larry robbins, ceo 19 th annual ira sohn investment conference may 5, 2014 wow, thats cheap! gotta...
TRANSCRIPT
1Larry Robbins, CEO
19th Annual Ira Sohn Investment Conference
May 5, 2014
Wow, That’s Cheap!Gotta Stick to the Fundamentals
We Want (and He Needs) the Cup!
Slides available atwww.sohnconference.org
MAY 2014LEGAL DISCLAIMERTHIS PRESENTATION DOES NOT CONSTITUTE AN OFFER TO SELL NOR THE SOLICITATION OF AN OFFER TO BUY ANY INTEREST IN ANY INVESTMENT FUND MANAGED BY GLENVIEW CAPITAL MANAGEMENT, LLC (“GLENVIEW”). SUCH OFFER OR SOLICITATION MAY ONLY BE MADE BY DELIVERY OF THE APPLICABLE FUND’S OFFERING DOCUMENTS, INCLUDING A PRIVATE PLACEMENT MEMORANDUM, APPLICABLE SUBSCRIPTION DOCUMENTS, APPLICABLE GOVERNING DOCUMENTS AND GLENVIEW’S FORM ADV PART 2, ALL OF WHICH MUST BE READ IN THEIR ENTIRETY. EACH FUND’S OFFERING DOCUMENTS CONTAIN A DESCRIPTION OF THE MATERIAL TERMS OF THE FUND, INCLUDING, WITHOUT LIMITATION, RISK FACTORS AND CONFLICTS OF INTERESTS RELATING TO THE FUND AND GLENVIEW. AMONG OTHER THINGS, THE RISK FACTORS PROVIDE THAT: AN INVESTOR MAY LOSE ALL OR PART OF ITS INVESTMENT, PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS, THE FUNDS MAY NOT ACHIEVE THEIR INVESTMENT OBJECTIVES, THE FUNDS MAY UTILIZE LEVERAGE, AND THERE ARE RESTRICTIONS LIMITING AN INVESTOR’S ABILITY TO REDEEM OR TRANSFER ITS INVESTMENT IN THE FUNDS. ANY OFFERING WILL BE MADE ON A PRIVATE PLACEMENT BASIS TO A LIMITED NUMBER OF ELIGIBLE INVESTORS WHO MEET THE SUITABILITY REQUIREMENTS RELATING TO AN INVESTMENT IN THE APPLICABLE FUND AND WHO ARE WILLING AND ABLE TO CONDUCT AN INDEPENDENT INVESTIGATION OF THE RISKS INVOLVED. THE INFORMATION CONTAINED HEREIN WILL BE SUPERSEDED IN ITS ENTIRETY BY THE APPLICABLE FUND’S OFFERING DOCUMENTS.
THE INVESTMENT FUNDS MANAGED BY GLENVIEW (EACH, A “FUND”, TOGETHER THE “FUNDS”) MAY HAVE POSITIONS IN THE SECURITIES OF COMPANIES REFERENCED IN THIS PRESENTATION. THESE PORTFOLIOS ARE ACTIVELY MANAGED AND ANY SECURITIES DISCUSSED HEREIN MAY OR MAY NOT BE HELD IN THE PORTFOLIOS AT ANY GIVEN TIME. THE SECURITIES DISCUSSED HEREIN DO NOT REPRESENT AN ENTIRE PORTFOLIO OF A FUND AND IN AGGREGATE MAY ONLY REPRESENT A SMALL PERCENTAGE OF A FUND’S HOLDINGS. SPECIFIC SECURITIES HIGHLIGHTED HEREIN HAVE BEEN SELECTED TO ILLUSTRATE GLENVIEW’S INVESTMENT APPROACH AND ARE NOT INTENDED TO REPRESENT THE FUND’S PERFORMANCE NOR HAVE THEY BEEN SELECTED ON THE BASIS OF PERFORMANCE OR ANY PERFORMANCE-RELATED CRITERIA. NOTHING CONTAINED HEREIN SHALL CONSTITUTE AN ADVERTISEMENT, A SOLICITATION, RECOMMENDATION OR ENDORSEMENT TO BUY OR SELL ANY SECURITY OR OTHER FINANCIAL INSTRUMENT REFERENCED IN THIS PRESENTATION.
ANY PROJECTIONS, TARGETS OR ESTIMATES IN THIS REPORT ARE FORWARD LOOKING STATEMENTS AND ARE BASED ON GLENVIEW’S RESEARCH, ANALYSIS, OPINIONS AND ASSUMPTIONS MADE BY GLENVIEW. THERE CAN BE NO ASSURANCE THAT SUCH PROJECTIONS, TARGETS OR ESTIMATES WILL OCCUR AND THE ACTUAL RESULTS MAY BE MATERIALLY DIFFERENT.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
THE FUNDS HAVE NOT BEEN APPROVED BY OR LICENSED OR REGISTERED WITH ANY LICENSING AUTHORITY OR GOVERNMENTAL AGENCY. THE INFORMATION CONTAINED IN THIS PRESENTATION IS FOR DISCUSSION AND INFORMATIONAL PURPOSES ONLY AND IS BEING FURNISHED ON A CONFIDENTIAL BASIS TO A LIMITED NUMBER OF ELIGIBLE INVESTORS. NO PORTION OF THIS PRESENTATION MAY BE COPIED, REPRODUCED, REPUBLISHED OR DISTRIBUTED IN ANY WAY WITHOUT THE EXPRESS WRITTEN CONSENT OF GLENVIEW.
THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT TO BE RELIED UPON AS INVESTMENT, LEGAL, TAX OR FINANCIAL ADVICE. ANY PROSPECTIVE INVESTOR MUST CONSULT WITH HIS OR HER INDEPENDENT PROFESSIONAL ADVISORS AS TO THE LEGAL, TAX, FINANCIAL OR OTHER MATTERS RELEVANT TO THE SUITABILITY OF AN INVESTMENT IN ANY INTEREST IN ANY INVESTMENT FUND MANAGED BY GLENVIEW.
FOR IMPORTANT ADDITIONAL DISCLOSURES, PLEASE REFER TO PAGES 46-48 OF THIS PRESENTATION.
MAY 2014SO NICE WE’LL SAY IT TWICE
“Plain English” Legal Disclaimer
IN ORDER TO ENHANCE CURRENT AND PROSPECTIVE INVESTOR UNDERSTANDING OF OUR PROCESS, APPROACH AND VIEWS, THIS PRESENTATION INCLUDES DETAILED DISCUSSIONS REGARDING SELECTED POSITIONS IN OUR FUNDS’ PORTFOLIOS. IN DOING SO, WE HOPE THIS TRANSPARENCY ENHANCES YOUR UNDERSTANDING OF OUR VIEWS ON THE INVESTMENT OPPORTUNITIES WE SEE IN THE MARKETPLACE AND WHY WE HAVE POSITIONED THE FUNDS’ PORTFOLIOS THE WAY WE HAVE. WITH SUCH INFORMATION AVAILABLE TO YOU, WE BELIEVE CURRENT AND PROSPECTIVE INVESTORS ARE BETTER INFORMED AND EQUIPPED TO CHALLENGE OR DILIGENCE OUR VIEWS AND APPROACH TO DETERMINE WHETHER AN INVESTMENT IN A FUND IS CONSISTENT WITH THE MANDATE OF EACH INDIVIDUAL INVESTOR. AS OUR FOCUS IS ON CURRENT POSITIONS, WE NATURALLY HAVE A CONSTRUCTIVE BIAS TO THESE COMPANIES, WHICH INVESTORS SHOULD WEIGH IN DETERMINING THEIR OWN VIEWS ON OUR APPROACH AND THE FORWARD RETURN OPPORTUNITIES OF THE FUNDS. AS THE LEGAL DISCLAIMERS MAKE CLEAR, WE ARE NOT DISCUSSING POSITIONS TO HIGHLIGHT THOSE THAT HAVE PERFORMED WELL FOR US. BY AND LARGE THE HIGHLIGHTED POSITIONS ARE CURRENT PORTFOLIO POSITIONS AND THEIR PERFORMANCE REMAINS TO BE SEEN. WE HAVE ALWAYS HAD A MIX OF WINNERS AND LOSERS AND EXACTLY HOW THESE POSITIONS PERFORM OVER TIME WILL BE JUDGED WITH TIME. TO UNDERSTAND THE PAST PERFORMANCE OF OUR FUNDS, YOU SHOULD REFER TO THE TABLES IN THE APPENDIX WHERE WE LAY OUT THE MONTHLY PERFORMANCE OF OUR FUNDS SINCE INCEPTION. WE HAVE ALSO INCLUDED A SECTION THAT SHOWS OUR TOP 5 WINNERS AND BOTTOM 5 LOSERS DURING THE LAST FULL CALENDAR YEAR TO PROVIDE YOU WITH ENHANCED TRANSPARENCY. OF COURSE, THIS WOULDN’T BE A DISCLAIMER, IF WE DIDN’T REMIND YOU THAT OUR PAST PERFORMANCE IS NOT AN INDICATOR OF HOW WE WILL DO IN THE FUTURE. NONETHELESS, OUR ACTUAL PERFORMANCE SHOULD BE YOUR GUIDE FOR HOW WE’VE DONE IN THE PAST, NOT THE PERFORMANCE OF INDIVIDUAL SECURITIES. WE RECOGNIZE THAT THESE MATERIALS ARE DETAILED AND SOMEWHAT “OPINIONATED”. WE HAVE DESIGNED THEM THAT WAY SO YOU CAN UNDERSTAND WHY WE ARE ENTHUSIASTIC ABOUT CERTAIN OPPORTUNITIES AND WHAT INFORMS OUR MARKET OUTLOOK. IN OUR VIEW, TRANSPARENCY IS PARAMOUNT AND WE HOPE THAT THESE MATERIALS SERVE AS A USEFUL GUIDE AS YOU EVALUATE WHETHER AN INVESTMENT IN OUR FUNDS IS APPROPRIATE FOR YOU.
