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The 10th Annual New York
Value Investing Congress
September 8-9, 2014 • New York, NY
SEATING IS LIMITED TO 275
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value investing congress
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9th Annual Value Investing Congress - New York
Insights from 25 Years of Constructive Shareholder Activism
Title
Alexander J. Roepers
September 16, 2013
Date
Agenda
Introduction
I. Introduction to Atlantic
33
Insights from
25Activism
Years of Constructive
Activism
I.II. Corporate
Action,
& Takeovers: Shareholder
Gaining Momentum
65
III. Review of Last Year’s Investment Ideas
IV. Investment
Five New Investment
Ideas
III.
Ideas
V. Q&A
2
1114
12
17
19
33
Introduction - Atlantic Investment Management
Value-oriented global equity investment firm with $1.7 billion in assets under management
Investment approach:
•
Concentration of capital on highest conviction investment opportunities
•
Selection from well-defined areas of competence, universe of industrial, consumer
products and services companies with solid balance sheets
•
Use of significant minority stakes (2-7%) to enhance and accelerate shareholder value
through constructive shareholder activism
•
Strict buy/sell discipline based on cash flow valuation multiples, combined with
active trading around core positions
Long/short and long-only activist equity funds
Founded in 1988 by Alex Roepers; SEC registered
New York and Tokyo offices; 28 team members, including 11 senior equity analysts
Note: AUM as of September 13, 2013.
3
Cambrian Fund – Performance Record
•
Atlantic’s largest fund with $900 million of AUM
•
21-year audited track record
•
Consists of 6 to 7 U.S. activist positions (10-20% of capital each)
•
The fund does not use leverage or derivatives
Cambrian Fund
S&P 500
2013 YTD
26.6%
20.2%
S.I. CAGR
19.2%
9.0%
Note: Figures are as of September 13, 2013. Cambrian Fund returns are net of all fees and represent Class A Series 1 shares. S&P 500 Index includes the reinvestment of dividends. Inception is October 1,
1992. Prior to June 1, 1996, performance is based on the audited record of a managed account with a similar strategy and fee structure as Cambrian Fund. Cambrian Fund returns are audited through 2012 and
unaudited thereafter. Past performance may not be indicative of future results.
4
Cambrian Fund – Performance Record
7.7x the total return of the S&P 500 since inception
$45,000
+3,927%
$40,000
Cambrian Fund
Berkshire Hathaway (BRK A)
$35,000
S&P 500
$30,000
2.3x
$25,000
+1,710%
$20,000
7.7x
$15,000
$10,000
+512%
$5,000
$0
1992
1996
2000
2004
2009
2013
Note: Figures are as of September 13, 2013. Cambrian Fund returns are net of all fees and represent Class A Series 1 shares. S&P 500 Index includes the reinvestment of dividends. Inception is October 1,
1992. Prior to June 1, 1996, performance is based on the audited record of a managed account with a similar strategy and fee structure as Cambrian Fund. Cambrian Fund returns are audited through 2012 and
unaudited thereafter. Past performance may not be indicative of future results.
5
Insights from 25 Years of Value Investing
Have a well-thought-out investment strategy
•
•
•
•
Focus on carefully defined universe of investment prospects
Stay with what you know well (“area of competence”)
Stay with what you can analyze
Invest, don’t speculate
Be consistent, disciplined, persistent and patient
•
•
•
•
•
•
•
Have conviction based on knowledge and your own on-going due diligence
Do your homework as if you are buying the whole business
Read / Call / Visit - crunch numbers and kick the tires first!
