Tuesday, May 15, 2012

Leucadia National Annual Meeting Notes 2012

I know the annual meeting excitement today is in Florida (J.P. Morgan), but I went to the "boring" one today in midtown.    Again, I am not the greatest note-taker and this is not meant to be a comprehensive summary although I tried to jot down most major points.  There may also be some errors too, obviously.   But anyway, you get what you pay for...

Justin Wheeler
After Ian Cumming went through the annual meeting business (votes etc...), Justin Wheeler, the new COO went through the results of each business.  There wasn't anything new that wasn't in the annual report (or the 10Q), obviously (due to Reg FD 8K requirement if there was new disclosure).

Wheeler said that his first day at LUK was at the 2000 annual meeting and he mentioned two questions asked by shareholders.  One of them was a shareholder complaining about LUK's pepsi bottling assets in Russia and Cumming said that the shareholder should sell his shares (if he didn't like it).  And then someone asked what they thought of the LUK stock price and Steinberg said that the shares were 25% overvalued.  (By the way, on May 15, 2000, the stock price closed at $23.25/share.  The BPS at 12/30/1999 was $19.75/share and $20.16/share at March 31, 2000).

Some very short comments about business segments:

Garcadia:   Positive perfect storm with less dealerships now due to industry restructuring, strong sales per dealership (and strong auto sales) and low interest rates (for attractive financing).

Berkadia:  Waiting for commercial refinancing opportunity which they feel will come

Mueller:  Focus on efficiencies, upside when construction recovers

Idaho Timber:  Just had best quarter in a long time, even though it might not mean much in this environment. 

Crimson Wine:  Has scale, size, reach and should grow.  Should be cash flow positive going forward.

Sangart:  Data they are getting back are positive.  It's still a bimodal outcome play, but information they are getting is good.

Premiere:  Took longer than they thought, but is profitable.  Hotel has 99% occupancy. They are contemplating adding another tower to the hotel to draw more customers to the casino.

With this done, the Q&A session started around 10:30 or so (meeting started at 10:00 a.m.)

A shareholder asked about the situation in Argentina; do they still own CRESY?  What do they think of what's going on there?  Cumming passed it to Steinberg who said LUK still owns just a few shares.  They had no further comment.  They obviously didn't want to talk about it as one of them said "Next!".

Cumming Retirement
Someone asked for more color on Cumming's nonrenewal in 2015 (when he turns 75).  Cumming said that he has two sons that have been begging him for a long time to quit LUK to help them start their own LUK.  He said that when he is 75 years old it's the right time.    (So how do we invest in the son's new LUK?!)

Steinberg said that he is four years younger than Cumming.  He mentioned that they are lucky to have a terrific COO that he really enjoys working with.  He said that this COO appointment is not the end of the succession issue.  They will continue to work on it.

Shipping Industry
Someone asked about the shipping industry; has LUK looked at deals/assets in this area?  Cumming said that they have looked at many deals in the area.  "Ships can sink", he said and they never had the courage.  Steinberg added that they have looked at many deals but it always seems that the Greeks are smarter when it comes to ships (although they have other problems).

Next Generation at LUK
Someone asked what LUK will look like in the future, in the next generation.  What are they looking for to deal with the succession issue?

They are looking for a business (or looking to create a business at LUK) that can earn $200 million per year but in a bad year still make $50 million (they may have meant they want LUK to be such a company).  They want to make LUK durable, a fortress.  The process of business is simple, but people in business are nuts and do stupid things (implying that LUK will simply do business without doing stupid things).  Cumming said there is a big cloud over us so may not make a lot of money in the near term.

LUK is an Inflation Play
In answering the above question about the future of LUK, Steinberg said that they started first and foremost as opportunists.   He then went on to say that LUK is now a bet on future inflation.  As they wrote in the annual report, there is no way out of this predicament other than inflation.  The assets owned by LUK; Inmet, Berkadia, Jeffries, Idaho Timber etc... all benefit when inflation finally comes.

He said that if you don't believe inflation is coming, you should sell your stock.

That's how LUK is positioned now.  It wasn't some strategy or plan that led here, but that's the way it is now.  The assets of LUK will benefit from inflation.

Scale of Business / Culture
Someone asked about the diseconomies of scale; does LUK suffer from it?  Also, how to think about culture at LUK for the next generation.