PAGE 4
TIME OUT: WHAT’S THE PLAY?
The Winning Playbook
1 Perceived Bad Guys May Be Great Teammates
HMOs, GMOs, and Hedge Fund CEOs
2 Make the Easy Play Secular Growth in Healthcare and Agriculture
3 Ignore the Crowd Noise and Focus
Watch Fundamentals Closely
4 Give Yourself Multiple Chances to Win
“Convertible Equities”
5 110% Effort Respectful Shareholder Engagement
Long Investment Ideas
Humana
WellPoint
Monsanto
(HUM: $109)
(WLP: $101)
(MON: $112)
The Best Things About May:
1.March and April are over2.Stanley Cup Playoffs3.The Sohn Investment Conference
Year 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Stage FED Tightening Goldilocks Tech Wreck Credit-fueled
Expansion System Failure Convergence
Market Multiple1 15x 13x 13x 26x 26x 15x 15x 17x 17x 12x 12x 16x and counting
S&P 500 Performance2 (2%) 26.2% per annum (40%) 10.8% per annum (7%) 22.5% per annum and
counting
Conditions
7 Fed hikes in one year
4% GDP growth 1% inflation Internet growth Compressed multiples
moved to irrational exuberance
Tech bubble burst
Y2K unwind 9/11 Enron/
WorldCom frauds
Credit crunch
Commercial credit repair Consumer credit
indulgence Global growth China/Dubai LBO craze Activism
Mortgage crisis “Too big to fail” repealed Credit Freeze Eurozone periphery crisis Mortgage fraud US AAA downgrade Risk Averse/Capital
Hoarding
Recoupling of financial assets to their intrinsic value
Large scale M&A Capital deployment Activism Capital deployment
drives EPS growth
PAGE 5
THE BIG PICTURE
1. While there’s risk in the world, we aren’t in systemic crisis
2. More times than not, the environment stays the same one year to the next
3. Conditions are favorable for fundamental long investing over the medium term
1 Market multiples sourced from Baseline. ² S&P 500 Performance reflects (i) total price return for periods of negative performance and (ii) annualized price return for periods of positive performance. Pleaserefer to pages 46-48 for important disclosures regarding the use of forward-looking statements, opinions and projections in this presentation. In addition, certain statements contained herein are based onGlenview’s research, analysis, opinions and assumptions made by Glenview, which may not prove to be accurate or correct.
PREVIOUSLY, ON THE LAST 104 WEEKS’ EPISODES….
May 2012 May 2014 Comments
Systemic Risk HighEuropean Uncertainty Low OMT, Germany stepped up3
Stock Correlations 0.75all risk on/off
0.55stock pickers market
S&P 500 1325 (12.7x) 1884 (16.1x) +45%
10-Year Treasuries 1.76% 2.58% Tapering now ½ done
High Yield Bonds 7.9% 5.6% Debt cheap and available
Corporate Boards Hoarding cash Deploying cash Success with Buybacks/M&A
M&A LTM1 $463B $798B Acquirers being rewarded
Annual Share Repurchase2 $366B $518B +41%
Engagement Little / None Strong acrossall market caps Unprecedented Wave
Mats Zuccarello & Carl Hagelin AHL/NHL Round 2 Playoffs,
1st / 9th leading scorers Lockout / Workout / Worked Out!
PAGE 6
1 Source: Strategas Group. 2 Represents Q4 2011 and Q4 2013 annualized. 3 250-day correlation amongst S&P 500 stocks (each stock in index correlated to one another) is sourced from Strategas
S&P 500 Rolling 250-Day Correlation
Jan-12 Jul-12 Jan-13 Jul-13 Jan-140.50
0.60
0.70
0.80
DRIVERS OF CONVERGENCEWe believe the fundamental backdrop for equity based investing strategies is constructive based upon the following factors:
'60 '70 '80 '90 '00 '102%
4%
6%4.8%
Leg 1: Cheap Valuations Leg 2: Excess Cash
Leg 3: Exceedingly Low Borrowing Costs Leg 4: Shareholder Engagement1
US Non-Financial Corps. Cash % Total Assets
% Total Assets
(4Q13 is most recent data)2014 P/E 2015 P/E 10 Yr Range
Glenview 14.7 11.8 8-19x
S&P 500 16.1 14.4 10-17x
S&P 500 Internet Retail 48.6 34.2 20-106x
PAGE 7
1 Examples of Shareholders Engagements. Data sourced from Strategas and Glenview figures. Please refer to pages 46-48 for important disclosure on highlighted securities, benchmark comparisons, performance data and forward looking statements, opinions and projections.
FROM DRIFT UP TO LIFT UP
2H 2012 & all of 2013
2014 & beyond
Lower Systemic Risk Valuation rebounded from lows Modest 6% earnings growth
Capital Deployment Corporate actions / M&A Accelerated earnings Strengthening economy Potential for continued P/E restoration
Board, Management and Owners must “lift up”
Excess returns achievable but work needed
Increased focus on contrarian ideas
Stocks “drifted up” 2/3 of index return from multiple
enhancement
ResultsDrivers
Company Sale Share Repurchase Accretive M&A Portfolio Restructuring Management Change Activist Engagement
Convertible Equity = Cheap, Defensive Secular Growth + Call Options on:
Opportunity Set - “Convertible Equities”A fictional concept that describes a low risk “base business” with one or more call options on value accelerants to lift up an ordinary investment return to an extraordinary return
Hard Work and Good Decisions Will Differentiate
PAGE 8
Please refer to pages 46-48 for important disclosures regarding the use of forward-looking statements, opinions and projections in this presentation. In addition, certain statements contained herein are based on Glenview’s research, analysis, opinions and assumptions made by Glenview, which may not prove to be accurate or correct.
PAGE 9
EVERYMAN’S TRASH IS GLENVIEW’S TREASUREPast and Present Sohn Conference Contrarian Longs
“What was said” vs. “Glenview’s view” Results Returns
Long Express Scripts (ESRX)
PBMs are fraudulent middlemenvs.
PBMs reduce pharma costs
Pharma Inflation:
12% 2%7.5x
over 10 years
Long McKesson (MCK)Distributors can’t survivebusiness model changes
vs.“Pills in ‘06”
EPS up5x
in 10 years
Outperformed SPX by293%
Long Hospitals – TenetHealthcare (THC) Obamacare will damage Hospitals
vs.More coverage = more revenues,
shareholders will be rewarded
ConsolidationRepurchase
Reform Uplift2x
and climbing
Long Managed Care Companies – Humana (HUM), WellPoint (WLP)
(we own more than these two)
HMOs are the problem with healthcare
vs.HMOs reduce costs,
shareholders will be rewarded
Strong basisfor optimism
We seeexcess returns
Long Monsanto (MON) GMOs will fall out of favorvs.
