Berkshire Hathaway 2017 AGM transcript – Part 4

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Berkshire Hathaway’s Annual General Meeting was held on May 6th, with the usual 40,000-odd attendees. It was also webcast on Yahoo Finance, giving us the chance to watch it in full, and live.  There’s always some dorks whining about one or two of their hundred-odd businesses, and the fan-boys asking rubbish about the search for happiness.  The fluff stuff aside, they’re two sharp dudes with clear insights, and answer in old white guy ways, which is sometimes pretty hilarious.

Here’s the fourth of five parts of the Q&A section.  

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Berkshire Hathaway is a huge player in renewable energy. Why has the group has been investing more money into, especially wind and solar power generation?

Don’t look at it as having more solar capacity than we need or anything like that. It’s really a question of what comes along and the projects that are internally generated, they’re externally offered to us and we have a big appetite for wind or solar. Just based on those figures, we have seen more wind lately, but we have no bias toward either one. If we saw 5-billion attractive solar projects, we could do it and didn’t happen to see any wind during that period, it wouldn’t slow us down from the 5-billion, or vice versa, so we have a huge appetite for projects in either area. We’re particularly well situated, I think I’ve explained or talked about it in the past, because we pay many taxes and therefore, solar and wind projects all involve a tax aspect to them and we can handle those much better than many other, certainly electric utilities.

Most electric utilities really A, don’t have that much money left over after dividends and frequently the taxes aren’t that significant. At Berkshire, we pay many taxes and we have lots of money, so it’s really just a question of doing the math on the deals as they come along. We’ve been very fortunate in Iowa in finding many projects that made sense and as a result, we’ve had a much lower price for electricity than our main competitor in the state, we’ve had a lower price than in any states that touches .We’ve told the people of Iowa they won’t have price increase for many years, we guaranteed that.

So, it’s worked out extremely well, but if somebody walks in with a solar project tomorrow, and it takes a billion Dollars or it take $3bn, we’re ready to do it, there’s no specific and the more the better. There’s no specific preference between the two and it obviously depends where you are in the country. Iowa is terrific for wind and obviously, California’s terrific for sun and there are geographical advantages to one or the other but from our standpoint, we can do them any place and we will do them any place. Okay, station four?

Amazon has been hugely disruptive due to the brilliance of Jeff Bezos, whom Charlie earlier called “The business mind of our generation”. What is your current outlook on Amazon and why hasn’t Berkshire bought in?

Well, because I was too dumb to realise what was going to happen. Even though I admired Jeff, I’ve admired him for a long time and watched what he was doing, but I did not think that he’d succeed on the scale he has and I certainly didn’t even think about the possibility of doing anything with Amazon web services or the cloud, so if you’d ask me, the chances that while he was building up the retail operation, that he would also be doing something that was disrupting the tech industry, that would have been a very long shot for me and I really underestimated the brilliance of the execution.

It’s one thing to dream about doing this stuff online, but it takes a lot of ability and you can read as 1997 annual report and he laid out a roadmap and he’s done it and done it in spades and if you haven’t seen his interview on Charlie Rose, three or four months ago, (see below) go to and listen to it because you’ll learn a lot, at least I did, so I just plain, it always looked expensive and I really never thought that he would be where he is today. I thought he was really brilliant, but I did not think he would be where he is today when I looked at it three, five, eight, twelve years ago, whenever it may have been. Charlie, how did you miss it?

It was easy. What was done there was very difficult and it was not at all obvious that it was all going to work as well as it did. I don’t feel any regret about missing out on the achievements of Amazon, but other things were easier and I think we screwed up a little.

No, we won’t pursue that line.

Well, I meant Google.

Oh, though we’ve missed a lot of things.

Yes, we have missed a lot of things and we’ll keep doing it.

Yes, and we’ll have a –

Luckily we don’t miss everything, Warren, that’s out secret, we don’t miss them all.

Okay, we’d better move on I think, you know. He may start getting specific, Carol?