Cumming said you can't buy culture.  Culture depends on the people at the top of the firm.  Nothing more to say about that.  Cumming never thought of diseconomies of scale at LUK.  They just always have been looking for 15% pretax returns.

Steinberg said there are some diseconomies of scale.  There are odds and ends in the closet they are selling off  (Cumming said, "It's junk").

Leucadia Energy
Someone asked about the energy business (gasification etc...).  Tom Mara who runs the business answered some questions.  Some of this stuff doesn't work with so low a natural gas price.  Tom recommended to shareholders to check out a petro-engineer named Arthur Berman who did a lot of research on shale.  Berman thinks that natural gas prices have to be $7.00/mcf or so for shale gas to work over the long term.

I think he said that there will be some activity within the next six months.

Fortescue Metals Note Litigation
Someone asked about what they think of the litigation on these notes.  Cumming said he would be "appalled" if they didn't win.  "I think we're going to win", he said.  Steinberg said that they wrote what they think in the annual report and he hasn't changed his mind.

There was a question about the gold/farmland comment in the annual report; if this means that they will buy gold/farmland for LUK.  Cumming said that he and Steinberg disagree on this but gold and farmland are personal investments; not for LUK.  Cumming said that he likes farmland as it's a producing asset and people have to eat, whereas he said Steinberg bought a lot of gold.

Cumming said he bought 27,000 acres of farmland (commercial agricultural stuff).  Cumming said "Gold is lethargic".  Steinberg said, "I still like gold".

Book Value/Valuation of LUK
Cumming ranted about the accounting (deferred tax assets written up and down, up and down twice) and how meaningless it is.  Steinberg said it's not that difficult to figure out what LUK is worth (he seemed annoyed by the question).  Just look at what's happening in the world, what the various assets LUK owns can do and figure it out yourself.

Share Repurchase
Cumming said that he disagrees on this with Steinberg (not sure what he meant; maybe Cumming wants to repurchase shares?). Steinberg said LUK is deleveraging now.  They did repurchase shares in the past and they may yet do so in the future (implying that they are not in such a rush to do so now).

Most Upside in the Portfolio
Someone asked where the most upside is now in the LUK portfolio.  Steinberg said that he doesn't want to answer that.  They explained that if they said something new, because of Reg FD, they would have to file an 8-K, so they don't want to comment on that.  Cumming joked that they have lots of new news but you can't have it (well, this is true so not really a joke).

Is Harvard MBA worth it?
Cumming has a Harvard MBA and he said it's a ticket.  It's not about whether you learned anything or not.  That's not important.  A Harvard MBA is a ticket.

Copper Spot Price Prediction?
They can't see the future.   Gravity will cause growth rate in China to slow, but copper is not just China; it's all of the developing world that need copper for various purposes.  It can't be replaced in many situations.   Cumming joked that if they can predict spot prices, "We wouldn't be wasting time here with you guys...".

Steinberg said that it's difficult to predict spot prices.  Copper asset fits the inflation scenario.  The copper business actually started as a gold project (bankrupt or distressed) but it turned out there was no gold.  But they found copper.  It took 15 years.  It took a long time, but it's been very profitable.

They talked about how you need a wind at your back.  Just like protein.  Changing dietary habits around the world means more protein consumption (beef etc...), so that's a wind at your back. Same with copper and inflation.  The inflation or potential inflation is a wind at your back for the copper business.

How was National Beef Bought?  Structure of Deal?
It was a cash deal.  Not an auction.

Leucadia Energy Potential; How Material Could it be for LUK Future?
Natural gas is very low so not making money now, but it can make a "hell of a lot of money".
There will be some real activity in the next six months.

Investment in Italian Company?
Cumming said it's a startup. It's a bet.  It's a very interesting bet  (no more explanation than that).

Inflation Hedge
Someone mentioned Buffett's article in the 1970s about how inflation is not good for stocks and it's not good for asset heavy / capital intensive businesses.  He also asked about how Jeffries (JEF) is an inflation play and how we know that JEF won't have a Dimon-like situation ($2 billion loss).

I guess the questioner was trying ask them if it wasn't better to invest in high return on capital, high-moat businesses rather than capital intensive, mining-type businesses if they are so worried about inflation.