Be stingy - Wait until the opportunity falls into your lap. Stick to a pre-determined valuation
level, don’t chase stocks
Don’t be greedy - Scale-out at a pre-determined valuation level
Don’t use leverage - Not in your portfolio, and stay away from levered companies
Concentrate funds on your highest conviction ideas
And most importantly…
•
6
Be honest and transparent with your investors, company executives of your investment
positions, and partners/team members of your firm
Insights from 25 Years of Constructive Shareholder Activism
Our Approach:
1) Work with management behind the scenes as much as possible
2) Maintain liquidity to allow trading and to sell
3) Maintain constructive, respectful dialogue with management
Our Objective:
Our Process:
Enhance and accelerate process of shareholder value creation while
retaining liquidity
• Build strong rapport with CEO/CFO through multiple on-site and face-toface meetings
• Propose win-win solutions for management and shareholders
• Submit proposals in writing to CEO and, as needed, to the Board of
Directors
• Broaden discussion of proposals, as appropriate, to include other large
shareholders, financial media and private equity groups
7
Insights from 25 Years of Constructive Shareholder Activism
Tailor-made proposals to unlock value addressing any of the following areas:
8
•
Investor Relations: messaging, access, crafting 3-year earnings road map
•
Use of Capital: dividend, share buyback, debt repayment, CAPEX, M&A
•
Corporate Structure: sell underperformers, splits or spins, streamlining
•
Operational: restructuring to close gap to top peers in relation to profit margins,
working capital, management changes at operational or C-level, etc.
•
Corporate Governance: critical review of executive compensation, board make-up,
corporate costs, etc.
Companies in which Atlantic was a Constructively Engaged Shareholder
United States:
Alexander & Baldwin
Ball Corp
ACS
Ball
Black & Decker
Ashland
Charter Power Systems
Cooper Industries
Baker Hughes
Chicago Northwestern Railroad
DelMonte Foods
Energizer
Esterline
Dole Food
Flowserve
Flowserve
Eaton
Harman
Greyhound-Dial
Goodrich
ITT Corp
Harman
FMC
Joy Global
Harsco
Kennametal
Kennametal
Harnishfeger
J.M. Smucker
JLK Distribution
New York Times
Oil States
International
Kennametal
Pactiv
Owens-Illinois
Nashua
Precision Castparts
Rockwood
Quixote Corp
R.R. Donnelley
Xerox
Terex
Sonoco Products
U.S. Shoe
Smith International
SPX
1989
9
2000
2010
Present
Companies in which Atlantic was a Constructively Engaged Shareholder
Europe:
Adidas
Faurecia
Puma
SKF
Aggreko
FLSmidth
Prysmian
Smiths Group
Amec
G4S
Rexam
Technip
Atos
GKN
Rheinmetall
Thales
BOC Group
Lanxess
Rhodia
TNT
Charter International
Metso
Safran
Trelleborg
Clariant
MTU Aero Engines
Sandvik
Valeo
Compass Group
Orkla
Securitas
Japan:
Dai Nippon Printing
Miraca Holdings
Shimadzu
IHI
Nomura Research
Sumitomo Electric
ITOCHU Techno Solutions
Omron
Sumitomo Heavy Industries
Koito Manufacturing
Secom
THK
Kuraray
2004
10
Yamamoto Holdings
Present
Review of Last Year’s Investment Ideas
Share Price
Company
Status
Company
Status
VIC 8
Oct 2, 2012
VIC 9
Sep 13, 2013
Scale-out
% Change
Energizer Holdings
(ENR)
Sold
$74
$94
$96
29%
Rockwood Holdings
(ROC)
Holding
$47
$66
n/a
39%
Clariant
(CLN VX)
Holding
CHF 11
CHF 16
n/a
42%
FLSmidth
(FLS DC)
Sold
DKK 345
DKK 310
DKK 328
-5%
Joy Global
(JOY)
Sold
$56
$54
$61
8%
Note: Average price sold based on scale-out of Atlantic core position. Positions Atlantic has sold (ENR, FLS DC, JOY), % change is based on
price sold. Positions Atlantic is still holding (ROC and CLN VX), % change is based on current price.
11
Five New Investment Ideas
44% average upside potential
Valuation
Company
Ticker
Country
12-Month Target
Price
Market Cap
($ billion)
P/E
EV/EBIT
Price
Target
Target/
Upside
Baker Hughes
BHI
U.S.