We all hope you win the record as mankind’s oldest living person, but at some point you and our Charlie will go and Berkshire’s stock may then come under selling pressure. My question is; if Berkshire’s stock falls through a price where share repurchase is attractive, can we count on the board and top management to repurchase shares? I ask this question, both because of past comments you have made about not wanting to take advantage of shareholders and because some of the passages and the owner’s manual lead me to believe this might be an instance when the board does not choose to repurchase shares. Can you clarify what course of action we might expect about repurchases in the circumstances I have outlined?

As far as I’m concerned they’re not taking advantage of shareholders if they buy the stock when it’s undervalued, that’s the only way they should buy it and they should, but in doing so, there were a  few cases back when Charlie and I were much younger, where there were very aggressive repurchases or the equivalent of repurchases by people (and the repurchases instantly made  lot more sense than they do now), but they were done by people who either, for various techniques tried to depress the shares and if you’re trying to encourage your partners to sell out at a depressed price by various techniques including misinformation, but there’s other techniques, I think that’s reprehensible, but our board wouldn’t be doing that.

I’ll take exception to the first part of it, but I’ll still answer the second. I think the stock is more likely to go up but if I died tonight, I think the stock would go up tomorrow and there’d be speculation about breakups and all that sort of thing, so it would be a good Wall Street story, but this guy that’s obstructed breaking up something where some of the parts might sell for more than the whole, there wouldn’t necessarily be, it’d probably be worth less than the whole, but it might sell temporarily for more than whole and that wouldn’t happen.

So, I would bet in that direction, but if for some reason it went down to a level that’s attractive, I don’t think the board is doing anything in the least that’s reprehensible by buying into stock at that point, no false information, no nothing and their buying, means that the seller would get a somewhat better price, but many sellers would get a mildly better price than if they weren’t buying and the continuing stockholders would benefit, so I think that it’s obviously what they would do and I would think that it’s obvious that it’s pro shareholder to do it and I think they would engage in pro shareholder acts and as far as the eye can see, we have that sort of board, Charlie?

Well, I think you are. I might suddenly get very stupid very quickly, but I don’t think our board is going to have that problem.

I want to think about that one.

In the past you’ve enjoyed discussing accounting for options grants. I’m curious what’s your view of the new accounting standard which mandates that companies report lower tax provisions based on so-called excess tax benefits enjoyed when share-based compensation ends up being more profitable for the grantees than what is initially modelled? These so-called excess benefits used to go through the shareholder’s equity line on the balance sheet, which accounting method makes more sense to you, the old method or the new?

Johnny, I think you know a lot more about it than I do, so if I were asked to answer that question, I’d probably call you up and say, “What should I say?” It’s not a factor that will enter into Berkshire, so I really am not – I mean I’ve heard just a little bit about that accounting standard, but I really don’t know anything about it, Charlie?

It’s not a big deal, Warren.

Yes, well I know that. There are a few things in accounting we really disagree with and whether they might be material to somebody trying to evaluate Berkshire and you know, that primarily gets in amortisation of intangibles, it certainly gets them to realise capital gains and that sort of thing and we will go to great lengths to try to tell our partners, basically, not all of them, our accounting experts or anything and we will try to make clear to them, at least what our view is, the same way as if I had a family business and I was talking to my sisters or something about it, but unless it’s material, we’ll probably stay away from trying to plan on any new accountings standards. If it’s material to Berkshire, we’ll go to great lengths to at least give our view, Charlie?

Well, I certainly agree with that. What he’s talking about is not very material to Berkshire.

No, it isn’t and it really won’t be. Some of these others are though and we will bring those up if they come up. We are reporting 400 and some million dollars less in our earnings if Precision Cast Parts had remained a public company. Well, are the earnings of Precision Cash Parts less real, is the cash list real, is anything because it’s moved the ownership,  I don’t think so and I want to convey that belief to shareholders and they can debate whether it’s right or wrong, but I think it’s a mistake not to comment and just assume that the owners understand that because it’s a fairly arcane point and so we pointed out, but we also point it out if we think the depreciation is inadequate as for evaluation purposes, the depreciation is inadequate at very capital intensive business like BNSF, which we, I must say, still love, anyway, Charlie any more?

