2015Q1 Pershing Square Holdings, Ltd., Q1 2015 Earnings Call, May 18, 2015

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CONTENTS

CALL PARTICIPANTS 2

PRESENTATION 3

QUESTION AND ANSWER 13

Pershing Square Holdings, Ltd. ENXTAM:PSH

FQ1 2015 Earnings Call TranscriptsMonday, May 18, 2015 3:00 PM GMT....................................................................................................................................................................

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PERSHING SQUARE HOLDINGS, LTD. FQ1 2015 EARNINGS CALL MAY 18, 2015

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Call Participants....................................................................................................................................................................EXECUTIVES

David Klafter

Jordan Rubin

Paul C. HilalPartner

Ryan Israel

Unknown Executive

William Albert AckmanChief Executive Officer andPortfolio Manager

William F. Doyle



Presentation....................................................................................................................................................................

William Albert AckmanChief Executive Officer and Portfolio Manager

Okay. The purpose of the call is really to update you on the portfolio in terms of portfolio events and giveyou an opportunity to ask questions. We will not be able to take questions with respect to Pershing SquareHoldings because this is a call that's open for U.S. investors as well.

Briefly on performance. First quarter, the funds were up between 3.4% and 3.5%. Month to date, monthto date, why is that a relevant number, Tony [ph]? You're confusing me. Year-to-date, about 6% to 6.3%.That's through May 14. Our portfolio today is largely fully invested. The biggest contributors for Q1 wereAllergan, 3.9%; Howard Hughes at 150 basis points; Zoetis, 80 basis points; Air Products, 70 basis points;Platform at 60 basis points, for a total of 150 basis points of gross performance, positive performance,offset by about 350 basis points of losses. The majority of that came from a short position in Actavis,which was a hedge against the Actavis shares we were to receive -- or some of the Actavis shares we wereto receive in the Allergan merger; 140 basis points from the appreciation of Herbalife; and some nominalchanges in other positions. Today, we are approximately 87% long, about 5% or 6% short, net exposureabout 81%. That's actually as of the end of the quarter on March 31.

In terms of significant close positions, we exited our position in Allergan and covered our short positionin Actavis with Actavis shares that we received when the merger between Valeant and Actavis closed. Weoriginally intended to hold about 1.35 million shares of Allergan, but the uncovering of a new investmentand the requirement for additional capital, we exited the rest of our Actavis position after the end of thequarter.

What I'm going to ask the team to do is go through the portfolio with a fairly brief summary of significantevents during the quarter. We have received a large number of questions from investors, and we're goingto spend a majority of the call answering those questions.

And with that, I'll turn it over to Jordan for an update on Valeant. Valeant, obviously, we spent last yearworking very closely with Valeant. We expected to become a very shareholder of Valeant by making a jointbid to acquire Allergan. That was cash and stock, and Pershing was going to take 100% cash, freeing upliquidity for other shareholders. Ultimately, Actavis bought the business, and we did not become a Valeantshareholder. But the moment that we were able to, we began building a stake shortly after the turn of theyear in Valeant and then used the liquidity behind the announcement of the Salix acquisitions to buy ourentire position at cost approximately 20% of capital.

With that, Jordan, why don't you tell us about Valeant.

Jordan Rubin

Sure. Thank you, Bill. So Valeant is an approximately $80 billion market cap specialty pharmaceuticalcompany with leadership in ophthalmology, dermatology and gastroenterology. We first built [ph] therelationship with Valeant, as Bill mentioned, in 2014 during the Allergan process.

Historically, Pershing Square is not investing pharmaceutical companies because in general, thesecompanies have products which are not durable and growth which is not predictable. With the opportunityin early 2014 signaled [ph] extensive diligence on Valeant as we were considering partnering with thecompany. It was during this diligence that we first realized that Valeant is very different than a traditionalpharmaceutical company. So for example, the majority of its products are durable. The company has atrack record of organic growth, and the company has a strong culture of cost discipline. In addition, welearned that the pharmaceutical industry is very fragmented and efficient and that Valeant has done agood job over time of using acquisitions as a tool to extend its unique operating model across additionalassets.

Unfortunately, however, as Bill mentioned, during the Allergan process, we were unable to acquire sharesin Valeant. However, following the conclusion of the Allergan process, we acquired shares in the company



earlier this year. And in February, we acquired our first shares of the company at approximately $161per share and bought the shares, of course, with the comments of our initial diligence. But in addition,we had the benefit of seeing the business since performance over the course of 2014 validate our initialthesis. So for example, we watched the company successfully complete the integration of Bausch + Lomb.We watched cash accounting adjustments decline significantly. We saw the company receive approvaland successfully launch several important products. And we saw organic revenue growth acceleratesignificantly.

In terms of recent events, as Bill mentioned, on April 1, the company completed or closed the $16 billiontransaction to acquire Salix. We're very excited about the transaction. We actually acquired the majorityof our shares following the announcement of the acquisition. Also, in April, the company reported firstquarter earnings where they reported among other items 15% organic revenue growth, marking thethird consecutive quarter of at least 15% organic growth, revenue growth. Also on the quarterly call,management reiterated their confidence in achieving at least $7.5 billion of EBITDA in 2016, whichtranslates into roughly $16 of earnings per share in that year.

In terms of valuation, our view is that investors today are paying something -- a modest discount to fairvalue for the Valeant-based business, which means they're getting Valeant's drug pipeline and the valueof all future acquisitions, which we call the company's Platform Value for free. For more information onhow we value the company's platform, please review a presentation that Bill gave earlier this month atIra Sohn. So today, we own about 20 million shares in the company or 5.7% of the business. We're thesecond-largest shareholder, and we look forward to working with management to continue to improve thevalue of the business.


Thanks. Paul, if you can just give us a brief update on CP. Obviously, it's well known to our investors.We've owned it for 4 years. Significant events going forward.


Sure. All right. Thank You, Bill. Fundamentally, during Q1, we saw continued progress on CanadianPacific's operational transformation. We saw a major strike that could have been crippling avoided. We sawvolume growth with pricing strength. We saw strong financial performance, and we heard the companyreiterate its 2015 guidance and its 2018 targets.

In terms of operational progress, train speeds this quarter were up 22%. Train lengths were up 8%,terminal dwell clients 14%, and fuel efficiency improved 5%. This is -- we're all very heartened by thisprogress, but perhaps the most important thing that happened in the quarter was the problem thatmanagement succeeded in avoiding, which was the potentially crippling strike of the train conductorsand engineers. The Teamsters union of conductors and engineers represent about 20% of CP's entireworkforce. And without those guys on the job, the railroad can't operate. Canadian Pacific, over thepast 3 years, has been preparing for expiration of this union contract and had trained a lot of nonunionemployees to operate the trains. Thus, when these employees went on strike, CP was able to operate andship a full 70% of its normal volume.

CP has generally excellent union relations. With every other union other than the Teamsters, CP hasrenewed its union contracts early. It's renewed them for unprecedented lengths of time, often 5 years.And the contracts, as negotiated with those unions, were voted in with approval rates from the unionmembers at levels that have never been seen before in the company's history. So generally, very solidunion relations. The Teamsters has been a trouble point, but the members of the union, in the context ofthe constructive deals, CP has negotiated with the other unions, and in the context of seeing how well CPwas prepared for a strike, ended the strike just 2 days after it began, sparing CP a huge disruption. Sosometimes the news is in the noise. Sometimes the news is in the silence. And in this case, it was in thesilence.



