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Southeastern Asset Management

Webcast Transcript

November 17, 2015


11:00 AM EST

Disclosure Information:
The statements and opinions expressed are those of the speaker and are as of the date of
this presentation. All information is historical and not indicative of future results and
subject to change. Reader should not assume that an investment in the securities
mentioned was or would be profitable in the future. Past performance does not guarantee
future results.
Before investing in any Longleaf Partners fund, you should carefully consider the
Funds investment objectives, risks, charges, and expenses. For a current Prospectus
and Summary Prospectus, which contain this and other important information, visit
longleafpartners.com. Please read the Prospectus and Summary Prospectus carefully
before investing.
Average annual returns for the Longleaf Partners Funds are their respective indices for
the one, five, ten, and since inception periods ended September 30, 2015 are as follows:
Longleaf Partners Fund: -21.89%, 5.96%, 2.81%, 9.96% (inception April 8, 1987). S&P
500: -0.61%, 13.34%, 6.80%, 9.28%.
Longleaf Partners Small-Cap Fund: -8.84%, 12.66%, 8.05%, 10.58% (inception
February 21, 1989). Russell 2000: 1.25%, 11.73%, 6.55%, 9.16%.
Longleaf Partners International Fund: -17.15%, 0.11%, 0.96%, 6.63% (inception
October 26, 1998). MSCI EAFE: -8.66%, 3.98%, 2.97%, 3.92%.
Longleaf Partners Global Fund: -21.36% (1 year), -0.68% since inception December 27,
2012. MSCI World: -5.09%, 8.47%.
Returns reflect reinvested capital gains and dividends but not the deduction of taxes an
investor would pay on distributions or share redemptions. Performance data quoted
represents past performance; past performance does not guarantee future results. The
investment return and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost. Current
performance of the fund may be lower or higher than the performance quoted.
Performance data current to the most recent month end may be obtained by visiting
longleafpartners.com
The total expense ratios for the Longleaf Partners Funds are as follows: Partners
Fund 0.91%. Small-Cap 0.91%, International Fund 1.25%, Global Fund 1.58%.
The funds expense ratios are subject to fee waiver to the extent a funds normal annual
operating expenses exceed the following percentages of average annual net assets: Partners
Fund 1.5%, Small-Cap Fund 1.5%, International Fund 1.75%, and Global Fund 1.65%.

RISKS
The Longleaf Partners funds are subject to stock market risk, meaning stocks in the Fund
may fluctuate in response to developments at individual companies or due to general

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Southeastern Asset Management


Webcast Transcript

November 17, 2015


11:00 AM EST

market and economic conditions. Also, because the Funds generally invest in 15 to 25
companies, share value could fluctuate more than if a greater number of securities were
held. Mid-cap stocks held may be more volatile than those of larger companies. As it
relates to the Small-Cap Fund, smaller company stocks may be more volatile with less
financial resources than those of larger companies. As it relates to the International and
Global Funds, investing in non-U.S. securities may entail risk due to non-U.S. economic
and political developments, exposure to non-U.S. currencies, and different accounting and
financial standards. These risks may be higher when investing in emerging markets.
The Top 10 holdings of each Fund as of September 30, 2015 are as follows:
Partners Fund: Level 3 Communications, 11.9%; CK Hutchinson, 8.6%; Aon, 7.5%; Google, 6.4%;
FedEx, 6.4%; McDonalds, 5.5%; Scripps Networks, 5.1%; Lowes, 5.1%; Cheung Kong Property,
5.0%; CNH Industrial, 5.0%.
Small-Cap Fund: Level 3 Communications, 9.8%; Graham Holdings, 6.6%;
DreamWorks, 6.5%; ViaSat, 5.9%; Rayonier, 5.7%; Vail Resorts, 5.0%; Hopewell, 5.0%; Everest
Re, 4.9%; Wynn Resorts, 4.7%; OCI,4.5%.
International Fund: EXOR, 8.4%; adidas, 8.3%; LafargeHolcim, 6.9%; CK Hutchinson, 6.9%; Melco
International, 6.3%; K. Wah International, 5.7%; OCI, 5.4%; Cheung Kong Property, 5.1%; Cemex,
5.0%; Philips, 4.9%.
Global Fund: Level 3 Communications, 9.0%; EXOR, 7.1%; FedEx, 6.2%; CK Hutchinson, 6.0%;
LafargeHolcim, 5.9%; adidas, 5.8%; McDonalds, 5.1%; Philips, 5.1%; Google, 4.9%; Melco
International, 4.4%.
Holdings are subject to change and holding discussions are not recommendations to buy or sell
any security. Current and future holdings are subject to risk.
P/V (price to value) is a calculation that compares the prices of the stocks in a portfolio
to Southeasterns appraisal of their intrinsic values. The ratio represents a single data
point about a Fund and should not be construed as something more. P/V does not guarantee
future results, and we caution investors not to give this calculation undue
weight.
The S&P 500 Index is an index of 500 stocks chosen for market size, liquidity and
industry grouping, among other factors. The S&P is designed to be a leading indicator of
U.S. equities and is meant to reflect the risk/return characteristics of the large cap
universe. The Russell 2000 Index measures the performance of the 2,000 smallest companies in
the Russell 3,000 Index, which represents approximately 10% of the total market capitalization
of the Russell 3000 Index. MSCI EAFE Index (Europe, Australasia, Far East) is a broad based,
unmanaged equity market index designed to measure the equity market performance of 22
developed markets, excluding the U.S. & Canada. MSCI World Index is a broad-based,
unmanaged equity market index designed to measure the equity market performance of 24
developed markets, including the United States. An index cannot be invested in directly.
Definitions for terms used include:

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Southeastern Asset Management


Webcast Transcript

November 17, 2015


11:00 AM EST

CAGR is an acronym for Compounded Annual Growth Rate.


CPI (consumer price index) is a measure of changes in purchasing power and the rate of
inflation.
Dividend yield is a stocks dividend as a percentage of the stock price.
Earnings Per Share is the portion of a company's profit allocated to each outstanding share of
stock.
EBITDA is earnings before interest, taxes, depreciation and amortization.
EV/EBITDA is a ratio comparing a companys enterprise value and its earnings before interest,
taxes, depreciation and amortization per share (EPS) is the portion of a company's net income
allocated to each share of common stock.
Free Cash Flow (FCF) is a measure of a companys ability to generate the cash flow
necessary to maintain operations. Generally, it is calculated as operating cash flow minus
capital expenditures.
G&A is an acronym for General & Administrative and are expenses pertaining to the operational
expenses of a company.
GDP (gross domestic product) represents the total value of all goods and services produced
within a country over a specified time period.
GMV (gross merchandise value) indicates total value of merchandise sold over a time frame
before deducting fees and expenses.
HKD is an acronym for Hong Kong Dollar at 11/12/15 the exchange rate was 7.75 Hong Kong
Dollars = 1 U.S. Dollar
Internal rate of return (IRR) is the interest rate at which the net present value of all the cash
flows from an investment equal zero.
Net present value (NPV) is the difference between the present value of cash inflows and the
present value of cash outflows.
P/E (Price Earnings) Ratio is the market price of a company's share divided by the
earnings per share of the company.
Funds distributed by ALPS Distributors, Inc. Separately managed accounts and related
investment advisory services are provided by Southeastern Asset Management, Inc., a federally
registered investment adviser. ALPS Distributors, Inc. is not affiliated with Southeastern Asset
Management, Inc. and does not distribute separately managed accounts.