No.

Earlier today, Mr Munger commented on the valuation of China versus the US market. My question for you is, is market cap to GDP and cyclically adjusted PE still valid ways to consider market valuation and how do those influence Berkshires investment decisions? 

I guess Charlie’s overall values are in China. I would say that both of the standards you mention are not paramount at all in our valuation of securities. It’s harder, people are always looking for a formula and there is an ultimate formula, but the trouble is you don’t know what to stick in for the variables, but that’s the value of anything, being the present value of all the cash it’s ever going to distribute, but the PE ratios, I mean every number has some degree of meaning. It means more sometimes than others, but evaluation of business, it’s not reducible to any formula where you can actually put in the variables perfectly and both of the things that you mentioned, yet themselves get bandied around a lot. It’s not that they’re unimportant, but sometimes they can be very important, sometimes they can be almost totally unimportant.

It’s just not quite as simple as having one or two formulas and then saying the market is undervalued or overvalued, or a company is undervalued or overvalued. The most important thing is future interest rates and people frequently plug into the current interest rates saying that’s the best they can do. After all, it does reflect a market’s judgement and the 30 year bond should tell you what people who are willing to put up money for 30 years and have no risk of dollar gain or dollar loss at the end of the 30 year period, but what better figure can you come up with? I’m not sure I can come up with a better figure, but that doesn’t mean I want to use the current figure either. So, I would say that I think Charlie’s answer will be, that it does not come up with China versus the US market based on what you’ve mentioned as yardsticks, but no, Charlie you tell them.

All I meant that, like I said before, that the first rule of fishing is to fish where the fish are, is that a good fisherman can find more fish in China if fish is the stock market, that’s all I meant. It’s a happier hunting ground.

This doesn’t really directly relate, I want to go back to one question that was mentioned earlier. I really think, if you want to be a good evaluator of businesses, an investor, you really ought to figure out a way without too much personal damage to run a lousy business for a while. I think you can learn a whole lot more about business by actually struggling with a terrible business for a couple of years than you learn by getting into a very good one where the business is so good that you can’t mess it up. I don’t know whether Charlie has a view on it or not, but it certainly was a big part of our learning experience and I think a bigger part in the sense that being involved in good business was actually being involved in some bad businesses and just seeing –

How awful it was.

– how awful it is and how little you can do about and IQ does not solve the problem and a whole bunch of things. It’s a useful experience, but I wouldn’t advise too much of it, don’t you think so Charlie?

It was very useful to us. There’s nothing like personal painful experience if you want to learn and we certainly had our share of it.

In life, business, and investing, strategies often work until they don’t work, other than a massive insurance loss, any thoughts on what could cause the Berkshire enterprise to not work?

Good question.  Yes, well if there were something changed, if we got some infection, outside agent of some sort to change the culture in some major way, you know, an invasion of different thought, but as a practical matter, I don’t think anything, and you know, it’s the things you can think of, but I can’t think of anything that can harm Berkshire in a material permanent way except weapons of mass destruction, but I don’t’ regard that as a low probability. It would take a recession, a depression, a panic, hurricanes, earthquakes, it all would have some effect, and in some cases it might even lead that we would do better because of them.

If there were a successful, as measured by the aggressor, nuclear chemical, biologic or cyber-attack on the United States and there are plenty of people who would like to pull that off or organisations and maybe even a few countries, it could disrupt society to such an extent that it would harm us, but I think with the variety of earning streams with the asset positions, with the general philosophy of the play to call, I think that we would be very close to the last one affected, but if somebody figures out how to kill millions of Americans and totally disrupt society then all bets are off, Charlie?

I agree it would take something really extreme and just take the question like, British Petroleum took a huge loss with one oil well blowing and Berkshire has all of these independent subsidiaries and they really are independent. The parent company is well armoured, if there’s one horrible accident somewhere, we would tend to pay of course, maybe more than our legal liability but we are not, one accident in one subsidiary that caused a big lot of damage, we’re better protected than most companies. Yes, in every way Berkshire is structured to handle stresses.