$50
$22.1
12.8x
8.7x
$71
43%
Faurecia
EO FP
France
€22
$3.2
9.1x
7.1x
€ 31
41%
Itochu Techno-Solutions 4739 JP
Japan
¥3,505
$2.2
12.3x
5.2x
¥5,800
65%
Lanxess
LXS GY
Germany
€ 52
$5.7
11.5x
10.9x
€ 75
45%
Harman
HAR
U.S.
$66
$4.6
12.9x
9.5x
$84
26%
$7.6
11.7x
8.3x
Average:
44%
Note: Figures are as of September 13, 2013. Totals may not add due to rounding. BHI, EO FP and LX S GY valuations are based on Atlantic 2014 estimates. BHI and 4739 JP are based on Atlantic FY2015
estimates. Target upside based on Atlantic’s estimates of earnings and valuations multiples. Figures at the bottom are equal-weighted averages and shown for Market Cap, P/E, EV/EBIT and
Target/Upside.
12
Baker Hughes (BHI, $50)
Price Target: $71 - Upside: 43%
Sales
$24.4 Bln
Market Cap
$22.1 Bln
EV
$25.2 Bln
EBIT
$2.9 Bln
% of 2014e EBIT
Other
North
America
5%
Middle East /
Asia Pacific
21%
46%
23%
Europe/ Africa/ CIS
5%
Latin America
Source: Share price and Market Cap are as of September 13, 2013. Sales, EV, EBIT are based on Atlantic 2014 estimates. Totals may not add due to rounding.
13
Baker Hughes
Business Description
•
•
•
Third largest oilfield services companies in the world after Halliburton and Schlumberger.
Leading provider of completion services, specialty chemicals, drill bits and artificial lift, both
onshore and offshore.
Global infrastructure with 50% of revenues derived from faster growing international
markets.
Thesis
•
•
•
•
•
•
14
Broad based opportunity for self help to enhance profitability and cash flow through better
execution in the field and more efficient use of capital.
Will generate meaningful free cash flow for the first time in several years through enhanced
profitability, increased emphasis on working capital efficiency and lower CAPEX.
North America (“NA”) margin improvement: BHI will begin to close gap with peers in the
critical NA market as it fully digests the 2010 BJ Services acquisitions and as it realizes the
benefits of continuing infrastructure investment.
Improvement in $6 billion pressure pumping operations has begun.
International profits continue to improve.
Improvement in operating management: recent high-level hires from Halliburton and
Schlumberger.
Baker Hughes
Catalysts
•
•
•
•
We are in an active dialogue with management on ways to improve shareholder value.
Improved capital allocation: pay down debt; sizeable share repurchases likely in 2014; no more
large acquisitions.
Better working capital efficiency and free cash flow beginning in H2-2013, more in 2014.
Proposed Investor Day to be held shortly: to present a credible roadmap to achieve EPS of
$5.50+ by 2016.
Recent Developments
•
•
Reported Q2-2013 earnings with solid progress across the board masked by problem with
LatAm unit.
Improving NA operations as manifested by improved utilization of the Pressure Pumping fleet.
Price Target
•
$71/share based on 12x 2014e EBIT, representing 43% upside potential.
Note: As of September 13, 2013.
15
Baker Hughes
$100
$90
$80
Price Target: $71
$70
$60
+43%
Upside
$50
$40
$30
$20
Jan-08
Aug-08
Mar-09
Source: Bloomberg, as of September 13, 2013.
16
Nov-09
Jun-10
Jan-11
Sep-11
Apr-12
Nov-12
Jul-13
Feb-14
Sep-14
Faurecia S.A (EO FP, €22)
Target Price: €31 - Upside: 41%
Automotive exteriors
Sales
$24.6 Bln
Market Cap
$3.2 Bln
EV
$6.0 Bln
EBIT
$0.9 Bln
% of 2014e EBIT
10%
Automotive
seating
29%
34%
Emission Control
Technologies
27%
Source: Share price and Market Cap are as of September 13, 2013. Sales, EV, EBIT are based on Atlantic 2014 estimates. Totals may not add due to rounding.