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Southeastern Asset Management


Webcast Transcript

Lee Harper:

November 17, 2015


11:00 AM EST

Hello and thank you for joining us for the Southeastern Asset
Management and Longleaf Partners webcast. Today, we appreciate your
joining us. We have an agenda similar to the past where we will make a
few introductory remarks and then go straight to Q&A to try and
answer your questions that you have on your mind. We have gotten a
number of questions ahead of time, so we'll sprinkle those in with the
live questions that are sent during the webcast.
As a quick disclaimer, this webcast is intended for our partners in the
funds and in separately managed accounts and not intended for the
media. So, to the extent that anyone from the media is joining this call,
all these comments are considered off the record.
Most of you have read our quarterly commentary that we put out at the
end of September, which was written at the performance low point. Our
goal today is to update you where we are after a particularly strong
October and why are enthusiastic about the path ahead.
The companies we own will drive our results and Mason and Staley are
going to talk more about that in a moment. First, we wanted to provide
a bit of historic perspective.
As our partners know, being long term value investors inherently means
we will own things that are out of favor for periods. As Seth Klarman
wrote in Barron's in 1999, another challenging time for value investors,
"Being very early and being wrong look exactly the same 99 percent of
the time."
Over Southeastern's 40 years, our underperforming periods have been
overcome by our periods of outperformance. You see the chart on the
screen, it shows the yearly difference between the Partners Fund and
the S&P 500 returns. Noting that many of those swings have been
greater than 500 basis points both in outperformance and
underperformance. The fund has the longest history, but these swings
in relative performance are representative of what we've seen across all
of our strategies over time.
You can see on the left hand side, over the long run, our cumulative
outperformance has been meaningful.
On the right hand side, you see the path for those cumulative results
has not been a straight one. We've had at least four distinct periods
where we looked very wrong, including recently. These generally were
times of low price to values in our portfolios and momentum driven
markets that set aside company fundamentals.
The magnitude of our outperformance years that followed was even

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Southeastern Asset Management


Webcast Transcript

November 17, 2015


11:00 AM EST

larger so that over the long run, we've more than made up for the
periods of underperformance and generated returns that look quite
different than the indices.
The fact that we've been here before and come out strongly is no
guarantee, but we believe we are positioned for another return to
strong results.
Mason and Staley are each going to tell you more about why that is.
Mason?
Mason Hawkins:

Thanks, Lee. It's important to reiterate that we're concentrated long


term value investors. As such, you can expect us to underperform
during certain periods when a few of our holdings remain materially
discounted and Mr. Market is waiting for the negative stock price
momentum to reverse.
As one of the largest clients of Southeastern and the largest shareholder
of the Longleaf Partners funds, we're acutely aware that our recent
absolute and relative returns have not been acceptable. These facts
were highlighted in our recent third quarter report to our partners.
However, since the lows of September 30th, we've made meaningful
progress and begun delivering the kind of performance you expect. As
the slide shows, all four Longleaf funds have outperformed their
respective indices and delivered meaningful absolute returns in the 45
days since quarter end. While these recent numbers are encouraging,
they're not the determinates of our future compounding. As has been
true coming out of previous challenging performing periods and
throughout our history, our future returns will be determined by the
companies we own, their managements and the discounted prices of
their securities.
Rarely in Southeastern's 40 plus years have we felt better about our
prospective performance. We believe our next three to five year results
should not only be acceptable, but quite pleasing because: we own, in
the main, dominant competitively advantaged industry leaders; our
businesses are managed by exemplary talented individuals focused on
prudently building intrinsic value per share and getting those values
recognized; our corporate value should be demonstrably greater in
three years.
The next slide shows what we've seen many times in our history, how
dramatically and quickly the tide of market perception can change when
Mr. Market recognizes the values will be growing, and/or a company
will be better governed and managed.

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Southeastern Asset Management


Webcast Transcript

November 17, 2015


11:00 AM EST

Over the last year and particularly in the third quarter, negative
momentum hurt a handful of our stocks, primarily those in the energy,
gaming and media industries. We've also bought several new holdings
where negative sentiment overwhelmed long term business values. You
can see in the chart how quickly momentum has changed direction.
Twelve of our companies are up over 15 percent since September 30th.
Those highlighted are the ones we've purchased this year in 2015.
Staley's going to review a few of our holdings that are materially
discounted from our appraisals, and why we expect the stocks to
handsomely reward us. Staley.
Staley Cates:

Well, thank you all for joining us today. Most of our quarterly letter and
most questions now understandably revolve around the names and
industries which have been our major detractors this year: energy and
Macau. And we'll talk even more about those in a minute, but as this
first slide shows, our largest investments have actually had productive
results. These overweights among our various funds by definition reflect
our very high conviction in their business quality and management
teams as well as their requisite significant discounts to intrinsic value.
The encouraging takeaway from this is that all of these companies are
successfully building value and performing at or above our expectations
of their management teams. Most of this intrinsic value building is also
reflected in very good stock price performance, recently from these
names.
The next few slides are meant to further update and refine what we
wrote in the quarterly letter about our energy and Macau holdings. Our
Macau holdings include Melco, K. Wah and Wynn. In October, Ken,
Manish, Scott and I went to Macau and Hong Kong. Josh couldn't make
this trip, but has also been to Macau and Hong Kong multiple times. As
you would expect, we met with all of the operators, but we also saw
consultants, analysts, co-investors and probably most importantly,
other Asian, non-Macau operators with a more unbiased yet
knowledgeable perspective on Macau.
As you recall, our Macau case is based on a misunderstanding about
what VIPs mean to the intrinsic values of the businesses there.
Specifically, what feels like 90 percent plus of the journalism about
Macau concerns VIPs; about half the revenues of Macau come from
VIPs, but only about 15 percent of Macau's cash flow comes from VIPs.
Eighty-five percent of EBITDA, the other 85 percent of cash flow, which
will almost entirely drive current and future business intrinsic value is
from the mass players. Mass gaming is not hated by the government
and it has hung in there this year far better than what you would think
from the headlines.
The chart here shows this. Note the wild volatility over time and the big
drop this year in VIP revenues as indicated by the line, but look at the

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Southeastern Asset Management