Despite the union disruption and other challenges, CP saw volumes grow 5% over the quarter in thecontext of strong pricing of up 4%. And combined with the operational progress, reducing costs, we sawimpressive financial performance from the company. Revenue was up 10% year-over-year. And despite thecompany moving 5% more freight than it did the prior year, it saw FX-adjusted operating expenses downa full 900 basis points. Combined, this translated into an operating ratio of just 63.2%. This is the lowestin the rail industry. It's the second consecutive quarter that CP has operated more efficiently than everyother railroad in North America. Very impressive considering they were by far the least efficient railroadjust 3 short years ago. On the bottom line, CP delivered an earnings per share of $2.26.

Management has reiterated its 2015 guidance of 78% revenue growth and a 62% operating ratio or betterand 25% EPS growth. They also reiterated their 2018 targets, which called for $10 billion of revenue in2018 and an operating ratio of between 58% and 63% -- 58% and 63%. If you run that through yourmodel, that gets to a $17 earnings per share number in 2018, and that's before the effective buybacks.As most of you know, CP is continuing its share repurchase program. CP repurchased about 6% of thecompany last year at CAD 199. This compares favorably with the average prices over the course of thatyear and today's $215 share price. We believe that CP is run -- like a number of our other companies, isrun by a superlative management team and at these prices presents an attractive risk-adjusted return.


Thank you, Paul. Brian [ph], update on Air Products.

Unknown Executive

Sure. So Air Products continues its transformation under its new CEO, Seifi Ghasemi. As a brief reminderfor the folks on the call, the company aims to improve its operating margins from about 15.5% to 22.5%,which is a 700 basis point improvement in operating margins. And half of this is expected to come fromSG&A and overhead and the other half from operational and productivity-related improvements.

Performance thus far under Seifi's brief tenure has been very impressive. During the first 3 quarters thatthe company has announced, results earnings per share are up in the mid-teens percentages, includingtheir fiscal Q2 numbers, which were just announced several weeks ago. During fiscal year second quarter,which ends in March, the company grew earnings per share 17% despite a 7% headwind from FX.Underlying improvements in the business were thus 24% year-over-year. And with an operating marginof 18.3%, margins are already at the highest level in decades in Seifi's first 9 months on the job. So, sofar, the performance has been fantastic. But notably, 60% of the EBIT improvement in the business overthe last 6 months has actually come from the company's noncore Performance Materials business, andwe think the vast majority of the $700 million of profit improvement potential from the company's coreindustrial gas business remains.

The company has already taken actions to reduce headcount by 1,100, most of which is coming out ofthe bloated corporate infrastructure at the company's Allentown headquarters, but much of these actionshave not yet fully flowed through to the P&L of the business given the notification that the company hasgiven employees and given the delays in actually executing on these headcount reductions in places likeEurope where the Works Councils require 6 to 9 months to work out severance and to actually terminateemployees that its positions will no longer be needed.

So importantly, the progress has been very good thus far, but a lot of the opportunity for improvementremains. The company reaffirmed its earnings per share guidance for the year, which calls for 10% to 13%earnings per share growth despite a 7% headwind. So at the higher end of its guidance, the company willhave shown underlying improvement in the business of 20%. And frankly, the benefits of its restructuringare just now starting to ramp into the P&L. So we believe the near-term and longer-term future for thecompany remains incredibly bright, and we're really excited about the transformation underway.




So Brian [ph], stock price took off a few points or more than a few points on the earnings announcement.Why did the market react negatively?

Unknown Executive

I think it could be a couple of things. I think -- Seifi produced extraordinary results in the first 2 quartersof his tenure, and there was an expectation that he would always sort of massively outperform theguidance that the company had put out. Obviously, during this quarter, the company faced someheadwinds that they hadn't previously been experiencing, including from foreign exchange, which hasreally sort of picked up in the last quarter as compared to the prior 2 quarters of Seifi's tenure. Butnotably, I'd say after the stock declined modestly on the earnings announcement, Seifi actually bought $3million of stock, taking his out-of-pocket purchases to date to $17 million in total. He remains confident,as we do, in the longer-term story year. The results for the quarter were good, I would say, but it didn'tblow out expectations. And perhaps short-term trading was taken place, hoping that Seifi would massivelyoutperform The Street's expectations.


Great. Thanks, Brian [ph]. So Bill, just a brief update on Zoetis. Obviously, Bill is on the board ofZoetis. Paul and I are on the board of CP. We obviously keep our remarks to just the publicly availableinformation. Go ahead, Bill.

William F. Doyle

Sure. So just to remind everyone, at $4.8 billion in revenue last year, Zoetis is the largest manufacturerof medicines for animals. That business is split about 60-40, 60% for livestock, 40% for the veterinarymarket for pets.

We like this business for a lot of reasons. First of all, strong underlying trends in the industry as populationgrows and protein consumption rises. The only way to create that protein is to put animals closer together,and that means they require more medicine. And secondly, as populations emerge into the middleclass, they buy more pets, which means more vets and more pet medication. Like Valeant, this is apharmaceutical business that is much more durable than a typical business. It's not particularly subject topatent cliffs. The products are very durable, and there's very little generic competition in the market.

We started acquiring our stake last summer, and we announced our position in November. We beganmeeting with management and working with them. And ultimately, as Bill mentioned, I joined the board atthe beginning of the year. And further, we work with management to add a second new independent boardmember. We announced that Paul Bisaro, the Executive Chairman of Actavis, joined in that role.

Importantly, in May 5, the company announced its Q1 results in another very strong quarter. Thecurrency-adjusted organic growth was 6%, and the adjusted net income growth was 14%. But perhapsmore importantly, the company also announced a new comprehensive initiative to simplify operations andimprove its cost structure.

This is sort of a natural evolution of the company. It was created as a spinout from Pfizer in 2013. For thefirst 2 years, management focused on building the infrastructure required to stand as a separate company.That effort is largely complete. And now they're very focused on making the sorts of changes that onewould expect now that they are stand-alone and can focus on their own operations.

So as part of that announcement, they will be eliminating about 40% of their SKUs. These are largely low-margin, low-velocity SKUs that have just built up in the business over time. They're going to sell or exit 10manufacturing sites around the world as they rationalize their manufacturing separate from Pfizer. They'regoing to change their go-to-market model in 30 smaller markets where they'll no longer support a directinfrastructure that might have made sense as part of Pfizer. But they'll go indirect or exit in these smallmarkets. They plan to streamline their workforce, principally non-customer-facing roles, by about 25% by2017. This simplification will also allow them to focus their R&D on the smaller, more profitable portfolio.



And the plan is projected to generate $300 million of cost savings by 2017. This, by the way, is on top ofabout another 200 basis points improvement that will come from previously announced manufacturinginitiatives. All of this will leave the company with exit margins that will grow from today's 25% toapproximately 34%, which will be the highest in the industry. So we're quite pleased with the progressboth in terms of the underlying performance of the business and management's initiatives to improve theefficiency of the operations.