17
Interior
Systems
Faurecia
Business Description
•
•
•
•
Leading global supplier of automotive emission control technologies, seating, interior and
exterior systems.
Global footprint to serve global platforms: factories and R&D centers in North America,
Europe, Brazil and China.
German OEMs account for 38% of product sales, North American 29%, French 21%, Asian
7%.
Peugeot S.A (“PSA”) owns 57% of Faurecia but are entirely separate businesses.
Thesis
•
•
•
•
18
Margins to recover from 3.0% in 2012 to over 4% in 2015 due to restructuring in Europe,
improved operational performance in North America and operating leverage.
$50 billion order book due to strong R&D efforts.
Inter-dependence of Faurecia and PSA is overstated. PSA accounts for just 12% of Faurecia’s
sales.
De-leveraging with a target Net Debt: EBITDA ratio of 0.5x versus 1.8x at December 2012.
Faurecia
Catalysts
• Strong earnings growth, supported by large backlog.
• Conversion of €460 million of convertible bonds will reduce the leverage ratio by 0.4 points
and dilute PSA’s ownership to below 50%.
• European production (LVP) picking up: each incremental point of LVP is +€20 million or +4%
to Faurecia’s EBIT.
• PSA divestment of Faurecia stake becoming more likely.
Recent Developments
•
•
•
Better-than-expected Q2-2013 results and net debt.
Outlook for European light vehicle production (LVP) improving: I H S expect 19.5 million units
in 2014, +4% year-over-year.
New highly regarded CFO from REXEL S.A. and formerly Valeo.
Target Price
•
€31/share in 12-18 months based on 9.0x 2014e EBIT and 0.30x EV/sales, representing 41%
upside.
Note: As of September 13, 2013.
19
Faurecia
€35
Price Target: €31
€30
€25
+41%
Upside
€20
€15
€10
€5
€0
Sep-08
Jun-09
Source: Bloomberg, as of September 13, 2013.
20
Mar-10
Dec-10
Sep-11
Jun-12
Mar-13
Dec-13
Sep-14
ITOCHU Techno-Solutions (4739 JP, ¥3,505)
Target Price: ¥5,800 - Upside: 65%
Product Sales
Sales
$3.6 Bln
Market Cap
$2.2 Bln
EV
$1.5 Bln
EBIT
$0.3 Bln
% of 2015e Sales
40%
Service
40%
20%
Application Development /
Infrastructure System Integration
Source: Share price and Market Cap are as of September 13, 2013. Sales, EV, EBIT are based on Atlantic FY2015 (ends March) estimates. Totals may not add due to rounding.
21
ITOCHU Techno-Solutions
Business Description
•
•
•
Japan’s third largest IT service provider.
Strong clientele includes Telecommunication (e.g., KDDI, NTT DoCoMo), Retail (e.g., Familymart)
and Manufacturing (e.g., Nissan Motor).
The company has strength in building IT system infrastructure using localized CISCO & ORACLE
products as well as offering maintenance/operation services.
Thesis
•
•
•
•
•
22
IT spending recovery in Japan – after sluggish IT spending over the past several years, Japanese
corporations have finally started spending on IT (+9% year-over-year, BOJ June Tankan Survey).
Recurring revenues through Service – 40% of total sales are from maintenance/operation sales
with 35-40% gross margins under multi-year contracts from a broad installed base.
Healthy balance sheet – ¥47 billion of net-cash (25% of Market Cap).
Laggard with attractive valuation – the share price has been a laggard since last November;
ITOCHU Techno is down 17% vs TOPIX +59% vs Nomura Research (#2 IT service provider) +89%.
Trades at 5.2x FY2015 (ends March) EBIT vs. Nomura Research at 9.1x.
ITOCHU Techno-Solutions
Catalysts
•
•
•
•
We are in active dialogue with management to enhance shareholder value.
