Sequoia Fund Transcript 2015

RUANE, CUNNIFF & GOLDFARB INVESTOR DAY 2015 ST. REGIS HOTEL, NEW YORK CITY MAY 15, 2015

Disclosures Please consi Please consider der the inves investment tment objectives, objectives, risks and char charges ges and expe expenses nses of Sequo Sequoia ia Fund, Inc. (the ‘‘Fund’ ‘‘Fund’’) ’) carefully before investing. The Fund’s prospectus contains this and other information about the Fund. You may obtain obt ain yea year-t r-to-d o-date ate per perfor forman mance ce as of the most re recen centt mon month th end end,, and a cop copyy of the pr prosp ospect ectus us by cal callin ling g (800) 686-6884, or on the Fund’s websi website te at www www.sequ .sequoiafun oiafund.com. d.com. Please rea read d the pro prospect spectus us car carefully efully before investing. An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency agency.. Average Annual Total Returns as of June 30, 2015

Sequoia Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S&P 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *

Year to Date

9.78% 1.23%

1 Year

17.04% 7.42%

5 Years*

19.04% 17.34%

10 Years*

10.30% 7.89%

Aver verage age Ann Annual ual Tota otall Ret Return urn

The per perfor forman mance ce dat data a sho shown wn re repr prese esents nts pas pastt per perfor forman mance ce and ass assume umess re reinv invest estmen mentt of div divide idends nds.. Pas Past t performance does not guarantee future results. The investment return and principal value of an investment in the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Year-to-date performance as of the most recent month end can be obtained by calling DST Systems, Inc. at (800) 686-6884. The S&P 500 Index (the ‘‘Index’’) is an unmanaged, capitalization-weighted index of the common stocks of 500 majo ma jorr US co corp rpor orat ation ions. s. Th Thee In Inde dexx is no nott me mean antt to be in indi dica cativ tivee of th thee pe perf rfor orma manc nce, e, as asse sett co comp mpos ositi ition on or volatil vol atility ity of the Fund. The Fund’s re resul sults ts may differ differ mar marked kedly ly fr from om tho those se of the Index, in eith either er up or dow down n market mar ket tr trend endss and inte intere rest st rat ratee env envir ironm onment ents. s. Unli Unlike ke a mutu mutual al fun fund, d, the per perfor forman mance ce of an ind index ex ass assume umess no taxes, transaction costs, management fees or other expenses. It is not possible to invest directly in an unmanaged index. As reflected in the current prospectus, the Fund’ Fund’ss Annual Fund Operating Expenses for 2014 were 1.03%. Ruane, Cunnifff & Goldfa Cunnif Goldfarb, rb, the Fund’s inves investment tment adviser, adviser, has agr agreed eed to re reimburs imbursee a portio portion n of the Fund’s opera operating ting expenses. This reimbursement is a provision of Ruane, Cunniff & Goldfarb’s investment advisory agreement with the Fund and will be in effect only so long as that investment advisory agreement is in effect. Investing in the Fund involves risk. Investors should carefully review the risks associated with an investment in the Fund and understand those risks before investing. The principal risks of investing in the Fund include market risk, value inves investing ting risk, non-diversifica non-diversification tion risk, foreign (non-US) risk, curr currency ency risk, small-c small-cap ap and mid-cap comp co mpan anyy ri risk sk,, ma mana nage ged d fu fund nd ri risk sk an and d liq liquid uidity ity ri risk sk.. As of Ju June ne 30 30,, 20 2015 15,, th thee to top p te ten n ho hold ldin ings gs of th thee Fu Fund nd included:

Val alea eant nt Ph Phar arma mace ceut utic ical alss Int Inter erna nati tion onal al,, Inc. Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Berrks Be kshhir iree Ha Hath thaw away ay,, Inc Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TJX TJ X Com Compa pannie iess, Inc Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . O’Re O’ Reil illy ly Au Auttom omot otiv ivee, In Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fasste Fa tena nall Com Comppan anyy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mast Ma ster erCa Card rd,, In Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preeci Pr cisi sion on Ca Cast stpa part rtss Co Corp rp.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Moha Mo hawk wk In Indu dusstr trie ies, s, Inc nc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Idex Id exxx Lab Labor oraato torries es,, Inc Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Google, In Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

28.7% 28.7 % 10.6 10 .6% % 5.0% 5. 0% 4.3% 4. 3% 4.2% 4. 2% 3.2% 3. 2% 2.7% 2. 7% 2.5% 2. 5% 2.3% 2. 3% 2.0%

1

Disclosures (continued) Any sector focuses of the Fund are subject to change, and past returns are not indicative of future returns. The cash generation of a company in which the Fund invests may not continue given market or other conditions, and portfolio turnover may change depending on future circumstances. Fund holdings and/or sector weighting are subject to change and should not be considered recommendations to buy or sell any securities. Current and future portfolio holdings are subject to risk. Shares of the Fund are offered through the Fund’s distributor, Ruane, Cunniff & Goldfarb LLC. Ruane, Cunniff & Goldfarb LLC is an affıliate of Ruane, Cunniff & Goldfarb Inc. and is a member of FINRA. The op The opin inio ions ns ex expr pres esse sed d be belo low w ar aree tho those se of th thee pe pers rson onne nell of Ru Ruan ane, e, Cu Cuni nifff & Go Gold ldfa farb rb an and d sh shou ould ld no nott be considered a forecast of future events, a guarantee of future results, or investment advice. The following has been edited for clarity.

2

Ruane, Cunniff & Goldfarb Investor Day 2015 St. Regis Hotel, New York City − May 15, 2015 Remarks have been edited for clarity and relevance.

Bob Goldfarb:

Good morning and welcome to our investor day. We are going to follow the same format we have foll fo llow owed ed fo forr a nu numb mber er of ye year ars. s. We wi will ll ta take ke questions until 12:30. We have to vacate the room by on onee o’ o’cl cloc ockk bu butt we wi will ll be ar arou ound nd be betw twee eenn 12:30 and one o’clock to answer any questions that you may still have. Before we begin, I would like to introduce our team. On my right are Greg Alexander and Greg Steinmetz. On my left are David Poppe, who is the president of our firm, and Jon Brandt. The rest of our team is seated in the front of the room. In alphabetical order they are: Saatvik Agarwal, Girish Bhak Bh akoo oo,, Jo Jonn Gr Gros oss, s, wh whoo is ou ourr di dire rect ctor or of cl clie ient nt services, John Harris, Jake Hennemuth, Arman Kline, Antonius Kufferath, Trevor Magyar, Scott O’Connell, Will Pan, Terence Paré, Rory Priday, Chase Sheridan, Inde In derr So Soni ni,, St Step epha hann va vann de derr Me Mers rsch ch,, an andd Ma Marc rc Wallach. I would also like to introduce the directors of th thee Se Sequ quoi oiaa Fu Fund nd,, wh whoo ar aree se seat ated ed in th thee fr fron ontt row: Vinny Ahooja, Roger Lowenstein, and Sharon Osberg. Bob Swiggett is away in Africa. Who wants to ask the first question? Question:

Howa Ho ward rd Sc Schi hill ller er ha hass re resi sign gned ed as th thee ch chie ief f financial financi al of offfice icerr at Vale aleant ant Pha Pharma rmaceu ceutic ticals als aft after er Times mes joked that he may four years. The Financial Ti be exhausted from ‘‘all this fiddling.’’ With Valeant’s lofty stock price likely bringing its percentage of our fund fu nd’’s as asse sets ts to up upwa ward rdss of 20 20% % an andd wi with th th thee company’s accelerated growth likely to be impacted by the specter of rising interest rates, have you been reevaluating our position? Rory Priday:

He has done quite a bit of fiddling. The market cap since Howard Schiller joined Valeant went from less than $15 billion to over $70 billion today. But I think thi nk som somee peo people ple get bur burned ned out at the company company just because of the number of deals that they do and thee nu th numb mber er of pr prod oduc ucts ts th that at th they ey ma mana nage ge.. So Some me people refer to their time at Valeant as a tour of duty. It was a little concerning for us that he left, but he is going to be on the board hopefully for a long time. He to told ld us th thaat he wo wouuld be the here re as lo lonng as 1

2

investors wanted to have him. So I do not think he is going anywhere.1 David Poppe:

The fact that Howard is staying on the board is a pretty strong sign that there are no disagreements or unhappiness. Not so long ago, he was telling us that Valeant closed a deal at eight o’clock at night on New Ne w Year’ r’ss Eve. It is a very intense pace. Sometimes you make a lot of money and that pace is too much. I think it is more about that than it is about anything else. 2 Question:

Last year you spoke about your investment in Rolls-Royce. In your December report, it was quite a horr ho rror or sh show ow th that at wa wass re repo port rted ed fo forr Ro Roll llss-Ro Royc yce. e. Could you give us an update? Arman Kline:

We try to be supportive of the companies we invest in, but sometimes we do not agree with the mana ma nage geme ment nt te team am.. Th That at is wh what at ha happ ppen ened ed at Rolls-Royce. The board has now chosen a new chief executive with whom we are pleased. We have not had a chance to meet him yet, but I was in London last la st we week ek an andd me mett wi with th th thee bo boar ard. d. Th Thee st stra rate tegy gy seems to be more in line with what we would like to see. se e. We ar aree lo look okin ingg fo forw rwar ardd to me meet etin ingg th thee ne new w CEO. Our initial research on him has been positive. So we are cautiously optimistic, and we continue to think that the core aerospace business at Rolls-Royce is very attractive. Question:

How do you think about selling a company? Is it bec becaus ausee the there re is a neg negati ative ve dev develo elopme pment nt at tha thatt company or is it more because of a change in your thesis about an industry? David Poppe:

If I understood the question correctly, you have noti no tice cedd th that at we so some meti time mess se sell ll wh when en th ther eree is a negative development at one of our companies. So, is our general strategy to sell upon negative news or do we sell for some other reason? Speaking broadly, we always sell based on valuation. Valuation can seem tooo hi to high gh be beca caus usee of ne nega gati tive ve de deve velo lopm pmen ents ts,, bu butt

Subsequent to the Ruane, Cunniff & Goldfarb Investor Day, Mike Pearson announced in a public forum that Howard Schiller was one of two potential successors. On 11 June 2015, Valeant announced that Robert L. Rosiello, formerly McKinsey’s Senior Partner in charge of its global merger practice, would take over for Howard Schiller as Valeant’s Chief Financial Officer on 1 July 2015. 3

Ruane, Cunniff & Goldfarb Investor Day St. Regis Hotel, New York City − May 15, 2015

every situation is unique. So it depends on what the negative development is. Some things are temporary andd fix an fixab able le,, an andd so some me th thin ings gs ma mayy se seem em mo more re intractable. We would not be sellers because there is negati neg ative ve new newss lik likee a sho short rt ter term m ear earnin nings gs mi miss ss or something like that. Question:

If I could ask about Valeant as well.... Being students of the family of Berkshire, can you discuss your views and perhaps comment on what Mr. Munger insinuated about Valeant recently? Bob Goldfarb:

After reading about Mr. Munge Munger’s r’s comments, comments, Rory looked for all the books on Harold Geneen that he could find. I think he is the man to answer your question. Rory? Rory Priday: Journa rnall meeting, We we were re no nott at th thee Daily Jou wher wh eree Mr Mr.. Mu Mung nger er ma made de th thee re rema mark rk co comp mpar arin ingg Valeant and ITT. So we do not know exactly what he said. But it was something to the effect that Valeant was like ITT, except that Mike Pearson was worse than Harold Geneen, who became CEO of ITT in 1959. ITT was one of a number of serial acquirers that were active particularly in 1960s. Geneen bought a raft of companies — some of the names you will recogn rec ognize ize tod today ay lik likee She Sherat raton on and Avis. Avis. Bob can provide more context than I can because he is pretty fami fa mili liar ar wi with th th thee co comp mpan anyy as we well ll.. Bu Butt Ge Gene neen en boug bo ught ht a lo lott of di disp spar arat atee bu busi sine ness sses es in di difffe fere rent nt industries. I recall from the books I read that ITT’s sales sal es wen wentt fro from m $70 $7000 mil milli lion on to $17 billion billion ove overr eigh ei ghttee eenn ye yeaars an andd the ear arni ninngs we went nt fro rom m $29 million to $550 million. But ITT also issued a lot of equity and was prone to issue equity in order to buy these companies. By the time Geneen stepped down from the CEO’s spot, ITT’s share count had increased tenfold. One of the big differ differenc ences es is tha thatt Vale aleant ant is focused on the healthcare sector. Last year, 57% of sales sal es cam camee fro from m pha pharm rmace aceuti utical cals. s. The com compan panyy is not really going outside the healthcare space, and it is not going far outside pharmaceuticals. There are plenty of pharma companies that operate in different therap the rapeut eutic ic are areas, as, and the mai mainn one oness for Vale aleant ant toda to dayy ar aree de derm rmat atol olog ogyy, op opht htha halm lmol olog ogyy, an andd gastro gas troent entero erolog logyy. Ano Anothe therr dif differ ferenc encee is tha thatt Mik Mikee does do es no nott li like ke to is issu suee eq equi uity ty.. Ev Even en th thou ough gh th thee 3