Thank you, Bill. I'll just make a couple of brief comments on Howard Hughes. Howard Hughes is really nota quarterly earnings story business. The way we think about it company is really the progress, think aboutthe value as it relates to progress towards the redevelopment sale, leasing and/or refinancing of existingassets. And with respect to all of the above, the company made meaningful progress during the quarter.

In terms of things that are a little more quarterly sensitive, land sales, the company's operations in LasVegas were extremely strong. And I would say Houston was weaker than previous quarters because ofuncertainty about energy prices and implication for new office development in Houston. We own, I wouldsay, the best real estate in Houston. The Woodlands is the most desirable office market and one of themost desirable residential market as well. Exxon is just in the process of completing a several millionsquare foot campus within a very short distance of The Woodlands, which will be a big demand driver longterm.

The stock has been somewhat volatile based on energy prices. We do not think that energy prices have aparticularly meaningful effect on the overall intrinsic value of the company and certainly on the long-termbasis and not even materially on a short-term basis.

The company's made a lot of progress selling condominiums in Hawaii, 80% plus or minus sold in the 2 --first 2 towers. The company is just now opening a marketing office for a new tower designed by RichardMeier, kind of a globally recognized architect. This is an on the waterfront, right on the beach, kind ofhigh-end tower that will -- the company is going to start pre-marketing in the next very short period oftime.

Continue to have tremendous confidence in the team. They are starting to look at some new potentialinvestment opportunities beyond the existing portfolio. And we do think of Howard Hughes in many waysas a platform similar to how we discussed about Valeant, the company with a very talented team that hasthe capability to manage more assets than they currently do. And as they make progress with existingportfolio and generate cash with existing assets, we expect they will find other things to do with theircapital.

So Randy [ph], why don't you just update us on Restaurant Brands.

Unknown Executive

Sure. So Restaurant Brands is a leading quick-service restaurant around the globe, and we think it hasa wonderful fully franchised business model, the opportunity to meaningfully expand its unit count andrestaurants around the world. And it's backed by its controlling shareholder, 3G, which we think is one ofthe best in the business. After 3G acquired Burger King in 2010, they made numerous amounts of increasein the restaurant units as well as significantly decreasing operating costs. After doing that, last year, theyannounced the acquisition of Tim Hortons in August and completed that acquisition last December.

Tim Hortons is a leading quick-service restaurant in Canada with a particularly dominant brand and marketshare in coffee. We think that Tim Hortons has the opportunity to meaningfully expand its unit count from5,000 to something much greater than that in the future, particularly in the United States where it hasabout 1/10 of the number of restaurants as its closest competitor, Dunkin' Donuts. And for perspectiveinternationally, Tim Hortons outside of the U.S. and Canada only has about 100 stores, whereas, forexample, Burger King has 7,000. So we think there's a lot of opportunity that the company can improveupon in terms of its unit growth. In addition, we think that 3G can both improve the capital efficiency ofthe business as well as reducing overhead costs.



Just a few weeks ago, the company reported its first quarter 2015 results, which is actually the firstquarter that included the entirety of Tim Hortons for the quarter. The results were terrific on a lot of levels.Same-store sales growth were at record levels for several years. The company continued a strong net unitexpansion. And at the same time, cost discipline was very great. With Burger King, one thing to note isthat same-store sales growth is actually 7%, which is at the highest level they've had in many years andwe think demonstrates that Burger King is finally starting to close what have been quite a gap between itsnearest restaurant peers in the U.S. So we're excited about that.

In addition, the company also dramatically reduced operating costs at Tim Hortons headquarters.Operating costs were actually down 30% versus the prior year in just the first year of ownership, and 3Galso continue to reduce overhead costs at Burger King nearly 5 years after making that acquisitions. So wecontinue to be very impressed with the progress they're making both at Burger King and how off of quickstart they are with Tim Hortons.

Overall, EBITDA growth as a result of the sales growth and cost controls were up nearly 20% on anunderlying basis, which is extremely exciting. However, because of the strengthening U.S. dollar, thereported results weren't quite as impressive. Reported EBITDA growth is about 7%. So we continue tomonitor the currency situation. And fortunately, the company is making such tremendous progress thatoverall, earnings are still growing at quite a rapid pace despite some of the headwinds with currencythey're facing.


What gives us confidence that Tim Hortons can grow in other markets around the world? Why does3G believe -- they haven't made a lot of progress under the previous management. Why under 3G'sownership can that change?

Unknown Executive

Yes, I think there are 2 things. First of all, 3G has implemented at structure at Burger King that wasvery helpful, which is it partners with local operators who understand the markets very well. One of thestrategies that Tim Hortons had in the U.S. was they wanted to actually take on all of that developmentthemselves, both in terms of selecting the locations, building the restaurants, expending the capital. Andthen they couldn't move nearly as quickly, and they also didn't know the market nearly as well as theirpartners. In Burger King, 3G has been able to grow the unit cap by more than 30% over the last 4.5years. And that's primarily resulting with having partners who they know around the globe that they canwork well and who know the local markets. And the advantage Tim Hortons has is that it can already takeadvantage of the relationships that 3G has built with the Burger King. And anecdotally, the information 3Gis getting is that a lot of their partners are excited to expand into Tim Hortons restaurants.


It doesn't matter that Tim Horton was a Canadian hockey player? That's still going to play well globally?

Unknown Executive

Yes, I think it increases the market acceptance to appeal to an even wider variety of customers than theBurger King.


Okay. Ryan, update us on Platform.

Ryan Israel



Sure. So Platform's strategy is to allocate a large amount of capital to high rate of return by acquiringa collection of specialty chemicals portfolios that will operate more efficiently under a large industryplatform.

Since the company began its life in the middle of 2013, Platform has made 4 acquisitions for a total ofabout $7 billion. Last year, the company made 3 acquisitions for a total of about $5 billion, all of whichwere focused on the agricultural solution segment. We think that the agricultural business has somesecular trends that are very attractive. The amount of farming land is flat, but the world's populationand food needs are growing tremendously, which means that the type of specialty chemicals that the agbusinesses that Platform has acquired sell will be increasingly important because they need to improve theproductivity of the available farming land.

The businesses that Platform has acquired make insecticides, herbicides and fungicides, and they focuson niche markets and particularly emerging markets around the globe. And what's interesting aboutthat market focus is it is outside of the focuses in the largest players in the industry which focus on rowcrops and rather than niche crops and focus primarily on the developing markets instead of the emerging,which means that the high-returning assets that Platform has purchased have very favorable competitivedynamics because they're playing away from some of the largest competitors we're focusing on.

Last quarter, for 2015, just a few weeks ago, Platform reported its results. And they were tremendousfor the first quarter of ownership with these assets. Revenue growth was up about 10% versus the prioryear on an underlying basis with strength that was both in the agricultural business as well as the firstacquisition of MacDermid, which is the industrial specialty chemicals business. And EBITDA growth wasabout double that level as some of these synergies on the cost side came through on the AgriculturalSolutions business.