GMOs are the only answerto growing food yields
Strong basisfor optimism
We seeexcess returns
2002
2005
2012
2014
2014
Securities highlighted in this slide have been selected to illustrate Glenview’s investment approach and/or market outlook and are not intended to represent the Funds’ performance or be an indicator for how the Funds have performed or may perform in the future. These examples have been selected solely for this purpose and have not been selected on the basis of performance or any performance related ‐criteria. In addition, certain statements contained herein are based on Glenview’s research, analysis, opinions and assumptions made by Glenview, which may not prove to be accurate or correct. Please refer to pages 46-48 for important disclosures regarding the use of highlighted securities and the use of forward looking statements, opinions and projections in this presentation.
PAGE 10
HMOS: DON’T LET THE FACTS GET IN THE WAY OF A GOOD ARGUMENT
Myth 1:
“We right now give $15 billion every year as subsidies to private insurers under the Medicare system. It doesn’t work any better through these private insurers; they just skim off $15 billion. That was a giveaway.”
- President Obama, Sep 2008
Entire Net Income of Public For-Profit HMO Industry
HMO Profits US Healthcare Spending
2008 2014E 2000 2010 2020E
$10B $14B $1,377B $2,600B $4,416B
A Single-Payor System would be more efficient than the Big Bad Private HMOs
Through consumer choice and policy decisions, government has increasingly transferred more
business to the private sector:
HMOs Profits are the reason healthcare costs are too high Myth 2:
Mythbuster:Mythbuster:
“What’s hard is what millions of families and small businesses are going through because we allow the insurance industry to run wild in this country.”
- President Obama, Mar 2010
2014E HMO Profits as a % of Healthcare Spending
National Medicare Advantage Penetration:2010: 24% 2014: 30%
Source: CMS, Kaiser Family Foundation, Credit Suisse. Please refer to pages 46-48 for important disclosures regarding the use of forward-looking statements, opinions and projections in this presentation. In addition, certain statements contained herein are based on Glenview’s research, analysis, opinions and assumptions made by Glenview, which may not prove to be accurate or correct.
HMO Profits ~0.4%
US HealthcareSpending
Medicaid Managed Care Management of Dual EligiblesExpansion or adoption
since 2011States pursuing Duals demos
Actions speak louder than words
Plus – ACA Medicaid Expansion
0x
10x
20x
30x
PAGE 11
HOW DO WE KNOW HMOS ARE HATED? MULTIPLE WAYS!
NTMP/E
Multiples
HC Services
12%(2%)
(3%) 8%(6%)
Managed Care1
(6%)
(4%)
11.7X
S&P 500 Healthcare Index Pharma Biotech Med Tech HCIT
HMOs are ABSOLUTELY Cheap
S&P 500 UNH CI AET WLP HUM0x
5x
10x
15x
20x
14.4x15.3x
10.6x12.3x
9.9x 9.7x 10.5x
7.5x
11.5x
8.4x2015 Multiples2
WLPBull Case
Managed Care Average1
Healthcare Index
HUMBull Case
1 Large cap managed care firms (UNH, CI, AET, WLP) excluding HUM. 2 Multiples based on consensus and GCM 2015 EPS estimates. Please refer to pages 46-48 for important disclosures regarding the use of forward-looking statements, opinions and projections in this presentation. In addition, certain statements contained herein are based on Glenview’s research, analysis, opinions and assumptions made by Glenview, which may not prove to be accurate or correct.
Jun 2007
Oct2008
Today
(18%)
Jun 2007
Oct2008
Today Jun 2007
Oct2008
Today Jun 2007
Oct2008
Today Jun 2007
Oct2008
Today Jun 2007
Oct2008
Today Jun 2007
Oct2008
Today Jun 2007
Oct2008
Today
HMOs only group yet to recover
DIDN’T THE AFFORDABLE CARE ACT HURT HMOS? YES, BUT THEY ARE HEALING WELL…
Profit Caps Federal MLR Requirements
Profit Caps 2 Federal and State Rate Review
Added Costs Industry Taxes and Fees
Reduced Reimbursement
Medicare Advantage reimbursement cuts to FFS Medicare Parity
High Unemployment 5% decline in commercial enrollments, 10% at trough
Falling Interest Rates 1-2% EPS headwind annually from lower investment income
1 Bureau of Labor Statistics, WLP estimates. 2 Historical data based on the JPM AA-rated JULI index. Projected AA yields are based on the current JPM AA-rated JULI index spread + the 7-year US Treasury forward curve. 3 Accenture 2013 report on Private Exchanges. Please refer to pages 46-48 for important disclosures regarding the use of forward-looking statements, opinions and projections in this presentation. In addition, certain statements contained herein are based on Glenview’s research, analysis, opinions and assumptions made by Glenview, which may not prove to be accurate or correct.
Sources of Pain: 2007-2013 Let the Healing Begin: 2014-2019
Better Business Mix and Better Business
Greater exposure to faster-growing Medicare & Medicaid: 9% in 2007, 22% today
MA Volume AND Price Growth
3% population, 3-5% penetration and 1-2% pricing growth in 2016 and beyond, plus share gains
Increased Medicaid Penetration
Medicaid Expansion and Outsourced Medicaid will nearly double market size in 3 years
Rising Employment Estimated to add 2% per year to commercial enrollments
Rising Interest Rates 1-2% EPS tailwind annually from higher investment income
Growth in Private Exchanges
Moving from ASO to Risk increases profit per member 4x-5x
Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-1889%
91%
93%
95%
Interest Rates2
Apr-07 Apr-09 Apr-11 Apr-13 Apr-15 Apr-170%
2%
4%
6%
8% – Historical & Projected AA Corporate Yields –
1-2%/year EPS tailwind
1-2%/year EPS headwind
projected
Unemployment1
2008-13 Commercial Enrollments
(5%)
2013-18 Commercial Enrollments
+9%~2% per year
Employment Rate (%)
projected
Private Exchanges3
2014 2015 2016 2017 20180
20000000
40000000
1,000,000
9,000,000
19,000,000
30,000,000
40,000,000
CAGR 2014-18: 151%
Members (M)
– Projected Adoption –
PAGE 12
Strong Secular Growth Enrollment +3% driven by population, employment, newly insured Commercial pricing stable with cost trend, Medicare headwinds abating M-HSD% premium growth leading to 13-15% EPS growth before extraordinary returns
Medium Term Tailwinds Interest rates, employment, free cash flow deployment Accelerating demographics in MA
Room for Multiple Restoration Group 10.6x EPS = return to over 14x over 3 years adds +10% above earnings growth
Fresh & Engaged Management Most management teams have new CEO/CFO in last 3 years
Levers to Drive Value Balance sheet optimization Repurchase M&A Asset reshuffling Monetizing “hidden assets”
HMOS – FROM INVESTOR HELL TO DOING WELL
The negatives were absorbed or never happened…
Leaving a clear road ahead…
Single Payor couldn’t get traction in 2009 with the Democratic sweep Early read of ACA population is “acceptable” within risk corridors MLR Floors, MA cuts absorbed in 2011 Managed Care Tax, “Dumping” absorbed in 2014
PAGE 13
Please refer to pages 46-48 for important disclosures regarding the use of forward-looking statements, opinions and projections in this presentation. In addition, certain statements contained herein are based on Glenview’s research, analysis, opinions and assumptions made by Glenview, which may not prove to be accurate or correct.
SINCE THE ACA, A TALENTED AND FOCUSED WAVE OF NEW LEADERS
Title Name Duration (yrs) Prior Experience Corporate Actions
CEO Joe Swedish 1 Trinity Health/ Catholic Health Association/ HCA
Divested 1-800 CONTACTS division
CFO Wayne DeVeydt 7 PricewaterhouseCoopers Repurchased >50% of shares outstanding during his tenure
Acquired AGP for $4.6B
CEO Mark Bertolini 3 Cigna Acquired Coventry for $7.3B
CFO Shawn Guertin 1 Coventry Health Care Repurchased ~9% of shares outstanding
CEO David Cordani 4 Coopers & Lybrand Acquired HealthSpring for $3.8B PBM outsourcing deal VADB carve-out
CFO Tom McCarthy 1 Kemper Insurance
CEO Bruce Broussard 1 US Oncology/Harbor Dental Hired 3rd party advisor to investigate opportunities for their PBM
CFO Brian Kane Starts June 1 Goldman Sachs
PAGE 14
Securities highlighted in this slide have been selected to illustrate Glenview’s investment approach and/or market outlook and are not intended to represent the Funds’ performance or be an indicator for how the Funds have performed or may perform in the future. The securities discussed herein do not represent an entire portfolio and in the aggregate may only represent a small percentage of a Fund’s holdings. Please refer to pages 46-48 for important disclosures regarding the use of highlighted securities and the use of forward looking statements, opinions and projections in this presentation.