4

Bausch & Lomb and Salix acquisitions required him to issue some equity, the share count has not really moved that much. If you adjust for the dividend that Valeant paid out bef before ore the Bio Biovai vaill mer merger ger,, ear earnin nings gs per sha share re have gone from 81 cents to probably close to $27 this year. Next year’s EPS will be close to $38 a shar sh are. e. So th thee ea earn rnin ings gs wi will ll ha have ve go gone ne up ov over er 45 times in seven years. Bob Goldfarb:

My guess, when I saw the comments, was that Charli Char liee mi migh ghtt ha have ve be been en ta tarrge geti ting ng Val alea eant nt’’s acccou ac ount ntin ing. g. If I we were re go goin ingg to qu ques esti tion on th thee accounting, the principal issue I would have would be with the accounting for the restructuring charges after Valeant makes a large acquisition. The company andd th an thee an anal alys ysts ts wh whoo fo foll llow ow it ad addd ba back ck th thes esee restructur restr ucturing ing char charges ges to deri derive ve the compa company’ ny’ss cash earnings. What we do is add back the restructuring charges to the purchase price; so that if Valeant buys a company for $9 billion and there are $500 million of af afte terr-ta taxx re rest stru ruct ctur urin ingg ch char arge ges, s, th thee co comp mpan anyy effectively paid $9.5 billion rather than the $9 billion that it announced initially. If you de dedu duct ct the res esttru ruct ctur uriing cha harrge gess associated with significant acquisitions from a given year’ ye ar’ss ea earn rnin ings gs,, I do no nott th thin inkk th that at is ac accu cura rate te accounting even though it does conform to GAAP. When we look at a company’s reported earnings in a given year, we are always searching for a sense of what wh at th thee tr true ue ea earn rnin ingg po powe werr of th that at co comp mpan anyy is relative to the stock price. If you deduct the large restru res tructu cturin ringg cha charg rges es in a giv given en yea year, r, you are not goin go ingg to ge gett an ac accu cura rate te nu numb mber er fo forr th thee ea earn rnin ingg powe po werr. He Hein inzz — Be Berk rksh shir iree ac acqu quir ired ed 50 50% % of th thee compan com panyy — is an exa exampl mple. e. Jon Jonny ny,, Hei Heinz nz had ver veryy low lo w ea earn rnin inggs la last st ye yeaar, ri righ ghtt, be beca cauuse of th thee restructuring charges? Jon Brandt:

Yes, it did. Bob Goldfarb:

That was GAAP acc That accoun ountin ting. g. Hei Heinz’ nz’ss ear earnin ningg power is clearly very substantial but it was masked in the accounting by that huge restructuring charge. So when we looked at Berkshire in the year Heinz was acquired, we just added back those restructuring char ch arge gess to ge gett a be bett tter er id idea ea of wh what at He Hein inzz wa wass earnin ear ning, g, hal halff of whi which ch Ber Berksh kshir iree 3 was ear earnin ningg as well.

Upon exercising warrants on 7 June 2015, Berkshire increased its ownership to 52.5% of Heinz.


Question:

Question:

I guess it is no surprise that most of the questions are about Valeant. So I will add one more. A few weeks ago in the papers it was reported that Valeant raised the price on a par partic ticula ularr drug by 400 400% % − 500 500%, %, within within a ver veryy short period of time after purchasing the rights to that drug from another company. I was troubled by reading that. I am curious to hear your reaction.

I have a question about World Fuel. I wanted to ask about the level of confidence that you have in volume vol ume gro growth wth and pri pricin cingg tre trends nds in the mar marine ine,, aviation, and land segment over the mid-to-long term and how important you think acquisitions are to the future. I find those mid-to-longer term numbers hard to get my hands around.

Rory Priday:

Rory Priday:

I un unde ders rsta tand nd wh whyy re reac acti tion on to th that at co coul uldd be negative. negati ve. Obv Obviou iously sly,, Seq Sequoi uoiaa and our cli client entss tha thatt ownn Val ow alea eant nt ar aree be bene nefit fitin ingg fr from om th thos osee pr pric icee increases. But in general, the capitalistic approach to pric pr icin ingg is to ch char arge ge wh what at th thee ma mark rket et wi will ll be bear ar.. Valeant believes that when it buys a drug and it is unde un derp rpri rice ced, d, it sh shou ould ld ch char arge ge a pr pric icee th that at wi will ll maxim max imize ize the com compan pany’ y’ss lon longg ter term m cas cashh ear earnin nings. gs. Some people maybe feel differently about healthcare. It is obviously a more sensitive topic.

We did too. We do not own the stock anymore. As I mentioned last year, World Fuel Services is a fuel supplier. It gets credit from some of the major oil companies and uses that credit to buy fuel to sell to var variou iouss cus custom tomers ers in ma marin rine, e, avi aviati ation, on, and lan landd markets. When you talk to the company’s managers, they will point out that World Fuel has very small shares of those markets; so you can get excited about the potential. Any time you look at an investment, you want to look at what percentage of its market it hass an ha andd ho how w bi bigg it ca cann ge get. t. On Onee of it itss bi bigg gges estt competitors in marine fuel went into bankruptcy late last year, but the trouble is that it is still going to be pretty difficult for the company to grow organically at a good enough pace in each of its markets. The markets marke ts may be huge, but ther theree are structural structural reasons why organic growth is difficult to come by. We th thou ough ghtt th that at mo most st of th thee gr grow owth th go goin ingg forwar for wardd wou would ld com comee fr from om acq acquis uisiti itions ons,, whi which ch is fine — the management team has been terrific. It has presided over a lot of value creation. Mike Kasbar is a great operator and has built a really nice company. The com compan panyy doe doess sma smart rt acq acquis uisiti itions ons.. If you run through the list of deals, on average over the last five or six years, World Fuel probably earns, by my math, between 10% − 12% on its acquisitions. If you had a company that was not growing at all organically and it could invest all its earnings at 10% − 12% each year, it could grow earnings at that rate. But we did not feel confident, owning something like that over a long period of time, that it would get a bigger at a fast enough pace to meet our hurdle rate. So that is why we are out of it.

Bob Goldfarb:

Embedd Embe dded ed in th thee as aski king ng pr pric icee fo forr Ma Mara rath thon on — which is the company that sold these drugs to Valeant Valeant — embedded in the sale price was a significant increase in thee pr th pric icee of tho hose se dr drug ugs. s. In fa fact ct,, Ro Rorry, wh what at ha hadd Mara Ma rath thon on’’s ma mana nage geme ment nt be been en ad advi vise sedd to do wi with th it itss prices? Rory Priday:

We we were re to tolld tha hatt Ma Mara rattho honn ha hadd hi hirred a consultin consul tingg firm that adv advise isedd it to tak takee hug hugee pri price ce increases. So Valeant was following the advice of the consulting firm, not that Mike would shy away from taking a price increase if he saw an opportunity. We are not really sure why the company decided to sell these drugs, but I think part of the reason was that management was looking at selling another asset. So Marathon needed to get this deal done. That is the one that David mentioned earlier when Valeant was working at 8:00 p.m. on New Year’s Eve. Bob Goldfarb:

A point that the article missed, and I am not Wall Str Street eet Journ Journal al, is that either those faulting the Wall prices pri ces or the volumes volumes at tho those se ele elevat vated ed pri prices ces are going to be very short-lived because both of those drug dr ugss ar aree su subj bjec ectt to ge gene neri rici ciza zati tion on an andd Val alea eant nt manage man agemen mentt exp expect ectss tha thatt the theyy wil willl be gen generi ericiz cized ed within a couple of years. So Valeant had to recoup its investment and more within that short window of time in order to achieve the returns that management was expecting.

Bob Goldfarb:

We sold World Fuel Services because it reported a ve very ry st stro rong ng qu quar arte terr, wh whic ichh to a fa fair ir ex exte tent nt wa wass based on the volatility of oil prices, which usually bene be nefit fitss th thee co comp mpan anyy. Go Goin ingg ba back ck to an ea earl rlie ierr ques qu esti tion on,, th ther eree ar aree so some me oc occa casi sion onss wh when en we ar aree selling into strength, and others when we are selling because there is a disappointment.

5


Question:

Would you comment on TJX please? David Poppe:

We have owned TJX for ... it will be fifteen years this summer. Obviously it has been a terrific stock, a terrific compounder. It still has a very good future. TJX is the largest off-price retailer in thee co th coun untr tryy. No Noth thin ingg ha hass re real ally ly ch chan ange gedd fr from om prior years, but at this point TJ has become a very larg la rgee cu cust stom omer er fo forr ma many ny of th thee bi bigg gges estt ap appa pare rell brands in the country and in the world. So it has a very important buying position and great access to merchandise. As a result, it can become a question — the company has become so large in the United States — of how much of what is in the store is ac actu tual ally ly tr true ue su surp rplu luss th that at TJ TJX X bo boug ught ht ve vers rsus us product that was made for it. That is a tricky thing for TJX to manage. But there are still good growth opport opp ortuni unitie tiess in the US, Can Canada ada,, and Eur Europe ope.. We think Carol Meyrowitz is an excellent CEO, and she has done a fine job job.. TJ’ TJ’ss num number ber one com compet petito itorr, Ross, also does very well. So you are at the top; it is a very strong industry; the consumer has shown over time that she is willing to buy this way as opposed to paying a higher price in a department store. So TJ and Ross continue to capture market share, the two of them. But even today, TJ, Ross, and if you add Burlington and Nordstrom Rack and combine them all, they are less than 15% of the US apparel market. So we do not think they are close to a ceiling. The other thing I would say about TJ is that I get some pushback from people who believe that, to exaggerate a little, all retail sales are just going to move to the Internet, and that people do not want to be in th thee st stor ores es an anym ymor ore. e. To go to TJ TJ,, yo youu ar aree making a trade of time for price. You are making the trip to the store and combing through those racks of clothes that are not always very well organized. But at the lower price points, it is showing to be very, very ve ry ha hard rd to ma make ke mo mone neyy on onli line ne in ap appa pare rel. l. Th Thee aver av erag agee ti tick cket et at TJ is ab abou outt $1 $155 an andd at Ro Ross ss prob pr obab ably ly $1 $100 or $1 $11. 1. We th thin inkk th that at th ther eree is a consumer who is very willing to make that trade of time for price. Off-price is also difficult — there are very ve ry sh shal allo low w le leve vels ls of in inve vent ntor oryy of a ve very ry br broa oadd assortment of product. And it is very hard to manage a website when the product turns over and is never replenished as it is in conventional retail. So for all those reasons, we think that TJ is fine. There are a couple negatives. Currency is very much against the company this year. TJ also has a

6

minor pension issue, which will restrain earnings this year. We could have flattish earnings this year after manyy yea man years rs of 15% 15%-pl -plus us ear earnin nings gs gro growth wth.. So the stock looks a little more expensive than it has in the past. But I still think the long term outlook for the business is quite good. Question:

A co coup uple le of qu ques esti tion onss on Ma Mast ster erCa Card rd.. Vis isaa benefits from a lot of the same secular trends that MasterCard does; so I am curious why you guys own Master Mas terCar Cardd and not Visa isa.. Sec Second ondly ly,, if you cou could ld commen com mentt on som somee of the rec recent ent acq acquis uisit ition ionss tha thatt MasterCard has made, and the strategic and financial rationale, if you agree with those. John Harris:

Let’s see, why do we own MasterCard instead of Vis isa? a? Th Ther eree is no nott re real ally ly a go good od an answ swer er.. We should sho uld hav havee own owned ed bot both. h. We sho should uld hav havee own owned ed more of both. We should have owned a lot more of both. It is a tremendous mistake for which I bear signifi sig nifican cantt res respon ponsib sibili ility ty.. So tha thatt is the ans answer wer to that. The acq acquis uisiti itions ons — I hav havee to be hon honest est wit withh you, and this is self-deprecating and not intentionally so — I have had a tough time understanding many of the acquisitions that these two companies have done over the years. Not just MasterCard, Visa also. Visa plunked down a sizeable amount of money to buy a busine bus iness ss cal called led Cyb CyberS erSour ource, ce, whi which ch wor worked ked for a couple years and now is not working so well. There is an understanding at the card networks that things will eventually change. It has been remarkable and surprising to me how slow the pace of change has actually been and how as threats have emerged, they have quickly gone by the wayside. It just turns out that th at th thee ne netw twor orkk bu busi sine ness ss mo mode dell is in incr cred edib ibly ly resilient. But there is some concern — subconscious, whatever you want to call it — that eventually things mayy ch ma chan ange ge an andd th that at th thee ch chan ange ge is go goin ingg to be driven by technology. So there is a desire on both of their parts, especially when new CEOs took over at both companies I noticed a marked increase in this desi de sire re,, to tr tryy to ra ramp mp up th thee pa pace ce of in inno nova vati tion on hope ho pefu full llyy to he head ad of offf so some me of th thee te tech chno nolo logi gica call threats that they see on the horizon. The fact of the matt ma tter er is th that at Vis isaa an andd Ma Mast ster erCa Card rd ha have ve no nott traditiona tradi tionally lly been terr terribly ibly inno innovativ vativee orga organizat nizations. ions. They were cooperatives for most of their lives and overseen by bankers. That is all you need to know on that subject.