So the results were very strong on an underlying basis. Similar to the Burger King and Restaurant Brandsresults, currency played a tremendous -- had a tremendous negative impact on the results. So whileEBITDA growth was about 20% organically, after taking into account the strengthening dollar versusthe local markets where Platform sells its products, reported EBITDA growth was only low single digits.I think over time, as we price in the local markets to be able to offset some of the currencies and aswe continue to have increasing cost synergies, we think that we'll still be able to develop a high level ofEBITDA growth, which the company has publicly stated should be in the high single digits over time.

In addition to the quarterly results, a couple of other noteworthy items happened in the quarter. First,management increased the synergy target just 1 month after it completed the last of the AgriculturalSolutions acquisitions, about 40%. So after getting inside the assets and really doing detailed study,recognize there's more opportunity than initially thought on the cost side. And secondly, the companyheld an Analyst Day in March, which really explained the detailed performance and competitive positionof the agricultural businesses, and that has resulted in a flurry of Wall Street coverage, which we think isincreasing the investor understanding of the story.


Thank you. So while I've got you, just a couple of notes on Fannie, Freddie, both business performanceand maybe kind of political status, trend, legal status.

Ryan Israel

So we continue to think that Fannie and Freddie are vital to allowing for the widespread and low-costaccess to the 30-year mortgage. 80-year history of success in that business and their market share hasactually continued to grow as private capital pulled away from the market ever since the financial crisis.One thing that's interesting is while several years ago there was a flurry of calls for political reformsending Fannie and Freddie business models and then bringing in private capital, that has really died downover the last several years. And we think the reason is that there's a growing acceptance that thesecompanies are here to say, that there is no alternative to the way that Fannie and Freddie have providedcredit guarantees for the average American. And so we think that the continued improving results of



Fannie and Freddie further bolster that trend. While results have improved dramatically over the lastseveral years, the improvement in profits hasn't actually allowed Fannie and Freddie to shore up theirbalance sheet and create a fortress balance sheet like they normally would be able to. And the reasonthat the government has been taking 100% of all of their profits in the form of a net worth sweep sincethe beginning of 2014. So the position this leaves Freddie and Fannie and it's despite improving resultsand being the largest financial institution in the world collectively, they actually have the least amount ofcapital with any financial institution in the world. We think that puts taxpayers at grave risk, and we alsothink this is an untenable economic arrangement that is an unlawful taking of shareholders' property. Overthe recent months, there's been a growing chorus of media reports and even congressional investigationsinto the actions that the government has taken in effectuating the net worth sweep. And we think thatthis will continue to go over time as people recognize that Fannie and Freddie are here to stay and thatthe situation is both -- for the net worth sweep is both legally and economically untenable. In the legalfront, there've been several positive developments in the Federal Court of Claims under Judge Sweeney asthere continues to be new documents that suggest that the government hasn't turned over all documentsthat was required and also seems as if the plaintiffs are making progress in moving forward to continuingwith the trial. There was one small item earlier in the year that I think was misinterpreted by the media,and that was there is a legal case in Iowa that was dismissed. And the reason why it was dismissed wasbecause it was very similar to a case under Judge Lamberth in a D.C. District Court that was dismissedlast September but is on appeal. So effectively, while there were 3 cases originally, the way to think aboutit they're now 2 cases, one of which is on appeal and the other in front Judge Sweeney is progressingnicely. In terms of an economic results for Fannie and Freddie that they reported last week, they continueto improve their underlying performance. The core credit guarantee business of Fannie and Freddiecontinues to be extremely strong. At the same time, their reported earnings of the businesses aren'tnearly strong, and that's because there's a mark-to-market loss on some derivatives they have that arehedging their fixed income arbitrage portfolio. Now what's interesting is the net worth sweep is paid off ofreported earnings. So the government is taking in less cash today, which some people view as a negative.But the associated asset with those derivatives is actually growing in value, but that is not reported in theeconomic -- that is -- well, its economic earnings is not reported in the financial results yet. And so thebusiness continues to improve, but the way the net worth sweep is set up means that the government istaking less money because Fannie and Freddie are reporting less profits even though the companies aredoing quite well. As the fixed income arbitrage portfolio shrinks, we think that the underlying strength inthe business model continue to show through.


Thank you. So Ben [ph], why don't you give us a brief update on Herbalife's quarter. And then DavidKlafter, if can you update us from a regulatory point of view where things stand.

Unknown Executive

Sure. So a brief update. Earlier this month, Herbalife reported Q1 earnings, which reflected a 12.5%decline in net sales year-over-year, which is actually a slight beat on guidance. That decline was drivenby declines in some of its most mature markets, including North America, Mexico and South Korea, butwas offset by 21% growth in China. That resulted in a beat on EPS in the quarter. And they increased theirguidance from $4.10 to $4.50 to $4.30 to $4.60 for the full year 2015. But for context, back in March of2014, analysts were predicting $6.65 of 2015 earnings. So the current kind of midpoint is about 1/3 lowerthan what analysts were predicting just a year ago.

Interestingly, they also announced an amendment to the credit facility where they extended the maturitydate of the revolver from March 2016 to 2017. They highlighted that as a positive for the quarter. Butin doing so, they had to make a number of concessions. One was that they had to reduce capacity onrevolver from $700 million down to $425 million. Second, they had to make some material principalpayments to reduce the amount of debt outstanding. Third, they had an increase in the rate for theMarch 2016 to 2017 period by 2%. And they also imposed some additional limitations on buybacks anddividends. All in all, while they tried to characterize that as a positive, we certainly think that, that was notexactly a vote of confidence.



David Klafter

On the regulatory side, the most significant development in the quarter was new disclosure in the10-Q from Herbalife. And I'll quote this for you, "The Department of Justice recently saw informationfrom the company, certain of its members and others regarding allegations being made about thebusiness practices of the company and its members. In prior disclosure, Herbalife had said that SECand FTC were investigating and it would not be making any additional disclosure unless they werematerial developments." I think we and Herbalife would agree that the DOJ's activities now are materialdevelopments.

The other facts continue to confirm our thesis. Over the last 10 months, 4 independent directors havestepped down, including the Lead Director and the Chairman of the Audit Committee who steppeddown right after the audit in February. Herbalife has spent over $77 million defending itself against thedisclosures we've been able to make about the company. Yet they still refuse to collect any data showingreal retail sales at the suggested retail prices, which we think is a big gap in their defense.

Last week, there was a settlement announced in a class action brought on behalf of distributors. Thesettlement was expected. The class actions are really not a great way to vindicate the rights of consumerswho have been victimized. The plaintiffs' counsel quickly has a conflict of interest because they want toget paid, and each victim has a fairly low stake. In the settlement, the -- most of the victims will receive$20, while the plaintiff's counsel receives $5 million. The court, in approving it, noted that this does notaddress the merits of the claim and that the government actions are not in any way affected by this. Andfrom what we understand, the FTC knows that consumer class actions are not the way to address systemicfraud, and we don't think this will in any way change their thinking about Herbalife.


Yes. The judge seemed take a lot of comfort in the Nielsen survey that Herbalife has still yet to share withthe public, which said that 73% of the members actually signed up to be members to get a discount onthe products, which is, in my view, a total farce. What's your -- I found that fairly disappointing, that asophisticated judge would read a survey in that manner, accept it as evidence of the fact.