CASE STUDY
PAGE 16
HUMANA: HEALTHY INVESTMENT OUTLOOK
1. MA Description Government pays private companies to manage Medicare
coverage & develop their own plan designs, which results in richer benefit designs including vision, hearing, & dental care
75% MA / 25% Other Managed Care2. Attractive Core Waterfall 2015 and Beyond
Revenues 9% EBIT 13% EPS 17%
3. Numerous Areas of Upside Optionality PBM Outsourcing Adding leverage for accretive M&A / repurchase Expanding membership from retiree private exchanges,
public exchanges, and state-based “Duals” contracts Long term: Potential acquisition target
4. Overcapitalized 23% to 26% dry powder as % of market cap
5. Cheap and Getting Cheaper
6. Enhanced Focus on Shareholder Value New CEO and CFO focused on driving core value and
addressing upside levers
Symbol HUM
Share Price $108.89
Shares Out 156 M
Market Cap $17.0 B
Parent Cash $0.5 B
Debt $2.6 B
EV $19.1 B
Debt/Cap 22%
“Dry Powder”
% of Market Cap
23 - 26%
Health Insurance Provider
2014E 2015E
EPS ~$8 >$9
P/E ~14x <12x
Financials
P/E 2015E 2016E
Base Estimates 11.5x 9.9x
+ PBM Outsource 10.1x 8.9x
+ Debt / Cap 35% 9.6x 8.2x
+ PBM Outsource & Debt/Cap 35% 8.4x 7.3x
Data sourced from company materials and Glenview’s projections, which may not prove to be accurate or correct. This example has been selected to illustrate Glenview’s investment approach and/or market outlook and is not intended to represent the Funds’ performance or be an indicator for how the Funds have performed or may perform in the future. This example has been selected solely for this purpose and has not been selected on the basis of performance or any performance-related criteria. In addition, certain statements contained herein are based on Glenview’s research, analysis, opinions and assumptions made by Glenview, which may not prove to be accurate or correct. Please refer to pages 46-48 for important disclosures regarding the use of highlighted securities and the use of forward looking statements, opinions and projections in this presentation.
THERE’S AN ALARMING OUTBREAK OF OLD PEOPLE
As Baby Boomers turn 65, population growth of 65 and over is 3% vs 0.70% national average…
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 201820%
25%
30%
35%
40%
Medicare Advantage
Penetration of >65 Population
(%)
Year
MA penetration has grown steadily1
+3% growth/yr
And they prefer Medicare Advantage over Straight Fee For Service Medicare…
4x the
Growth!
And they prefer Humana over other MA providers…
2009 2010 2011 2012 20130%
10%
20%
30%
40%
50%
Medicare Advantage
Market Share (%)
Other
UHC
KFHPAETWLPCIG
HUM
UHC HUM
KFHPAET
WLPCIG Other
(<100K)
2013 Market Share1
Other (>100K)
HUM share has grown steadily1
Year
Consolidation of plans with <100K members could add 3-5% growth as smaller rivals
exit over next 5-10 years
PAGE 17
+5% growth/yr
1 Based on CMS data. Please refer to pages 46-48 for important disclosures regarding the use of forward-looking statements, opinions and projections in this presentation. In addition, certain statements contained herein are based on Glenview’s research, analysis, opinions and assumptions made by Glenview, which may not prove to be accurate or correct.
PAGE 18
SENIORS VOTE FOR MA – EVEN THE CBO GETS IT
30%+
20-29%
10-19%
0-10%
Share of Medicare Beneficiaries Enrolled in MA1
High % MA States are Swing States & PopulousStates Senators House Members % US
Electoral College
Weighted Average MA %D R D R
30%+ States (18) 23 14 107 112 47% 37.1%
20%+ States (32) 32 32 162 188 78% 32.9%
0
25
50
206
18
12
5
14
818
States
Senate Leadership State with 20%+ MA
Swing State with 20%+ MA
MA Plans are high-quality & Seniors are very satisfied
MA outperformed fee-for-service on 10 of 12 quality measures2
~9 out of 10 enrollees are satisfied with every aspect of their MA plan3
1 Kaiser Family Foundation, 2014. 2 Am J Manag Care 16(11): 841-848, 2010 and 18(2): 96-104, 2012. 3 National Survey of Seniors Regarding Medicare Advantage Plans, North Star Opinion Research, Feb. 2013.Please refer to pages 46-48 for important disclosures regarding the use of forward-looking statements, opinions and projections in this presentation. In addition, certain statements contained herein are based on Glenview’s research, analysis, opinions and assumptions made by Glenview, which may not prove to be accurate or correct.
2007 2014Despite ACA cuts, seniors stay in MA & CBO has increased its
MA enrollment estimates
20092010
20112012
20132014
20152016
20172018
20192020
6
12
18
24
ProjectedMA Enrollees
(M)CBO 2010
CBO 2012
CBO 2014
WHICH ALL ADDS UP TO 10-15% ORGANIC REVENUE GROWTH
Humana MA Revenue Growth 2015 & Beyond
Population Growth
Penetration Market Share Gains
0%
5%
10%
15%
3%
3-5%
3-5%
Total...
+
Pricing Gr...
9-13%1-2%
=
Share Gains
Penetration
Population Growth
2015+ ...
10-15%
=
2009 2010 2011 2012 20130
500
1,000
1,500
2,000
2,500
HUM Medicare Advantage Members
(‘000)
2009-1312.7% CAGR
Year
9-13% MA growth is inline with recent organic growth… …and accelerates the earnings waterfall over time
2015 2016 2017 20180%
5%
10%
15%15% 15% 15% 15%
5% 5% 5% 5%
12.4% 12.5% 12.7% 12.9%
HUM EBIT Growth (%)
Year
Medicare Advantage
Other
Consolidated
PAGE 19
Calculations are based on Glenview’s projections, which may not prove to be accurate or correct. Please refer to pages 46-48 for important disclosures regarding the use of highlighted securities and the use of forward looking statements, opinions and projections in this presentation.
RELIEVING ELBOW PAINAfter 5 years of absorbing rate cuts resulting in no earnings growth, the pig is finally
through the python, leading to sustained, defensive growth + convertible options
2011 2012 2013 2014 2015 2016 2017 and beyond
$6
$8
$10
$12
2011 2012 2013 2014 2015 2016 2017 and beyond
80%
90%
100%
110%
120%
12% 10% 7% 4% 2% 1%
FFS Parity Remaining ACA Cuts
2011 2012 2013 2014 2015 2016 2017 and beyond
-6%-5%-4%-3%-2%-1%0%1%2%
(~2%) (~2%)(~1%)
(~5%)
(~3%)
About flat
1-2%
Phase-In of Medicare
Advantage ACA Cuts1
Annual Rate Increase/Decrease2
Humana EPS
Convertible
Options:Option 1
PBM
+Option 2
Cash Use / Returns on Cash
+Option 3
Retiree Private Exchanges
+Option 4
New Markets
+Option 5
Long Term Consolidation
15-20%EPS Growth
PAGE 20
1 Based on JP Morgan estimates. 2 2011-15 estimated based on Humana’s disclosures. Calculations are based on Glenview’s projections, which may not prove to be accurate or correct. Please refer to pages 46-48 for important disclosures regarding the use of highlighted securities and the use of forward looking statements, opinions and projections in this presentation.