They are doing their best. To be totally honest, they feel like part of being innovative and doing a goodd job is buy goo buying ing sm small all inn innova ovativ tivee bus busine inesse sses. s. Whethe Whe therr any of the them m hav havee rea really lly add added ed any anythi thing, ng, ther th eree ce cert rtai ainl nlyy is no pe perc rcep epti tibl blee ev evid iden ence ce.. It is possible that at some point in the future we will find out that MasterCard is able to adapt to technological change because of some small acquisition it did in the past — it is entirely possible, but I do not see any evidence of it. In the past, for the most part the deals the company has done have been so small that they have had a nonmaterial impact on the financial progress of the business. This year that has changed a little bit. MasterCard did a couple of deals that were pretty meaningfully dilutive to its earnings so that the company is going to have the slowest rate of earnings growth it has had this year since we have owne ow nedd th thee st stoc ockk an andd si sinc ncee it ha hass be been en a pu publ blic ic company — we have owned it for its entire life as a public company. A lot of that is foreign exchange, which is a real headwind this year. Part of it is those acquis acq uisiti itions ons,, whi which ch are det detrac ractin tingg in a mea meanin ningfu gfull way from the earnings. Bob Goldfarb:

As to why we bought MasterCard rather than Visa isa,, we bou bought ght MasterCa MasterCard rd in the first few days that it went public. We should have kept going, as John said. Visa went public later and it was priced off MasterCard, which was selling at a significantly higher price at that time than when it went public. Question:

Would you please comment on the prospects for Tiffany and Richemont? David Poppe:

I will talk about Tiffany and Saatvik can talk a little bit about Richemont. I will give you the high leve le vell vi view ew.. Th Thee hi high gh le leve vell vi view ew we ha have ve is th that at Cart Ca rtie ierr an andd Ti Tifffa fany ny ar aree tw twoo of th thee gr grea eatt je jewe welr lryy brands bra nds in the wor world. ld. We hav havee own owned ed Ti Tifffan fanyy not consecutively but for most of the last 14 or 15 years; so we feel like we know it pretty well. What I would say about Tiffany is it has grown the topline at about 7% over the last decade, which is good, not great but good. But it is still immature in a lot of parts of the world. wor ld. Exc Except ept for Jap Japan, an, Tiffan Tiffanyy was ver veryy lat latee to Asia As ia-P -Pac ac,, ve very ry co cons nser erva vati tive ve ab abou outt ex expa pand ndin ingg in Eurrop Eu opee. Am Amer eric ican an lux uxur uryy — I th thin inkk a lot of Euro Eu rope pean anss do no nott be beli liev evee in it it,, an andd Ti Tifffa fany ny wa wass conservative about enlarging the store base there. But in the last few years, Tiffany has opened a bunch of stores in Europe including one on the

Champs-Élysées in Paris, and done very well. The comp co mpan anyy ha hass go gott tten en mo more re ag aggr gres essi sive ve in th thee la last st few years about opening opening sto stores res in Chi China, na, and not only on ly ar aree th thos osee st stor ores es do doin ingg re real ally ly we well ll,, bu butt th thee engagement ring custom is catching on there as it did in Japan, I want to say in the ‘70s. It seems like that is going to become a custom for people all through Asia as well, which is good for Tiffany since the comp co mpan anyy ha hass a st stro rong ng po posi siti tion on in hi high gher er-p -pri rice cedd engagement rings. Tiffany managers have been very good stewards of the brand and very good store operators, although not as financially sophisticated as they might have been be en in so some me ca case ses. s. So we th thin inkk th ther eree is go good od operating margin potential for Tiffany. The tax rate is an American tax rate, even though over half the sales come from outside the United States. So there should be go good od op oppo port rtun unit ityy to ma mana nage ge th thee ta taxx ra rate te.. Th Thee company is talking about getting it from 34% − 35% to 30% 30%,, whi which ch is a goo goodd opp opport ortuni unity ty for earning earningss growth. If I think about a sustainable 5% − 6% − 7% − 8% re reve venu nuee gr grow owth th ra rate te,, op oper erat atin ingg ma marg rgin inss th that at could be higher, and a lower tax rate, I feel pretty goodd abo goo about ut Ti Tifffan fanyy. Aga Again, in, the big bigger ger pic pictur turee is it work wo rkss ev ever eryw ywhe here re.. Th Thee co comp mpss ri righ ghtt no now w... th thee earnings this year will be tricky because currency is so much against you when you do a lot of your sales outside the United States, and Tiffany makes a lot of the product in the States. So it is probably going to havee a dif hav diffficu icult lt ear earnin nings gs yea yearr in 201 2015. 5. But lon longer ger terrm, bra te rannde dedd je jewe welr lryy is tak akiing sha harre fr from om unbranded jewelry at a rate of something like a point a year. Cartier and Tiffany ought to be two major beneficiaries of that trend. Saatvik Agarwal:

Richemont is actually more of a watch business than a jewelry business. Its largest and best known brand is Cartier. But Cartier generates more revenue from fro m wat watche chess tha thann fro from m jew jewelr elryy. Plu Plus, s, Ric Richem hemont ont owns ow ns a co coll llec ecti tion on of ot othe herr Sw Swis isss wa watc tchh br bran ands ds including IWC, Jaeger-LeCoultre, and Piaget. On the jewelry side, branded jewelry has only a 20% market share, and, as David mentioned, it is increasing that by ab abou outt a po poin intt a ye year ar.. Bu Butt je jewe welr lryy sa sale less fo forr Richemont have grown better than 10% a year for someth som ething ing lik likee ten yea years. rs. Mor Moree gen genera erall llyy, I wou would ld say the high end luxury goods business will benefit from the world getting wealthier.

7


One thing we worry about with Richemont is thee de th depe pend nden ence ce on th thee Ch Chin ines esee an andd th thee As Asia iann consumer. We have all heard about the crackdown on gift-giving in China, and gift-giving is in fair part really a code word for corruption in China. Swiss watch sales had gone backwards by about 30% in China. But given the quality of its brands and the quality of the business, we think Richemont has a long runway of growth in front of it. Historically, the business has done a lot better than 6% − 7% revenue growth. Question:

Could you update us on Precision Castparts? I know that the stock underperformed in 2014. I know it wa wass ki kind nd of sl slow owin ingg do down wn.. An Andd in 20 2015 15,, it preannounced a couple quarters back to back. I was wondering if you could update us on that and if you still see compelling value there. Greg Steinmetz:

We do see compelling value, but it has been a disappointment. It was supposed to earn $16 a share in th thee fis fisca call ye year ar th that at we ju just st st star arte ted. d. In Inst stea ead, d, management is guiding to something like $13. The diffficu dif iculty lty has bee beenn con confine finedd lar largel gelyy to the for forged ged prod pr oduc uctt se segm gmen ent, t, wh whic ichh is a ve very ry hi high gh fix fixed ed co cost st busine bus iness. ss. So whe whenn vol volume ume goe goess aga agains instt you you,, you really feel it in the margin. We saw a 900 basis point drop dr op in th thee ma marg rgin in of th that at se segm gmen entt la last st qu quar arte terr. Furthermore, the oil & gas market has gone against Precision. Management had big plans for the oil & gas business, making very large diameter pipes that are highly resistant to corrosion. Precision is the only company on earth that can make that kind of pipe. Management thought that whatever happens with the oil & gas market, the company would be ready, and it would still be able to sell this pipe because of its comp co mpel elli ling ng va valu lue. e. Th That at di didd no nott ha happ ppen en,, an andd th thee company was late to restructure that business and cut costs. The restructuring is now completed; so things should get a little better. Management was expecting $400 million in revenue out of that pipe business last year and only got $200 million, and it will probably be similar this year. Another thing that has hurt is that Rolls-Royce is agg aggres ressiv sively ely trying trying to tak takee inv invent entory ory out of its syst sy stem em.. Ro Roll llss ha hadd to tooo mu much ch in inve vent ntor oryy be beca caus usee managers were worried about not being able to meet delivery schedules and overdid it on inventory. Now they are cutting back the other way. There have been some other issues. Precision makes a lot of parts for the military. Military spares are down 35%. That was

8

not something that the company foresaw happening in the current fiscal year. That $16 a share was a number that was derived three years ago and as recently as six months ago management was still talking about $16 a share for this year. But lately management recognized that the worl wo rldd ha hadd ch chan ange gedd an andd de deci cide dedd to th thro row w in th thee towel. In addition to the restructuring I mentioned, the company also wrote down some inventory. This year, Precision thinks it is going to make about $13. I think that is a conservative number. Time will tell. What we like about Precision and why we are keep ke epin ingg it is is,, as I me ment ntio ione ned, d, th that at it is th thee on only ly comp co mpan anyy in th thee wo worl rldd th that at ca cann ma make ke th thes esee la larg rgee diameter highly corrosive resistant pipes. Precision is also far and away the leader in making powdered metal components that are used in large jet engines. It is the only company that can make certain large structural castings, and there are some other things that th at on only ly Pr Prec ecis isio ionn ca cann su supp pply ly.. Th That at gi give vess th thee comp co mpan anyy a lo lott of le leve vera rage ge ov over er it itss cu cust stom omer ers. s. Management is not afraid to use it. So it has a very stro st rong ng co comp mpet etit itiv ivee po posi siti tion on.. We al also so ha have ve wh what at should be a growing market for aerospace. I was with Boeing management this week — the compan com panyy is tal talkin kingg abo about ut rai raisin singg the mon monthl thlyy uni unitt deliveries of the narrow body 737 from 42 a month now to 47, and the thenn to 5050-som someth ething ing.. Tha Thatt cou could ld even go to 60 because the backlog is so big, and there is still an enormous appetite even in China — which, as you know, has a soft economy — to get these planes and get them now. The 787 has gone from 10 a month to 12 and that is going to go to mayb ma ybee 14 14.. So th ther eree is gr grow owth th th ther ere. e. Pr Prec ecis isio ionn is seeing that in some of its segments. The company will not see it in other areas because of de-stocking at Ro Roll llss-Ro Royc yce. e. An Andd th thee bu buil ildd ra rate te fo forr th thee 74 7477 is being dialed back. Also there is a transition going on from fr om th thee ol oldd mo mode dels ls of th thee 73 7377 an andd th thee Ai Airb rbus us narrow body, the A320, from the current generation to a re-engined version. Precision has had to absorb a lo lott of de deve velo lopm pmen entt co cost stss al alon ongg th thee wa wayy as th that at transition has taken place. But now it is coming to an end. One thing that I think worries people is that, okay, aerospace is going to be a growing market, but is Precision losing share? We all know that because of Pr Prec ecis isio ion’ n’ss ar arro roga ganc ncee in th thee wa wayy it tr trea eats ts it itss customers — raising prices and making demands on them the m — the theyy wou would ld li like ke to cut Pre Precis cision ion dow downn to size. So is there a case of customers taking market share away from Precision and giving it to Alcoa and


others? I have looked under as many rocks as I can think of to try to get to the bottom of this and I am not finding the evidence. Maybe I am looking under the wrong rocks, but the fact that I have not turned anyt an ythi hing ng up an andd th thee fa fact ct th that at th thee cu cust stom omer erss bu buyy under long term contracts which they are locked into, and the fact that competitors are not giving me any exam ex ampl ples es of ho how w th they ey ha have ve ta take kenn sh shar aree fr from om Precision make me think we are okay on the market share question. If Pr Prec ecis isio ionn ca cann pr pres eser erve ve ma mark rket et sh shar aree in a growing market, we should be okay, which is why we ar aree st stil illl ho hold ldin ingg th thee st stoc ock. k. Pl Plus us at it itss cu curr rren entt price it is not expensive. It trades at a discount to some other of the big names in aerospace. Before it always traded at a premium. Question:

I had a quest question ion on Fast Fastenal enal — your your thoughts on its ne its nett mar argi gins ns as th thee co com mpa pany ny pu push shees in intto non-fastener products and larger customers. And then maybe a little bit on Fastenal versus Grainger. Chase Sheridan:

I will start with the margins. There has been a lott of di lo disc scus ussi sion on ar arou ound nd gr gros osss ma marg rgin in be beca caus usee Fastenal’s average customer size has been ... its large customers have been growing faster than the rest of the business; so the gross margins have been coming down a little bit. Fastenal has gross margins north of 50%, 50 %, wh whic ichh is al almo most st un unhe hear ardd of in in indu dust stri rial al distribution. Fastenal’s operating margins are north of 21%, which is also highly unusual. I expect the gross margins to come down over time. But I expect the operating margin to rise over time. That is because it is mor moree ef efffici icient ent to ser serve ve the these se lar larger ger cus custom tomers ers.. Manage Man agemen mentt ma makes kes tha thatt ar argum gument ent on a qua quarte rterly rly basis when it reports its result. Management always tries to talk about how its average revenue per store is growing. When we first bought it, Fastenal was growing the store base rapidly. In its early days, Fastenal was growing its store base by over 30% a year and it was still growing by 14% when I joined the firm in 2006. That growth rate is now zero. So the company does not have a lot of low volume new stores depressing its margins. As a result, as the existing store base grows in terms of the average sales per store, those stores become more efficient. The second part of the question was how do we think about Fastenal versus Grainger. We like both busine bus inesse sses. s. We fol follow low Gra Graing inger er clo closel selyy. It is an excell exc ellent ent business business wit withh a wid widee moa moat.t. Jim Ryan at