David Klafter

Yes. Well, what she was doing is saying, is this a fair way for the plaintiffs' counsel to stop the case? Andshe said that, that fact could contribute to making a fair way to withdraw the claims. What she didn'tmention is that 8 months earlier, Herbalife had told the public in an SEC filing that only 27% seek adiscount. And so the numbers directly flipped in the course of 8 months based on the survey. It neverreleased the survey. It's all retrospective. If they really want to know who wants a discount, they shouldoffer a discount consumer, customer option, which they don't.


Okay. So with that, that sort of covers the portfolio. We have 2 new investments that we have yet todisclose: one, a smallish position, a couple of percentage points of capital, which will have a little moreupdate on, I expect, by probably the end of this month, early part of June; the second is a large positionthat we're building, approaching 15% of capital that it could be a couple of months before we're requiredto make a disclosure.With that, why don't I go to questions. And there are a fair number of them. And I will do my best to coverall of them if possible.



Question and Answer....................................................................................................................................................................


The executive compensation warrants use for Howard Hughes' executives has clearly been effective.However, they expire in November 2017 as the company enters its next phase. Given the success of thiscompensation tool on Howard Hughes' case, do you foresee it being used in future situations?

So to remind our investors, David Weinreb, Grant and other members of senior management wrote acheck when they became CEO or CFO of the company, president and so on. And they bought for fairmarket value, long-dated warrants that could not be sold or hedged for 6 of the first 7 years. It was agreat way to gInnov8e management a leveraged upside in the outcome but with their putting their ownmoney at risk and differentiating the structure from your typical option structure where you could seea pop in the stock price, options can vest, management can sell; the stock price goes back down andshareholders are in a worse place, management walks with a lot of money. This, we think, is a muchbetter mechanism, and we would've liked to use it in future cases. Since we really built Howard Hughesfrom scratch, we were able to design this compensation structure. Now it expires in November 2017. Atsome point, we'll probably sit down with the Howard Hughes team and design something for the next 7years.

As a shareholder -- okay, I have followed the case we've been making to expose Herbalife for the pyramidscheme that it undoubtedly is. Although I agree with your findings, the thing that concerns me is thathaving gone through a relatively small percentage of world's population over the past 32 years, it's nowactually 35, why can't Herbalife in the almost certain absence of any regulatory demand to close thescheme down continue to chew up and spit out the similar percentage of the world's population over thenext 32 years?

So the point here is, which is a good question, Herbalife cycles through a lot of distributors every year,about -- they've got 4 million and something like 2.1 million will quit this year. And then just to stay in thesame place, they need to find another 2.1 million, 2.2 million. And in order grow, they need to find more.First of all, you have to ask yourself, what legitimate business loses half of its customers every year thatsells real products. As they do on the -- they have to turn to these distributors.

And the question is 2 million sounds like a large number, but 7 billion people of the company in 91countries, why can't this scheme go on for a very long time?

Well, the answer is it has. And the explanation for why Herbalife has existed for 35 years is really thepremise of this question, which is that you can fool a small number of a very large population and stillkeep the scheme going. It does become more difficult and, it certainly becomes more difficult withtransparency, which is why we believe the U.S. market is declining, Mexican market decline, SouthAmerica, other markets, with more visibility around the issues about this company, it gets harder forthem to recruit people. And today, a distributor trying to recruit someone into the scheme probably has tomake a lot more than one phone call to recruit someone. So for every 2 million that's brought in, there'sprobably 100 million of people that are contacted. I think that gets more difficult in -- as -- with moreexposure on the company. But it can go for a very long time. And regulatory intervention, we think, isimportant. And if regulators do nothing, there is a risk that Herbalife continues to defraud people over anextended period of time. And I think -- hopefully that motivates regulators to do their job.

Let's see. What kind of impact to the portfolio can we expect when the Fed increases interest rates?

I don't expect to see a material impact. The businesses we own for the most part are not extremelyinterest rate sensitive. Stock prices today with the S&P at, call it 16x, 17x earnings or 15x, 16x earningsis not trading at a multiple that reflects a 2.2%, 10-year treasury. So embedded, if you will, on themarket multiple, I think, is an expectation of higher interest rates. I think the same thing is true for ourcompanies. But the businesses that we own generally, we own them at what we believe to be a prettydeep discount to what their worth as is. On the margin, higher rates means the business is -- everything



else is staying the same, the businesses will be less valuable. But we believe higher rates will probably bean indicator of more positive economic progress, GDP growth, et cetera, which -- it's probably a more thanoffsetting factor. We don't expect a meaningful impact.

Can you clarify how big Herbalife position is right now including put options?

It's about 6.5%, 7% of the portfolio.

How much would you gain if, in percent, Herbalife went to 0 tomorrow?

It's about $1.5 billion profit, about 7.5%, 8% gain.

You're not talking so much about Zoetis. How close were Pershing Square involved in the restructuringthey just announced? Where are you seeing Zoetis long term?

It's part of another big company or stand-alone company. Just briefly on this one. We're not reallypermitted to discuss details at a board level with respect to the company. We are very supportive of theplan that was announced. Long term, Zoetis will either justify its value as an independent company or it's-- there's been people who have -- other companies who have expressed interest in acquiring Zoetis. SoI think like any other business, you can go deliver attractive returns to shareholders as an independententerprise or substantial synergies are available when combined with someone else. And if that's a betteralternative for shareholders, I'm sure the board will look at that carefully.

Okay. This is 10 questions from one investor. Let's see if I can -- what are the merits of extending aconsolidation strategy through buying equity in Endo or Actavis?

We really selected Valeant, if you will, as our horse here. We like the Valeant product portfolio, I wouldsay, and we got a real familiarity with the management team. We did not know the management. We'renot a huge fan of the product portfolio at Endo. But Valeant, it's really our -- where we focus on energies.

Let's see here. In fact [ph], the ownership profile of Valeant is a massive competitive advantage. HasValeant considered using owners as source of financing, in a similar way to Constellation Software.

I don't know the answer to that.

Okay. Is there a -- I'll give another investor chance to ask some questions. A few questions on Fannie,Freddie I hope you might address. When will shareholders finally have their day in court as JudgeSweeney has promised? David Klafter, when do you think there'll actually be a trial on the merits in Fannieand Freddie on the Court of Claims?

David Klafter

My guess is that it will take at least until the end of the year to get through discovery, and the governmentis attempting to withhold documents on the basis of various executive privileges. That can take a while.The judge is going to -- is likely to address those things very seriously and allow the DOJ a lot of time onthat. So it could be 1 year, 1.5 years before they get to trial.


Okay. And then how long does a trial take? When do we get a decision on the Court of Claims issue,realistically? It's a very important question.

David Klafter

May 12, 2017. I don't know.


Well, likely, it's later than that. That's your midpoint of the range?



David Klafter

I think that's probably a good date.


Okay. Wow, it's impressive.

David Klafter

2 years.


2 years. What's the ultimate catalyst or appeal to the amendment? Congress and Director Watt, any of theconservatorships?

I think it can be any and all of the above. I do think a decision in a court, a favorable one, will be acatalyst for bringing parties to the table. So the litigation, I would say, is the stick, the carrot is theopportunity to negotiate with the owners of the business, a resolution that's in the best interest of thetaxpayers, shareholders and the housing finance system. We'd love to help if we can.