Webcast Transcript

November 17, 2015


11:00 AM EST

bars and note the relative stability and long term growth of the mass
revenues. Our bet is not that the Chinese corruption crackdown and
economic slowdown will get better. It's that they don't matter much to
long term cash flow and value because they dont matter much to mass.
And so, it was very significant for us to hear almost unanimously from
these various sources on the trip that mass has stabilized.
Going to the next slide, the status report on energy is not as good,
based entirely on the fact that the commodity prices have gotten worse,
not better since we discussed the energy holdings at length in the
quarterly letter; however, those spot prices don't dent our long term
case, which is that the undrilled land at Chesapeake and at CONSOL has
very large appraised value that is not recognized by the stock market,
which is only looking at their depressed cash flow right now. Evidence of
this comes in the deal comps for raw land acreage which have occurred
recently shown on this slide.
Just as importantly, the management teams at Chesapeake and CONSOL
continue to perform very well for shareholders. At Chesapeake, the
recently reported quarter showed exceptional cost control with
production and G&A (general and administrative) expenses per barrel
down meaningfully while daily production was up.
Meanwhile, CONSOL in October made clear that they should end up in a
position to separate their legacy, overhanging coal business from their
emerging, extremely valuable Marcellus and Utica gas business. It's
something we urged in our 13D earlier in the year.
The CONSOL slide shows the wide ballpark appraisal range and you can
see that most of the value is in the E&P (exploration and production)
division.
There are multiple peers referenced in the footnote at the bottom of
this page, which make for ready public comparisons for these assets.
And the smaller coal division has already been listed in the form of
publicly traded CNX Coal Resources. This gives CNX a vehicle into which
to drop down more of its coal assets.
Just because oil, gas and these energy equities are down, doesn't mean
that they shouldn't be freshly underwritten constantly or that there
won't be higher quality things to own in a concentrated portfolio with
the limited number of holdings. So along those lines, despite Murphy Oil
being very cheap like the other energy names, we decided that National
Oilwell Varco (NOV) was just as cheap, but of higher business quality
and with superior capital allocation, so we sold the Murphy in the
Partners' Fund to fund the NOV. Portfolio weighting also played into this

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Southeastern Asset Management


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decision. If we'd simply added the NOV, the total industry overweight
would have been higher than we were willing to have.
Past industry overweights in insurance and building materials have
tended to max out around 15 percent similar to the current weightings
of Energy in Partners, Macau in International, and Media in Small-Cap.
The next slide is about Wynn Resorts. Wynn is a perfect example of
several current themes. First, it has been a massive detractor to
performance this year. Second, it has had a trifecta of things the market
hates, which has let it becoming a poster child for momentum investing
currently prevalent in this market. Those negatives were Macau,
followed by a major common dividend cut and a governance black eye
in the form of the proxy fight between Steve and Elaine Wynn. Most
importantly, because these current negatives were magnified by a
momentum market, Wynn now sells for a price which is extremely
compelling as a generator of meeting our future long term performance
goals.
You know our template of business, people, price. Wynn's business
quality as it relates to the Las Vegas properties isn't often debated, and
although opinions about Macau are usually currently dominated by
worries about government actions there, that same government hand is
what keeps Macau as China's only home for casinos, which is an
incredibly powerful barrier to entry.
On our criteria of people, Steve Wynn has created a track record
without many peers in either gaming or many other public industries. So
for this discussion, we turn most of our attention to the price paid and
the next two slides show two different ways to look at that.
The first way to appraise it is to value the U.S. assets and then see what
we are paying/risking for Macau. Using a 12.5 times multiple on EBITDA
in Las Vegas or roughly an 8 percent cap rate, strikes us as very
conservative considering this asset quality. We then put a lower
multiple and higher cap rate on Boston's eventual EBITDA and discount
that back and then subtract U.S. debt to arrive at a net U.S. value of
about 50 bucks per share.
Then in looking at Wynn's Macau assets, the biggest and simplest piece
is today's stock market value of their publicly traded Wynn Macau,
which itself has not surprisingly been beaten up along with all of the
Macau operators. That works out to about $50.00 per parent Wynn
share. But there's another source of Macau value, which is the
management fees paid from Wynn Macau to Wynn. Capitalizing those
fees yields another roughly $20.00 per share of value.

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Southeastern Asset Management


Webcast Transcript

November 17, 2015


11:00 AM EST

So we come up with a total Wynn value of over $120.00 per share


versus today's $63.00 stock price before even trying to make the case
that Wynn Macau is cheap, which we strongly believe it is.
A second method of appraisal is to look at Wynn's non-earning assets,
which are huge, on a per share basis and which can cause Wynn's stock
to not screen as cheaply when screens are run based on multiples to
revenues, cash flow or earnings. Those non-earnings assets include the
money spent so far on the new Macau property, the Boston concession,
their raw land in Las Vegas next to their existing properties and cash on
the balance sheet. This all works out to over $70.00 per share of assets
which are not yet generating any earnings or cash flow. Their existing
properties did over $10.00 per share of EBITDA in the past year, so
valuing those at a reasonable multiple of EBITDA, backing out the debt
and adding the value of the non-earning assets all again works out to a
total number for Wynn of more than $120.00 per share. That again
assumes no change in Macau perception, nor any high return on the
new Macau property.
With that, I'm going to turn it back to Lee to handle Q&A.
Lee Harper:

All right. For those who want to ask a lot of questions, on the left side of
your screen, you can type in a question and hit send. We're going to
start with a few that were submitted ahead of time. We got several
questions about the price to value ratios where we are today. So, which
is, as you know, where our stocks are trading versus what we think
they're worth. This price to value chart, we prepared to answer those. It
shows where each mandate was at the end of September when all the
portfolios were trading somewhere between 55 and 62 percent price to
value, well below our long term average in the high 60s.
With the subsequent rally that we've had since the end of September,
the price to values have moved up closer to the historic average, but
remain quite attractive.
With that, we'll go to the first question. Staley, I'll address this to you.
Others can chime in. Energy and Chinese government's anti-corruption
impact on Macau have been large headwinds for performance in the
past year. Several questions around that. How do you think about
managing macro type exposures like that in the portfolio? Are you
adjusting your appraisals? And then thirdly, how do energy companies
meet Southeastern's good business investment criteria?

Staley Cates:

Well, I'll start on that and anybody else chime in if they feel like it, but
on the macro part of this, of course as we talked about the previous
times, the macro swings these stock prices like crazy and especially
they've done so this year and we're not minimizing the importance of

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Southeastern Asset Management


Webcast Transcript

November 17, 2015


11:00 AM EST

the macro. And every analyst on each of their micro cases has to be fully
aware of how the macro impacts that case.
But the main takeaway is that we are not making macro bets, so as I
mentioned on Macau, it is not about the macro negative swinging it.
We're actually sitting out the macro bet, even though of course we have
to be cognizant of how that short term is affecting stock price. The same
is true in energy, especially over long term cycles, which is that there's
no debating that all the short term moves are going to be driven by
macro and yet, if you look at these over a really long period of time,
energy commodity prices do what you expect, which is kind of in line
with CPI, which is a zero real return, and yet these equities can do eight,
nine percent real returns because it isn't all about the commodity price
in the long haul, even though it really doesn't feel like that short term.
On the second part of adjusting appraisals, I mentioned a little bit of this
in the comments of having wide value ranges to try to consider to try
to take into account this volatility, but more specific to where we are
now, we are valuing these energy companies on the futures curve,
which itself is low and it is not very vertically sloped and so it, in effect,
assumes not a whole lot of bounce from these low spot prices.
Now that under with that underwriting, as we mentioned in the
quarterly report, we think we have 50 cent dollars in that kind of
remaining poor spot price environment, but the curve itself has not
been that great a predictor as we saw when it was up at $100.00 for oil,
so if the curve is wrong in the low way this time, we have extra margin
of safety, extra upside if things went well for the first time in a long time
in energy.
And then the last thing is why would energy even quality as a good
business? We talk about it understandably 'cause it's a big detractor,
but what's a little bit frustrating for some of the appraisal mistakes
we've made within energy is that the vast majority of our portfolios
have pricing power and/or gross profit royalties and they are not
subject to commodity price risk. So why would we own these in the first
place?
Well, as long term shareholders will know, not only do we not own a
whole lot of commodities over time, but energy would be the main one
compared to other more plain-vanilla commodities and that would get
down to the dispersion of cost curves and people, meaning that the
commodity may be doing one thing, but the cost curve to produce that
can be all over the place and that can vary by geographic basin or by
management teams or by both.
And so that has given us the opportunity over the time when we pick
the right properties and the right people, there was not only a huge

