Leucadia National's Cumming and Steinberg Comment On Jeffries Group, AmeriCredit, Fortescue Metals, Cresud, Sangart, and Moody's On Annual Shareholders Meeting

Notes from Leucadia National Annual Shareholder Meeting

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May 15, 2009
Disclaimer: These notes were taken in real time at the Leucadia Annual Meeting in New York, NY on Monday, May11th, 2009 without the use of a recorder. The goal was to get the gist of the questions and as much of the answer as possible. Please excuse any mistakes or omissions.


Speakers: Chairman Ian Cumming, President Joe Steinberg, Director Jeff Keil, CFO Joseph Orlando (if the speaker is not listed then he/she was not identified)


A. Introductory remarks


Cumming: Aside from what is printed in the SEC filings and the annual report, the company has nothing to say and will open the floor up for questions


B. Q&A


Q1: If it is true that LUK’s competitive advantage is having Steinberg and Cumming as leaders, how should investors think about where the next level of management comes from? Please talk about the succession plan.


Cumming: They have been working for 10 years on a succession plan. It is a topic of discussion at every board meeting. They think they have a couple of people in mind who can assume at least a part of the management role


Previously they had just focused on putting investments in place. Believe they were not as cognizant as they should have been on buying durable companies that would keep them cash flow positive. For the next two years they will focus on buying companies with durable underpinnings. It is easier to run durable companies so this has to be a strategy tied to their succession plan


Said he is 68 now and is signed through 2015. Said he hopes to sign another long term contract then



Steinberg: Their company has accomplished one important thing. If he and Cumming dropped dead one day the company has management below that would allow it to go on and be in good shape


Steinberg and Cumming do not fly together as mandated by the Board. Replacing whatever investment acumen he and Cumming have is a high priority for them. They are working on it but they don’t know exactly how they are going to solve it yet. Believes this is the most serious issue at LUK today


Q2: Can you talk about the Jeffries (JEF, Financial) compensation structure a little bit?


Cumming: We don’t know exactly what people are getting paid there. But, Steinberg and Cumming are both on the Board of JEF now. They are trying to stop JEF from seriously diluting shareholders when they hire new people. Have recently convinced the management team to go out into the market and buy stock if they use stock as a way to attract employees to JEF. Now that this requires an actual expenditure and liquidity the company has started to think more about compensation. Are concerned that over-energetic 28 years were making way more than they were worth and of course are concerned about compensation


Q3: In terms of AmeriCredit (ACF, Financial), can you talk about why they liked the business and what they see in the future of that business?


Cumming: They have made 4 large investments recently and they feel like they bought too soon on all of them. However, all but ACF are in the money right now. They previously had owned a subprime auto lender. Were forced to sell it when the pricing got too low to compensate them for the risk. So they are knowledgeable and comfortable with the business. Believe that there are going to be cars in this world. Aside from in NY where it is impossible to drive, most people have to drive to work. Poor people will need cars too. Based on today’s margins, ACF would be doing incredibly well. The problem is that there is no credit as the securitization market has dried up. Said that they have been in the Fed’s offices multiples times trying to figure out how to use TALF to get an economically prudent deal done. The Fed has been trying to get liquidity and investors back into the securitization markets but ACF has had no luck with TALF. They are currently shrinking the business, trying to get the capacity within the company’s net worth. Even suggested the old fashioned idea of not lending more money than they had and not levering up at all. Joked that the management team was horrified. Will make money and grow as credit grows.


Have learned major lessons regarding this experience. Believe that 10-15 years from now banks will have forgotten about these past troubles, want to get back into this business and hopefully ACF could be sold to the banks before they drive pricing down enough that ACF can’t be profitable and has to be liquidated.


Claim that ACF has done $58B in securitizations and no one has lost a penny yet


Steinberg: Going forward, there should also be less competition from non-banks. ACF will not be as big as company as before. However, Chrysler credit and GMAC are wounded and are not supplying credit. The car companies are basically out of the subprime space now. ACF will finance itself in the future but will not be as highly levered. The goal is to maintain the book value of the company, which is about $15 per share now. This will allow them to wait and fight another day


Q4: In the past you had been hesitant to say that the stock was overvalued. What would you say about it now?