Okay, next. Why doesn't the legal team request Judge Sweeney to suspend the third amendment profitsweep until the trial is complete? It seems to me once government can't receive this income, they have noincentive not to settle. I don't know that we have the ability to do that.

David Klafter

That's the ultimately relief. The judge won't grant that on an interim basis.


Here's a good one. First of all, big thanks to the team because of your hard work, dedication, confidence,conviction, careful research, able to retire in my 40s due to an investment on GGP [ph]. Me and family aregrateful to you and your effort to help unlock vale for shareholders. Okay. Questions, is it possible to knowwhat percentage today Pershing Square holds in Fannie Mae and average cost?

Our average cost is about $2. Our stake is above 10% of both Fannie and Freddie.

We've covered the next question. Can you comment on how Fannie Mae is affected if Starr wins in the AIGlitigation?

The AIG litigation is -- really the lawsuit here that Hank Greenberg has filed is that basically thegovernment was unduly harsh in the terms it obtained in providing finance to AIG during the crisis. Weare not challenging the expensive preferred and the 80% warrants that the government received. I dothink if the AIG case were to get ruled in the favor of Starr, it's on the margin positive, I would say, butnot directly relevant.

Please discuss the impact on earnings of the strengthening dollar in the portfolio of the company? Pleasealso include discussion on the impact to earnings from recent commodity moves.

Most of our businesses -- Fannie and Freddie really do not have a foreign earnings component, butmany of our other businesses do. In some cases, we hedge that kind of exposure. In other cases, wedon't. It's judgment call. In some cases, we hedge exposure. In the case of Canadian dollar, we haveforward contracts we have effectively locked in for the portion of CP's revenues that are Canadian dollarexposed. We hedge that exposure. We own some options that protect us from a more meaningful declinein the euro. But we are, in some cases, completely unhedged with respect to currency. And we thinkour businesses will be harmed by the U.S. dollar appreciating. Again, all things staying the same, ourbusiness would benefit U.S. dollar depreciating. But the reality is the U.S. dollar doesn't appreciate all



things staying the same. Usually, it appreciates because the economy is improving and other factors. Butwe do not think that currency will have a particularly material impact on the overall portfolio, particularlyin light of the headwinds that we have.

Okay. Questions on size versus performance. I'll try to summarize this one. How has your current size of$20 billion of capital affected your ability to achieve returns going forward? That's basically this overallquestion.

We believe that for this strategy, scale is a significant asset. We have more ideas than capital today.I think the best ideas are the biggest companies. Our ability to own a large percentage interest in acompany versus a smaller one, we think, is a positive. And even the kind of businesses we like, thesestable, simple, predictable businesses, often, these are the largest companies. That's how they get to bevery highly valued businesses. They have very high-quality, simple, predictable businesses. We did kindof a very brief analysis of what percentage of the S&P 500 was sort of within our universe. I would say,something in the order of 300 of the S&P 500 companies are certainly companies we'd looked at and couldpossibly own in terms of business quality and market cap. The portfolio does not turn that meaningfully.We add 1, 2 or maybe 3 investments a year. So we do think the market opportunity is very large versusthe size of Pershing Square. If that would change, if we became large relative the market opportunity andwe felt that capital was no longer a competitive advantage, we would return capital or pay dividends. Butnow I would say we are literally out of capital and could consume meaningfully more. The, I guess, bestevidence of scale contributing to performance, last year was one of our best years ever with the largestcapital base.

This person's other questions are about PSH. If you have PSH questions, please contact the IR teamdirectly who can answer them.

Why do you believe CP remains an attractive investment today. We can earn $17.25 per share in 2018with a P [ph] of 15 to 20. 3-year CAGR is 12.5% to 33%.

Is this in line with your thinking?

I think these are within the relevant range, and we think those kind of returns are attractive over the nextseveral years.

Understand commodities are a big part of the Canadian economy. As commodities are not doing well, howdoes it impact CP cargo volume and pricing power? Paul, do you to comment?


Sure. Bulk-related freight is about half of CP's business. So this is just -- we're talking about just half ofthe story. That's one thing to keep in mind. The other thing to -- so focusing on the commodity side ofthings, a 1% drop in the commodity price doesn't mean that CP's volumes go down 1%. In fact, it oftenmeans that CP's volumes don't move at all. A lot of CP's freight customers are among the lowest-costproducers of their commodities in the world. For example, Teck coal mines is -- thermal coal is in thebottom quartile of the cost curve, and the potash producers are also very efficient. So prices for thesecommodities will have to drop pretty far for these volumes to be materially impacted. But freight volumeon the commodity side is only part of the story. You also have to recognize that there's another issue ofhow much CP can charge for those commodities and also CP's market share in those commodities. Andone of the things that you have to ask as a third party is whether or not the CP's current market share andthe prices they can charge for its services have kept up with the dramatic improvement in service qualitythat CP now delivers to its customers. Customers value service. If CP can deliver goods from Toronto toVancouver in 3 days rather than 4 like it used to, that deserves a higher rate and you have very happycustomers glad to pay that rate. If CP can deliver cars in a very narrow delivery window rather than abroader one, that commands a higher rate and customers are glad to pay for that enhanced service.And finally, if cars are more available than they ever were such that if a customer gets a large order,they can get the cars they need to fulfill the order on a timely basis, that's also worth something. So asyou analyze the commodity side of the picture, you should keep those dimensions in mind. On the non-



commodity side of the picture, one also has to ask whether or not CP's market share and pricing reflectsthe dramatic improvement in service levels, and that's something we'll leave to you to consider. And thenfinally, the commodity -- the Canadian's economy is a commodity economy. It's an export economy. Andthe Canadian dollar is closely linked to commodity prices. Another thing for you to think about is thecorrelation of their currency with commodity prices. And when you recognize that Canada's #1 tradingpartner in the world is the United States, a devaluation of the Canadian currency like we saw earlier thisyear, one would expect would be tailwind for demand for Canadian Pacific's shipments into the UnitedStates.


Thank you, Paul. Why don't -- instead of just dealing with one person's questions, I'll come back to thisperson if we have more time.

As Pershing Square transitions from 1.0 to 2.0, a transition which should we expect to receive reducedturnover and long-term investing and a somewhat Berkshire way of investing, what is Pershing Square'sviewpoint on the current fee structure? We think the current fee structure is fair.

Maybe a different question is, which I received from someone else, has our -- as the transition -- does thetransition mean we expect to earn lower returns going forward than we have in the past?

The answer is no to that. I mean, as a commented in the letter, this is the reference to Pershing Square1.0 versus 2.0, we think being a longer-term investor, being in a position of more influence with boardrepresentation and otherwise, owning high-quality businesses, is a way to earn high returns overlong periods of time comparable to what we've achieved in the past. Again, past performance is not aguarantee of future success, but we think we've got a number of meaningful competitive advantages,including a much larger base of permanent capital, which we believe should enable us to invest a higherpercentage of the capital in the core strategy, and as a result, earn more attractive returns going forward.

Given that 3 portfolio of companies, Valeant, Platform, Burger King, are highly levered, how do you thinkabout leverage across the portfolio and the risk associated with it with debt maturities beyond 2020? This,of course, does not imply immediate risk. But we'd be keen to hear your thoughts.