Integrated medical / Pharmacy Management
Formulary Design
Clinical program development
Sales & marketing
Customer facing functions
Direct engagement with physicians
Management of mail order facilities
Ownership of specialty pharmacies
OPTION 1: PBM – TIME TO STEP ON THE SCALE
PBM Optionality
PBMRx Volume
(MM)Buyer / Partner Year Structure Impact
WLP ~200 ESRX 2009 10-yr asset purchase $4.7 B Cash
AET ~136 CVS 2010 Outsourcing Agreement 10% Accretive to EPS
CI ~170 CTRX 2013 Outsourcing Agreement 7% Accretive to EPS
HUM ~275 ?? ?? Likely Outsourcing Could be 10-15% Accretive
We believe that HUM could outsource parts of its PBM operations to another scale provider to reduce costs & enhance earnings from its PBM operations
CVS ESRX UNH CTRX HUM WLP CI AET -
500
1,000
1,500
2,000 1,709 1,478
572 444 275 200 170 136
Scale Matters – Significant Saving Opportunity to Humana
Adjusted Rx Volume (Millions)1
“We’ve Seen This Movie Before”
XTBD
“…We continuously – in fact we're in the process right now of evaluating our cost structure both from a fulfillment point of view and from a purchasing point of view to ensure that we are competitive. We've hired a third-party to do that evaluation and nothing to-date has given us an indication that we need to change that perspective.” - CEO Bruce Broussard (March 11, 2014)
AET CI
1 CVS includes 890 M prescriptions filled at the pharmacy & 819 M through the PBM. CTRX totals are pro-forma and include CI scripts. Calculations are based on Glenview’s projections, which may not prove to be accurate or correct. Please refer to pages 46-48 for important disclosures regarding the use of highlighted securities and the use of forward looking statements, opinions and projections in this presentation.
PAGE 21
OPTION 2: DRY POWDER – THE GENERAL CAN FIRE BACK
22%
25%
LBO
40%
Old “Target” of outgoing CFO
Max leverage to maintain investment grade as per rating
agencies
HUM Valuation
2015 2016
Current leverage 11.5x 9.9x
30% Debt / Cap 9.9x 8.4x
35% Debt / Cap 9.6x 8.2x
40% Debt / Cap 9.3x 7.9x
Dry Powder23-26%
Dry Powder16-19%
2015 Debt / Cap
Current
Dry Powder13%
30% 35%
Peers
CI 33%
UNH 34%
AET 36%
WLP 37%
While investors continue to value Humana using a rear view mirror, management should aggressively repurchase shares
PAGE 22
Data sourced from company materials and Bloomberg. Calculations are based on Glenview’s projections, which may not prove to be accurate or correct. Please refer to pages 46-48 for important disclosures regarding the use of highlighted securities and the use of forward looking statements, opinions and projections in this presentation. In addition, certain statements contained herein are based on Glenview’s research, analysis, opinions and assumptions made by Glenview, which may not prove to be accurate or correct.
OPTION 3: RETIREE PRIVATE EXCHANGES – MORE THAN HOT AIR
10-12M retirees have employer-
sponsored health coverage
1.5-4.5Mcould move to
Private Exchanges in the next 5 years
400k-1.5M of those will likely adopt MA plans:A membership tailwind
for MA of up to 9%
0.5-2% Revenue Growth per year,
10-40c EPS Growth
Based on current market share,
50k-225k new MA lives for Humana
Private Exchange: A marketplace of health insurance & related products open to employees/retirees of a given employer sponsor
Large Employers across 8 surveys1
Actively pursuing 8-10%
Near-term adoption 22-28%
Retirees on Private Exchanges of AON & Extend Health, two leading managers
On MA plans 25%
PAGE 23
1 Source: Aon 2013 Corporate Exchange Survey, Benfield 2013 Employer Healthcare Reform & Private Exchanges Survey, PwC 2013 Focusing on the Future of Healthcare Benefits Survey, TW 2013 Health Care Changes Ahead Survey, KFF 2013 Employer Health Benefits Survey, Alegeus 2013 Defined Contribution & Private Exchange Survey, Willis 2012-13 Healthcare Reform Survey, PwC 2012 Health & Well-Being Touchstone Survey, International Foundation of Employee Benefit Plans 2013 Employer-Sponsored Health Care Survey, Aon 2012 Retiree Health Care Survey, Aon 2013 Retiree Healthcare Survey. Calculations are based on Glenview’s projections, which may not prove to be accurate or correct. Please refer to pages 46-48 for important disclosures regarding the use of highlighted securities and the use of forward looking statements, opinions and projections in this presentation.
OPTION 4: NEW MARKETS
2014 Guidance
2015E 2016E 2017E0.0
0.4
0.8
1.2
0.25
0.54
1.00 1.04
Public Exchanges Medicare/Medicaid “Duals”
1M public exchange lives would add ~40-80c to EPS
Humana Public Exchange Lives (M)
Already-won contracts add ~40-60c to EPS
Total (CBO) 6M 13M 24M 25M
HUM Share 4% 4% 4% 4%
HUM recently won Duals contracts worth $5-7B HUM’s long-term target margin for state-based
contracts is 3%
There are ~9M dual-eligible enrollees, accounting for $250B+ in annual healthcare spending
17 states are running or plan to run demonstration projects to coordinate care for these “Duals”
Lives(M)
Project cleared by CMSProposal pendingConsidered
PAGE 24
Please refer to pages 46-48 for important disclosures regarding the use of forward-looking statements, opinions and projections in this presentation. In addition, certain statements contained herein are based on Glenview’s research, analysis, opinions and assumptions made by Glenview, which may not prove to be accurate or correct.
VALUATION
Consistent with the framework of a “Convertible Equity” we see healthy gains ahead for Humana, with the opportunity for extraordinary returns
driven by PBM outsourcing and sound capital deployment.
PAGE 25
2015E Multiple Target Price % Upside
Base Case ~$10 15-16x $143-152 31-40%
+ PBM Outsource ~$11 15-16x $162-172 48-58%
+ PBM Outsource & Debt/Cap of 35% ~$13 15-16x $194-207 78-90%
Calculations are based on Glenview’s projections, which may not prove to be accurate or correct. Please refer to pages 46-48 for important disclosures regarding the use of highlighted securities and the use of forward looking statements, opinions and projections in this presentation.
CASE STUDY
PAGE 27
WELLPOINT: HEALTHY INVESTMENT OUTLOOK
1. WLP Description Diversified health benefits company providing health, drug,
dental, vision benefits including Blue Cross & Blue Shield plans The Blue network as 3x the market share of its next closest rival
in the commercial health insurance market, and WLP has dominant 28% share in its markets
2. Attractive Core Waterfall 2015 and Beyond Revenue 6% EBIT 9% EPS 14%
3. Numerous Areas of Upside Optionality PBM asset value Cash EPS Excess subsidiary revenues Adding leverage for accretive M&A/repurchase
4. Overcapitalized ~24-27% dry powder as % of market cap
5. Cheap and Getting Cheaper
6. Enhanced Focus on Shareholder Value New CEO (March 2013), new Head of Government Division,
new Chief Strategy Officer, new CIO New Chairman of the Board and 4 new Directors
Symbol WLP
Share Price $100.87
Shares Out 293 M
Market Cap $29.5 B
Parent Cash $2.0 B
Debt $14.5 B
EV $41.9 B
Debt/Cap 37%
“Dry Powder”
% of Market Cap
24 - 27%
Health Insurance Provider
2014E 2015E
EPS ~$9 ~$10
P/E ~11x ~10x
Financials
P/E 2015E 2016E
Base Estimates 10.5x 9.3x
+ “Cash EPS” 10.0x 8.9x
+ New PBM Deal 9.4x 8.4x
+ Debt/Cap 45% 8.6x 7.8x
+ All 3 of the Above 7.3x 6.7x
Data sourced from company materials and Glenview’s projections, which may not prove to be accurate or correct. This example has been selected to illustrate Glenview’s investment approach and/or market outlook and is not intended to represent the Funds’ performance or be an indicator for how the Funds have performed or may perform in the future. This example has been selected solely for this purpose and has not been selected on the basis of performance or any performance-related criteria. In addition, certain statements contained herein are based on Glenview’s research, analysis, opinions and assumptions made by Glenview, which may not prove to be accurate or correct. Please refer to pages 46-48 for important disclosures regarding the use of highlighted securities and the use of forward looking statements, opinions and projections in this presentation.
PAGE 28
WHO DOESN’T LOVE OPTIONS?
WellPoint = All the benefits of the base case for HMOs, trading at 10x 2015 earnings+
Option 1
PBM Options in 2017-2019+
Option 2
Move to “Cash Earnings” to conform to “Buffett Math”+
Option 3
Excess Capital Deployment+
Option 4
Rising Interest Rates+
Option 5
Duals Opportunity+
Option 6
Medicaid Expansion
Please refer to pages 46-48 for important disclosures regarding the use of forward-looking statements, opinions and projections in this presentation. In addition, certain statements contained herein are based on Glenview’s research, analysis, opinions and assumptions made by Glenview, which may not prove to be accurate or correct.