Steinberg said that he would rather own Coke stock rather than the companies in LUK's portfolio for himself.  He said that Buffett is way better, smarter, saner and less prone to do insane things than they are.  Steinberg would be "very satisified" just to keep up with inflation in LUK's portfolio.   LUK is simply not in the business of buying Coke stock.  He said maybe the questioner should own Berkshire Hathaway instead.

(My comment:  I think people keep forgetting that LUK is a distressed asset / special situations investor.  They are not going to compete with BRK and other blue chip investors, mutual funds etc...  They don't have a history of buying healthy, strong, listed companies at full price and beating the S&P 500 index; that's just not their game.  If KO was bankrupt, then sure, I bet LUK would buy up the bonds and try to get equity on reemergence etc...

Also, note that even though Cumming/Steinberg are bullish inflation, they are not buying gold and farmland in LUK.  They are distressed asset investors, not a commodity fund.   Buying gold would not be within their area of expertise.

Steinberg explained that they want to own assets with the wind at their back, and they believe their portfolio now reflects that.

As for JEF, they didn't comment but I'll just say that JEF is a play on Handler.  LUK has known Handler for many years so it's a bet on the CEO.  He is a conservative CEO and one of the best in the business.  As for JEF play as an inflation play, I think part of the play is that JEF specializes in high-yield bonds and there will be plenty of opportunities going forward due to so much debt in the world.  The opportunity may come from refinancing needs (JEF can participate) and also if many borrowers have trouble, they can participate in restructuring etc...)  So JEF can play in many different areas)).

Decreasing Leverage Contrary to Inflation Play?
Steinberg said they are deleveraging, so someone asked if that wasn't contrary to their inflation outlook.  Isn't having debt better in that scenario?

Debt is good in inflation, but Steinberg said that you can get killed along the way in rocky times.  He said they are taking a moderate approach.  They can borrow $1 billion at 8%, but "it just doesn't feel right".

Advice for Research, Finding Ideas to People Who Aspire to Do as LUK Did
Cumming said you should sit on a porch, watch the world go by and then if you see something succulent, jump on it.

And that's about it.  The whole thing ended a little after 11:00 am, so it was pretty short but they got through a lot of questions.  That's pretty efficient.   The questions seemed to be to the point and on topic for the most part, and the answers were pretty straight forward too.  Good meeting.


  1. Thanks for taking the time to publish your notes. Would you say that the tone of the meeting was positive? Thanks.

    1. Hmm... I don't know what you mean. It was positive in the sense that LUK seems to be well-positioned and there was no complaining or anything. But negative in the sense of Cumming/Steinberg's views of the world.

  2. seems the "deleveraging" is a kind of "hedge" against their huge inflation bets. After all, even if inflation comes much later, the businesses will chug along, although not do anything spectacular.
    Seems C&S underpromise and overdeliver, sure they say their busiensses are crap compared to Berkshire but their history shows they are trying to get 5 and 10 baggers while at the same time claiming 15% pre-tax.

    1. They're just being conservative. In the annual report, they did say good deals are hard to find as hedge funds / private equity have a lot of cash and interest rates are low. Money costs 8% for LUK, so raising money now, paying 8% and then waiting can be expensive. Tisch at Loews said the same thing on a conference call recently; they can sell bonds and pay interest on it for negative carry until a good deal comes along, but they don't want to pay the negative carry when they don't know when an elephant may show up. Sure, they can lock in a low rate now, but that is offset by the time it might take until they can deploy it. Net, net, they'd rather not issue bonds at this point...

  3. Thanks for sharing the notes! Much appreciated.

  4. how many times did they say the words "sell your shares" in the meeting. my count was 5. you want us to forecast copper prices? sell your shares. you want a moat? sell your shares and buy Berkshire. you think the sky is blue? sell your shares!!

    1. I didn't count, but I don't blame them either. They do what they do. It's either you understand what they are up to and go along, or you get out. Steinberg is just being straight and blunt with shareholders and that's a good thing.

      He said they are an inflation play so if you don't think inflation is coming, sell LUK stock. That may just be good, honest advice because they can get killed in a deflationary collapse. Also, people keep comparing LUK to BRK even though they are almost the exact opposite (BRK is investment grade / LUK is junk rated. BRK buys quality (top feeder), LUK buys problems (bottom feeder). BRK buys and holds forever, LUK buys to sell (this may change over time for succession/durability issues) etc...