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value add in terms of cost versus price, but the reinvestment rate was
the whole show. In other words, if you have a great property and great
people drilling that, your IRRs can be so high, they can be 30, 40 percent
or better and they don't get arbed away like every other form of either
commodity or real estate or just almost any form of capitalism. That's
the only way they've fit the good business tag. So, you wouldn't know it
from our performance this year, but over the long haul, our record in
energy has been good and that's why they have sometimes fit this
definition of good business.
Lee Harper:

Okay. Another sort of macro driven line of questions is around the


impact of slower Chinese GDP growth on our companies. Has this
generated any opportunities? I'll let Ken and Manish start since they're
in Asia and seeing it live as we speak. And then anyone else can chime
in, to the extent it's affected their investments as well.

Ken Siazon:

Hi, this is Ken Siazon from Singapore and Manish just chime in when you
want. So, yes it is true that the 6.9 percent GDP growth in quarter three
was the slowest in China since 2009. Having said that, growing 6.9
percent on an economy the size of China means that a lot of growth is
still happening.
However, I'd say that that growth is not happening uniformly. China's
economy is changing and for the first time ever, services and
consumption accounted for more than half of China's GDP, which is at
51 percent up from about 41 percent a decade ago. So, consumption is
going strongly in Japan in China and it's driving almost 50 percent of
the GDP growth this year and in October nominal retail sales grew
eleven percent year over year, which was actually a pick up from
September. So, at the micro level, we're seeing strong growth in
consumption, especially for those that appeal to the middle class. This
growth in consumption is manifesting itself in a number of ways, which
has created fast growing winners in a number of industries.
For example, in Japan, Chinese visitor arrivals was up 133 percent in
August and up 100 percent in September, driving growth in Japanese
retail, hotel, entertainment. So, for the first time in many years, we're
actually seeing double digit same store sales growth in retail companies
in Japan.
In the first half of 2015, express parcel deliveries in China grew about 43
percent year over year and in the last quarter, it actually accelerated to
50 percent growth, driven by the growth of the China online business as
consumption has shifted from offline to online.
For Alibaba, which we own via SoftBank, you know, their GMV (gross
merchandise value) was up 28 percent year over year. The revenues
were up 32 percent in the last quarter.

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Southeastern Asset Management


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November 17, 2015


11:00 AM EST

For our investee company Baidu, you know, they grew sales in a bad
quarter at 32 percent year over year and in other online guys like
Tencent grew revenues as well around 32 percent.
So, investee company, adidas, grew China revenues by 15 percent and
the Reebok brand, I believe, grew revenues of actually doubled in the
quarter. So, on the other hand, I think there are sectors of China that
have slowed, in particular industrial production, manufacturing,
construction, and mining. So the slowdown in the economy has
prompted more easing and stimulus by the government and relaxation
of property measures, which actually has benefited the real estate
sector, especially the tier one, major cities.
I'd say that the A-share market crash in the June-September period has
not affected real estate sales. In fact, I think it may have actually
encouraged movement of investor capital into more stable real estate
sector that's supported by the government through lower rates and
relaxations of restrictions on purchasing real estate. So year to date, you
know, the Shanghai A-share market is actually up still 11 percent, having
recovered strongly in the last few months.
The Hong Kong market for residential real estate has been strong this
year after a few years of weak volumes in the primary market. In the
commercial real estate space and Hong Kong in particular, there have
been a slew of whole building transactions that have occurred at very
low cap rates, driven by institutional demand for world class rental
property. So, our investee companies in the space, including Cheung
Kong, New World, Hopewell and Great Eagle, I think are benefiting from
this trend.
Manish Sharma:

Yeah, so I guess one of the key reasons why China growth has slowed
down somewhat is the ongoing anti-corruption crackdown. While this is,
we think, great for the long term, sustainable, and quality growth in
China, this crackdown has delayed decision making and is causing a lot
of uncertainty. This anti-corruption campaign, which intensified during
the course of this year, it affected our casino investments in Macau, the
GGR, the growth gaming revenue in Macau was down roughly 35
percent year to date, primarily due to the collapse and lower margin VIP
business, which has always been somewhat of a black box to us and we
don't ascribe much value to it. Sorry to belabor this point, but as Staley
mentioned earlier, we are convinced that the higher margin mass
market or the non-VIP business has stabilized and will continue to grow
at a healthy rate over the medium to long term.
It is important to note that non-VIP business accounts for more than 90
percent of EBITDA at our investee company Melco. The period of
unfavorable year over year comparables will subside as we enter the
next quarter, kind of view. The case for Macau entirely rests on the

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growth of the mass business, which will be supported by significant


investments that are being made in the infrastructure segment as well
as the hotel rooms to enable more visitation to Macau.
Ken Siazon:

So, I think this anti-corruption campaign actually, you know, affected


more than just our Asian names. The slower GDP growth, the anticorruption campaign also affected European investments such as
Philips, whose orders for medical equipment fell by double digits in the
last quarter as procurement by the government sector has been deeply
affected by this anti-corruption campaign.
European luxury goods guys like Christian Dior, for example, saw their
subsidiary, Louis Vuitton sale to China fall double digits as well in the
first half, but that fall has actually flattened out in the last quarter as
growth and sales to Chinese customers, whether it's overseas or when
they travel overseas to take advantage of the cheap currency made up
for weak sales in China.
The collapse in the China A-share market, coupled with the unexpected
RMB (Renminbi) devaluation created a kind of ripple effect of fear and
contagion across Asian markets, especially as the A-share market was
heavily regulated by Chinese regulators so a lot of the risk reduction
actually happened in Asian exchanges outside of China. So, Chinese
companies listed in Hong Kong, Singapore and the U.S. actually suffered
significant price volatility, which gave us the opportunity to buy these
world class businesses with wide motes and attractive value growth, but
that historically have not qualified on our deeply discounted price
criteria.
So Baidu, which we bought for the Asia Pacific mandate as well as for
our non-U.S. mandates, is a good example of that kind of opportunity
that came available in the past quarter. Baidu, which is known as the
Google of China with 80 percent revenue share of online search,
basically declined or their stock price declined about 35 percent in the
quarter. Those fears about China reached a crescendo during the
period, which was compounded by further worries about investment in
online to offline business segments that would temporarily squeeze
margins.
This panic created the opportunity for us to buy a world class business
with a dominant mote that's growing very fast at a big discounted value.
So, you know, Baidu has in part recovered from that panic and is up 44
percent since the end of the third quarter. In the Asia Pacific strategy,
we bought seven new names during the quarter, some of which we
have owned before. A few of these names have started to also be
reflected in the international fund and non-U.S. mandates close to
quarter end. So, you know, since quarter end, we're seeing a strong