PAGE 29
SO NICE, LET’S SELL IT TWICE
Options to Unlock PBM Value which could happen as early as 2017:
Improve terms of the current outsourcing arrangement with incumbent (ESRX) or another PBM, closer to comparable recent transactions
Achieving terms similar to AET/CVS (2010) or CI/CTRX (2013) would add ~$750M to WLP EBIT (+19%) On reduced share count in 2019, this will add approximately $2 in EPS or $26-28 in future value
I. Improved Terms
Receive another up-front payment to renew the “long-term lease” on the outsourced PBM from the incumbent or another PBM
ESRX paid $4.7B for the contract in Dec 2009 A new deal could be worth >$5B in 2017 (+16% of WLP market cap after taxes)
II. Up-Front Payment
Bring the PBM in-house (like UNH) We believe this option is least likely
In 2009, WLP announced the sale of their PBM assets and operations for the next 10 years to Express Scripts for $4.7B
Thus, in Dec. 2019 they reclaim their PBM Investors value WLP PBM at zero. In 2019, we believe it’s worth $25-30 per share or $15
in present value today.
III. In-Source
Calculations are based on Glenview’s projections, which may not prove to be accurate or correct. Please refer to pages 46-48 for important disclosures regarding the use of highlighted securities and the use of forward looking statements, opinions and projections in this presentation.
PAGE 30
BUFFETT’S RIGHT—GOODWILL DOESN’T AMORTIZE
Companies should be valued based on “Cash EPS” (excl. acquisition amortization) when this metric is a more accurate reflection of FCF/share than GAAP EPS
Several Healthcare companies have switched to Cash EPS in recent years, including… …and we think it is the right metric for WLP too
Subsidiary Dividends
Last Five Years
Cash Net Income= >120%
Switching to Cash EPS would add ~$0.50 (+6%) to WLP EPS
Calculations are based on Glenview’s projections, which may not prove to be accurate or correct. Please refer to pages 46-48 for important disclosures regarding the use of highlighted securities and the use of forward looking statements, opinions and projections in this presentation.
DRY POWDER – THE PENDULUM HAS MORE ROOM TO SWING
37%
LBO
45%Max leverage to
maintain investment grade as per rating
agencies
WLP Valuation
2015E 2016E
Current leverage 10.5x 9.3x
+ 43% Debt / Cap 8.8x 8.0x
+ 45% Debt / Cap 8.6x 7.8x
Dry Powder
27%
Dry Powder
19%
2015 Debt / Cap
Curre
nt
Peers
HUM 22%
CI 33%
UNH 34%
AET 36%
Excess reserves at subsidiaries = 6% of market cap
43%
Dry Powder
24%
PAGE 31
Data sourced from company materials and Bloomberg. Calculations are based on Glenview’s projections, which may not prove to be accurate or correct. Please refer to pages 46-48 for important disclosures regarding the use of highlighted securities and the use of forward looking statements, opinions and projections in this presentation. In addition, certain statements contained herein are based on Glenview’s research, analysis, opinions and assumptions made by Glenview, which may not prove to be accurate or correct.
PAGE 32
OTHER OPTIONS & TARGET PRICE
Calculations are based on Glenview’s projections, which may not prove to be accurate or correct. Please refer to pages 46-48 for important disclosures regarding the use of highlighted securities and the use of forward looking statements, opinions and projections in this presentation.
Interest Rates
Duals
Medicaid Expansion
Interest rate increase of 280 bps based on the forward curve would worth $0.70 (+8%) to earnings power by 2018
CBO’s current schedule for Duals would be worth ~$0.60 (+7%) to earnings power by 2018
If all of WLP’s states were to expand Medicaid today, it would be worth up to $0.30 (+4%) to earnings power
2015E Multiple Target Price % Upside
Base Case ~$10 13-14x $125-134 24-33%
+ Cash EPS >$10 13-14x $131-142 30-40%
+ New PBM Deal ~$11 13-14x $139-150 38-49%
+ Debt/Cap of 45% >$11 13-14x $153-165 52-63%
+ All 3 of the Above >$13 13-14x $179-193 78-91%
CASE STUDY
FEEDING 9 BILLION PEOPLE
1 in 7 people today do not have access to sufficient protein and energy in their diet, and even more suffer from malnourishment1
The Inescapable Facts:
Between population growth and per capita consumption trends, food demand will nearly double by 20502
Arable land is a finite resource
1 State of Food Insecurity in the World, Food and Agricultural Organization of the United Nations. 2 “Food Security: The Challenge of Feeding Nine Billion People,” Godfray, H.C. et al., Science 327, 812-818 (2000). 3 Food and Agricultural Organization of the United Nations. 4 Tilman et al. “Global Food and the Sustainable intensification of agriculture” Proc. Natl. Acad. Sci. USA. 108 (2011). Calculations are based on Glenview’s projections, which may not prove to be accurate or correct. Please refer to pages 46-48 for important disclosures regarding the use of highlighted securities and the use of forward looking statements, opinions and projections in this presentation.
1
2
3
2009 20505,000
7,500
10,000
12,500
15,000
5,000
7,500
10,000
12,500
15,000
Global Population & Food Consumption3,4
Arable Land
1.4 BHectares
Global Population
(B)
Global Food Consumption
(M kcalper day)
~1.5 BHectares
60%–100% Growth in Calories is Needed
6.8 B
9.5 B
Low estimate
High estimate
Population
Population
PAGE 34
HOW TO FEED THE WORLD…WITHOUT DESTROYING IT
GMO seeds are the world’s best option for sustainably meeting demand
Food Inflation
Environmental Impact
Structural Limit
High grain prices need for ROIC
Comes from deforestation Stresses water supply
Can help with efficiency But, cap. intensive w/ quest. ROIC
Government restrictions Infrastructure lacking
Saturation in developed world Credit limits in emerging markets
Limits on application rates
Small % of farmer costs Seed prices increase with yields
Studies say no negative impact Lower usage of toxic chemicals
Drought-tolerance reduces H20 req.
Quick adopt. when gov’t not in way No capital or credit limitations
Increase Arable LandOption #1
Capital EquipmentOption #2
Fertilizer & ChemicalsOption #3
GMO SeedsOption #4
Toxic
Issues
Positive impact on yield But, incr. costs at extreme prices
Increased fuel and emissions
PAGE 35
Please refer to pages 46-48 for important disclosures regarding the use of highlighted securities and the use of forward looking statements, opinions and projections in this presentation.
PAGE 36
SEPARATING FACT FROM FICTION
“GMOs are meddling with Mother Nature”
Fiction
“GMOs are unsafe”
“Seed manufacturers benefit at the expense of farmers and society”
Fact
Around 8500 BC people started breeding the desirable traits of wild plants into their crops to increase yields… it’s called farming
“The WHO, the AMA, the U.S. National Academy of Sciences, the British Royal Society, and every other respected organization that has examined the evidence has come to the same conclusion: consuming foods containing ingredients derived from GM crops is no riskier than consuming the same foods containing ingredients from crop plants modified by conventional plant improvement techniques.”
- American Association for the Advancement of Science, October 2012
MON earns a 25% incentive fee Revenues go up proportional to higher yields their products create
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 1325
40
55
70
85
100
115
130
Pre-MON Income
Higher Seed Price
Yield Benefit and Cost Saves
Post-MON Income
Yield & Insecticide Use
(Indexed,1996 = 100)
Value to the FarmerU.S. Corn & Soy Since the Launch of GMO
1 Yield data per USDA. 2 Benbrook: Impacts of genetically engineered crops on pesticide use in the U.S. – the first sixteen years. Environmental Sciences Europe 2012 24:24. Calculations are based on Glenview’s projections, which may not prove to be accurate or correct. Please refer to pages 46-48 for important disclosures regarding the use of highlighted securities and the use of forward looking statements, opinions and projections in this presentation.
72% decrease in insecticide usage²
23% increase in yields¹
PAGE 37
MONSANTO: ALL THE TRAITS OF A GREAT INVESTMENT
Data sourced from company reports. Debt is pro forma for $1.0B of debt issued subsequent to FY2013 related to acquisition of Climate Corporation. Calculations based on Glenview’s projections , which may not prove to be accurate or correct. Please refer to pages 46-48 for important disclosures regarding the use of highlighted securities and the use of forward looking statements, opinions and projections in this presentation.