Grainger has done a very good job. It is tempting to say we could own both of them. So far, we just own Fastenal, though. Question:

Do you find it more difficult today to find good stoc st ocks ks?? Be Beca caus usee it is lu luck ckyy if yo youu fin findd on onee go good od stock a year. A Picasso sold this week for something astron ast ronomi omical cal.. Why is it tha thatt wea wealth lth cannot cannot find a good home in a stock and instead goes into art? It is hard ha rder er an andd ha hard rder er,, it se seem ems, s, to fin findd — ab abse sent nt technology stocks — a good investment today. Am I wrong? David Poppe:

Yes, it is definitely harder to find good stocks today tod ay.. The mar market ket has gon gonee up, has com compou pounde ndedd 14% a year for the last five years through April 30. I think we are up about 17% a year over that time. That Th at is ro roug ughl hlyy a do doub ubli ling ng in st stoc ockk pr pric ices es.. You cannot say that it is probable that we are going to compound at 17% over the next five years. No one know kn owss ho how w we wi will ll pe perf rfor orm. m. Bu Butt we ar aree in an envi en viro ronm nmen entt wh wher eree mo more re mo mode dest st re retu turn rnss go goin ingg forward are more likely than what we have seen in those five years. Question:

Can you give me an update on Idexx? Arman Kline:

The company had a wonderful 2014. It made a big decision to go to direct distribution. Historically, Idexx distributed the consumables for its instruments andd it an itss ra rapi pidd as assa sayy te test stss fo forr co comp mpan anio ionn an anim imal alss thrrou th ouggh a ne nettwo worrk of di dist stri ribu buttor orss in the US US.. Overseas it was a little bit more direct. It made a decision to go direct here, and the reason it made that decision is that it felt as the market leader with a dominant market share introducing new technology, new ne w pr prod oduc ucts ts,, it ne need eded ed a sa sale less fo forc rcee th that at co coul uldd encourage the adoption of those products more than it nee needed ded the hel helpp of dis distri tribut butors ors to pen penetr etrate ate the market mar ket.. We thi think nk tha thatt man manage agemen mentt mad madee the rig right ht decision. Earlier this year, you may have noticed in the first quarter, Idexx had a little bit of a hiccup as a ressul re ultt of tha hatt mov ovee to di dirrec ectt di dist stri ribu buttio ionn. A competitor came out with a lower priced product and distributors picked it up because Idexx was no longer sell se llin ingg th thro roug ughh th them em.. Th Thee co comp mpet etit itor or wa wass ve very ry aggressive, and, as the CEO of Idexx said, there is now a rapid assay price war going on in the industry. The bus busine iness ss is sti still ll gro growin wingg ver veryy nic nicely ely,, but the

9


stock was pri stock priced ced for per perfec fectio tionn — las lastt yea yearr it was trading for a high 30s multiple of forward earnings. Mostt of you have pro Mos probab bably ly not notice icedd we hav havee sol soldd down our position as a result of that valuation. We are sti still ll lar large ge sha shareh rehold olders ers.. We sti still ll bel believ ievee in the business. We think it is unique. We think it has a long runway. We think it will continue to dominate that space. We remain excited about the future there and believe in its direct distribution model. Do you want to add anything, Greg? Greg Steinmetz:

Idexx is responsible for at least 75% if not more of all of the R&D spending in veterinary diagnostics. It ca cann ea earn rn a ni nice ce re retu turn rn on th that at be beca caus usee th this is megatrend of the humanization of pets is showing no signs sig ns of sto stoppi pping. ng. Peo People ple wil willl spe spend nd any anythi thing ng on their animal if the veterinarian gives them a credible reason why they should. And it is a lot more than just rich people. It is a broad swath of pet owners. Idexx, to its credit, is a great believer in veterinary diagnostics. Management sees it as a very long-lived opportunity. It has really been paying off. Despite the issue with rapid assay this year, we are still going to gett 10 ge 10% % or orga gani nicc gr grow owth th.. In Inte tern rnat atio iona nall is go goin ingg gangbu gan gbuste sters, rs, and the there re the hum humani anizat zation ion of pet petss is just getting started. Even in China — where they are boiling Tibetan mastiffs, if you read the story in the Times two weeks ago — people are starting to treat animals more like humans. It is an opportunity that Idexx is going to benefit a great deal from. Question:

What is the weighted P/E of your portfolio on 2015 GAAP earnings? Two, in terms of Valeant, it has no R&D, I think. Given that any drugs that it has on pa pate tent nt wi will ll ev even entu tual ally ly go of offf pa pate tent nt,, wh what at is Valeant’s moat? David Poppe:

I do not think we actually know the weighted average P/E on GAAP earnings. For companies like Valeant, I am not sure it would be a relevant number anyway. On the rest of it we will bring Rory up and put him on the spot. Rory Priday:

Val alea eant nt do doees spe pennd on R& R&D. D. I th thin inkk the compan com panyy is goi going ng to spe spend, nd, adding adding Sal Salix ix and the legacyy Valea legac aleant nt busin businesses esses,, about $300 mill million. ion. We met with Mike a few weeks ago and he was telling us how with $300 million, you can get an awful lot done. Mike can get a lot done with very little. Jublia is a good example. Jublia is a toenail fungus drug

10

that Val that alea eant nt ju just st la laun unch ched ed la last st ye year ar.. It sp spen entt $30 − $40 million developing that drug over the last few years, and it is probably going to do more than $300 million in sales this year. Valeant has a number of other compounds in the pipe pi peli line ne,, es espe peci cial ally ly on th thee de derm rmat atol olog ogyy si side de.. It bought bou ght Dow Pha Pharma rmaceu ceutic ticals als ear early ly on in Mik Mike’ e’ss reig re ignn at th thee co comp mpan anyy — he pa paid id $2 $285 85 mi mill llio ion. n. Valeant has gotten Acanya out of it, which was a $70 − $80 million drug, and it is getting Jublia now. Val alea eant nt ha hass si sixx or se seve venn dr drug ugss th that at it ex expe pect ctss to launch over the next eighteen months. One of them, Vesn esneo, eo, for gla glauco ucoma, ma, man manage agemen mentt thi thinks nks cou could ld generate as much as $1 billion in sales globally. I think Mike said the company is going to spend less than $100 million on that program, in total. With an R&D budget of $300 million, Valeant can do quite a bit in terms of building its pipeline. In term termss of the phar pharmace maceutica uticals ls and Valean aleant’ t’ss exposure to patents, one of the things the company has tried to do is go into areas where the company has durable products. Valeant has a lot of branded generic drugs overseas, which are off patent drugs. Valeant has contact lens solutions and OTC pha pharma rmaceu ceuti tical cals. s. It has Cer CeraV aVe, e, whi which ch is a moisturizer. And Valeant has a lot of drugs that are not going off patent. The key in the pharma game is always alw ays,, onc oncee you hav havee the dis distri tribut bution ion,, onc oncee you have a sales force in the ophthalmology space or in thee der th erm mato tollog ogyy spa pacce, how do yo youu so sour urcce innovation? You can do that through R&D or you can do that through buying things. Mike is making a big bet that it is cheaper sometimes to buy things, to source that innovation wh wheen you have the distribution. So it seems like that model is working. The business is growing right now pretty nicely. David Poppe:

Mike Pea Mike Pearso rsonn bel believ ieved ed tha thatt he cou could ld bui build ld a large and successful pharmaceutical company without taking the risk of expensive R&D that most large, successful pharma and biotech companies had taken. He would instead do it by focusing on specialties that did not require these risks through lean R&D, zero-b zer o-base asedd bud budget geting ing,, mi minim nimal al tax taxati ation, on, and hig highh returns from the get-go on numerous acquisitions. He would target companies of all sizes in product and geogra geo graphi phicc are areas as in whi which ch big com compan panies ies did not compete and in which there was minimal reimbursement risk. By avoiding all of those other risk ri skss, he wo woul uldd be abl blee to tak akee som omee ris iskk by leveraging his balance sheet to generate very rapid


growth grow th an andd hi high gh re retu turn rnss on to tota tall ca capi pita tall an andd spectacularly high returns on shareholders’ equity. Question:

My question is about Google and your opinion of it itss cap capita itall all alloca ocatio tionn str strate ategy gy.. And may maybe be mor moree specifically products like Google Glass and driverless cars. Is Google on the right path? Chase Sheridan:

Great question. When people ask me about risks to Google, hubris is one of the primary risks that it face fa cess be beca caus usee the cor oree bus usiine nesss is so go goood. Manage Man agemen mentt is inv invest esting ing rea really lly,, rea really lly hea heavil vilyy in being the aggressor in a lot of areas — the opposite of a mi milk lker er.. So Some me pe peop ople le mi milk lk th thei eirr bu busi sine ness sses es.. Google is putting the milk back in the cow. With its capita cap itall all alloca ocatio tionn str strate ategy gy,, I wil willl sta start rt by loo lookin kingg backwards and saying I thought that Google overpaid forr You fo ouT Tub ubee at th thee ti time me.. I th thou ough ghtt th that at Go Goog ogle le overpaid for DoubleClick at the time. Looking back, those were both great acquisitions. I would certainly advisee Googl advis Googlee to do them again. Android was a very insightful acquisition. The acqu ac quis isit itio ionn an andd de deve velo lopm pmen entt of An Andr droi oidd we were re spearheaded by Larry Page, who was very involved in the pro projec ject.t. Android Android has bec become ome an eno enormo rmous us asse as sett fo forr th thee co comp mpan anyy. I wi will ll sa sayy th that at se seco cond nd guessing Larry Page has proven to be a humbling experi exp erienc ence. e. Man Manage agemen mentt is ext extrem remely ely far farsig sighte htedd whenn it com whe comes es to the directio directionn tha thatt tec techno hnolog logyy is moving. That said, I think the reason we did not put on a bigger position in Google at the time we bought it was that we perceived — I think a lot of investors perceived correctly — that shareholders are not first in line when it comes to the buffet of cash flow that Goog Go ogle le pr prod oduc uces es.. La Larrry Pa Pagge ha hass ve very ry lar arge ge ambi am biti tion onss an andd th thee jo joke ke ar arou ound nd he here re is Go Goog ogle le generates more cash than its managers know what to do with, and the fear is that Larry Page is going to usee it to co us colo loni nize ze Ma Mars rs.. I th thin inkk Go Goog ogle le wi will ll st star artt paying a dividend ten years after Larry Page’s death. I do not want to second-guess management, but I really cannot handicap very well what the company’s investments now are going to look like in ten years. I will say this: A lot of the products that get a lott of pr lo pres esss ar aree re real ally ly no nott ma mate teri rial al to Go Goog ogle le’’s overall results. If you look at Google Fiber, if you look lo ok at Go Goog ogle le’’s re rece cent nt mo move vess in th thee wi wire rele less ss industry, these are points of leverage that Google is findi fin ding ng to pr pres essu sure re th thee re rest st of th thee ec ecos osys yste tem m to invest, to improve access to the Internet for all users, which ultimately benefits Google. It does not require

very muc very muchh mon money ey and Goo Google gle is act actual ually ly get getti ting ng respon res ponses ses fro from m fol folks ks lik likee AT&T spe speedi eding ng up fibe fiberr access. So I do not think that these projects that we are rea readin dingg abo about ut lik likee dri driver verles lesss car carss — the theyy are interesting, but I do not think that the resources that they th ey co cons nsum umee ar aree si sign gnifi ifica cant nt in th thee co cont ntex extt of Google’s overall earnings power. When I look over the next five years, I think that Google could create $100 $1 00 bi bill llio ionn of pr profi ofits ts.. So I am go goin ingg to gi give ve management the benefit of the doubt for now. But it is a good question and I do not have a great answer for it. Question:

Going bac Going backk to Valea Valeant, nt, I bel believ ievee it is alm almost ost 20% 20 % of th thee po port rtfo foli lio. o. Co Coul uldd yo youu sh shed ed so some me li ligh ghtt going forward? Bob Goldfarb:

It is actually more than 20%. We are always reevaluating it in terms of the risks and the rewards. To date, we have always believed that the rewards outwei out weighe ghedd the ris risks. ks. That sai said, d, the com compan panyy has been operating in a fairly benign environment despite the risks that we consider. I think particularly of the riskk tha ris thatt the low int intere erest st rat ratee env enviro ironme nment nt cou could ld change unexpectedly. But Valeant has been able to borr bo rrow ow mo mone neyy at ve very ry re reas ason onab able le ra rate tess to fu fund nd acquisitions. As Rory mentioned earlier, the company hass us ha used ed eq equi uity ty ve very ry sp spar arin ingl glyy. Th Thee se seco cond nd ri risk sk would wou ld be Mi Mike ke Pea Pearso rson’ n’ss hea health lth and lon longev gevity ity.. So far so good — he is 55 — the mortality tables would suggest that the risk there is relatively low at this juncture. A third risk would be changes in drug pricing by the government and/or the payers, the pharmacy bene be nefit fitss ma mana nage gers rs an andd th thee HM HMOs Os.. A fo four urth th ri risk sk,, which the company lived with in the earlier days of our ownership, was genericization. But at this point in time the portfolio is less subject to genericization with wi thin in th thee fo fore rese seea eabl blee fu futu ture re.. In te term rmss of th thee opportunities, management has guided to earnings of abou ab outt $1 $111 a sh shar aree th this is ye year ar an andd it ha hass gi give venn a number for EBITDA that translates into about $16 a shar sh aree of ea earn rnin ings gs fo forr ne next xt ye year ar.. So th thee co comp mpan anyy certainly sees the very rapid growth continuing into 2016 and I think the market is beginning to accept that th at nu numb mber er an andd pr pric icee it in into to th thee st stoc ockk to so some me extent. One major change since we met a year ago was that the organic growth has really accelerated. It is doub do uble le di digi gitt th this is ye year ar an andd we wo woul uldd ex expe pect ct a contin con tinuat uation ion of dou double ble dig digit it or organ ganic ic gro growth wth nex nextt

11


year. So Valeant has really transformed its portfolio. Afte Af terr th thee me merg rger er wi with th Bi Biov ovai aill in 20 2010 10,, or orga gani nicc growth was not very good for several years. But due to some very smart acquisitions since then, Valeant has rejiggered the portfolio so it is now geared for substantial organic growth. Question:

I thought somebody should offer a compliment to Jonathan Brandt, who was one of three analysts questi que stioni oning ng Warr arren en Buf Buffet fettt and Cha Charli rliee Mun Munger ger two weeks ago at the annual meeting at Berkshire Hathaway. I have read some of your comments that were extracted by Morningstar, but I would like to hear some of your insights from the Q&A two weeks ago. Jon Brandt:

I am not sure I have a great answer to that questi que stion. on. My pri princi ncipal pal insight insight is tha thatt the theyy do not really like my questions. There are so many issues that get bandied about, and none of them really is going to change my valuation of the company. On certain questions, they cannot really be as open as maybe you would like them to be because there are sensitive issues, competitive issues and such. It is fun and it is interesting. But there are just so many different divisions of Berkshire. The railroad is si sign gniific fican ant, t, an andd the ins nsuura rannce com ompa pany ny is significant. Heinz would be another big one now that it is merging with Kraft. It will be publically traded, but he thinks of it as partially owned. But I spend a lot of time looking at all of Berkshire’s businesses. The format of the meeting is not one that lends itself to a change in valuation. Some people have talked abou ab outt wh whet ethe herr he sh shou ould ld pu putt th thee le lead ader erss of th thee variou var iouss bus busine inesse ssess up on sta stage ge to tal talkk abo about ut the their ir businesses. I think that would be an interesting thing to do. But each incremental insight is not going to chan ch ange ge th thee va valu luat atio ionn in a ma mate teri rial al wa wayy. A lo lott of people complain that there is not enough disclosure in the annual report. A huge business like Lubrizol, which is on its way to making $1.5 billion pretax, might get two sentences about it in the annual report. But I am not sure if there were five pages about Lubri Lub rizol zol tha thatt my val valuat uation ion of Ber Berksh kshire ire wou would ld be any different, which is his point for why he does not spend more time disclosing information. Question:

In the annual report, you mention and discuss trends towards more passive investing versus active inve in vessti ting ng an andd th thee impa pact ct it ha hass on re rela lati tive ve

12

performance. Could you share some more insights on your views on that topic? Bob Goldfarb:

I ha have ve be been en su surp rpri rise sedd th that at th this is tr tren endd ha hass no nott cont co ntin inue uedd in into to 20 2015 15,, an andd ye year ar to da date te,, a mu much ch higher percentage of active managers is outper out perfor formin mingg the ind indice ices. s. I hav havee bee beenn sur surpri prised sed because usually when you see a trend like that, it tends to go on until it gets so extreme that it ends, and it ends with a bang, not with a whimper. Question:

Jus ustt a qu quiick qu ques esti tion on fr from om an op opeera ratting perspective. I am wondering if you can comment on how Sequoia interacts with some of the other funds within the firm. It is probably wrong — but if you check Bloomberg it says the firm owns 30 million shares or so of Valeant but ten million shares are in Sequoia. So it raises a couple questions like how do you guys share ideas between funds, and then when you are building up a stake, how do you determine which fund, if you are going to put it in multiple funds, gets the first or the best price? David Poppe:

We ha have ve Se Sequ quoi oiaa as a cl clie ient nt.. We al also so ha have ve separatel separ atelyy mana managed ged portf portfolio olioss for seve several ral thou thousand sand client cli ents. s. Ide Ideall allyy, eve everyb rybody ody has the sam samee por portfo tfolio lio.. When we buy a stock, it is allocated pro rata to all the cli client ents. s. Bec Becaus ausee eve everyb rybody ody has dif differ ferent ent cas cashh flows in and out of accounts, the percentages over time can be off from one account to the next. One client might be taking withdrawals and over time that account will look different. Another client is putting money in. But we do not run tailored portfolios. We own 34 million shares of Valeant and 11 million are in the fund, but pretty much every client who was with us at the time we first started buying Valeant should have the same basis, or within pennies. That is true for all the positions. positions. Bob Goldfarb:

When we buy or sell a stock, we buy or sell it pro rata across all of the accounts so each gets its fair share at the same cost. The result of that is a lot of ma mail il,, wh whic ichh we kn know ow ma many ny of yo youu di disl slik ike. e. However, we think that is the fairest way to do it.


Question:

I know you have a relatively small position in Verisk Analytics. Just a question on the investment thesis the sis,, the val valuat uation ion,, cap capita itall all alloca ocatio tion, n, and mor moree specifically the Wood Mackenzie acquisition, which the company announced in March. Chase Sheridan:

I wi will ll tr tryy to be br brie ief. f. Ou Ourr po posi siti tion on in Ver eris iskk roun ro unds ds to 0. 0.0% 0% of th thee po port rtfo foli lio. o. So I wo woul uldd no nott cons co nsid ider er it a re real al po posi siti tion on.. It is a gr grea eatt bu busi sine ness ss.. Verisk is basically becoming a platform for buying data da ta an anal alyt ytic icss fir firms ms.. It Itss co core re bu busi sine ness ss in th thee insurance space has as big a moat as you are going to find anywhere anywhere but the returns returns on its expansio expansionn busi bu sine ness sses es,, th thee ju jury ry is st stil illl ou out. t. Th Thee ac acqu quir ired ed busi bu sine ness sses es ar aree go good od bu butt th thee re retu turn rnss on th thos osee inve in vest stme ment ntss ar aree no nott an anyw ywhe here re ap appr proa oach chin ingg th thee returns in its core business. It is probably not worth it to take any more time because we really do not have a material position. Question:

On page three of the prospectus, there is a bar chart cha rt sho showin wingg the per perfor forman mance. ce. We all kno know w tha thatt Valeant has a big effect on the total bottom line. But if you start with 2012 when the return was about 16% and the next year 35%, last year 8%, this year it is about 12% — if you backed out Valeant, what would those percentages be for the other 80% of the investments in the Sequoia Fund? David Poppe:

Vale aleant ant has out outper perfor formed med the S&P 500 by a substantial margin over the last three years. If you back ba cked ed Val alea eant nt ou out, t, th thee ot othe herr 80 80% % wo woul uldd ha have ve unde un derp rper erfo form rmed ed th thee S& S&P P, bu butt th that at in incl clud udes es a subs su bsta tant ntia iall ca cash sh po posi siti tion on at al alll ti time mes. s. Th Thee st stoc ockk portfolio performed roughly in line with the S&P. Question:

So on a percentage basis, what would let’s say last year’s 8% be without Valeant? David Poppe:

About 4%. Question:

Let’s say the current bottom line is about 12%, right? David Poppe:

Val alea eant nt ca came me in into to th thee ye year ar at 20 20% % of th thee portfolio and it is up 56% year to date. So that is over eleven points of return for the total portfolio.

Sequoia is up about 12% so the rest of the portfolio gene ge nera rate tedd le less ss th than an on onee po poin intt of re retu turn rn an andd th thee market has generated about 3. Question:

So you are saying that without Valeant, instead of its being 12%, it would be less than 1%? David Poppe:

When a 20% position goes up over 50% that works out to a lot of performance, yes. Question:

If you skip last year and you go to the wonderful year of 2013 when the result was 35%, what would that have been without Valeant, about? David Poppe:

Valeant was up almost 100% that year. It started the year at about 12% of assets. If Valeant went up 100% in 2013 and it was 12% of the portfolio that was twelve points of performance. We were up 35 that year and began with about 14% in cash. So, the rest of the stocks, about 74% of the portfolio, were up around 31% in aggregate and generated 23 points of return. Question:

Coul Co uldd yo youu pl plea ease se sh shar aree yo your ur po poin intt of vi view ew about margins at Google and stock options? Chase Sheridan:

Net ma Net marg rgin inss at Go Goog ogle le ha have ve be been en de decl clin inin ingg rather rat her rap rapidl idlyy as the com compan panyy has exp expand anded ed int intoo non-search businesses. Search is such a high margin busine bus iness ss tha thatt not nothin hingg is goi going ng to com compar pare. e. But in addition to the display business and other businesses that Google is currently monetizing, management is planti pla nting ng a lot of see seeds ds els elsewh ewhere ere.. So the margins margins have come down over time. If you are looking solely at the growth of net income or EPS — let’s go to the EPS line — if you are looking solely at EPS growth, it doe doess not look tha thatt com compel pellin ling. g. Tha Thatt is bec becaus ausee Google is being penalized for an enormous amount of growth investing. Howe Ho weve verr, Go Goog ogle le tr trad ades es at a ve very ry mo mode dest st premium to the S&P. If you look at its enterprise value to net operating profit after taxes, which is a way that you would look at it to give the company credit for the $60 billion of cash on the balance sheet andd so an some me in inta tang ngib ible le am amor orti tiza zati tion on,, it is ab abou outt 19 times forward looking, 2015, ballpark. The S&P is in the 17 − 18 range for its forward P/E. Meanwhile Google grew at 18.9% last year and the S&P in aggregate grew about 4.2%. So if you are

13


taking a long view, you do have to have some faith that th at so some me of Go Goog ogle le’’s in inve vest stme ment ntss th that at ar aree no nott currently benefiting the EPS line are going to work out. It does not have to be a lot of them but Google is planting a lot of seeds in a lot of places. Wit ithh re rega gard rd to st stoc ockk op opti tion ons, s, Go Goog ogle le ha hass a policy pol icy of com compen pensat sating ing its emp employ loyees ees ver veryy wel well.l. I think the intention is to try to create a place for the very best talent in the world to congregate and to avoid becoming a big stale company. I would say Google is on its way. The goal seems to be to create in the twenty-first century what Bell Labs and Xerox PARC were in the twentieth. Stock options are a part of that. They are expensed so it is already included in th thee ma math th.. Th Thee gr gran ants ts ar aree ve very ry ge gene nero rous us,, bu butt Google does get outstanding talent. Question:

Could you talk about the attractiveness of the indust ind ustria riall gas mar market ket,, and mor moree spe specifi cifical cally ly abo about ut Praxair Praxa ir,, the relat relative ive attr attractiv activeness eness of that company versus the other players in the market? Trevor Tr evor Magyar:

The in The indu dust stri rial al ga gass bu busi sine ness ss is an ex exce cell llen entt business. It has been for decades. The industrial gas business really starts with these large air separator units that the industrial gas suppliers build near ne ar la larg rgee in indu dust stri rial al cu cust stom omer ers. s. Th Thee se sepa para rato tors rs connne co necct to th thee ind ndus ustr tria iall pl plaant an andd pr prov oviide atmospheric gas, oxygen and so forth to the customer for a period of many, many years. The gas is sold unde un derr lo long ng te term rm ta take ke or pa payy co cont ntra ract cts. s. Wh What at is inte in tere rest stin ingg ab abou outt th that at is th that at no nott on only ly ar aree th thos osee conntr co trac acts ts pr profi ofittab ablle, but the heyy al also so gi give ve the com co mpan aniies es,, the ind nduust strrial ga gass su supp ppli lier ers, s, an opport opp ortuni unity ty to bui build ld a bus busine iness ss in the sur surrou roundi nding ng area. So they overbuild the air separator unit. They take some of those extra molecules, liquefy them and peddle the gas to customers within a certain radius. The key to the whole equation is that these gas molecu mol ecules les are ver veryy, ver veryy che cheap ap to pro produc duce, e, whi which ch means mea ns the dis distr tribu ibutio tionn cos costs ts ass associ ociate atedd wit withh tho those se molecules outweigh the cost to produce them. If you are the one producing the gas in a particular region through one of these big onsite plants, you are the low lo w co cost st su supp ppli lier er of th that at ga gass to cu cust stom omer erss in a 150-mile radius. So you truck the liquefied gas to smaller customers in the area and you make a nice profit. That is how the business has worked for a long time. It has always been a very good business. Over the past 10 − 15 − 20 years, it has gotten even better because it has rationalized. It has turned into a