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rebound across our Asian holdings as Mason discussed in his opening


statement.
Manish Sharma:

I guess really quickly, I guess one of the names that we have added to in
Asia Pacific, non-U.S. and global portfolios within the quarter was
SoftBank. SoftBank, as you might know, is one of the most profitable
telecom operators in Japan and it owns over 80 percent stake in Sprint
in the U.S. But most importantly, it holds 30 percent stake in Alibaba,
which is worth 300 percent of its market cap today. So, in the third
quarter, I mean, it's all this China slowdown fears, Alibaba, which
dominates the online retail business in China declined 30 percent. This
led to an over 20 percent drop in SoftBank's share price and gave us an
opportunity to add to SoftBank at steeply discounted levels.
We like SoftBank for its domestic telco business, which is a cash cow
and it generates close to five billion in free cash flow per annum. BABA
has recovered since 3Q and as you might know, they just announced 50
percent growth in their Singles Day online sales to over $14 billion. Yes,
that's 14 billion U.S. dollars in one day on Alibaba platform. Son-san, he
owns almost 20 percent of SoftBank and he realizes there's a big
discount in price and NAV, so he completed one billion dollars' worth of
buy back in a matter of days in August. And interestingly, his second in
command Nikesh Arora, he announced that he will be buying almost
500 million U.S. dollars' worth of SoftBank shares in one of the largest
insider purchases in the world.

Lee Harper:

Thanks Manish and Ken.


We've gotten several questions around our media holdings. What are
our thoughts about the uncertainty around media and the resulting
price weakness? How does that impact our analysis of the different
media related companies and specifically at Scripps Networks was one
of the questions that was thrown in.

Ross Glotzbach:

Sure. This is Ross. I'll talk about some of those. So yes, we own Scripps.
Graham Holdings also has media exposure as does Tribune,
DreamWorks and Vivendi. You know, there are a lot of worries in the
market at the moment about something that's actually been going on
for a long time, which is what's known as cord cutting, where I guess
slightly fewer people per year are subscribing to the traditional video
bundle here in the U.S. This is not a surprise to us. We have accounted
for this accordingly and you know, Southeastern has navigated
profitably through other media transitions. We don't have our head in
the sand, but we would say that, you know, there will be definitely
winners and losers here. We've avoided some of these companies. We
think ours are unique. Scripps, for example, while others have rating
declines and overpriced fee contracts with the distributors, Scripps has

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relatively good ratings. They're actually up with millennials last quarter


the only big cable channel group to do that.
They also have reasonably priced fees per subscriber per station, which
we think is a very good thing. Then they have a money losing
international business. You know, whereas others are making money
internationally, so just capitalizing EPS misses that. And then just these
brands have shown that they have legs just outside of the traditional
pay TV world, especially HGTV, which is 100 percent owned by Scripps,
strong ratings over the last years, extended into a variety of fronts.
Then, over to Tribune. You know, that is a large collection of interesting
assets where we've got owners on the case such as Oaktree and really a
significant amount of spectrum value there that is missed if you're just
looking at a simple EBITDA calculation. Also good real estate holdings
they're in the midst of monetizing.
And Graham Holdings, you know, it's also a jumble of stuff that people
might, you know, might take some time for an analyst to work through.
It's covered by no one on Wall Street, but the Graham family has an
incredible track record building value. We think their CEO, Tim
O'Shaughnessy will do a great job and their stations are in advantaged
markets and they also own SocialCode, which is a beneficiary of the
strong growth at Facebook and other social networks. So, I'll let
anybody else join in if they want to.
Staley Cates:

Yeah, I would just add on, DreamWorks, which is a very large position in
Small-Cap is painted with the same brush that Ross was talking about
and yet interestingly, part of that part of that huge value is the library,
especially Shrek, Kung Fu Panda and those are not necessarily in current
results, EBITDA revenues, cash flow, anything and yet those have an
enormous value, especially in an over the top world where the kids
category is the quickest thing to cut the cord.
And then there are other businesses which are TV and web-based. We
feel like they're kind of way ahead of the media curve in being part of
that over the top solution rather than problem.

Lee Harper:

All right, we've gotten a question about one of the names that we own
in our Small-Cap, International, and Global programs, which is OCI. Our
thoughts on the OCI and CF merger proposal, both short term and long
term outlook. Scott, do you want to start with that one?

Scott Cobb:

Sure. Briefly, we think it's a combination of two best in class companies,


you know, CF has arguably the best management in the industry as
evidenced by their operating performance as well as their capital
allocation over the past few years. We think OCI's assets that they're
acquiring are best in class in terms of efficiency based on how new they

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are and also strategically well placed with low cost gas in the U.S., which
helps their strategic positioning long term. So we think it's kind of a
merger that's a win-win for everybody. We're very excited about the
management of CF owning these assets and continuing to operate them
and then when Iowa comes online operating that as a best in class
asset, we also are very excited about the company's decision to move
it's domicile out of the U.S. We think that there are significant
operational and tax synergies available through this deal. And so we're
very pleased. We think that in the short term, the industry, you know,
pricing is at the lower end of the spectrum. That's kind of normal for this
time of year.
We think long term, the fundamentals are still in place. The world needs
nitrogen. There's greater demand for the end product and if you're a
low cost operator in strategically well placed geographies, you're going
to benefit really well over the long term and even in the short term,
though prices are down, these plants are generating tremendous cash
because of the advantageous gas position.
Lee Harper:

Great. We've also gotten a question about one of our largest holdings,
Level 3. Level 3's performed well and it's now a large overweight. Is it
still discounted? What investment opportunities does Level 3
management have for their free cash flow they're generating and what
return hurdles do you think they have? Mason, you want to start?

Mason Hawkins:

Well, for the overweighting question, we overweight positions if the


company is deemed to be hugely competitively advantaged, checks all
the boxes on the Porter model stuff; the company is financially sound
and has flexibility; and, lastly, it has a management team that has
demonstrated that it can prudently grow intrinsic value per share and
make wise capital allocation decisions. So, Level 3 at this stage certainly
qualifies for being more than an equal weight in our portfolios. Staley,
you want to comment

Staley Cates:

Yes, to go into a little more detail, the place to start is to thank Jeff
Storey, the CEO and Sunit Patel, the CFO and the whole rest of that
team for doing an incredible job. Part of the happy overweight here is
that even though the price is up a lot leading to that overweight, the
value has grown even more, and that has just gotten down to their
execution. So, what that model looks like even though that can get
confused by some of the consolidated numbers in a couple of smaller
businesses they have kind of running off, is that in their core business,
those revenues grow organically at five or six percent. And they have a
contribution margin that's at least the current EBITDA margin level, so
that the EBITDA grows low double digits, but the capex doesn't have to
grow even as fast as the revenues, so you're free EBITDA, which is the
most important thing, grows mid double digits. So you can see that it's
worthy of a very high multiple and the numbers on which you place that

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start with about five bucks of free cash flow before growth capex and
about two and a half bucks of free cash flow after growth capex. So
either way you look at that, it remains cheap at this price and that's
before one final part of the valuation, which is the non-earning assets.
They have a lot of dark fiber and conduit value that is so difficult to
value and would come at us in such a lumpy way if they ever monetized
it that we just we dont really incorporate that in a value as we
capitalize that free cash flow number, and yet it is a very real value and
a lot of different types of really different industries, not just different
companies would be interested in that. So it remains really cheap.
Lee Harper:

Great. We've gotten a few questions related to some of our newer


holdings as well as existing that are around our exposure or increased
exposure to industrial companies. We have new names like DuPont and
Actuant. Can we comment on these opportunities that we're seeing and
also in that bucket is a question that came in about just what our view is
of CNH Industrial? So, I'll let Lowry start since he covers a couple of
those.