It’s the kind of thing we think about all the time and we’ve thought about it ever since we started, but I really don’t know any company that could take more general adversity and specific adversities, but if you get into what could happen with weapons of mass destruction, that is something we can’t predict, but if that ever happens, there’ll be more to worry about the price of Berkshire. 

Berkshire Hathaway specialty insurance generated $1.3bn of premium volume in 2016. This business is on the smaller end of the commercial property casualty insurers in terms of scale, although its volume did grow 40% last year. In a highly competitive commercial PNC environment, what gives you confidence that Berkshire Hathaway’s specialty is destined to become one of the world’s leading commercial PNC insurers as you said in this year’s annual letter?

Yes, I think it will be and I think how fast it grows did depend very much on the market. We are not interested in trying to be a price cutter in a market where the prices already aren’t that attractive, but we have built the scale worldwide and a lot of it has just been added in recent month in just over the past year. 

We will grow a lot, but if the market should turn hard for any reason, we would grow a lot faster, but we are destined at Berkshire Hathaway especially to be one of the leading PC firms in the world, just as we were destined to have, when a cheap came in, even though we had nothing, we were destined to become a very important re-insurer throughout the world and in certain ways, almost the only re-insurer for certain types of risks in the world and we have the people, the capital, the reputation.

There is no stronger company in the insurance world and there won’t be, than the Berkshire Hathaway Insurers. We have the talent there. Therefore, it will grow, it may grow slowly some years, it may have big jumps just like the re-insurance operation did many years ago, but it’s a very important addition to Berkshire that brought that on. 

I just wish we could have started it a little earlier, but you had to have the right people and they came to us and as you say, whatever was the billion, we were a billion for last year and we’ll bite more this year, but we won’t bite as much as if were in a hard market.

I have heard that Mr Munger says that your greatest talent is that you’re a learning machine, that you never stop updating your views. What are the most interesting things you’ve learned over the last few years?

Well, it is fun to learn. Charlie is much more of a learning machine than I am. I’m a specialised one and he does as well as I do in my specialty and then he has a much more general absorption rate than I have about what’s going on in the world, but it’s a world that gets more fascinating all the time and a lot of fun can occur when you learn you were wrong on something. 

That’s when you really learn that the old ideas weren’t so correct and you have to adapt new ones and that of course is difficult. I don’t know that I would pick out, well, I think actually what’s going on in America is terribly interesting, and politically, all kinds of things, but just the way the world’s unfolding. It’s moving fast, I do enjoy trying to figure out narrowly what going to happen, but what’s even happening now, but I don’t think I have any special insights that would be useful, but maybe Charlie does.

Well, I think buying the Apple stock is a good sign in Warren and, no, he did run around Omaha, and as he was, he could take his grandchildren’s tablets away and he did market research. I do think we keep learning. More importantly, we don’t unlearn the old tricks and that is really important. You look at the people who try and solve their problems by printing money and lying and so forth, take Puerto Rico, who would have guessed that a territory of the United States would be in bankruptcy? Well, I would have predicted it because they behave like idiots.

We did not buy any Puerto Rico bonds.

No, and if you go to your Europe, look at the government bond portfolios we’re required to hold in Europe, there are no Greek bonds and the bonds are nowhere but Germany, just everywhere you look in Berkshire somebody is being sensible and that is a great pleasure and if you combine that with being very opportunistic, so that when something comes along like a panic, it’s like playing with two hands instead of one in a game that prefers two hand. It helps to have a fair-sized repertoire and Warren, we’ve learned so damn much. There are all kinds of things we’ve done in the last ten years we would not have done 20 years ago.

Yes, that’s true. It’s interesting, I’ve mentioned this before, but one of the best books on investment was written, I think in 1958, I think I read it around 1960, by Philip Fisher called “Common Stocks and Uncommon Profits”.