14

global business with four large players: Praxair, Air Products, Air Liquide, and Linde. It is fundamentally a good business in terms of how it is structured. We chose to invest in Praxair because it is best in class; it has the highest returns. The company is run in an incredibly lean way. When we looked at the ind indust ustry ry,, it was obv obviou iouss fro from m the get-go get-go tha thatt Praxair was the best operator in terms of returns and cost focus. That said, while the reality is they have all done very well over the long-term, the industrial gass bu ga busi sine ness ss ha hass do done ne le less ss we well ll ov over er th thee pa past st few years, and the reasons are pretty obvious. China, Brazil and some other emerging markets have slowed down. That has affected growth because fewer new sepa se para rato torr un unit itss ha have ve go gone ne up an andd th thee cy cyli lind nder er busi bu sine ness ss ha hass be been en we weak aker er.. Bu Butt we st stil illl fe feel el ve very ry confident about the quality of the business and the management team. Praxair has tended to trade at a premium to the other industrial gas players because of that quality. Air Products, which had been a reasonably good company and a reasonably good operator, had always been something of a laggard to Praxair. It now has a new ne w ma mana nage geme ment nt te team am th that at ha hass id iden enti tifie fiedd th thee opportunity to close the gap with leaders like Praxair. So Air Products’ stock has run on those management changes. The valuation reflects investors’ belief that improvements are going to come and they are going to come relatively quickly. We could have a debate about how reasonable that is and the time frame over which whi ch tho those se ben benefit efitss are lik likely ely to ma mater terial ialize ize.. Air Products might have been the better stock to be in over the past few years, but we do not regret our choice in terms of focusing specifically on Praxair. So aga gaiin, it is a wo wond ndeerf rful ul bu bussin ineess ss;; it ha hass a wonderful management team. Maybe the growth has been disappointing over the past few years, but we still feel confident in holding it. Question:

Two que questi stions ons,, one on Goo Google gle.. May Maybe be som somee more commentary on how you think the transition to mobile is going. I know that is a tricky question, but some so me th thou ough ghts ts on th that at.. Th Then en on Pe Perr rrig igo, o, an anyy comm co mmen entt on th thee cu curr rren entt My Myla lann of offe fer/ r/bi bid, d, an andd whether or not that company ultimately will remain independent now that it is technically in play. Chase Sheri Sheridan: dan: I to took ok a pe peek ek at Go Goog ogle le’’s market shares and how they have changed over the last twelve months. Google’s market share in mobile browsers, Chrome and Android combined, went from 37% to 48%. The company’s market share in mobile


search sear ch we went nt fr from om 91 91% % to 92 92% % gl glob obal ally ly.. An Andd th thee market share of the mobile operating system, which is the Android OS in all of its forms, from 37% to 52%. It is worth pointing out that Google’s share in mobile search is actually quite a bit higher than its market mar ket sha share re in des deskto ktopp sea search rch.. The tra transi nsitio tionn to mobile is fraught with all kinds of potential pitfalls, but Goo Google gle was ver veryy ear early ly in emp emphas hasizi izing ng mob mobile ile with Android. The worry for a lot of Google followers is that people tend to spend a lot of their time in apps on mob obiile dev eviice cess; so th thee wo worr rryy is tha hatt as app ppss predominate in terms of taking users eyeballs away, mobi mo bile le se sear arch ch us usee ma mayy de decl clin ine. e. As it tu turn rnss ou out, t, people peo ple still still do a lot of sea search rching ing on the their ir mobile mobile phones through the browser, which is how Google makes the bulk of its mobile money. But it also has a pretty robust display business, and the company is doing doi ng wha whatt it can to max maximi imize ze its presence presence there. there. I am going to pull a number from memory, but I believe that Google has something like 37% of all mobile mob ile adv advert ertisi ising. ng. It has a tre tremen mendou dously sly str strong ong position. In terms of just the advertising technology stack that Google owns, there is nobody who comes clos cl ose. e. Th That at is so sort rt of an un unho holy ly me mess ss,, bu butt it is consolidating and it is consolidating into a couple of larg la rgee pl plat atfo form rms. s. Go Goog ogle le wi will ll ow ownn on onee of th them em.. Facebook will own one of them, and then we will seee wh se what at el else se sh shak akees out ut.. Bu Butt Go Goog oglle has a trem tr emen endo dous usly ly st stro rong ng po posi siti tion on in mo mobi bile le.. Th Thee compan com panyy has nav naviga igated ted tha thatt tr trans ansiti ition on bet better ter tha thann I would have expected. Google saw it coming before most of us did. Saatvik Agarwal:

Regarding Regard ing Per Perrig rigo, o, Myl Mylan an mad madee an of offer fer for Perrigo about a month ago. The original offer was made for about $205 but Mylan never disclosed the actual terms of the offer. It came as a surprise to Perr Pe rrig igo. o. It ca came me as a su surp rpri rise se to us us.. Si Sinc ncee th then en,, Mylan has actually disclosed the terms of the offer. And it does not quite work out to $205 a share if you use the terms Mylan has disclosed. You have to value it based on the stock price of Mylan before it made the offer, because it is a stock and cash deal, and the stock price of Mylan ran up when they made the of offer fer par partly tly bec becaus ausee peo people ple spe specul culate atedd tha thatt it would put Mylan into play and that Teva would bid on Mylan, which is what happened — Teva made a bid for Mylan after Mylan made an offer for Perrigo. Then Mylan raised its bid for Perrigo. We have known Perrigo and its CEO, Joe Papa, since we bought the stock five years ago, but we are

rational ration al peo people ple and if som someon eonee of offer ferss us a rea really lly good go od pr pric icee fo forr on onee of ou ourr co comp mpan anie ies, s, I th thin inkk we would be open to selling it. And I think that Joe Papa feels pretty much the same way. Perrigo has rejected rejec ted the Myla Mylann of offer fer,, sayi saying ng it under undervalue valuess the company. So at this point we do not really know what is going to happen. Question:

This year in your annual report you had very interesting insights on the UK corporate governance challenges that seemed to surprise you in terms of your investment investment consi considerat derations. ions. How do you thin thinkk abou ab outt in inve vest stin ingg di dire rect ctly ly in co comp mpan anie iess li list sted ed in foreign countries relative to the US? David Poppe:

It is in inte tere rest stin ing; g; Gr Greg eg Al Alex exan ande derr ha hass be been en a tremendous investor in foreign companies. We have been be en le less ss su succ cces essf sful ul.. Wh Whil ilee so some me of ou ourr fo fore reig ignn inve in vest stme ment ntss ha have ve pe perf rfor orme medd ex extr trem emel elyy we well ll,, in aggregate if you stripped out the foreign stocks that we have owned over the last ten to eleven years, they have cert certainl ainlyy under underperfo performed rmed the US stoc stocks. ks. Europe Eur ope in gen genera erall has und underp erperf erform ormed ed the US. So you are fishing in an inferior pond to begin with or one that has been so over the last ten years. Maybe it will be better over the next ten years. One thing that I learned — I would be curious what Bob thinks — we are good in the United States. Bob has an encyclopedic mind on US stocks and we have a lott of ex lo expe pert rtis isee an andd a lo lott of ho hour urs, s, ye year arss sp spen entt looking at these stocks. The UK has been interesting. Arman was just over there and he met with a prominent person there. That person said UK boards are interesting because the board tends to be very involved in trying to set strategy and telling the management what to do. In the US, the board ten tends ds to rea react ct to man manage agemen ment’ t’ss ideas about strategy. Management has to set strategy and the board holds them accountable, but is not as active. Our perspective is that boards are not going to be as good at setting strategy as the management team. They are not on the ground. They do not know the businesses well. The UK system in particular is a little bit odd because it tends to be retired CEOs who come co me in into to in indu dust stri ries es th that at so some meti time mess th they ey do no nott know anything about. There is that push of who is in charge. So in the case of Rolls specifically, we were veryy unh ver unhapp appyy wit withh the boa board rd set settin tingg str strate ategy gy.. The board installed one of its own as CEO for a time and now he is retired. We think the board has, to its credit, thought really hard about this.

15


So two sep separa arate te thi things ngs:: One One,, alt althou hough gh for foreig eignn markets have underperformed ours, our success has been a mixed bag. We just have not always picked the right companies and that is on us. Second, the UK,, it is ju UK just st di difffe fere rent nt.. As we go in into to fo fore reig ignn mark ma rket ets, s, ev even en on onee as si simi mila larr to th thee St Stat ates es as th thee UK or Sc Scan andi dina navi via, a, we ha have ve go gott to be aw awar aree of those cultural differences and who is really setting the strategy for the company. Question:

Woul ouldd you ple please ase of offer fer som somee gui guidan dance ce wit withh respect to distributions for this year from the Sequoia Fund? Bob Goldfarb:

We are going to have a capital gains distribution that will be paid on June 8. It should be about $2.53 a share. The reason I say should is depending on the number of shares outstanding it can vary by a penny or so so.. Th Thos osee ar aree fr from om ga gain inss th that at we were re ta take kenn in November and December of 2014 that we will be dist di stri ribu buti ting ng.. Fo Forr 20 2015 15 ye year ar to da date te,, th thee fig figur uree is approx app roxima imatel telyy $7. $7.64, 64, aga again in bas based ed on the cur curren rentt number of shares outstanding. Question:

Mr. Buffett always calls all of us his partners. Did anybody at the annual meeting ask — he has so much cash in the bank — why he does not pay a one-time dividend to his shareholders or as he calls us his partners, which we are not. Jon Brandt:

He has add addres ressed sed the div divide idend nd iss issue ue sev severa erall times, and I agree with him. As long as he feels that over time he can add more than a dollar of value for every dollar of retained earnings, it makes sense for him to reinvest the money. If it takes him a little timee — the opp tim opport ortuni unitie tiess do not alw always ays sho show w up immediately — he had a lot of cash going into the crisis in 2008, and when stocks went down he made the deal with Goldman Sachs. He made the deal with GE. He made the deal with Dow. Even though it happ ha ppen ened ed sh shor ortl tlyy af afte terr th thee cr cris isis is,, he bo boug ught ht th thee railroad in February of 2010 at a price he would not have been able to get the board to agree to in 2007. What Wh at I ha havve alw lwaays sa saiid to pe peoopl plee wi with th Berkshire, if they want the cash, if they want a 3% divi di vide dend nd yi yiel eld, d, wh whyy no nott se sell ll 3% of yo your ur ho hold ldin ingg ever ev eryy ye year ar?? If yo your ur Be Berk rksh shir iree is in a ta taxa xabl blee port po rtfo foli lio, o, yo youu wi will ll pa payy le less ss ta taxx on th that at sy synt nthe heti ticc divide div idend, nd, if you wil willl — you can be an inv invest estme ment nt bankk in you ban yourr own hom homee — tha thatt syn synthe theti ticc div divide idend nd

16

will have a lower tax rate on it than if Warren paid a dividend, presuming you have a non-zero cost basis in the stock. Honestly, I do not understand the ‘‘He should sho uld pay me a div divide idend’ nd’’’ ar argum gument ent at all all,, giv given en that you have this option. It does not make any sense to me. Question:

I have two quick questions. I might have missed the first one, but I was wondering what you thought of Val alea eant nt go goin ingg fo forw rwar ard, d, if yo youu th thou ough ghtt it wa wass going to perform similarly well from now to next year. The other question I had that you might have answer ans wered ed ear earlie lierr is bas based ed on kin kindd of an exp expert ertise ise thing. thi ng. I not notice icedd tha thatt giv given en you yourr ass asset et all alloca ocatio tions ns most mo stly ly in eq equi uiti ties es th that at yo youu ar aree pr prob obab ably ly ve very ry correlated to the S&P, and I was wondering if you hadd ev ha ever er th thou ough ghtt ab abou outt in inve vest stin ingg in ot othe herr as asse sett classes, going into FX, commodities or anything to maybe reduce that, or not? Bob Goldfarb:

I would disagree with your statement that our equities are closely correlated to the S&P. They are not. That lack of correlation accounts for much of thee si th sign gnifi ifica cant nt va vari rian ance ce in pe perf rfor orma manc nce, e, in bo both th dire di rect ctio ions ns,, be betw twee eenn Se Sequ quoi oiaa an andd th thee S& S&P P ov over er 45 years. The firm has invested in bonds twice since it wa wass fo foun unde ded. d. Bu Butt gi give venn th thee re resu sult ltss fr from om th this is week’s auctions, maybe we should have invested in art. We did not. And we do not have any plans to diversify on that score. With regard to Valeant, we are not any good at predicting short term movements in the stock; so we are not going to hazard a guess. But I would say that it is definitely ... it is a virtual certainty that we will have significantly lower returns from Valeant in the next five years than we had in the first five. Question:

My ma main in qu ques esti tion on wa wass th then en do yo youu pl plan an on keepin keep ingg th thee ho hold ldin ings gs at 20 20% % or mo more re of yo your ur portfolio, or are you going to plan to reduce that? Bob Goldfarb:

We are holding on to it. We believe that the company will continue to grow EPS at a rapid rate and that the stock should do quite well.