P/E CY 2014E CY 2015EWith current capitalization 19x 15x
Pro forma at 2.5x Debt/EBITDA 17x 12x
Symbol MON
Share Price $112.00
Shares Out 533M
Market Cap $59.7B
Cash $3.8B
Debt $3.2B
EV $59.0B
Net Debt/EBITDA (0.1x)
“Dry Powder”
% of Market Cap
$15.8B
27%
Seed & Trait Manufacturer
CAGR 13-17
Revenue Growth 9%
EBIT Growth 21%
EPS Growth 24%
2014E 2015E
EPS ~$6 ~$7
P/E 19x 15x
Financials
1. Great Business Seeds and Traits (80% of profit) Defensive, recurring, acyclical
2. Attractive Core Waterfall Revenues 7% GP 8% EBIT 12% EPS 15%
3. Numerous Upside Levers Near-term: COGS, LatAm Soy Medium-term: Greater Yield, New Traits, DD Pricing Long-term: Precision Farming
4. Massively Overcapitalized 27% to 56% dry powder
5. Cheap and Getting Cheaper
6. Enhanced Focus on Shareholder Value
High recurring revenue 70% seed and traits is non-discretionary
Dominant share and presence
Subject to weather not economic cycles
NOT TO SOUND DEFENSIVE, BUT ITS GROWTH IS ORGANIC
Monsanto’s franchise and defensive characteristics are on par with the best 'large moat' businesses:
Cell Towers Pharmaceutical Services Online Search, Shopping & Travel
Massive barriers to entry: Seed shares are perpetual local monopolies based
upon historical use Each year of efficient breeding grows yields by 3% Without a time machine, uncatchable lead Traits are progressively stacked and again winners
create winners – seed industry must license MON traits
Taken together, this creates attractive and defensive organic core growth
MON Share
Seeds Traits
US Soy 28% 100%
US Corn 38% 90%
Revenues
7%GP
8%EBIT
12%EPS
15%
PAGE 38
Data is sourced from company materials. Calculations based on Glenview’s projections, which may not prove to be accurate or correct. Please refer to pages 46-48 for important disclosure regarding the use of highlighted securities and the use of forward looking statements, opinions and projections in this presentation.
STACKING GROWTH ON GROWTH
PAGE 39
0%
5%
10%
15%
20%
25%
MON EPS Growth1
2009 2010 2011 2012 2013$1,400
$1,800
$2,200
$2,600
$3,000
Extraordinary COGS
Several natural disasters have led to a buildup of extraordinary costs which should unwind in coming years
$1,507
$1,796
$1,941
$2,225
$2,668
Extra Costs
10% to 20% of
EPS
COGS Relief
South America 120M acres $0 revenue today
North America 80M acres $1.7B Revenue
today (11% of total)
LatAm Soy with $1.75 of EPS by 2017
LatAm Soy Launch Accelerating YieldsCorn Demand Will Nearly
Double…Acres Will Not
2
4
6
8
10
0.0
0.4
0.8
1.2
1.6
2.0
Corn Demand
Bushels Harvested
(B)
Hectares Planted
(B)
Yields must grow 75% by 2030 to feed the world 2% yield CAGR must accelerate to 3%
Year
100%
140%
180%
220%
260%
MON Provides the Solution
Future: 3% Yield = 9% MON Pricing = 15% EPS CAGR
Indexed to 2003
MON Price8% CAGR
Corn Yields2% CAGR
Increase in MON Price
($/Acre)
Increase in Yield
(bu/Acre)
Value to the farmer @
$4.50 CornROI to the
farmer
$10 8 bu $36 260%
U.S. Drought Resistant Corn (launched 2013)
South American Corn Trade-up (launched 2012)
Brazil: Singles to Doubles Argentina: Doubles to Triples
New Traits
DD paying more for MON traits To protect margin, they need to
raise price Ironically, this also helps MON
soy seed pricing 1-2% pricing uplift
DuPont price increases in Soy create competitive halo
Data sourced from company materials and Glenview’s projections, which may not prove to be accurate or correct. This example has been selected to illustrate Glenview’s investment approach and/or market outlook and is not intended to represent the Funds’ performance or be an indicator for how the Funds have performed or may perform in the future. This example has been selected solely for this purpose and has not been selected on the basis of performance or any performance-related criteria. In addition, certain statements contained herein are based on Glenview’s research, analysis, opinions and assumptions made by Glenview, which may not prove to be accurate or correct. Please refer to pages 46-48 for important disclosures regarding the use of highlighted securities and the use of forward looking statements, opinions and projections in this presentation.
¹ EPS growth based on Glenview’s projections through end of Fiscal Year 2017; assumes midpoint of management “price/mix” guidance, reversal of extraordinary corn seed COGS, contribution from Intacta rollout and management guided South America corn trait trade up.
Net Cash
HEY BATTER BATTER, SWING, BATTER!
PAGE 40
Data sourced from company materials and Bloomberg. Calculations based on Glenview’s projections, which may not prove to be accurate or correct. Please refer to pages 46-48 for important disclosure regarding the use of highlighted securities and the use of forward looking statements, opinions and projections in this presentation.
(0.1x)
1.0x
LBO
4.0x
2.5xPeers
Quality Chemicals
If We Were King For a Day
201414%
201737%
201427%
201755%
201439%
201772%
MON Valuation
CY 2014 CY 2015
Base 19x 15x
1.0x Leverage 18x 14x
2.5x Leverage 17x 12x
4.0x Leverage 16x 11x
As a defensive monopoly with multiple upside levers, Monsanto is suboptimally hoarding capital and value is trapped
Dry Powder
Dry Powder
Dry Powder
You are here
ENHANCED FOCUS ON SHAREHOLDER VALUE
Over the past nine months Management and the Board have taken small steps towards convergence:
If Monsanto utilizes their dry powder well in addition to executing on the myriad of growth opportunities, we expect that shareholder value will grow
“Based on our analysis and with feedback we've gotten from many of our owners, we are now moving to use the cash over and above our current levels to further prioritize our share buyback and dividend programs.
The best example of that more aggressive approach is the recent authorization by our board of a new $2 billion three-year buyback program.
Practically, this is the first time in our company's history where we've doubled the size of our buyback program. Our current program was approved in June of last year. So between what we spend for Q3, additional spending in the first month of Q4 and our expected program for the remainder of the quarter, we have accelerated the current buyback program.”
– Pierre Courduroux, CFO
1. ~$450M repurchase per quarter
2. $2B repurchase authorization
3. Discussion of enhanced dividends
FY13A FY17E - Base FY17E - Accelerants FY17E - Balance Sheet Deployed$2.00
$7.00
$12.00
$17.00
$4.56Base Growth Base Base
LatAm Soy LatAm SoyCOGS
COGS
New Traits New Traits
Maintain 2.5x Net Leverage
~$15
~$11
~$8
~24% CAGR
~15% CAGR
~35% CAGR
PAGE 41
This chart includes the following assumptions, projections, forward looking statements and opinions: 15% Base EPS growth assumes ~9% revenue, ~13% EBIT and 15% EPS growth. Assumes MON reaches 2.5x Net Debt / EBITDA during FY2014E and maintains that leverage. All free cash flow after dividends and proceeds from increased debt used to repurchase. Assumes 15% stock price appreciation per year. Calculations are based on Glenview’s projections, which may not prove to be accurate or correct. Please refer to pages 46-48 for important disclosures regarding the use of highlighted securities and the use of forward looking statements, opinions and projections in this presentation.
This example has been selected to illustrate Glenview’s investment approach and/or market outlook and is not intended to represent the Funds’ performance or be an indicator for how the Funds have performed or may perform in the future. This example has been selected solely for this purpose and has not been selected on the basis of performance or any performance-related criteria. In addition, certain statements contained herein are based on Glenview’s research, analysis, opinions and assumptions made by Glenview, which may not prove to be accurate or correct.
Aug 2017 EPS P/E Range Target Price 2-Year % Return
Base Case ~$8 17x-20x $136-$160 21%-43%
+ Accelerants: LatAm Soy, COGS relief, New Traits ~$11 17x-20x $187-$220 67%-96%
+ Net Leverage at 2.5x ~$15 17x-20x $255-$300 128%-168%
VALUATION
PAGE 42
Calculations are based on Glenview’s projections, which may not prove to be accurate or correct. Please refer to pages 46-48 for important disclosures regarding the use of highlighted securities and the use of forward looking statements, opinions and projections in this presentation.