Cumming: Will not comment directly on the stock price, but he did say that he is very comfortable with their 4 big investments: two financial service companies and two mines. Believe that when the market comes back these investments will outperform


Q5: Can you talk about Fortescue Metals (FMG, Financial) and the dilution that could happen there? Can you also talk about the Cresud investment in Argentina?


Steinberg: The newspaper reports on FMG are true. They have the ambition to double their output. This will require a major investment and this means they will need to raise money in order to make that investment. The Chinese will likely provide the money


(WSJ Article from 5/11/09: Hunan Valin Iron & Steel Group executives said China's sovereign-wealth fund may help finance expansion at Fortescue Metals Group Ltd. through debt rather than stock purchases, as the Chinese steel group became the Australian iron-ore miner's second-biggest shareholder. )


They have a lot of work to do to get what they already have up and running efficiently and without delays. It is a long term process


Cumming: Believe the fundamentals are good for the company. TV and the internet have shrunk the world. There are millions of people who watch TV and see the wealth that exists in much of the rest of the world. Are going to want to taste that wealth themselves. This should help this mine prosper as there will be further demand for iron ore.


Steinberg: Have a small investment in Cresud agricultural company in Argentina. Not really focusing on it right now. Has a great portfolio of assets but the fundamentals right now in Argentina are terrible. Will hit the wall again soon. Not very optimistic.


Q6: Can you discuss the cash available for acquisitions and whether or not you would be interested in looking for cheap assets tied to commercial real estate?


Cumming: Until the company has a big fat infrastructure that consists of durable companies they will certainly not speculate on commercial real estate assets. Do not have the luxury or the desire to pursue hit or miss assets. Have $500M in cash right now on the balance sheet. Will not go a penny below $500M unless they can buy companies that they feel are durable


Q7: How is LUK positioned for a decline in the US dollar and/or inflation?


Keil: LUK is well positioned to protect against either of those through its borrowings in US dollars and investments in commodity/hard assets companies


Q8: Why do they use Baldwin subsidiary to make certain investments?


Orlando: It is basically a tax structure decision. Allows them to use NOLs


Q9: Can NOLs be used as financing vehicles (like a John Malone spinoff) to purchase assets?


Steinberg: Definitely going to try to do this going forward. The NOLs provide them with an advantage as an acquirer


Cumming: Have more flexibility in terms of what they can pay as a result of the NOLs


Q10: Since they are now claiming that they are focus on buying better businesses, is that different from buying cheap business? What is the difference?


Cumming: Nothing has really changed. They have never paid too much (based on their own assessment of value) and never will. Have seen the prices that people want coming down slowly over time. Can use the NOLs to take advantage of opportunities


Q11: Can you talk about the prospects for Sangart? How do you know if the additional investment was throwing good money after bad?


Cumming: They have no idea if they threw good money after bad. Still have to go through Stage II and Stage III trials on Hemospan


(From Sangart website regarding Hemospan: Sangart’s lead product, MP4, is designed to effectively target oxygen delivery to tissues that are insufficiently oxygenated. Because of the critical role oxygenation plays in the human body, MP4 has the potential to improve outcomes in a wide variety of surgical and medical conditions. )


Results so far have been very positive. Over 1000 people have used Hemospan and no one has died. But, the FDA and potential buyers are terrified because other companies that tried to develop similar drugs ended up killing people. Therefore no one is offering to buy Sangart. Believe it would be a gift to humanity if they can get it to work. Seems to be working now


Q12: Buffett said that there would consequences of the Fed’s quantitative easing and recent government interventions. What is better protection, buying hard assets or great businesses like Buffett does?


Cumming: Buffett is smarter than they are so they will certainly not contradict anything he says. But they do have a copper and iron ore mine that could prosper as a result of a decline in the dollar and inflation


Q13: Does durable (when it comes to the companies they are looking to buy) mean that they will have to give up potential upside?


Cumming: They are just looking for companies with a solid future. Examples: food companies, cheese companies, manufacturers of things such as bearings. Looking for companies like their plastics company (Conwed Plastics). Even in the crash their revenues are only down 15-20%. Have a drilling company (Goober Drilling) that should be stable and durable. Will lose money in 2009 on a net income basis but not on an EBITDA basis


Steinberg: The mistake they made was putting money with third party managers (Wintergreen and Pershing Square). They now realize this is foolish and they will not do it again. They expect to have all their money back from the 3 rd party managers in 6 months. Say they are near the end of this. The Pershing Square investment was a huge mistake. Claimed they have lost almost everything. The Wintergreen investment was more complicated but they felt the need to get the money back


Q14: Have the prices of stacked rigs come down enough for LUK to want to buy more?