All the companies went to hell eventually.

It talked about the importance or the usefulness of what he called a “scuttlebutt method” and that was something I did learn from Graham but every now and then it’s turned out to be a very useful. Now, it doesn’t solve everything and there are a whole lot of voices.

Or you do it with American Express and the Salomon scandal, bet you’re all doing it on Apple, you know Dick Anglesey.

Yes, in certain cases, you actually can learn a lot just by asking a lot of questions and I give Philip Fisher credit. That book goes back many years but as Charlie said, some of the companies he picked as winners forever did sort of peter out on him, but the basic idea that you can learn a lot of things just by asking in some cases. If I got interested in the coal industry, just say to pick one out of the air, when I was much younger, more energetic, if I went and talked to the heads of ten coal companies and I asked each one of them, way later into the conversation after they got feeling very – felt like talking and I would just say if you had to go away for ten years on a desert island and you had to put all of your family’s money into one of your competitors, which one would it be and why?

Then I’d ask them if they had to sell short one of their competitors for ten years, with all their family, why and everybody loves talking about their competitors and if you do that with ten different companies, you‘ll probably have a better fix on the economics of the coal industry than any one of those individuals has. There are ways of getting at things and sometimes they’re useful, sometimes they’re not, but sometimes they can be very useful and the idea of just learning all the time about it. I’m more specialised than that by far than Charlie. I mean, he wants to learn about averting and I just want to learn about something and we’ll, Berkshire, but it’s a very useful attitude to have toward the world and of course, I don’t know who said it, but somebody said, “The problem is not in getting the new ideas, but shedding the old ones” and there’s a lot of truth to that.

We would never have bought Iscar if it had come along ten years earlier; we would never have bought Precision Gas Parts if it had come along ten years earlier. We are learning and my God, we’re still learning.

In 2012, you were quoted as saying, “I think the healthcare problem is the number one problem of America and of American business”. We have not dealt with that yet. Do you believe that the current administration’s plan to repeal and replace ACA will ultimately benefit the economy in Berkshire or not?

Yes, well I’ll give you two answers here. The first one being that if you go back to 1960 or thereabouts, corporate taxes were about 4% of GDP having to, bounced around some and now they’re about 2% of GDP and at that time, healthcare was 5% of GDP and now it’s about 17% of GDP, so when American business talks about taxes strangling our competitiveness sand that sort of thing, they’re talking about something that as a percentage of GDP has gone down from 4% to 2% while medical costs, which are borne to a great extent by business, have gone from 5% to 17%. So, medical costs are the tapeworm of American economic competitiveness, if you’re really talking about it. Business knows that and they don’t feel they can do much about it, but the tax system is not crippling Berkshire’s competitiveness around the world or anything of the sort.

Our health costs have gone up incredibly and will go up a lot more and if you look at the rest of the world over a half a dozen countries that were around our 5% if you go back to the older years and while we were a 17%, they’re a 10% or 11%, so they have gained a five or six-point advantage the world and even in these countries with fairly high medical costs.

That’s with socialised medicine.

Yes, so it’s huge. Whatever I said then goes and is accentuated now and that is the problem that society is having problem with and it’s going to have more trouble with and regardless of which party is in power or anything of the sort, it almost transcends that. In terms of the new act, those past couple of days ago, versus the Obama Administration Act, it’ a very interesting thing. All I can tell you is, the net effect of that act on one person, is that my federal income taxes would have come down 17% last year if what was proposed went into effect.

It is a huge tax cut for guys like me and you’ll have to figure out the effects of the rest of the act, but the one thing I can tell you is, if it goes through the way the house put in, anybody with $250,000.00 a year of adjusted gross income and a lot of investment income, is going to have a huge tax cut and when there’s a tax cut, either the deficit goes up or they get the taxes from somebody else, so as it stands now, that is the one predictable effect if it should pass, Charlie?