Historically, Monsanto has traded at 20-22x forward earnings per share. Using a more conservative 17-20x multiple on FY17 earnings yields two year price appreciation in the range of 21% to as high as 168%, assuming capital deployment at 2.5x leverage.
Importantly, these targets give no value to Monsanto’s investment in Precision Farming, as there is no positive earnings contribution assumed in the near-term
PLANTING A SEED FOR AN ADDITIONAL $24 OF EPS IN 10 YEARS1
1. MON has been investing in & developing "Integrated Farming Systems" or Precision Farming This is analogous to personalized medicine Using informatics and data to develop optimal solutions by farm
FieldScripts (internally developed product) Timing: rolling out commercially for first time this year onto “hundreds of thousands of acres” Pricing: $10 per acre Value to farmer: gives farmers 5-10 bushels per acre (~$30 of value to farmer)
Climate Corporation (acquired October 2013 for $930M)
At 85% incremental margins, this equates to $24 in EPS on current shares, achievable over the coming decade
2. Monsanto currently has 2 platforms
3. At its investor day in November 2013, MON estimated that these two platforms together can reach 1 billion acres at $20 per acre
PAGE 43
Data sourced from company materials. Please refer to pages 46-48 for important disclosure regarding the use of highlighted securities and the use of forward looking statements, opinions and projections in this presentation.
1 This calculation is based on Glenview’s research, analysis, projections and opinions, which may not prove to be accurate or correct. Please refer to pages 46-48 for important disclosure regarding the use of forward looking statements, opinions and projections in this presentation. Securities highlighted in this slide have been selected to illustrate Glenview’s investment approach and/or market outlook and are not intended to represent the Funds’ performance or be an indicator for how the Funds have performed or may perform in the future. This example has been selected solely for this purpose and has not been selected on the basis of performance or any performance-related criteria. The securities discussed herein do not represent an entire portfolio and in the aggregate may only represent a small percentage of a Fund’s holdings.
WE LIKE THE AND BUSINESS
PAGE 44
Often times capital allocation choices are presented as mutually exclusive “OR” choices
Will I invest in the business for the long-term? Will we pursue short-term value through share buybacks?OR
We prefer the AND business
Monsanto can:
1. Continue to have strong business
2. Invest >$1.7B annually in R&D
3. Invest $300 million annually in technology acquisitions
4. Increase leverage to 2.5x net Debt/EBITDA to drive per share value
5. Have $8B available for opportunistic acquisitions
6. Retain a strong, investment grade credit rating
7. Pursue and invest in Precision Farming
If Monsanto wishes to accelerate investment in Precision Farming, they may also:
1. IPO <20% of this segment to raise cash for accelerated investment and development
2. Allow growth investors to capitalize this segment on earnings potential while earnings-based investors may see the separated value of core Monsanto
AND
AND
AND
AND
AND
AND
Calculations are based on Glenview’s projections, which may not prove to be accurate or correct. Please refer to pages 46-48 for important disclosures regarding the use of highlighted securities and the use of forward looking statements, opinions and projections in this presentation.
J. CRAMER
4J. GUNDLACH
4R. PZENA
4M. JULIS
5B. MILLER
5C. ICAHN
6M. PRICE
6
DOUG HIRSCH
19DAN NIR
19EVAN SOHN
19
FROM MANAGED CARE TO MANAGERS THAT CARE…
S. ZELL
3J. DINAN
3S. EISMAN
3J. GRANT
3S. MANDEL
3D. SINGH
3
L. ROBBINS
7
J. GREENBLATT
7
E. FRIEDMAN
7J. CHANOS
7
B. ACKMAN
9D. EINHORN
11
PAGE 45
Glenview Capital is proud to be part of a team of hedge fund managers who have and will continue to support the critical work of the Sohn Foundation
PAGE 46
We Applaud the Men and Women Who Make the Work of the Foundation Possible
“The name on the front is a hell of a lot more important than the one on the back!”
– Herb Brooks, Miracle
THANK YOU
IMPORTANT ADDITIONAL DISCLOSURES
This presentation does not constitute an offer to sell nor the solicitation of an offer to buy any interest in any investment fund (each, a “Fund” or together the “Funds”) managed by Glenview Capital Management, LLC ("Glenview"). Such offer or solicitation may only be made by delivery of offering documents containing a description of the material terms of any investment, including risk factors and conflicts of interest. Any such offering will be made on a private placement basis to a limited number of eligible investors. You should conduct your own investigation and analysis of Glenview and the Funds. Anyone considering an investment in the Funds should review carefully and completely the applicable Fund’s Offering Documents, including the Offering Memorandum of such Fund, the applicable subscription documents, the applicable Governing Documents and Glenview’s Form ADV Part 2, in their entirety and ask questions of representatives of the Funds before investing.
Benchmark Comparisons
Information about indices is provided to allow for comparisons to that of certain well known and widely recognized indices. Such information is included solely ‐ ‐for the purpose of showing comparisons and general trends, as displayed in the relevant charts.
Definitions for indices used in this presentation are included below:
S&P 500 Index
The Standard and Poor’s 500 Index (the “S&P 500 Index”) is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries. The S&P 500 Index was developed with a base level of 10 for the 1940-43 base period. Returns shown in this presentation for the S&P 500 Index reflect total returns, which captures the changes in the prices of the index components and which accounts for dividend reinvestment.
S&P 500 Internet Retail Index
The Standard and Poor’s 500 Internet Retail Index is a capitalization-weighted index of 500 stocks. The index was developed with a base level of 10 for the 1941-1943 base period. The parent index is the S&P 500 Index. This is a GICS Level 4 Sub-Industry group.
PAGE 46
IMPORTANT ADDITIONAL DISCLOSURES
Past performance is not indicative nor a guarantee of future results. There can be no assurance that any Fund will achieve comparable results in the future or that it will be able to avoid losses. There can be no assurance that Glenview will be able to implement its investment strategy or investment approach to receive comparable results. Additionally, Glenview may not be able to dispose of its investments on the terms or at the time it wishes to do so.
Highlighted Securities
Securities highlighted or discussed in this presentation have been selected to illustrate Glenview’s investment approach and/or market outlook and are not intended to represent the Funds’ performance or be an indicator for how the Funds have performed or may perform in the future. The securities discussed herein do not represent an entire portfolio and in the aggregate may only represent a small percentage of a Fund’s holdings. Each security discussed in this presentation has been selected solely for this purpose and has not been selected on the basis of performance or any performance-related criteria. The portfolios of the Funds are actively managed and securities discussed in this presentation may or may not be held in such portfolios at any given time. Nothing in this presentation shall constitute a recommendation or endorsement to buy or sell any security or other financial instrument referenced in this presentation. In addition, certain statements contained herein are based on Glenview’s research, analysis, forward looking statements, opinions, projections and assumptions made by Glenview.
Forward Looking Statements, Opinions and Projections
This presentation contains certain “forward looking statements”, opinions and projections that are based on the assumptions and judgments of Glenview and the Funds with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of Glenview or the Funds. Because of the significant uncertainties inherent in these assumptions and judgments, you should not place undue reliance on these forward looking statements, nor should you regard the inclusion of these statements as a representation by Glenview or that the Funds will achieve and strategy, objectives or other plans. All forward looking statements and projections are made as of the date of this document. The opinions expressed herein are current opinions as of the date appearing in this material only. There is no obligation to update these forward looking statements, projections and/or opinions to reflect events or circumstances after the date hereof, nor is there any assurance that the policies, strategies or approaches discussed herein will not change. For the avoidance of doubt, any such forward looking statements, opinions, assumptions and/or judgments made by Glenview and the Funds may not prove to be accurate or correct.
PAGE 47
IMPORTANT ADDITIONAL DISCLOSURES
Information Obtained From Third-Party Sources
Certain economic and market information contained herein has been obtained from published sources prepared by other parties, which in certain cases has not been updated through the date of the distribution of these materials. While such sources are believed to be reliable for the purposes used herein, Glenview does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein.
Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Glenview considers to be reasonable.
IRS Circular 230 Notice
To ensure compliance with Internal Revenue Service Circular 230, each prospective investor is hereby notified that: (a) any discussion of United States federal tax issues in this presentation is not intended or written by any of the foregoing to be relied upon, and cannot be relied upon by prospective investors, for the purpose of avoiding penalties that may be imposed on investors under the internal revenue code; (b) such discussion is written in connection with the promotion or marketing of the transactions or matters addressed herein; and (c) each prospective investor should seek advice based on its particular circumstances from an independent tax advisor.
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