Question:

Can you comment on Cabela’s please? Was it a mistake? How long are you going to hold on to it? What do you think the future is? Greg Steinmetz:

Yes, it was a mistake. I thought that by now the comp co mpan anyy wo woul uldd be ge gett ttin ingg cl clos osee to ea earn rnin ingg $4 a share, and it will be a little over $3 this year if all goes go es ri righ ght. t. We ar aree ho hold ldin ingg on to it be beca caus usee th thee opportunity now is the same as when we entered. Unlike a lot of sectors in retailing, the hunting and fishing apparel business has not rolled up into the hands of one or two players. The mom & pops, the independent hunting and fishing goods stores, have 65% of the market. No company we think is better positioned to enjoy the benefits of the consolidation than Cabela’s. Cabela’s has some really good things going for it. One is the brand. Anyone who loves hunting knows Cabela’s and it is a brand that travels across the country. The sale of branded apparel with the Cabela’s name is close to a billion dollars a year; so you have a quarter of your revenue coming from that. There is a much higher margin on the Cabela’s brand product than on the other merchandise. What I undere und eresti stimat mated ed was jus justt how sev severe ere the han hangov gover er would be from the surge in gun sales as well as the softne sof tness ss tha thatt dev develo eloped ped in som somee of the com compan pany’ y’ss other categories of merchandise. As you know, know, rig right ht aft after er New Newtow townn gun sales took to ok of offf be beca caus usee ev ever eryo yone ne wa wass af afra raid id th that at th thee government was going to say no more buying guns. So people ran out and got guns. Cabela’s benefited more maybe than anyone else because it went out and bought every gun it could. So Cabela’s had a lot of guns on the shelf. That has unwound and Cabela’s is feeling it. The question has come up how far are gun sales going to fall? We have already seen the sales of what they call modern mod ern spo sport rting ing wea weapon pons, s, whi which ch are the these se thi things ngs that look like AK-47s, really fall off. Handgun sales, on the other hand, have held up. Why is that? The biggest reason is the legislation has gone completely in the favor of the gun industry. It used to be you could only carry a concealed weapon in ten states. Now it is 43 states. So there has been a secular shift withh reg wit regard ard to gun leg legisl islati ation on tha thatt fac facili ilitat tates es gun sales. Cabela’s is doing what it said when we bought the stock, which is that it is adding a million square feet of retail space a year. What management has to do is figure out how to get comps back. Cabela’s comparable store sales have been negative now for

six quarters. We think later this year the comps are going to turn positive and when that happens, there is going to be more enthusiasm for the stock. At that time, we would have to think again about what we want to do with it. But right now it is priced at a point where it would not make sense to sell it. Question:

Your opening remark was that it was a mistake. And then you spent the rest of your answer telling us why it is a great company. I just do not understand some so meti time mes. s. Fo Forr tw twoo ye year arss in a ro row w I he hear ardd th that at QinetiQ was a mistake, but we lucked out with that mistake. We did not luck out with Cabela’s. Why? Some So meti time mess I do no nott un unde ders rsta tand nd wh whyy yo youu ar aree so reluctant. Okay, it is a mistake. So you get out. Take your losses, find something better and move on. Greg Steinmetz:

We think at the current valuation, it is not a mistake to be owning it. Bob Goldfarb:

If the stock were selling today at the price for which we bought it, we would be selling it. So I do nott th no thin inkk th ther eree is an anyy in inco cons nsis iste tenc ncyy in Gr Greg eg’’s comments. Question:

I noticed the fund has a position in IBM and there have been many questions about Google. They seem se em to be co comp mpan anie iess mo movi ving ng in tw twoo di difffe fere rent nt direct dir ection ions. s. Eve Evenn tho though ugh IBM scr screen eenss che cheapl aplyy on metrics, what is your attraction to the business right now? Will Pan:

If you go back a little bit, IBM in 2010 put out a plan that it called the 2015 Roadmap. Management said that by 2015 it would be earning $20 per share. That was through a mix of a little bit of revenue growth, a bit of operating margin expansion as the mix mov moved ed mor moree tow toward ardss hig higher her mar margin gin sof softwa tware re and other higher margin services. And also IBM was goin go ingg to cu cutt so some me co cost sts. s. Th Then en th ther eree wa wass a la larg rgee component that was repurchase of shares. The plan wass cr wa cred edib ible le.. IB IBM M ha hadd hi hitt on onee be befo fore re.. It se seem emed ed doable going forward at the time. Mike Tyson says everybody has got a plan until they get punched in the face. And IBM got punched in the face a couple times — IBM did not keep its hands up the whole time. So in 2013, the company had some issues with its mid-range UNIX hardware busine bus iness. ss. Two thi things ngs hap happen pened. ed. One was Int Intel el got

17


more com more compet petiti itive ve at tha thatt ran range ge of sys system tems. s. The Thenn IBM IB M al also so ha hadd be been en se seei eing ng go good od gr grow owth th in th thos osee types of systems overseas. With Edward Snowden’s revelations about the NSA installing back doors in west we ster ernn ve vend ndor ors’ s’ ha hard rdwa ware re,, su sudd dden enly ly al alll th thos osee emerging market consumers, customers, got skittish, unders und erstan tandab dably ly.. So IBM had an iss issue ue the there. re. Also management was not able to grow its large software business as much as it thought it might. That is an execut exe cution ion iss issue ue on IBM IBM’’s par part.t. Man Manage ageme ment nt als alsoo mayb ma ybee we went nt a li litt ttle le bi bitt to tooo fa farr in te term rmss of co cost st cutt cu ttin ing. g. It wa wass no nott ke keep epin ingg it itss em empl ploy oyee eess ve very ry satisfied. Finally, the last issue that caused the company to ab aban ando donn th thee ro road adma mapp ca came me wh when en th thee do doll llar ar strengthened. IBM is an extremely global com co mpan anyy — 75 75% % of th thee sa sale less ar aree ou outtsi side de the United States. With the strong dollar, the company faced a very large headwind. As a result, in the third quar qu arte terr of la last st ye year ar,, IB IBM M de deci cide dedd to gi give ve up th thee roadmap, probably a little bit too late. There were some so me cr crac acks ks al alre read adyy sh show owin ingg an andd yo youu co coul uldd se seee them when the company repurchased a huge amount of its stock, $8 billion worth, in the first quarter of 20114. It wa 20 wass als lsoo tak akiing in incr crea eassin inggly la larrge restructuring charges. On th thee ot othe herr ha hand nd,, th thee ma main infr fram amee tu turn rned ed 50 years old recently and people have been saying it hass be ha been en de dead ad fo forr 10 − 20 − 30 ye year ars. s. Fi Firs rstt mi mini ni computers came at it and then the PC came at it and now you have got the cloud. This is not lost on CIOs who have mainframes. They have not been sleeping unde un derr ro rock ckss — th they ey ha have ve co cons nsid ider ered ed th this is.. Bu Butt consider what it means for the CIOs. If you are a bank and you run your core banking application on a mainfr mai nframe ame and it has bee beenn run runnin ningg smo smooth othly ly for 40 − 50 years. You pay tens of millions of dollars to IBM IB M to ma main inta tain in al alll th that at,, bu butt wh when en yo youu do th thee calculation on whether to replace that, at the end of the day, you get your core banking application on another platform. That is all you get. There is really no big ROI for that. Who would want to risk an entire ent ire car career eer and an ent entire ire com compan panyy on som someth ething ing like that? As part of its roadmap, IBM has repurchased an enormous number of shares. Whether the company repurc rep urchas hased ed tho those se sha shares res on our behalf behalf at a goo goodd pric pr icee is go goin ingg to be pr prov oven en ou outt by wh whet ethe herr th thee compan com panyy can tak takee adv advant antage age of new wav waves es goi going ng forward. One of the new waves is cloud. IBM was kind of late to the game there. But it is somewhat hard to blame the company because many enterprises

18

were qu were quit itee re relu luct ctan ant. t. IB IBM M re real ally ly fo focu cuse sess on th thee global 2000 and if most of those customers were not really receptive, then there is only so much that you can do. You can spend a lot of money trying to force the technology but often it is really about getting the timing timi ng right right.. Apple tried handh handheld eld comp computing uting once with the Newton twenty years ago and it did not work. Then Microsoft tried a decade later with the tablet PC and it did not work. Only with the iPad did it work. IBM has got a couple irons in the fire today: It is trying to seize mobile by doing a partnership with Appl Ap plee an andd re rewr writ itin ingg or ad addi ding ng ne new w en ente terp rpri rise se applications that run on iPads. Ginni Rometty, IBM’s CEO, has been on this push for cognitive computing, which is trying to build expert systems like Watson that faced off against the Jeopardy champions. There are some other initiatives around security, which is paramount to IBM’s customers. So we feel that the franchises are not going away. It remains to be seen whether the company is going to be able to capitalize on what it has got going forward. In the meantime, we paid $130 on $11.52 per share of earnings, and right now the stock is at $174 on about $16 per share of earnings. Bob Goldfarb:

We hav havee had three com compan panies ies that have have had roadma road maps ps an andd to da date te th they ey ar aree ze zero ro fo forr th thre ree. e. So beware of roadmaps. Question:

Can we get updates on O’Reilly and Mohawk? Rory Priday:

O’Reil O’Re illy ly ha hass be been en do doin ingg fa fant ntas asti tic. c. It Itss fir first st quar qu arte terr co comp mp wa wass 7. 7.2% 2%,, an andd it ha hass be been en pr pret etty ty terrific relative to some of its peers in the industry. It seems like the spread between O’Reilly’s comps and the comps of the other companies has only increased. Ever Ev eryy ye year ar on onee wo wond nder erss wh whet ethe herr th thee op oper erat atin ingg margin is going to go higher, and it keeps climbing higher. Management has done an excellent job. The company has moved into Florida and the Northeast. It is going to put as many as 300 additional stores down in Florida. O’Reilly added a distribution center there recently, and it has 130 stores down there right now; no w; so th that at is a goo oodd gr grow owtth op oppo port rtun uniity ty.. Management just mentioned that it is going to put a DC in San Antonio in 2016. So O’Reilly is adding about abo ut 200 sto stores res a yea yearr. The bus busine iness ss is com compin pingg right now in the mid to high single digits but that may well slow down at some point.


O’Reilly seems to have the strongest culture in the in the inddus usttry and a re real al foc ocuus on se serrvi ving ng it itss commer com mercia ciall ins instal taller ler bas base. e. Als Alsoo on the DIY sid side, e, O’Reil O’R eilly ly has bee beenn out outper perfor formin mingg DIY ret retail ailers ers in terms of comps for some time. A number of factors are driving the comps, but they all seem to be going in the same direction, and the company is firing on all cylinders. Terence Paré:

We have owned Mohawk for a long time. But I feel better about the company today than I have in a very long time. There are a couple reasons for that. One, the company is practically a unique franchise. It is th thee on only ly flo floor orin ingg co comp mpan anyy th that at ha hass ex expo posu sure re across almost the entire globe and is in most of the import imp ortant ant floo floorin ringg mar market ketss in the wor world. ld. Num Number ber two, its portfolio of brands covers just about every kind of flooring that there is. It will add sheet vinyl andd lu an luxu xury ry vi viny nyll ti tile le wh when en it cl clos oses es on th thee IV IVC C acquis acq uisiti ition, on, whi which ch it ann announ ounced ced at the end of las lastt year. So it will make every kind of floor covering, be in mo most st im impo port rtan antt ma mark rket ets, s, an andd ge gene nera rall llyy be th thee leader in just about every market that it is in. It is the lar larges gestt cer cerami amicc til tilee man manufa ufactu cturer rer in the wor world, ld, and ceramic tile is the largest floor covering in the world. Somebody mentioned dividends earlier. Mohawk has never paid one. The reason the company has not paidd one is tha pai thatt the manageme management nt of the company company,, which I think is the best in the business, has found good go od th thin ings gs to do wi with th th thee ca cash sh th that at it pr prod oduc uces es.. Lookin Loo kingg for forwar ward, d, rig right ht now Moh Mohawk awk has roo room m to grow around the world and it has room to grow in the US, not so much because the US is going to be a fast-growing market, but because the US still really has not normalized in its remodeling spending and in construction. So there is growth in the US. Mohawk hass gr ha grow owth th po pote tent ntia iall in Ru Russ ssia ia.. It ha hass gr grow owth th potential in Mexico, and in different areas of Latin America. So it has a fairly long runway in front of it. And there is M&A potential still. Even though it is the largest floorcovering company in the world, it is only $8 billion in sales. So there are things to buy. The company will be closing shortly on an acquisition in Bulgaria, a company called KAI Group. The terrific thing about that is that there are lots of little ceramic tile companies in Eastern Eurrop Eu opee tha hatt wo woul uldd be bennefi efitt fro rom m the mod odeern mana ma nage geme ment nt an andd mo mode dern rn ma manu nufa fact ctur urin ingg th that at Mohawk can bring to them. And there are a lot of floor flo orss tha hatt ne need ed to be rem emod odel eleed an andd a lo lott of domi do mici cile less th that at ne need ed to be bu buil ilt. t. So Some meth thin ingg li like ke

