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00:00Look, it's been about two and a half months since your last position with FlowServe.
00:04What's it been like since any new campaigns, any new positions you have?
00:07You know, the market has been really interesting this year.
00:11It's been more of a stock picker's market.
00:13I think you see it the last couple days.
00:16We've had stocks that have been moving on earnings both directions.
00:19So it makes it a great time for a value investor to be able to come in and buy
00:25positions at opportunistic prices and get involved and see if we can make a difference
00:29and improve those businesses and create value.
00:31So honestly, this has been a lot of fun this year.
00:34So where have you found that value now?
00:36What's been an opportunity for you to jump into?
00:38We have a new name that I'd like to talk about today.
00:41Please.
00:42So we've been active in restaurants throughout our career.
00:46So I think we're most known for Darden restaurants, but there's been others,
00:51Papa John's, Bloomin', some other restaurant chains.
00:53And we're invested in another restaurant.
00:56So we're in Shake Shack, which we are very, very excited about.
01:00So how significant is your position?
01:04We're economically one of the larger shareholders, maybe the largest active shareholder.
01:08It's several hundred million dollars.
01:11And, you know, we're really excited.
01:13It's just too cheap.
01:14So this is an example of this year of a stock that's dislocating maybe more than it should.
01:20And in this instance, after the first quarter earnings, the stock came down from roughly 90 to 55, 60.
01:27And when you look at the quality of this business, how great a business it is, how much it's growing,
01:32how many new stores can open, it's just too cheap.
01:38So if you looked at a whole swath of restaurant companies and you kind of measured how fast are they
01:45growing compared to where their EBITDA multiple is,
01:48and you drew a line, you should be getting a relationship between growth and multiple.
01:54The faster growing one should have higher multiples, the slower ones lower multiples, just like any other industry.
02:00And Shake Shack just doesn't make sense.
02:03So we're able to own Shake Shack at roughly 10 times EBITDA, and the multiple should be twice that, given
02:11that it's growing mid-teens.
02:13And it's, you know, one of the fastest growers and, you know, high-quality, high-quality brand, high-quality restaurant.
02:20Well, to your point, you and the team at Starboard are legendary for what you've done.
02:24The restaurant space started in coming in, sweeping the board.
02:27I don't think anyone will ever forget your report on Olive Garden and lack of salting the pasta water.
02:33You mentioned Papa John's.
02:34And here you're making big operational changes for those restaurants.
02:37So you're an expert in this.
02:38So when you look at Shake Shack, are there operational changes that you think that they should be making and
02:44that you would push to make?
02:45Well, you know, this one is even more interesting and maybe slightly easier.
02:52So I don't think there are massive operational changes.
02:55It's actually run, well, look, Danny Meyer's legendary as the founder.
03:00And the CEO is Rob Lynch.
03:02And Rob was the CEO that we hired at Papa John's to run Papa John's when I was the chair
03:08of Papa John's.
03:09So I know Rob well.
03:10He's a terrific operator.
03:12Shake Shack is running really, really well.
03:14And, in fact, he's done a great job of lowering the cost to build a new Shake Shack.
03:21And the importance of that is then the returns on new restaurants go up.
03:25So if you can have among the best returns on a new restaurant build, it makes it easier to justify
03:31building more and more restaurants, whether you do it yourself or you have a franchisee do it.
03:37So the opportunity here isn't so much operationally.
03:41We think they do a great job there.
03:43The opportunity is to continue their mid-teens growth and accelerate it even further.
03:48They have about 400 restaurants, owned restaurants in the U.S.
03:54They have a target of 1,500.
03:56We actually think it could be 2,500.
03:58But they have a target of 1,500.
03:59But they've limited themselves into doing, in the U.S., only owned restaurants.
04:06And they haven't been willing to franchise, even though they franchise internationally.
04:11And they franchise actually nontraditionally in airports and in stadiums.
04:16But in the U.S., they've chosen, from way back when, that they want to own the economics and they
04:21want to control the outcome.
04:23But they've proven that they can have independent operators operate their restaurants by doing it internationally and in nontraditional areas.
04:29So we would like them to layer on franchising in the U.S. in addition to growing their own stores.
04:37And if they do that, we think it can make a material difference in their growth rate.
04:41And they can get to their 1,500-store target in seven years instead of 12 years, if you model
04:47it out.
04:47A big, big difference, which creates a lot of value.
04:50Again, modeling growth rate and multiple, we think they're valued at half of where they should be.
04:57But if you can move the growth rate even higher, then you get even more opportunity.
05:01Right, and some of their peers, and I'm assuming ones that are, to your point, trading at a higher multiple
05:05than Shake Shack is, the franchise model is well-tested.
05:09Why do you think Shake Shack hasn't already gone there?
05:12And do you think it's something that they're a little bit resistant to?
05:15Or do you think that it's something that they'll easily take on board?
05:19I think it's a good discussion.
05:21So they aren't resistant to it because, again, they've done it internationally.
05:25I think if you were to go back historically, based on the conversations I've had with them, early on, they
05:31had a discussion about whether they should grow through franchising or they should own their own restaurants.
05:36And they decided very, very early on that they wanted to own the restaurants to control the quality.
05:40This is a high-quality brand.
05:43They cook everything to order.
05:44It's real food.
05:45This is a good quality business.
05:48And they wanted to control that image, and they wanted to control the quality.
05:51Great decision.
05:52They've done an amazing job with that.
05:54Terrific decision.
05:55Fast forward to where we are now.
05:57We've proven that we can build 400 restaurants.
06:01They're actually growing the number of restaurants they can build by themselves.
06:03They're doing 65 this year.