      I think he is doing people a favor by being so straight and blunt. Don't expect to wake up the next morning and see Cumming/Steinberg turn into Buffett; it won't happen.

  5. I don't get how some of their investments with lots of "potential" are value investments, namely Sangart, Leucadia Energy's gasification, and Italian telecom. I got a bad vibe at the meeting. I recognize that they are different than Buffett, but they seem to have lost focus on finding long-term value and have instead moved into things that are hopes and dreams.

    1. Sangart is clearly a biotech startup. But it isn't that big. I don't get a lot of things they do; look at what goes in and out of their stock portfolio. I think they tend to bet on people they like. A lot of their smaller investments are head scratchers, but it's the big ones that count.

      Fortescue too was a startup lead by a 'difficult' person. Wiltel was a scary pick but I think they got out at break even with a $5+ billion in tax loss carryforwards etc...

      You know what Steinberg would say; if you don't like what you see, then sell the stock, lol...

    2. I don't like that the meeting was so short as well. There's so little transparency; Cumming seemed like it was all a formality. BH and BRKB meetings are much more useful. I'll have to see about GLRE on Monday.

  6. In term of the Leucadia energy, did they elaborate how they can make money? I thought the liquified coal is on hold because of the low natural gas price, so would the activity from the LNG export terminal? Would this be related to Japan shutting down all its reactors and they are already the biggest importer of LNG? Is there another piece there to Leucadia Energy that I am not aware of?

    1. I think when Mara mentioned Berman, the point was that natural gas can't stay this low. I may have misheard and I haven't googled Berman yet, but what I thought Mara said is that Berman did some serious research on shale and that these projects, over time, won't work unless natgas prices are at $7.00/mcf. The implication was that even with all this new shale gas, natgas prices have to get back to $7.00 for a lot of these to become economical.

      Also, Buffett in a TV interview somewhere mentioned the natgas forward curve. He says that people are running around making plans and assumptions with $2.00 natgas prices, but if you look at the curve going out, forward prices are $4, 5/mcf.

      So the implication here is that I think LUK thinks that these low natgas prices are temporary and unsustainable even with this huge new supply and that when prices come back up from these extremely depressed levels, their energy projects can make a lot of money.

    2. Thank you. I am really enjoying your blog and thank you for writing it.

  7. thanks for posting this, one question when you write this BPS 12/30/1999 was 19.75/share - is that adjusted for a split? b/c i see book value listed on the 2011 annual letter (for 1999) as $6.59

    (By the way, on May 15, 2000, the stock price closed at $23.25/share. The BPS at 12/30/1999 was $19.75/share and $20.16/share at March 31, 2000).

    1. No, it's not adjusted; it's the stock price as it was seen back then. I just looked it up because Steinberg apparently said the stock was 25% overvalued back then (at the May 2000 annual meeting). The BPS for 1999 is from the 1999 10K. There have been splits since then...

  8. Thanks for posting all this information. Do you understand the Mueller investment? I know it will benefit from a rebound in construction, I just don´t think it is that cheap in order to buy 27,5% of the company. Probably I am not understanding it well and its actually pretty cheap. Any thoughts?

    1. Hi, No, I haven't really taken a close look at that yet. I agree it's not obvious at first glance what is going on there. If I have anything interesting to say (as I look at it later), I may post something.

  9. Any additional comments on Inmet? Its trading below book and below LUK´s cost. Any commets?

    1. I haven't looked at Inmet closely myself, but the folks at LUK obviously still really like it. China demand softening is only one part of the equation and there is the other developing economies etc... Maybe I will take a closer look at this at some point... but I haven't yet.

  10. Thanks for posting this. Did not find your blog until July. I did not get the LUK report this year because i traded in and out of the stock earlier this year to make a little money, made more on JEF, of course. Your notes were great. Thanks.

  11. Thoughts on this JEF acquisition? or rather, thoughts on the fact that they are paying for the acquisition with what appears to be under valued stock? It seems like given how cheap it is to borrow share holders would benefit more if they issued debt and used the proceeds to pay cash for JEF rather than issuing under valued stock and using that to pay for the acquisition.

    1. Hi, I'll make a post later about this deal after going through the material. Stay tuned.


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