I certainly agree with you about the medical care. What I don’t like about the medical care is that we’re getting too much medicine, there’s too much chemotherapy on people that are all but dead and all kinds of crazy things going on in medicare and in other parts of the health system. There are so many vested interests that it’s very hard to change, but I don’t think any rational person looking objectively from the outside at the American system of medical care, we all love the new lifesaving stuff and the new chemotherapies and the new drugs and all that, but my God, the system is crazy and the cost is just going wild. It does put our manufacturers at a big disadvantage with people, where the government is paying the medical bills and so on. I agree with Warren totally.

If you had to bet ten years from now, will it be higher or lower than 17% of GDP?

If present terms continue, it’ll get more and more. There are huge vested interests in having this thing continue the way it is and they’re very vocal and happier than the rest of us, who are indifferent. So, naturally we get a terrible result and I would say that on this issue both parties hate each other so much that neither one of them can think  compared to the whole federal budget. I mean there’s some overlap and all of that, but if you talk about world competitiveness of American industry, it’s the biggest single variable where we keep getting more and more out of whack with the rest of the world and it’s very tough for political parties to attack, yet it basically is a political subject.

It’s deeply immoral. If you have a group of hospital people and doctors, there’s a feasting like a bunch of jackals on a carcass on some dying person, it’s not a pretty sight.

Tell them about that group up in California that –

Oh yes, this is Redding, this is one of my favourite stories. There are a bunch of very ambitious cardiologists and heart surgeons in Redding and they got the thought that really what a heart was, was a widow maker, so every patient that came in, they said, “You’ve got a widow maker in your chest and we know how to fix it” and so they recommended heart surgery for everybody. Of course, it involved a huge volume of heart surgery and they got very wonderful results because nobody comes through heart surgery better than the man who doesn’t need it at all and they made so much money that the hospital chain, which was Tenet, brought all its other hospitals, why can’t you be more like Redding?” This is a true story and it went on and on. Finally, there was some beloved Catholic priest and they said,

“You’ve got a widow maker in your chest” and he didn’t believe them and he blew the whistle.

He was a priest; you can see why he didn’t believe them.

At any rate, well when you’ve got a routine you just keep using it, you know. If a heart is a widow maker, it’s a widow maker. Later I met one of the doctors who threw these people out of the medical profession and I said to him, “In the end, did they think they were doing anything wrong?” He said, “No, Charlie, they thought that what they were doing was good for people”. That is why it’s so hard to fix these things. The delusion that comes into people as they make money and get more successful by doing god awful things, should never be underestimated and a lot of that goes on and you’ve been under such gross craziness and you thought little Wells Fargo looks like innocence here, they had a little trouble with this incentive system, but the heart surgery rate was 20 times normal or something, you’d think you’d notice if you’re running a hospital, but they did notice they wanted the other hospital to be more like it.

They had a terrific success ratio.

As you look forward in taking into consideration some of the headwind space in the US based utilities including weaker electricity demand growth as increasing energy envisages the impacts demand distributed generation which hits vertically integrated utilities doubly hard as they face both declining energy sales revenue and increased network constant support reliable delivery and third, higher interest rates, which would increase borrowing costs, what are the key attributes that Berkshire Energy would be looking for in future acquisition candidates? In particular, are there advantages or disadvantages attached to say, transmission assets relative to generation assets that would make you favourable one over the other?

Yes, well generation assets even if it’s a habit, is inherently more risk because some them are stranded and yes, obsolete, but now the question is how they treat stranded and all that sort of thing. We, on the other hand, more of the capital investment than the generating assets, so that tends to be where a good bit of the capital base is, we like the utility business okay, the electricity demand is not increasing like it was as you point out. They’re going to be stranded assets, if they’re stranded because of rank foolishness, they will probably be less inclined or the utility commissions will be less inclined to let you figure that in your rate base as you go forward as opposed to things that are more sociable, demands are changing, but we still think the utility business is a very decent asset. The prices are very high, but that’s what happens in a low interest rate environment.

