Biglari Holdings FY 2015 Annual Meeting Notes

Notes from Biglari Holdings annual meeting for the year ended December 31, 2015 by Adam Gaglio

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Note: Nothing should be taken as a direct quote. Some of the numbers may be wrong as it was difficult to hear a few times. Unless otherwise indicated, Biglari is speaking.

• 1:07pm start- went through formalities regarding proposals and introducing directors
• Pre Q&A Remarks
  • Good idea to review history to see where we came from
  • First slide, top part is an email from 2008 stress testing 10% decline in sales [it’s not pretty]
  • Current CEO was very concerned about the business
    • One of the main reasons for his resignation was the belief that company was going to fail
  • Steak ‘n Shake (SnS) losing $100k/day, in violation of debt covenants
  • “I’m self-made entrepreneur”
    • Started first business with $15k
      • Parlayed into bigger and bigger sums
    • Phil & I decided to partner up and have always behaved entrepreneurially
  • Other companies were not interested in taking over SnS
    • ‘We offered them and other individuals generous pay packages’
      • Made it clear that money was no concern
  • SnS resurrected from ashes, now thriving
  • Prior to our management, traffic declining faster than peers
    • After our management, growing faster than peers
  • Minor changes not going to save SnS
    • 10/10 restaurant veterans would have failed in turnaround
    • No time for analysis, needed entrepreneurs
  • This was not an activist campaign that was successful
    • Activists not interested in, or many that are even capable of, running a company and turning it around
    • We are entrepreneurs first, investors second
  • We developed a value proposition that we first formed in our own minds
    • We presented the value prop during the proxy battle and were questioned because our prices were higher than competitors
    • We had better quality but the value proposition was still lower because of higher prices
  • SnS started with $1.6mm of corporate cash in 2008, ended 2015 with $815 million of cash [presents slide showing sources of cash: rights offering, debt, operating cash flow, etc.]
  • CBRL is our most significant investment
    • Without our pressure on the BOD, investment would have turned out much differently
    • Most important change was a moratorium on new stores
      • We didn’t have all the data but could see a productivity decline
    • We prompted management to reveal their return on new restaurant investment
      • Showed their calculation in a filing
        • Running their numbers using Damodaran’s method, return would have been sub 4%
      • Big contention was whether you have to add back G&A
        • If you add a couple stores maybe you don’t need additional G&A, but beyond that, you absolutely do
        • Even without G&A, return would be only 9%
    • Beyond 2011 and 2015, CBRL opened 34 new stores costing $5 million a piece
      • Bet they’re not going too well on that
    • Dividend payout ratio has slowly creeped up, now over 100%
    • Investment a testament to holding company structure
      • Had we opened SnSs instead, wouldn’t have made nearly as much
  • All decisions we make with idea of increasing per share intrinsic value
    • If our interest was increasing managerial domain we would buy more whole businesses, not partial stakes
  • We don’t use committees, consultants, etc. to assist with capital allocation
  • We have 23k employees and only 5 at the holding company
    • Don’t burden pursuit of value with bloated cost structure
  • Ideally we buy great companies like First Guard [compliments First Guard and Ed Campbell at every opportunity] but will get involved with turnaround situations
  • We have a great capital structure
    • All debt is at subsidiaries
      • Pay a higher cost of debt but safer
  • Have long term orientation
    • A lot of people talk about this but few have it
    • We think in terms of decades
      • Doesn’t sit well with some, like those managing money for others
      • We look at minimum of 10-year period
      • Benchmark is S&P 500
  • Our stock performance has been very volatile
    • For a while the stock outperformed the business
    • Final analysis: We have outperformed S&P500 [starting from day current management took over]

Biglari Holdings

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