Lowry Howell:

Thanks, Lee. So we own several companies that are categorized as


industrials. DuPont and Actuant are the newest additions, but we find
sometimes that Philips and CK Hutchison are also classified as
industrials too. But even though we found these opportunities in the
broader sector, the purchases don't reflect any specific sector theme.
They're the result of us qualifying each individual company on business,
people, and price. And when you look deeper into each of our holdings,
you'll see that they all contain very different businesses with different
fundamental drivers, but the commonality in all of them comes from a
purchase most of these companies, they have one business segment
that's performing poorly in the short term and this weak performance in
one segment is really masking the underlying value of the entire
company. And our sum of the parts appraisal process is really what
helps us identify these undervalued opportunities that are missed if you
were just taking a PE multiple and placing them on future earnings.
So, for a quick example, Actuant, one of our newer purchases, has three
main business segments. They have a high force hydraulic tool segment
under the well-respected market leader Enerpac. They have an energy
services business and then a third segment with some smaller niche
business.
But the main source of value is this hydraulic force tool business and
with Enerpac, and even though it has some near term headwinds, it's
still producing at 30 percent EBITDA margins in a capex lite model and
so it requires very little capex to maintain its competitive advantage.
But the stock price is cheap because this energy business that they have
is being impacted by lower oil prices. We've taken this into account in

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our appraisal and the energy segment's only about 20 percent of our
sum of the parts value, but yet the stock price has corrected over 50
percent from its peak. And so as we add up the sum of our values of
these individual parts, they're just worth significantly more than today's
price.
Also, with companies like Actuant and our other industrial holdings that
have multiple different business lines, it's super important to have
proven operators, but also leaders that are willing to maximize the
value of the combined company. Sometimes we get this through them
merging or selling a division or it can be as simple as just taking
advantage of the weak current stock price and buying back stock to
boost value per share. And across the board with all of our industrial
type companies that have multiple segments. We think we have both
strong operators and capital allocators at the helm. And Scott, I think
you were going to talk about CNH?
Lee Harper:

Or rather, Manish.

Lowry Howell:

Or Manish, I'm sorry.

Lee Harper:

CNHI?

Manish Sharma:

Hi. Yes. Along the lines of what Lowry was mentioning, I guess. CNH too
has a bunch of different segments and currently I guess the biggest
reason why the stock has corrected is the ag cycle in North America, the
high, high horsepower tractors and combines, they're down almost 25
to 30 percent year to date in North America, but what we like about this
industry and this segment is the pricing power.
So, as you might know, this is a duopolistic industry between Deere and
Case New Holland. I mean, they dominate the market Case New
Holland, which is CNH, is the second biggest farming equipment
provider right after John Deere. And they have significant pricing power,
despite the 30 percent drop in volumes. They have been increasing
prices. So I dont know when the cycle turns, maybe it takes a few
months to a year, but basically this company has a very strong balance
sheet and it will come out much stronger out of the cycle because they
are cutting costs very fast. On top of that right now with the market
misses is IVECO, which is their commercial vehicle division. They have
almost 14 percent market share in Europe and Latin America. So unlike
passenger cars, we believe CV, commercial vehicle is a much better
business for cost of a truck is just around ten percent of the real cost of
ownership.
So what really matters here is fuel efficiency and the service network,
the dealer network. So no wonder you don't see much of cheap Chinese
competition in this space. Last year in this IVECO division, CNH was just

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break even, but this cycle is turning primarily in Europe right now, so
this could provide a very significant offset to the ag decline that we will
see in the near term.
In terms of people, we love the partners that we have here. We know
John Elkann and Sergio Marchionne through our investments in EXOR
and we think they are very smart capital operators, I mean capital
allocators as well as operators, so we have good partners and a good
business and a very cheap valuation today.
Lee Harper:

Thanks, Manish. We've gotten several follow-on questions from Staley's


opening comments around Chesapeake, so give an update on
Chesapeake. What are the primary pieces of the value there and how
long could gas prices remain this low before the company faces a threat
of bankruptcy?

Mason Hawkins:

This is Mason. I'll take a shot at the last part of that. We expect
Chesapeake to end the year with over a billion dollars of cash and a $4B
revolver, giving them over five billion dollars of liquidity. And we also
expect that given today's pricing for natural gas and oil, that they will
run negative cash flow in 2016, about a billion or so dollars a year. So,
when you look at the liquidity versus the cash burn, the company has a
number of years of operating opportunity and that's at today's low
prices and assuming no asset sales. Those two assumptions we think are
over conservative and that this management team and this board is
currently doing everything in their power to reduce costs further and to
explore every opportunity with their asset hands. And it's just highly
probable that they will be successful on both fronts. So, we continue to
hold Chesapeake believing that we have terrific partners managing the
business, we have great board members, good governance. We have
very, very incredibly valuable assets that are currently not producing
cash, as Staley outlined on the front end, that will produce cash in the
future. And some industry participants may choose to own those assets
and it may be to our advantage to let them do so. But, we're certainly
not going to force that in today's market environment.
Ross, you want to comment?

Ross Glotzbach:

Thank you. Definitely hit the high points there. You know, this
borrowing base, this key revolver was just reaffirmed by a bank group
who had better info on it than anyone in the public market did just
about a month or so ago. That's a pretty big vote of confidence that
they were willing to give us more time and better covenants because
they see the value of the assets at this asset rich company.

Lee Harper:

Okay. Stepping back a little from individual companies, we've gotten


several questions that are broader based. How dependent are the
portfolios on strong economic growth? What would be the best macro

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environment for the portfolios to outperform and specifically questions


around how rising interest rates might impact the portfolios. Staley, you
want to start?
Staley Cates:

I'll give this a shot and anybody else can chime in. As far as the
dependent on growth question, I think it's really important and
encouraging to note that that is really not an important part of our
math on the growth that we expect from our companies and that we
model. I mentioned earlier that if you looked at kind of the Porter
model strength, if you will, how strong are these businesses, how do
they grow, the most important common denominator, despite those
energy discussions, is how many of these things have pricing power,
Cheung Kong and FedEx, where their gross profit royalties like an Aon
and you can eyeball our holdings and you can see that pricing power or
the gross profit royalty is going to drive the top line often without
regard to GDP type top line growth. A second category would be margin
improvement. If you looked at sell sider's version of this, they love to
call it self-help, but that is just saying that you can get your margins up
without a whole lot of top line required to do so. So, Lowry talked about
some of those and then FedEx's Express division is another. Philips is
another where we can see big earnings growth that comes from
margins and yet, there's not a revenue tailwind to get the margins.
Another category would be taking market share that's really all kind of
ways. That could be Level 3 in their metro fiber business. They're going
to take share from Verizon and AT&T forever. There's still a share in
Metro Fiber of single digits even after buying TW. And even if we have a
recession, they should be growing and taking share. That could be
adidas, which is not just tethered to the sports apparel market. That has
gotten into leisure wear and some forms even of fashion and they're
just dramatically outgrowing what's been considered their past
category.
DreamWorks would be another where we talked about mobile and over
the top being a whole different revenue source for them that's really
just not been in any kind of past model. And then the final category
would be people that can grow with capital allocation, with the
reinvestment rate. To me, this is like when Buffett talks about what he
loves about railroads.
It's not just the asset you see today. It's what they can do with
reinvestment of capital. And we have some of those as well, so Cheung
Kong, which is a huge position. You see Cheung Kong reinvesting
sometimes in infrastructure, sometimes in these telecom deals in
Europe, and just creating a lot of value with what they do with their
capital not necessarily the organic ops.
We've talked about EXOR and covered it a couple of different ways.

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EXOR's another one of these. They've done some brilliant sales and now
they've done some new buys like PartnerRE. So, sometimes it's just the
partner allocating the capital, but bottom line is, we think there are
plenty of ways to grow and very little of that assumption is predicated
on GDP.
Then to really the second and third questions to me are similar of what
macro environment would actually help us the most and tether that to
the interest rate rise 'cause we think that's one and the same, meaning
that one of the biggest values one of the biggest things creating
cheapness for us in the market and creating way overvalued expensive
things in other parts that we are avoiding is this yield hog market where
people are chasing yield which all gets down to how low interest rates
are, and sometimes that's in obvious things, like us sitting out things like
REITs and utilities that are just blatant yield propositions, but they can
also be sitting out industry groups where because they do pay out a
healthy yield, they're dramatically in favor and they end up with PEs
higher than the math of their earnings really justifies. And those are
things we're avoiding that we think long term is the right thing to do,
short term, it's made us trail the index a bit and we don't really care
long term. But, if rates do rise, which it seems like they need to, there'd
be a lot of kind of risk retuning in the market and that would help us in
both the things we own and the things we've avoided.
Lee Harper:

Following up again on one of the comments Staley made at the outset


was our referencing our purchase of National Oilwell Varco. With all the
dislocation in the energy sector, why did you choose National Oilwell
Varco to purchase? Brandon, do you want to talk a little bit about that?

Brandon Arrindell:

Sure. Yeah, the energy space has certainly seen stock prices collapse,
but if you assume current commodity prices and production levels in
your appraisal models, most of those companies are still not
discounted. But at NOV, which we bought in our U.S. large cap portfolio
in the last quarter, we found an opportunity to take advantage of the
markets overreaction by acquiring a high quality business at a discount
to appraisal. So NOV is the leading provider of offshore and land
equipment with market share of around 80 percent and that type of
leadership is extremely important in an industry that tries to mitigate
the risk of large exploration and production projects by choosing market
leading vendors that have the best technology and proven track
records.
Right now, there's an oversupply of offshore rigs because operators
ordered too many of them at the peak of the cycle; however, at NOV's
current price, the market is effectively saying that going forward, the
normalized level of supply is less than half of what it is today, or that the
new build cycle won't resume for over ten years.

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But given the need for increased offshore production to replace annual
depletion and just to meet growing global demand, the normalized level
supply is higher than the market implies, new rigs will be needed to
replace an aging fleet and NOV will continue to provide the equipment
and aftermarket services for the vast majority of those rigs.
And while we wait for the new build cycle to resume, we benefit from a
nice five percent dividend yield. NOV entered this downturn with a
strong backlog that currently stands at eight billion and also generates
substantial cash flow from businesses that don't require new rig orders.
So we're confident in the company's ability to continue generating free
cash flow and are happy to pay a ten times going in free cash flow
multiple for a quality business and to partner with a great operator and
capital allocator in Clay Williams who has shown his ability to both
execute on costs and repurchase shares at discounted levels.
Staley Cates:

I'd add one thing to that that's really more of a process thing too, which
is a lot of times, the biggest value we get in these various research visits
and discussions has to do with other companies we learn about, not
necessarily the company talking to us about themselves. And I put this
in this category where we may look like total morons right now in our
E&P (energy and production) holdings, but we do have a lot of
interaction with those teams and they help us go to school on some of
these oil service providers that have been beaten up so much and we
learn about who has to give what back in price and who's the most
vulnerable and negotiation strength and weakness and on and on. And
NOV pops up consistently as so well positioned that they just they
don't have to give back as much on price and they're kind of top of the
heap on quality within that group.

Lee Harper:

We've gotten some questions around the opportunities that we're


seeing. Ken and Manish talked a little bit about what they see in Asia
right now. One of the questions came in about the opportunity set in
the Europe in terms of Europe versus the U.S. You know, where do we
see our overall market valuations. What are the relative opportunities
and how is that reflected in our purchases and/or on deck list? Josh, do
you want to talk a little bit about the European side and then maybe
Mason, do you want to talk a little bit about the U.S.?

Josh Shores:

Thanks, Lee. This is Josh and from London, Scott and I spend a lot of
time looking across Europe and evaluating those markets and from a
very top down perspective, which as everyone well knows, is not how
we really approach the world, but aggregating all of our bottoms up
looks from a top down perspective, you wouldn't say that Europe is
broadly super cheap, but I mean, we would say on a relative basis we're
finding a lot more interesting things in Europe than the U.S. and on a
bottoms up basis, there are lots of unique opportunities in Europe that
maybe require a little bit of a different perspective. It's not like it was in

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2011 where whole countries and whole markets were cheap and there
were opportunities all over the place.
It's much more of a targeted approach where there are companies with
unique opportunities and you really have to do the deep work to
understand what that potential is and potentially engage with a
company and management to help realize that. So, we're finding plenty
to do in Europe right now. We think it's a very attractive place to be
looking, but we wouldn't say that blanket's the entire universe is cheap
like it has been in times over the last five years.
Mason Hawkins:

I'd say that our on deck lists are more populated with Asian names than
any other geographic region. And to reiterate what Josh just said, we
don't really think about it in terms of the globe, the world map. We
think about it in terms of individual businesses and the people that run
them and clearly, the price. And regarding the price, the Asian gaming
world and the energy space is replete with a number of interesting
opportunities. We'll be very careful about pursuing those, but we do
believe it's a terrific place to look.

Ross Glotzbach:

And then, you know, it's Ross, U.S. Small-Cap, as you can probably tell
from our high cash levels, is probably where there's the least because it
feels the best to people today because there's not a lot of this scary, to
some people, emerging markets or other kind of macro risk to U.S.
Small-Cap companies and their on deck list has grown in the second half
of this year. That's still where you see our most cash.

Lee Harper:

Great. We've gotten some questions around how do we reevaluate


companies when things arent going the way we anticipated. Can you
talk about how we reevaluate situations and then when we decide to
actually sell, gets along the lines of how do we try to avoid value traps,
and in particular, we've had several questions related to this, Staley, on
Loews come in. So, just an update on where we are with that.

