Sequoia Fund Investor Day: Full Transcript

Ruane, Cunniff & Goldfarb Investor Day St. Regis Hotel, New York City – May 16, 2014

Calhoun, Georgia — it must have been ten years ago  — Jeff had a list of maybe six or seven companies that he thought were viable acquisition candidates. And they were all in the United States and they were all relatively small.

If we fast forward, we find out that Jeff kind of grew up with the business as he was building it. When he bought Unilin, which was after we had taken a position in the company, you began to sense the possibilities outside the US. That changed the calculus for the potential growth of the business. When we first took our position, we were thinking — at least I was thinking — of Mohawk mainly as a domestic business in the US, with limited growth potential tied very much to the US housing market. Now the biggest piece of the business still is tied to the US housing market and the remodeling market. But Jeff has found a way to deploy the capital that the business produces in very interesting ways.

Now, he has not batted a thousand, but as was mentioned before, he found potential with Marazzi and has a meaningful investment position in Russia, where the market is growing very fast and where he is making a lot of money. He has investments in Australia, a joint venture in Brazil. Jeff inherited a company that made just carpet, which he recognized was a slowly declining business. And so he has expanded into different modes of floor covering. Mohawk is still a very much a carpet company, but Jeff has also made it the largest ceramic tile manufacturer in the world, and ceramic tile accounts for more floor covering than any other kind. Mohawk is also a leader in laminate flooring and will soon be manufacturing luxury vinyl tile, a new and fast-growing floor covering. So rather than thinking of Mohawk as a US carpet business, we really have to think about it as a global floor covering company. Mohawk now stands very well to benefit from a resurgence in remodeling spending and residential and commercial construction here and all around the world. Jeff really has turned Mohawk into something that certainly I did not expect.

As for a recovery in the US, we are … somebody mentioned regulators before … hearing some noise that the requirements for home mortgages may get a little looser and more favorable for first-time home buyers. If we get a little more employment, that would be a positive in the US. So what used to be a US business where we were counting on share buybacks and growth with the US housing and remodeling, is fundamentally a different animal now. I think, looking ahead, it will do okay.

Bob Goldfarb:

In some ways, the question about Mohawk really goes back to what was asked before from theEconomist article about whether Berkshire should be broken up. One of the disadvantages of a huge conglomerate like Berkshire is that Warren is not thinking all the time about flooring acquisitions in Italy or selling into the Russian market. Jeff Lorberbaum at Mohawk, all he is thinking about is flooring. I do not know who is running Shaw for Warren, and that person might be thinking about acquisitions. But he has got to run them by Warren. He has got to get Warren’s approval. There is an advantage in focus that you have when you are only in one business and that Berkshire, with its 72 businesses, may lose. It is true that a number of those 72 businesses have done acquisitions, but it is easier for Mohawk to acquire companies than for Shaw. Jeff’s acquisition of Unilin did not turn out to be that good a deal because of the subsequent decline in housing and the timing of the acquisition.

Question:

I know it is early in the season, but do you have any sense of what distributions might be like for this year?

David Poppe:

We expect to distribute about $2.50 per share in June. In addition, we will pay about $1.58 per share in November if there are no additional gains and losses on sales of securities through October 31^st.

Bob Goldfarb:

On that we’ll end the meeting. We thank you all for attending.

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