Continuing strong order intake through IT spending recovery in Japan.
Unleashing pent-up demand from Telecommunication customers.
Share buybacks / accretive M&A.
Recent Developments
•
Reported weaker-than-expected Q1-FY2014 results in late July due to one-off sales
recognition timing from Telecommunication customers as well as the rapid yen depreciation,
order backlog remains solid and grew 11% year-over-year.
Target Price
•
¥5,800/share in 12-18 months based on 10x FY2015e (ends March) EBIT, representing 65%
upside potential.
Note: As of September 13, 2013.
23
ITOCHU Techno-Solutions
¥7,000
¥6,000
Price Target: ¥5,800
¥5,000
+65%
Upside
¥4,000
¥3,000
¥2,000
¥1,000
¥0
Jan-07
Sep-07
May-08
Source: Bloomberg, as of September 13, 2013.
24
Feb-09
Oct-09
Jul-10
Mar-11
Nov-11
Aug-12
Apr-13
Dec-13
Sep-14
Lanxess (LXS GY, €52)
Target Price: €75 - Upside: 45%
Sales
$11.7 Bln
Market Cap
$5.7 Bln
EV
$8.9 Bln
EBIT
$0.8 Bln
% of 2014e EBIT
Performance Chemicals
Performance Polymers
54%
21%
25%
Advanced Intermediates
Note: Share price and Market Cap are as of September 13, 2013. Sales, EV, EBIT are based on Atlantic 2014 estimates. Totals may not add due to rounding.
25
Lanxess
Business Description
•
•
•
Leading global maker of Performance Polymers - critical partner to the global tire industry in
formulating high performance rubber compounds that reduce tire rolling resistance, saving
fuel and reducing emissions.
Advanced Intermediates - unique, integrated network of plants, supplying a broad array of
customers with aromatics, chiefly in agricultural chemicals.
Performance Chemicals - seven distinct specialty chemicals businesses; key franchises are in
inorganic pigments, leather, rubber and water chemistry.
Thesis
•
•
•
•
•
•
•
26
A proven management team: CEO led LXS since IPO in 2005 completing a comprehensive
portfolio restructuring and instilling a price-over-volume strategy.
2013 profits are not the “new normal”, we expect a solid rebound in 2014.
Attractive growth pipeline underpinning 2013-2016 earnings progress.
Despite industry capacity built, supply/demand in LXS key rubber grades should remain
balanced.
Pent-up demand for replacement tires globally.
Green tire legislation should accelerate demand for high performance rubbers.
Current share price below replacement value.
Lanxess
Catalysts
•
•
•
•
•
We are in active dialogue with management to enhance shareholder value.
Strategy update on September 18/19 – likely to introduce an efficiency program to boost
profitability.
Ramp-up of Singapore plant was headwind in 2013, will turn to tailwind in 2014.
Further countries adopting tire labeling legislation.
Improving demand for replacement tires is starting to take hold.
Recent Developments
•
•
While reporting weak H1-2013 results and lowering guidance, company re-reiterated that
2014 will see a substantial recovery and retained 2018 goal of $1.8 billion EBITDA.
Improving market environment:
- Positive outlook statements by global tire makers indicates that replacement tire
demand is improving.
- Recovery in key commodity prices (butadiene, natural rubber) suggests that de-stocking
phase in global tire industry may have come to an end.
Target Price
•
€75/share in 12-18 months based on 11x 2015e EBIT, representing 45% upside potential.
Note: As of September 13, 2013.
27
Lanxess
€ 100
€ 90
€ 80
Price Target: €75
€ 70
€ 60
+45%
Upside
€ 50
€ 40
€ 30
€ 20
€ 10
€0
Jan-08
Aug-08
Mar-09
Source: Bloomberg, as of September 13, 2013.