Staley Cates:

Okay. There are several ways to come at this. Some of these are kind of
rules based to take any psychological traps out of the process. Some of
them are kind of ongoing underwriting, reevaluating as we go, including
at our regular research meetings, but some of those things would
include if we talk about price to value all the time, we talk less
externally about how those values are growing, but that's a huge deal to
us internally. So that's maybe the first red flag is that if a value even if
it's a cheap price to value, if that value is not growing as we have
expected or at least at our discount rate, we know there's a problem
with the appraisal. And so the first thing that would beg discussion and
underwriting and reevaluation would be a value not growing on our
intrinsic value basis.
Second, there would be almost more of a PM thing than a research

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underwriting thing would be if the value actually drops. I think one area
I think we've done a poorer job than I would like in the past that we've
put a lot of focus on in recent years and currently would be on a PM
perspective, being a little less aggressive when the value itself is
dropping. Sometimes we've added because the P/V may still be great,
but when the V is dropping, that's just a whole different category of you
need to be terrified that you may be entering value trap territory.
Third category would be reappraisal constantly where there may be
comps in the industry sector, we're looking at privately. There may be
changes in public peers in the public part of comps or it just may be
through the regular quarterly earnings that come out of companies
reporting. All of those lead to new values, new ways of looking at the
value to make sure it is not a trap.
One other thing would be this is more of a minor one, but I found it kind
of interesting, which is we, of course, look at all respected peers filings.
We are definitely not afraid to try to poach the best ideas, but
sometimes it's a value trap category if too many likeminded value peers
have already piled in. Sometimes that tells you the market just the
market's discounting mechanism is actually at a deeper level than what
may be articulated by a whole bunch of value holders.
And that's more of an art than a science. I guess the final part of this
would relate to our Loews where we filed a pretty large reduction in our
holding there. That would be part of this value growth equation. So if
we took the various parts of Loews, we have great respect for the Tisch
family and for what they've done over the years. We like them very
much as people, so this is really about the pieces of the business.
But a huge part of it is cash per share, which is very comforting and risk
reducing, but we don't we haven't seen that be reinvested and now
we're at a part of both the stock market cycle and private equity
multiples where we're not sure how quickly that can turn into big NAV
growth. Then the pieces themselves CNA (CNA Financial Corp) has
tougher sledding than some of the insurance underwriters that we have
found and tracked before and as a value building proposition, we think
we can find better quality than that.
And then with Diamond Offshore and Boardwalk, their energy troubles
are kind of obvious and that is also tough sledding and so we just kind of
came away with a price to value that may still be okay, but at a value
build that we thought was less than what we can accomplish putting
this money into other operating companies.
Lee Harper:

We've had some follow-up questions from Staley's presentation on


Wynn. Staley covered the values and the sort of valuation piece, but
there's several questions around how do we think about the exposure

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of Wynn that's more towards VIPs in Macau than some of the other
players are. What about the succession question, for Steve, and then
how do we think about the debt levels at Wynn. So, Ross, do you want
to just in general talk a little bit more about our case on Wynn?
Ross Glotzbach:

Sure. So on the VIP front, I guess first of all, setting aside the half or so
of the value that is from the U.S., so this is a Macau question, on a
trailing basis, you're right, Wynn probably does get a little more of its
EBITDA from VIP than some of its peers. You know, it's in the 20 percent
range. However, looking forward as they open Wynn Palace and as the
trends that Staley talked about continue, this is getting to be, you know,
into the teens as a percent of EBITDA, so that's teens of EBITDA on half
of the value, so this is less than ten - and it's also a lower multiple, so it's
less than ten percent of the value just when it comes to VIP.
But we do think in the long run, having the global high end brand that
Wynn does is a very good thing. So that's that one.
On succession, you know, I dont think Steve's going anywhere for a
long time. I think he's very involved, very into the details. And I think
that's a good thing given his track record.
So, we think he's going to continue to build value. He's on the case. He's
not disengaged, you know, at 73. He has many years on Sheldon
Adelson, for example. On the debt, you know, he just a month or so
ago, much like Chesapeake, they got their kind of one covenant that
was a very misunderstood covenant, by the way, renegotiated and
reaffirmed at a much better level, just totally taking this risk off the
table. It wasn't ever really a risk, but now it's just all the way gone.
And once we get Wynn Palace up and producing EBITDA next year, then
there will be significant cash flow generation at this company to both
pay down debt and go on offense.

Staley Cates:

I've got one more thing to add to Ross's first category there, which
would be there's as we try to explain this case, we understandably try to
oversimplify and keep it basic and we've talked about mass and VIP, but
actually within mass, there's what the operators would call premium
mass and to us, that's really the best of both worlds, meaning A VIP
player drops a lot of money, but the reason they're such a low EBITDA
margin is the junket bringing them rips out the margin. The junket is
lending to them, that can also lead to money laundering opportunities
that leads to collection weirdness. There's all kinds of things about the
VIP junket side that makes it low margin. And yet that player's dropping
a lot of money.
Premium mass, think of it as the best of both worlds. That is what it
sounds like. That's a mass player who's just showed up to bet a lot of

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money and have fun, but they're not with a junket and so they're both a
high revenue player, but way better yet, they are a high margin player.
So Wynn's new property is aimed at that player and their whole legacy
in both Vegas and Macau suggests they can get that player. So they
would answer this question in the shortest form possible with that
property is geared to premium mass and hope to have their cake and
eat it too.
Lee Harper:

Okay, great. From a broader perspective in terms of talking about the


opportunities and how we invest, is value investing harder now than it
has been in the past? You know, we see this bifurcation between things
that are doing really well and then things that are not, like the energy
companies we've talked about, for example. You know, how does our
value approach thrive in a forward-looking market? Mason, you want to
talk a little bit about that?

Mason Hawkins:

I don't think human psychology has changed a lot over the many years
that we've been applying our disciplines, now in our 41st year at
Southeastern. Fear and greed swing markets to extremes, as always.
I think they get swung to extremes more violently and quicker possibly
today than they did in times past. I think that there's more herd
mentality today than in the past. There's more, on both sides of the
equation, both on the long side and the short side. For the disciplined,
long term investor, it provides terrific opportunities.
Momentum carries on until it doesn't. We've seen two recent really
vivid examples, where we have taken massive positions both in adidas
and in DuPont recently. They were very cheaply priced with great long
term opportunity for the long term value investor and yet they were
disdained in every way in the marketplace. When the market does
understand that free cash flows will be growing and or the companies
will be better governed and managed, it can swing dramatically. So, yes,
there is more short term focus, more momentum relative strength
chasing in today's world that swings these prices to even more
discounted levels sometimes than they might have in the past. I will
conclude by saying that value investing is alive and well. We've seen its
popularity come and go over many cycles in the past.
We're not discouraged by the flavor of the day in the investing arena.

Lee Harper:

Great. That seems like a good note to end on. We've gone a little over
an hour, so we appreciate everyone's time today. We're very
appreciative of your support of the long term partnership we've had
with many of you on the webcast and our other partners and we hope
that this has helped people get a clearer understanding of where we
stand and the opportunity set that we're excited about. So thanks very
much.

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