyor
belts is essentially a duopoly following the recent acquisition of Valiant
So the point here is whats important out of specifics of individual
businesses more than just the underlying exposure and what is again
factored into the price. Its based on normalized through-cycle economics.
And using a multiple within 815 time that we think adequately reflect the
cyclical nature of the business, if we can derive an intrinsic value that
implies the stock is trading at a significant discount, then were interested
in becoming shareholders in the business whether or not its cyclical.
Weve done it before. Think about LSL, Wolseley, Travis, Adecco, BBA,
Daimler, Taiwan Semi more recently.
The other ones we added in the past three months or so, I dont
know how cyclical one would consider them to bewhether thats Adidas,
Christian Dior, Prada, or Hypermarcas. So far as existing holdings are
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Yeah, so were going to have our estimates on our website in the next few
weeks. So stay tuned for that. Well have the estimated capital gains for
the Fund.
Pierre:
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Controller, is very much of that same vein. The new CEO, we havent
seen anything negative about him thus far. And as a result of that havent
made any adjustment to the intrinsic value according to this. But I think its
fair to say that, with respect to the CEO specifically, were still kind of
waiting to see what he can achieve and deliver.
Wed also highlight that we are very close to the Chairman of the
Board at Aggreko, who used to be the CEO of Cadbury, which is a
company we were invested in at the time. And we have direct rapport with
him as well, and we think that he is fully understands where we come
from. Weve had very clear exchanges with him with respect to our
expectation, how we think about capital allocation, how we think about
some of the technologiesnot to go into the specifics of this business
that are appropriate for this business. And I believe were very much on
the same page. So we see no reason to change the assessment of the
intrinsic value.
The 2.2 billion offer for Reebok, (63:01) I think its still a bit early for
me to be talking about this, and I certainly would not disclose what the
intrinsic value is that we have on Reebok. I think the bottom line is Reebok
was a mistake. The management team acknowledged that theyve
destroyed significant amount of value doing this deal back in 2006.
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Theyve struggled to find a formula that works. They may be on the verge
of doing that with a focus on fitness, and so I certainly wouldnt want them
to sell at a discount to intrinsic value for that asset. But if we can get a
good price for it, I dont I would want management to consider it. And
how they think about it is going to be an important factor to how we assess
their quality level.
Discount to intrinsic value for Adidas and SAP, in light of the recent
results, no dramatic change in enterprise value. As you know enterprise
value is the perpetual stream of free cash flow discounted back to present
time so whatever is happening in a given quarter doesnt have a massive
impact. And the discount to intrinsic value has to be north of 33% for us to
buy. So that answer on the question on Adidas and SAP, I think I can
disclose on this call. As we stand today, even though its been a long
existing holding, its north of 33% as well.
Why do we think Accenture is genuine bargain? Accenture is still in
the portfolio. Its come down as a weighting. I think we can say that its at
the bottom of the pile in terms of discount to intrinsic value. When we do
case studies, we try not give away our hottest investment thesis. So
maybe that gives you some perspective. Its clearly not at the top of the
docket.
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defensively to below 10%. In the case of the euro, I can say as of today,
were a little over-hedged, but weve got more than 60% that hedged.
Ryan:
Thanks, Pierre and team. I think that was all the questions that were
submitted both beforehand and during the call. If for some reason we
missed your question, please feel free to email us at crm@fpafunds.com.
and well get back to you later today.
Thank you, team. And to our listeners, we would like to thank you
for your participation in todays FPA International Values third quarter
2014 webcast. We invite you, your colleagues, and clients to listen to the
playback and view the slides from todays webcast, which will be available
on our website, fpafunds.com, over the next week or so. (67:02) We urge
you to visit the website for additional information on the Fund, such as
complete portfolio holdings, historical returns, and after-tax returns.
Importantly we expect the portfolio manager commentary for this quarter
to be available in the coming days. So please go to our website for that.
Following todays webcast, you will have the opportunity to provide
your feedback. We highly encourage you to complete this portion of the
webcast, and we do appreciate and review all of your comments.
Please visit fpafunds.com in the future for webcast information,
including replays. We will post the date and time of the prospective
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webcasts during the latter part of each quarter, and expect the calls will
generally be held three to four weeks following each quarters end. We
hope that our shareholder letters, commentaries, and these conference
calls will help keep you, our investors, appropriately informed about the
Fund.
We do want to make sure you understand that the views expressed
on this call are as of today, October 21st, 2014, and are subject to change
based on market and other conditions. These views may differ from other
portfolio managers and analysts of the firm as a whole, and are not
intended to be a forecast of future events, a guarantee of future results, or
investment advice. Any mention of individual securities or sectors should
not be construed as a recommendation to purchase or sell such securities,
and any information provided is not a sufficient basis upon which to make
an investment decision. The information provided does not constitute and
should not be construed as an offer or solicitation with respect to any
securities, products, or services discussed.
Past performance is not a guarantee of future results, and it should
not be assumed that recommendations made in the future will be
profitable or will equal the performance of the security examples
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[END CALL]
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