Valeant is a BB-rated credit but probably deserving of an investment-grade credit profile in light of itspeople tend to look at the business on an EBITDA multiple -- debt to EBITDA multiple basis when theycompare it with other companies. But the fact that it's a very modestly capital-intensive business, it has avery low tax rate. Those kind of comparisons, I think, can lead to kind of an overstated view of the look-through leverage of the business. Valeant generates enormous free cash flow and can delever very quicklyto an investment-grade profile. In light of Valeant's size, it's now an $80 billion, $75 billion, $80 billionmarket type company. We do expect the company will migrate to being an investment-grade companygoing forward simply because the non-investment-grade credit markets are really not large enough tocontinue to finance the company doing large transactions. So much the same way that Heinz started outas a BB credit and then became an investment-grade credit -- or will become an investment-grade creditwith its acquisition of Kraft, it would not surprise us to see Valeant become an investment-grade company.So it has better access to capital. And Platform is in a very high growth stage. It does use a fair amount offinancial leverage, but we think that Martin and the team are prudent about that use of leverage. Platformis a relatively small investment for us as a percentage of capital. Burger King is an extremely high-quality,low-risk business. And we think the amount of leverage that they're using is appropriate. And again,a simple EBITDA leverage multiple, we think, is not the right way to think about the business. What'sinteresting about Burger King is the company has almost no CapEx. All -- almost -- effectively all of theCapEx is spent by the franchisees. So what you own in Burger King is a gross royalty on, we call it, 14,000Burger Kings growing to hopefully 30,000 Burger Kings around the world. Same thing with Tim Hortons.It's a gross revenue royalty, almost no corporate CapEx. One of the most stable cash flow streams in theworld and we think appropriate to use a fairly high amount of leverage as measured on a multiple EBITDAbasis. Ryan, do you have any further comments on that?

Ryan Israel



Agree.


Agree. Okay, that happens rarely. Thank you, Ryan.

Okay. The funds have been fully invested, 98% long, 93% net. Special royalty to the historic 40% cashposition. None of the existing positions seemingly near their harvesting period. Under these positions, howdo you think about researching, initiating new positions? Would you consider selling additional shares?

Okay. So we are very close to being, if not entirely, fully invested. I'm not allowed to comment aboutPershing Square Holdings, but our choices in terms of if we have an idea and we -- that's better than onewe currently own and we need more capital is we can sell an existing holding or we can raise capital. Andwe will do 1 of those 2 things if we believe that the new idea is better than an existing one. But what itshould be telling you is, as I said maybe earlier in the call, we believe we are, if you will, capital-starvedand we could consume a lot more capital than we currently have.

A question about portfolio sizing. I know it's related to risk reward. How do you arrive with the varioussizing of various investments? How do you come up with roughly 20% sizing for Valeant?

If we think about position sizing in terms of how much we can lose and how much we can make, opento losing 500 or 600 basis points on any one investment, permanent loss of capital. What that meansis something like Fannie and Freddie where we can lose our entire investment because of legal, politicalleverage and other uncertainty. That's a small investment, collectively 3% of our portfolio. Something likeValeant, a strong credit, BB, but we think deserving to be a higher credit. Diversified, very durable productportfolio, cheap valuation. We think Valeant has, in terms of the big cap things we own, probably the mostupside of the things we own and relatively modest amount of downside trading at a relatively low multiple-- reasonable multiple for kind of its base business. So is it possible we could lose 25% of our investmentin Valeant? It's certainly possible. We think unlikely. Is it possible we would make multiples of our capitalon Valeant? We think that's certainly possible. And therefore, it's our largest investment because the riskof loss versus the opportunity for profit is large.

Okay, next. Another question on portfolio sizing. Some of the positions in the portfolio seemed quiteexpensive. Zoetis trades at a 27x, 12-month forward PE, 21x, 2017. What are the main valuation metricsupsides in order to take it into consideration?

So I wouldn't look at absolute multiples of next year's earnings to value pretty much anything we own.That is a relevant metric for a business that's in a very stable form, but one that's going through a majorcost takeout, it is probably not the right way to think about the business. You also have to think aboutbusiness quality, growth rates and thinking about what's appropriate. But we like the businesses we ownat the prices where they trade, otherwise we'd sell them.

Howard Schiller, resignation of CFO of Valeant seems like a big loss. What are your views? How does itimpact the investment case?

We think very highly of Howard. We were disappointed that he chose to retire as CFO. He's going to stayon the Board of Directors. I understand he intends to retain his stock in the company. But I think he hasother ambitions that at 53 he decided he wanted to pursue. My guess is he'll buy a business and be aCEO of the business. And with Mike Pearson signing on for another 5 years, I think there wasn't really anopportunity for Howard to run Valeant. And I think that drove part of his thinking.

Still I can't believe [ph] the Common Securitization Platform developed for Fannie and Freddie is in thebest interest of the company. This could be used as a means to replace them. I think it's a good ideabecause to have Fannie and Freddie -- actually, their securities trade at slightly different spreads becausethe liquidity, having a common platform that can be more liquid, reduce the cost of housing finance.It does not, however, replace -- make it easier to replace them because you still need a guarantor toguarantee these security that's acceptable to the marketplace.



Will the split of the company's long business lines, rental, multi, single, will be beneficial to shareholders?

No.

Could you speak at a high level about the nature, active, passive sector geography of the undisclosedinvestments?

No. I was looking at the March risk reported list 12 long for the 13F list to 8 [indiscernible] the riskmitigator hedge was taken off.

Okay. So the hedge was a hedge against Allergan, and we collapsed the hedge when the transactionclosed. The 13F -- 13F is only for 13F securities. 13F securities is for the U.S. only. So it doesn't includenon-U.S. companies and it doesn't include derivative transactions. Very often, when we're acquiring astake in a company, we're required to use some form of derivative. So that was not included in the 13Fsecurity.

I'm interested for the details and your thoughts on the Platform company's potential risk of the strategy,particularly about the ability to successfully integrate acquisitions, merits on focusing on one businessline versus diversifying. How do you think about this company's ability to leverage and implement thestrategy?

I spent a fair amount of time talking about that at our -- the Ira Sohn presentation in the actualpresentation. The risk of this strategy really relates to the quality of the management team, theopportunity in terms of the size of the market and then their ability to execute. It's not so easy to go by alarge number of businesses in a relatively short period of time, integrate those acquisitions, not overpayfor them, finance them correctly, and get the balance between equity and debt correct. I think that is a --that is why there are very few platform companies that are deserving of the platform valuation becausethere are some bad stories. We do believe the ones we own, call it Valeant, Restaurant Brands, Platform,the quality of the team, and we have some meaningful oversight in these companies as well. We can behelpful if we can help.

Any thoughts or comments you can share on the deal between Kraft and Heinz?

Not at this time.

Okay. Is there any reason that the combination of Valeant and Zoetis would not make sense?

I would ask Valeant that question.

Can you discuss the investment rationale for your new investments in Actavis? We received Actavis sharesas part of the transaction. We like Brent Saunders. We think he's got a very good business model. Heowns some very good assets. It has less of a durable portfolio. It's more reliant on pipeline and drugs thatare going to going to go off patent, if you will, a little bit more so than Valeant, but we like the business.We are no longer a shareholder because we needed capital for something new.