28
Nov-09
Jun-10
Jan-11
Sep-11
Apr-12
Nov-12
Jul-13
Feb-14
Sep-14
Harman International (HAR, $66)
Target Price: $84 - Upside: 26%
Professional
Sales
$5.3 Bln
Market Cap
$4.6 Bln
EV
$4.4 Bln
EBIT
$0.5 Bln
% of 2015e EBIT
Infotainment
22%
44%
33%
Lifestyle
(Car and home audio)
Source: Share price and Market Cap are as of September 13, 2013. Sales, EV, EBIT are based on Atlantic FY2015 (ends June) estimates. Totals may not add due to rounding.
29
Harman
Business Description
•
•
•
The leading provider of automotive infotainment systems with a 22% market share, a 1,900+
patent portfolio and relationships with 9 of the world’s 15 largest OEs
A leader in the car and home audio markets, with iconic brands such as JBL, Harman/Kardon
and Infinity.
Professional division is the global leader in audio systems for concert halls, stadiums and other
public structures.
Thesis
•
•
•
•
•
•
30
HAR is at an inflection point: embarking on a period of sustainable higher sales growth and
profitability.
$20 billion order backlog highlights HAR’s position with the automakers and anchors its
earnings outlook.
EPS likely to grow at up to 30% CAGR for the next three years.
Margin expansion as higher margin scalable software based infotainment systems become a
larger part of the mix and profitability in other segments improves.
Infotainment business benefits from high barriers to entry as software emphasis provide a
technological and cost advantage.
HAR has proven its reliability and its OE relationships are sticky.
Harman
Catalysts
•
•
•
•
We are in active dialogue with management to enhance shareholder value.
Rapid adoption of infotainment systems due to consumer preference for the connected car.
HAR is a potential take out candidate, with GOOG, APPL, Bosch, SIRI potential buyers. Private
equity bid for the company in 2007.
Increased share repurchases: we called for $700 million in the next 2 - 3 years.
Recent Developments
•
•
•
Long term financial targets point to a 3 year earnings CAGR of 25%+.
Backlog grew 25% over the last 13 months ended July to $20 billion.
A new $200 million share repurchase authorization and doubling of dividend in June.
Target Price
•
$84/share based on 12x FY2015e (ends June) EBIT, representing 26% upside potential. Shares
could trade above $100 by FY2016 based on 15x P/E on our estimate of $7 EPS in FY2016,
which includes implementation of substantial share buybacks.
Note: As of September 13, 2013.
31
Harman
$140
$120
$100
Price Target: $84
$80
+26%
Upside
$60
$40
$20
$0
Jan-07
Sep-07
May-08
Source: Bloomberg, as of September 13, 2013.
32
Feb-09
Oct-09
Jul-10
Mar-11
Nov-11
Aug-12
Apr-13
Jan-14
Sep-14
Q&A
33
Jen Cahill
Chief Marketing Officer
Phone: +1 (212) 484 5080
cahill@atlanticinvestment.net
666 Fifth Avenue, 34th Floor
New York, New York 10103
Phone: +1 (212) 484 5051
www.atlanticinvestment.net
Rema Davis
Head of Client Relations
Phone: +1 (212) 484 5055
davis@atlanticinvestment.net
This document shall not constitute an offer to sell interest in any Fund or a solicitation of an offer to purchase any securities described herein. Any
such offer will only be made pursuant to a private placement memorandum or other similar materials. This presentation is intended exclusively for the
person to whom it has been delivered by Atlantic Investment Management, Inc. (“Atlantic”) and is not to be reproduced or redistributed to any other
person.
The analyses and conclusions of Atlantic contained in this document are based on publicly available information. These opinions and facts are not
intended to be a forecast of future events or a guarantee of future results. Information contained in this document has been obtained from sources
which Atlantic believes to be reliable, however, Atlantic does not make any representation to its accuracy or completeness.
Actual results may vary materially from the estimates and projected results contained herein. Atlantic does not undertake any obligation to update
any opinions, facts, projections and other forward-looking statements to reflect any developments after the date of this document. Past performance
may not be indicative of future results. Hedge funds are speculative and involve risk of loss.
34