two-third two-th irdss of the hou housin singg in Rus Russia sia,, for ins instan tance, ce, need ne edss to be re remo mode dele ledd be beca caus usee un unde derr th thee So Sovi viet et admi ad mini nist stra rati tion on,, no nobo body dy ow owne nedd th thei eirr ho hous uses es.. So nobody took care of them, and they did not have the money anyway. As a result, those homes are in a very serious state of disrepair. And Russia is not the only country like that. A natural question would be — now Mohawk is in Russia, who knows what is going to happen there? What about all the currency issues that they face? Those are certainly real concerns. The company does not try to hedge the dollar against the ruble, but it does manufacture in-country a significant amount of what it sells in Russia. So although there is a lot of econom eco nomic ic tur turmoi moil,l, Moh Mohawk awk has a cos costt adv advant antage age overr som ove somee oth other er Eur Europe opean an floo floorin ringg man manufa ufactu cturer rerss who are competing against it in Russia. In addition to having the advantage of a partial hedg he dge, e, Mo Moha hawk wk ha hass na natu tura rall ex expa pans nsio ionn po pote tent ntia iall because the company has a variety of methods of distribution. Mohawk has a chain of stores in Russia that it got when it acquired Marazzi last year. Part of it is franchised, but part of it Marazzi owns. It is run main ma inly ly by Ru Russ ssia ians ns.. Th They ey ha have ve be been en th ther eree fo forr tenn ye te year ars. s. Th Thee ac acco coun unti ting ng ca cann be be beli liev eved ed.. Th Thee company has been careful about that. So the business can grow both by expanding its market share through distributors, but also by expanding its retail network. There are many reasons to feel good about the future growth of the company, and it is inherently a cash generative business. Question:

Could you describe what Danaher does and how it is doing? Terence Paré:

Danahe Dan aherr is in a lot of dif differ ferent ent bus busine inesse sses. s. It started out as an industrial company making things like hand tools and engine retarders. It used to make Craftsman Craft sman mechanics mechanics tool tools. s. But the comp company any right now is bas basica ically lly — and in fac factt has rec reclas lassifi sified ed its documentation with the SEC — to that for industrial instruments. Danaher makes things like oscilloscopes, mass spectrometers. It has a very significant dental business. But it still sells Matco hand tools, which aree so ar sold ld in va vans ns th that at dr driv ivee ar arou ound nd to ga gara rage ges, s, indust ind ustria riall pri printe nters, rs, med medica icall gea gear, r, wat water er tre treatm atment ent equipment, and more. The business right now is in the headlines a lot becaus bec ausee man manage agemen mentt rec recent ently ly ann announ ounced ced tha thatt it is going to break Danaher into three pieces and it is going goi ng to acq acquir uiree Pal Pall,l, whi which ch is an ind indust ustria riall filt filter er

19


compan comp anyy. On Onee pi piec ecee wi will ll be Pa Pall ll an andd Da Dana nahe her’ r’ss instruments piece, and another will be the industrial businesses. On top of that, Danaher has a communications business. This is part of an earlier acqu ac quis isit itio ionn an andd wa wass or orig igin inal ally ly ca call lled ed Tek ektr tron onix ix Communications. Without getting too far under the hood, hoo d, Tekt ektron ronix ix Com Commun munica icatio tions ns mak makes es gea gearr and soft so ftwa ware re th that at ke keep ep tr trac ackk of th thee wa wayy th that at th thee IT infrastr infr astructur ucturee works in ente enterpri rprises. ses. For examp example, le, it will wi ll tr trac ackk if th ther eree is so some me we weir irdd gl glit itch ch go goin ingg on somewhere in your enterprise system. Danaher has decided to combine that piece of its business with a company called NetScout, which further furt her compl complicat icates es thin things gs becau because se share shareholde holders rs are going goi ng to be of offer fered ed the opportun opportunity ity to swa swapp the their ir Danaher shares for NetScout shares. These are very differe dif ferent nt busi businesse nessess from the rest of the comp company any.. When the communications piece was in Danaher, it was fun to talk about, but it was relatively small. When it is combined with NetScout, we are going to have to make a decision about how we want to go abou ab outt de deal alin ingg wi with th ou ourr Da Dana nahe herr st stoc ock. k. I am st stil illl worrki wo kinng on thi his. s. Mos ostt of the bi bigg ne news ws ab aboout Danaher has only occurred in the past week or so. So we are still noodling over it. But like Mohawk, Danaher is one of our oldest positions. I think only Berkshire has been in the portfolio longer. Danaher has been a very good investment for us. Where we go from here right now is hard to say because we can elect to own one, two, or three pieces. Onee th On thin ingg I wo woul uldd sa sayy, an andd th this is sp spea eaks ks to a principle that Bob has pointed to before, and that is that there is significant insider ownership of Danaher by the Rales brothers. They will continue to serve on the boards of both companies after they split it apart. And Jim Lico, a Danaher executive vice president, will serve on NetScout’s board. What is not clear to me is whether or in which entity or entities the Rales brothers are going to elect to receive a percentage of shares disproportionately higher or lower than their current ownership of Danaher. The Rales have made an awf awful ul lot of mon money ey for the themse mselve lvess — and the theyy have made, relatively speaking on a percentage basis, a lot of money for us. They are not going to do anything ill-advised. Question:

One so One sour urce ce of su succ cces essf sful ul in inve vest stme ment ntss in recent years has been corporate spinoffs. I am just wondering — there are not too many in the Sequoia portfolio, Zoetis, and if you go way back,

20

Praxair — have spin-offs merited your attention and do you think they will merit your attention in the future? Bob Goldfarb:

We loo ookk at the hem m an andd we ar aree go goiing to ge gett another two with the Danaher breakup that Terence just discussed. So if they are large enough in terms of market capitalization, we will certainly take a look at them. Question:

I have a question on Berkshire which I think is your second largest position. Warren Buffett now is what, 84, 85. What if he should die or get sick and can no longer manage the company? I know he has given it a lot of consideration. But how do people feel about it? Jon Brandt:

Warren has the very unusual ability to have an instinctual way to find a deal — when he is in the bathtub call the CEO of Bank of America, or meet people ... Jorge Paulo Lemann from 3G on the board of Gillette 30 years ago, remember him and have a relationship with him so that when 3G had the idea of buying Heinz, 3G called Warren. Berkshire will alwa al ways ys be a ca call ll fo forr pe peop ople le wh whoo ne need ed ca capi pita tall fo forr deals. dea ls. That is not goi going ng to cha change nge.. But Warre Warren’ n’ss unique ability to find those deals — it will be hard to duplicate that. Then the final thing is the people who manage the businesses, particularly the founders who sold to him, do they have loyalty to Warren or do they have loyalty to Berkshire? I think that will be a challenge. That said, it is not easy for Warren to put large amounts of money to work at very high rates very often. A fellow from India visited me last week. He was comparing the more recent years’ compound at Berksh Ber kshire ire to the 5050-yea yearr com compou pound. nd. He ask asked ed me whet wh ethe herr I no noti tice cedd th that at it is no lo long nger er gr grow owin ingg at 25%, and how did I think about that? I said, ‘‘Yes, I have noticed that. It is virtually impossible.’’ But I tolld Bo to Bobb an andd Da Davi vid, d, I thi hinnk if Be Berrks kshhir iree ca cann compound its intrinsic value at 10% over the next 10 or 20 years that would be an excellent result. My point is that the expectation has already gone down so much. It is very hard for huge companies to do 15%. And it will be hard for Berkshire to do 10%, give gi venn it itss si size ze.. Bu Butt if th thee bo boar ardd pi pick ckss th thee ri righ ghtt candidate for CEO — and it already has two good CIOs, CIO s, chi chief ef inv invest estmen mentt of offfice icers rs — 10% is sti still ll a realistic if somewhat difficult or challenging hurdle.


Question:

That Th at be begs gs th thee qu ques esti tion on wh whyy is it in se seco cond nd position, is it safety? Jon Brandt:

It is a couple things. I cannot speak for Bob but it is reasonably priced. It is still at a discount to its intr in trin insi sicc va valu lue. e. I wo woul uldd al also so sa sayy th that at we ar aree no nott having great success in finding other things to buy. What are we in terms of cash, David, these days, in Sequoia? David Poppe:

Close to 20%. In the last 10 years Berkshire’s stock price has compounded at 10% while the S&P comp co mpou ound nded ed at 8% 8%.. So Be Berk rksh shir iree ha hass ac actu tual ally ly outp ou tper erfo form rmed ed by a de dece cent nt am amou ount nt ov over er th thee pa past st 10 years, despite its size. So you have to think of it in te term rmss of it is st stil illl a de dece cent nt ho hold ldin ing; g; it is st stil illl ballast in a storm and Warren is still very, very good in a crisis at putting capital to work. Bob Goldfarb:

I think he has done an excellent job of transforming the company or institutionalizing it with longg dur lon durati ation on ass assets ets,, mai mainly nly the rai railro lroad ad and the utilit uti lities ies.. I thi think nk the tra transa nsacti ction on wit withh 3G is rea really lly drivenn by the opera drive operationa tionall mana managemen gementt exper expertise tise of 3G,, an 3G andd th that at is a re rela lati tion onsh ship ip th that at is go goin ingg to cont co ntin inue ue fo forr a lo long ng ti time me.. Al Alll th thre reee of th thes ese, e, th thee railroads, the utilities, and the alliance with 3G will likely lik ely con consum sumee ver veryy sub substa stanti ntial al com commi mitme tments nts of capital. Consequently, the deployment of capital will be less of a burden for his successor than it would otherwise be. So I think there is less concern about Berksh Ber kshire ire aft after er Warr arren en bec becaus ausee of the these se mea measur sures es that he has taken. David Poppe:

We ar aree al almo most st at 12 12:3 :30. 0. Ho How w ab abou outt on onee la last st question? Question:

Your comments on Omnicom? David Poppe:

Omni Om nico com m is on onee of fo four ur la larrge ad adve vert rtis isin ingg agency hold agency holding ing comp companies anies.. The indus industry try has real really ly consolidated down, and there are four large ones left. We think Omnicom is best of breed, but in fact they

are all pretty good. It is a very good industry for a couple reasons. One is media is really fragmenting right rig ht now now.. For lar large ge cor corpor porati ations ons tha thatt hav havee hug hugee marketing budgets, it is getting harder not easier as advert adv ertisi ising ng spe spendi nding ng fra fragme gments nts to onl online ine,, mob mobile ile,, social, as well as TV. And TV itself just continues to fragment as there is more and more cable proliferation all the time. We think Omnicom has a good stable of creative agencies. Arguably, you could say Omnicom is the best creatively. Its agencies tend to win the most prizes, for whatever that is worth. Omnicom is also very good at the data analytics side of it as are the others. It is an area where the clients need the help; so we think it is well positioned for the fut future ure.. Ano Anothe therr tai tailwi lwind nd is tha thatt the eme emerg rging ing world is really growing and global marketers want to reac re achh th thos osee ne new w co cons nsum umer erss or ne newl wlyy we weal alth thyy cons co nsum umer ers. s. An Andd Om Omni nico com, m, WP WPP P, an anot othe herr bi bigg advertisi adver tising ng hold holding ing comp company any,, thes thesee compa companies nies are necessary to reach those potential new customers. Margins in the business reflect its necessity. The margins are quite high for everybody. I am not sure that there is room for margins to go up, but I do not think there is a lot of pressure for margins to go down, because it is a needed resource. But the last thing I would say is there is some pushback — as technology gets better, the clients will be able to buy moree adv mor advert ertisi ising ng in a pro progra gramm mmati aticc or aut autom omate atedd way. It will not be sold and the media buying agency maybe goes away over time. So far that really has not been the case. As there are more options of what to bu buyy an andd ho how w to ta targ rget et pe peop ople le mo more re an andd mo more re finely; the agency, so far anyway, seems to be just as necessary if not more necessary than in the past. Last quar qu arte terr Om Omni nico com’ m’ss or orga gani nicc gr grow owth th ra rate te wa wass 5% − 5.5%. That is a pretty good organic growth rate forr a la fo larrge co comp mpan anyy. I am no nott su sure re if 5. 5.5% 5% is sussta su taiina nabl blee bu butt glo lobbal GD GDP P pl pluus two is ve verry sustainable, and that makes for a good business. Bob Goldfarb:

We are going to bring the formal Q&A session to an end. But those of you who have unanswered questions, please come forward and we will try to direct you to the right analyst who can answer those questi que stions ons.. We tha thank nk you all for att attend ending ing and we look forward to seeing you next year.

21

Sequoia Fund Transcript 2015

Recommend Documents