$20 billion of assets under management, do you think the next 10 years would be harder than the first?

I think the next 10 years will have different challenges than the first 10. In many ways, the first 10 wereharder because we were starting the business from scratch. We didn't have an existing team. We don'thave -- no one knew who we were. We had a lot less experience. We had a lot less brand equity. We hada lot less stable capital. Next 10 years, we have the benefit of a much stable -- more stable capital base.We've got an organization that's been through a lot together and a very stable team. I think the new --the future will have some more challenges than the past, but we feel very good about the future.

Okay. I lost my spot here. When you mentioned estimated EPS for Valeant, did you take into accountpotential equity dilution?

Yes, we didn't assume -- yes, we did in our -- the way we rolled out the model.

Anything about position sizing?



We did that.

Thank you for hard work and extraordinary transparency, your investment in Fannie and Freddie like allyour investments require risk-reward analysis before making an investment. In that light, what are youhandicapping the odds for success in courts. If in fact, the court is favorable, what upside in the securitywould you expect?

We think it is likely that we will win in the Court of Claims or in appeals of the Court of Claims decisionmuch more likely than not. And in that case, we expect very significant upside for Fannie and Freddie.

Has Pershing Square considered a more comprehensive Street-level marketing campaign againstHerbalife?

Not really.

Let's see. I think that's it, remarkably. Does everyone here feel we've answered enough questions? Orwould you like me to see if there are some that I've missed? Again, try to be comprehensive. This was theguy I promised to come back to. Hold on. A little overtime.

Valeant, accounting. How much accounting due diligence did you do on Valeant?

A fair amount.

Do you feel comfortable with its accounting?

The answer is yes. In fact, one way to get comfortable with Valeant's accounting is really look at 2014 andhow quickly cash -- Valeant's cash earnings conformed to GAAP earnings as they stopped making materialacquisitions.

How durable is Valeant's business model in 5 or 10 years?

We expect it will continue to be durable because of their focus on durable products.

How much is relying on acquisitions for growth?

With 15% organic growth, they don't have to do an acquisition to grow. But we do think they will doacquisitions to grow.

[indiscernible] commented on Valeant.

Valeant is like ITT. Harold Geneen come back to life. Only the guy is worse this time.

So interesting little side note here. As I did the communicate with Mr. Munger and asked him about hiscomments. And he said, "Look, I don't know Mike Pearson and I hear very good things about him frompeople I respect. But call me old-fashioned. I don't like companies with low tax rates that use a fairamount of leverage and make a large number of acquisitions quickly. Call me old-fashioned." So we'll callMr. Munger old-fashioned. But his comments are fair. We think -- let put it this way. Where he's not fair isValeant is not like ITT. ITT was a roll-up of a very diverse collection of businesses, largely driven by a high-priced stock that was used to make acquisitions. Harold Geneen was considered to be a good operator. Butthere wasn't a lot of business logic between the businesses he acquired. And eventually, the business wasbroken up. In this case, Valeant is a very strategic company in its approach to the pharma sector, sectorsit invest in. I mean, Bill, do you want to comment? Or Jordan, any thoughts on Valeant?

William F. Doyle

Its acquisitions are highly strategic. They use cash and they have a unique operating model in the industrythat has a combined culture of cost discipline and a decentralized operating philosophy that's allowed themto achieve industry-leading margins and has allowed them to accelerate growth at every major companythey've acquired.

Jordan Rubin



Yes, Mike Pearson ran the pharmaceutical practice at McKinsey for 23 years. He perfected the elementsof the strategy. Again, they're not trying to be all things in all markets. They're very focused on brandedgenerics and markets where that make sense, consumer products and markets where that make sense,ethical pharmaceuticals and markets where that make sense. This is not a casual assemblage of assets.


Thank you. What's the investment case for Air Products at the current price? Can Air Products becomeanother CP? Does it have the pricing power of a railroad. Brian?

Unknown Executive

Sure. I mean, I mean, I'd say the investment case is really the same as it was from when we initiatedour position. Obviously, the stock has done quite well in our nearly 2 years of ownership. But most ofthat has frankly come from, as I mentioned during my remarks, the improvements in the non-coreperformance business, which was frankly something that we had not underwritten in our initial analysis ofthe company and a second variable which is the closing of the discounted valuation or sort of credibilityand performance gap, if you will, between Air Products and Praxair. So at the initiation of our position, thecompany traded at about 16x, 17x earnings, while Praxair traded at 21x. And you've seen that multipleclose. But as I mentioned on my remarks, the vast majority of the $700 million of profit opportunity fromclosing the structural gap between Air Products' performance and Praxair's remains, and the companycontinues to bring onstream a lot of its multibillion of growth CapEx that has occurred over the pastseveral years and is continuing to occur over the next several. So the combination of those 2 variables willlead to very significant earnings upside from here.


Zoetis, is the good news already priced into the stock with the revised guidance between -- 2015 guidancebetween $0.79 and $1.02? What are the other catalysts besides cost-cutting?

I think there is a fair amount of the value of the company that is priced into Zoetis stock.

What are the other catalysts besides cost-cutting?

This is again a company that there's been a lot of speculation about potential takeovers largely because ofbuyers' comments about being interested in the animal health space. So I think there are some amount ofacquisition premium in the Zoetis stock.

Platform, how confident are you about management team's capability, especially Mr. Leever and Mr.Hewett? Ryan?

Ryan Israel

We think they're both terrific operating executives. I think one of the best ways to judge them is bylooking at their track record in the previous companies before they were part of Platform. Dan Leever, ourCEO, has been with the MacDermid, the first acquisition of Platform, for 40 years. He's been CEO for thelast -- over the last 20. I've gone back and I've read all the annual letters. I've looked at the performance,and the track record there is simply amazing. Wayne Hewett, a little bit shorter tenure with Arysta, whichis Platform's most recent Agricultural Solutions acquisition, similarly very positive track record. So I thinkthe people themselves, when you speak with them, when you look at what they'd like to do there , I thinkthey're high-quality people -- high-quality executives and they both have great track records.


Okay. Thank you. And with that, let's see if any more questions have rolled in. There is, in fact, one more.

You seem to set very high standards on your investments. For example, I like to invest in companies I like.In the past you've said you don't like Pepsi. You said you -- only long comers are good for America. Short



comers are bad. You said you're doing God's work on Herbalife. The valuation for Amazon is very high. Willyou short it or since the company is good for America, you wouldn't consider shorting it?

Okay. I do think Amazon is probably good for America, but we will short very few stocks, and we won'tshort stocks purely on valuation. Not clear to me that valuation of the Amazon is very high if you thinkabout the future progress of the business. I haven't done the work, but I think it's an incredibly dominantfranchise where they're spending most of their profits on building more dominance. I think it's a veryinteresting company, but I have no view as to whether the price is high or not high.With that, we are out of questions. And I thank you very much of your time and attention.



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2015Q1 Pershing Square Holdings, Ltd., Q1 2015 Earnings Call, May 18, 2015

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Transcript of 2015Q1 Pershing Square Holdings, Ltd., Q1 2015 Earnings Call, May 18, 2015