I would be surprised if ten years from now we don’t have significantly more money in not only wind and solar, but we’ll probably own more utility systems than we own now. We’re a buyer of choice with many utility commissions. In fact there’s a slide which shows something about our pricing compared to other utilities and Greg Abel and his group have done an extraordinary job, they’ve done it in safety, they’ve done it in reliability, they’ve done in price, they’ve done it renewables.

It’s hard to imagine a better operation than exists at Mid American Energy and people want us, with that record, to come to their state in many cases, but when prices get to the levels they have, some utilities are sold at extraordinary prices and we can’t pay up and have it make sense for Berkshire shareholders, but just because we can’t do it this year doesn’t mean it won’t happen next year or the year after, so I think we’ll get a chance.

Our utilities are also not normal. The way Greg has run those things; they’re so much better run in every way than normal utilities. They’re better regarded by the paying customers, they’re better regarded by the regulators, they have better safety records, HR, just everything about is way the hell better and it’s a pleasure to be associated with people like that and have assets of that quality and it’s a lot safer. If somebody asked Berkshire to build a $50bn nuclear plant, we wouldn’t do it.

Yes and we have public power here in Nebraska. It’s been sort of the pride of Nebraska for many decades. It’s all, there are no private utility systems and it’s totally public power end and those utilities have no requirements for earnings on equity, they can borrow at tax exempt rates, we have to borrow at taxable rates and Nebraska, it’s not that much different than Iowa and we’re selling electricity across the river, a few miles from here at lower prices than exist I Nebraska. So it’s an extraordinary utility and it was lucky when we got involved in, I think Walter Scott, a director from introducing me to it, almost 17 or 18 years ago or so but I don’t think the utility business as such, if I were putting together a portfolio of stocks, I don’t think there would be any utilities in that group now, but I love the fact that we own Berkshire Hathaway Energy.

It’s radically different and better.

A lot better actually.

I noticed that one company, McLane contributes a lot of revenue, a large portion of Berkshire’s revenue and to a lesser extent earnings but I don’t’ ever see much about it in the annual report, so I’m curious why we don’t hear more about that company and are there any investing lessons like we get from See’s and GEICO that you can share about that company?

McClain, the reason you see their figures separately is because the FCC has certain requirement that are based on sales and McLane is a company that has an extraordinary amount of sales in relation to intrinsic value or to net income. It basically is a distributor of – well, it’s a huge customer, for example, of the food companies, the candy companies, the cigarette companies that go up and down the line of anything that goes into convenience stores, but we bought it from Walmart and Walmart is our biggest customer. I can’t tell you the precise volume, but to get Walmart and Sam’s together, you’re getting up to 20% plus, but it’s nationwide.

In the end it operates on about 6% gross margins and 5% operating expenses, so it has a 1% pre-tax margin and obviously a 1% pre-tax margin only works in terms of return on capital if you turn your equity extraordinarily fast and that’s what McLane does. Being a wholesaler, it’s moving things in, moving things out very fast, very efficiently and it does this, it also has a few liquor distribution subsidiaries that have wider margins, but the basic line business is $45bn plus makes 1% pre-tax on sales, but the return on capital is very decent. However, it has an outsized appearance simply because of this huge volume of sales that go through it. Brady who runs it, is exceptional. He was there when we bought it from Walmart; whatever it was a dozen years ago and I’ve been there once. We got thousands and thousands of trucks, big distribution centres all over the country.

It was a major factor in moving goods and wholesale, I mean if your Mars candy or something of the sort, I mean we’ll be the biggest customer, but that pretty well describes the business. It’s a business that earns good returns in relation to invested capital and in relation to our purchase price, but every tenth of a percent is important in the business and moving ir-receivables exceptionally fast and consequently and the payables moving big time, so the sales are 30 times receivables and 30 times payables, you’ve got maybe 35 or so times inventory. I mean this is a business that’s moving a lot of goods, but it’s an important subsidiary, but not as remotely as important as what would be indicated by the sales. It’s still very important making the kind of money that goes up in the 10K, Charlie?

You said it all.

That was an interesting thing Walmart wanted to sell it, they came to see us.

 

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