06:05Last year they did 40-something.
06:07And they've proven that independent operators actually can cook their food to their standards internationally as well as in nontraditional
06:15restaurants.
06:16So they've already done that.
06:17As a result of why they're not willing to do that in the U.S. as of yet, I think
06:22it's just a matter of time.
06:23I think it's a good conversation to have.
06:26I think they just need to figure out how to be able to do both.
06:28Take the areas that you want to densify and you want to own, and let's own those.
06:33And the areas you weren't going to get to on your roadmap for 4, 5, 6, 7, 8, 9 years,
06:39let's just do that at the same time.
06:42Let's bring in quality franchisees and have them attack those markets that you weren't going to get to for 7,
06:478 years anyway.
06:48And let's get those started sooner so we can improve the growth rate.
06:52And if you just run the math, it's a higher NPV.
06:55It's a higher return for shareholders.
06:57So it's a good discussion.
06:58Some of your other stakes.
07:00Again, you know this industry very well.
07:01Lamb Weston was a recent one which makes fries for McDonald's and maybe soon J-Jack if they're not already.
07:07How have conversations been going there?
07:09You've talked about them reducing costs, drive growth beyond just raising prices.
07:14Have things been productive since taking your activist campaign with them?
07:18Yeah, Lamb Weston, French fries.
07:20I didn't mean to talk about both of those today, but yes, they are related.
07:24Lamb Weston, we believe, does supply some to Shake Shack.
07:29They're not a sole supplier.
07:32And, you know, the premier or one of the premier French fry companies.
07:38It's a business that has a moat around it.
07:42But there's only so many players that can make French fries.
07:44So it's a beautiful thing.
07:46When we made our investment, they had come on some harder times where they had expanded too quickly and they
07:51had had some supply issues.
07:54And they were kind of in the penalty box.
07:56And what's happened since then is we've gotten involved and they've elevated their CEO.
08:01They brought on a new exec chair who we're really excited about.
08:05And they've been executing better.
08:06So the stock's performed a little bit better.
08:08They've gotten their volumes back.
08:09They're starting to raise their price.
08:12Earnings have stabilized.
08:13And we've had conversations with them just recently about how we have to improve the earnings growth trajectory to be
08:20able to get sustainable earnings growth out of the business.
08:23But we're super excited about what's ahead for Lamb Weston.
08:27And the relationship has been terrific.
08:28So you sound confident that things are moving in the right direction.
08:31Would you say the same with CarMax?
08:33They've also made board changes after your involvement too.
08:35Yeah, CarMax, I think we talked a lot about CarMax last time.
08:39So we need an update for everyone watching.
08:41CarMax is a lot of fun.
08:43We were able to buy into CarMax, I think I said the last time I was here, near book value,
08:47which didn't make any sense to me.
08:48And in hindsight, that seems like it made sense because the stock has worked.
08:53And a really cheap multiple of earnings and cash flow.
08:58What they needed to do is to be able to get their share back and be able to do that
09:02by getting their price to consumers down while being able to hold their gross profit.
09:08And they were running their business kind of backwards before, where they were running it based on gross profit.
09:14So the way they were running it before was they would buy cars, they would spend the money to refurbish
09:18them, and then they would add, call it $2,000 on top of the cost and sell the car there.
09:24Problem was they were inefficient on buying and they were inefficient on refurbishment, which meant that when you added $2
09:29,000 to the price of that car, their market price was too high.
09:34So how do you get that market price down to the right level so that you can get your share
09:38back and gain share, but keep your margin?
09:41And the way you do that is you have to get more efficient in buying cars and in refurbishing cars.
09:45They brought in a great new CEO, Keith Barr, who's honestly been getting up to speed way faster than I
09:52would have expected, and we're pretty excited about it.
09:54They brought on some new board members, including some that we recommended.
09:58And they are starting to hit their stride.
10:01We're very, very excited about what's happening.
10:03Some of the data we've been looking at looks really good.
10:09I think they should be able to gain momentum.
10:11I still don't understand why their omni-channel business shouldn't be better than Carvana's omni-channel business because they have
10:18all these lots in addition to being able to buy and sell cars digitally.
10:23And when I think about a used car, I would think if I were a consumer, I would think that
10:27if I wanted to buy a car, I might want to see it.
10:29I might want to touch it.
10:30I might want to smell it.
10:31So having that optionality that you don't really have to pay for because the stock is so cheap makes it
10:37a great investment.
10:38Again, this is the common theme between all of these.
10:40And this is kind of where we started, Jeff, that a lot of these opportunities have been really cheap.
10:45But it's also not just a market where things are discounted.
10:47It's a market that is really volatile.
10:49And we've seen huge swings in this market, too, whether it be because they report earnings or whether because Jeff
10:55Smith announces a new position.
10:57How does that change your investment thesis where things aren't just cheap, but they're jumping around a lot?
11:02Love it.
11:03Love it.
11:04Stay disciplined.
11:05It's what we do as value investors plus a catalyst as an activist.
11:10This is what we want.
11:11We want stock-specific volatility.
11:13And what we will do is when it gets really opportunistic, we're going to buy it.
11:18And if it gets even more opportunistic, we're going to buy more of it.
11:20And then we'll start making a case for change to be a catalyst.
11:24And then as the stock moves higher, we're going to continue to evaluate how it's valued versus their peers and
11:30their potential and what can happen.
11:31Where's the earnings power?
11:32Where are we going?
11:33And then, you know, just like any other good investor, you might sell some, you might buy some again.
11:38But that volatility, if you can capture it and remain disciplined, is a great thing for an activist, for an
11:44active investor and an activist investor.
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