Cumming: No, have not come down enough. Want to get all of their rigs signed up before they look into buying any new rigs


Q15: Do they care to comment on the Moody’s downgrade?


Cumming: Moody’s downgraded LUK?Who cares: they pay not attention to them. They will probably upgrade LUK at some point and downgrade LUK at another point. No one should pay any attention to Moody’s. They have missed almost everything and have been late at each turn.


Q16: Can you talk about the NOL accounting rules? Why does it matter if they are inane?


Cumming: Brief background on the NOLs: Had a large NOL on the balance sheet. Auditors determined that it was not likely to be used. Therefore LUK had to take it off the balance sheet and recognized a huge loss that impacted net income significantly. However this is a non-cash loss. The accounting rules are inane and ridiculous.


If they ever are likely to use the losses then they will bring it back onto the balance sheet. The NOL only has speculative value. Can only use it if they make a profit. But they have not paid income tax in 30 years and suspect they won’t for another 30. The NOL misleads people who are trying to value the company. Created a huge loss that could fool unsophisticated people. They prefer to revert to cash thinking


Q17: You say you have 4 large investments but how does the smaller investment decision processes and management work?


Cumming: They have an asset management group that focuses on the smaller investments. They report constantly to Steinberg and Cumming


Q18: Are they looking more or less outside the US as a result of the crisis?


Cumming: Nothing has changed either way on this front


Q19: How does the rest of the world look to you right now? How long do you think this downturn will last?


Cumming: They have no idea how long the downturn will last. Do see the private equity guys trying to sell stuff. Finally are loosening their prices. Believe that as the downturn continues they will see further pricing pressure. They are not good at looking forward. Certainly to not have a crystal ball


Q20: You keep talking about durable businesses, but isn’t Jeffries (JEF) in a levered and tough business right now?


Cumming: Bought their shares of JEF with LUK shares that were close to $54. Thought the price of JEF was attractive. In retrospect they believe it was even more attractive. Was a financing as well as a cheap asset deal


Steinberg: JEF is not a troubled investment bank. Do not have toxic assets. Trading is going to be a disproportionate component of earnings going forward. The government needs to borrow a lot of money and JEF should be in a good position to benefit from that. However, they are in a tough business for sure. They have applied to be a broker dealer, which is a very competitive business


JEF did not have a near death experience like Goldman Sachs and Morgan Stanley. However, the guys at JEF were paying attention when Bear Stearns and Lehman went away. They are being more cautious and acting differently now


Q21: In terms of ACF, has there been any attempt to sell securitizations without breaking it down into tranches?


Cumming: There have been some discussions but nothing made sense financially


Q22: How do you decide when to sell an asset?


Cumming: The science is in the “in”. The poetry is in the “out”. Cumming does not use spreadsheet models to determine when to sell. Does have access to people who can use models and spreadsheets. They look at the future earnings stream and discount it back to determine a value


The rate depends on how durable the company is and how much they love it. If the asset is selling above their estimation of value then they think about selling it


Q23: Can you give us your take on natural gas?


Cumming: In Oregon they have a de-liquidation plant. They believe they are one year away from having approval from FERC (Federal Energy Regulatory Commission). Will need a more experienced partner to come in if they get the approval.Think that after the approval and necessary investment they will have a saleable asset when they are up and running. Could make 2-3x their investment. Long term view on natural gas is $6-7 per Mcf. Gas is well below that now


Q24: Can you talk about what you are seeing in home prices through your subsidiaries?


Cumming: In the San Diego market they are seeing foreclosures coming through. Things are slowly improving. Builders have started to ask about buying lots at distressed prices


Q25: You say that you are covering operating expenses with cash reserves, how much cash burn is going on? How long can you last? What about upcoming debt maturities ?


Cumming: If they don’t make an investments then they can last forever and a day. Not a likely scenario but if they could not find any investments they would return cash to shareholders. Operating cash flow is not a problem. They are working hard to make debt disappear. Have been buying back their debt. Are looking to de-lever going forward


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