Notes from BB&T 1-on-1 Conference

The Inoculated Investor

The opinions included in the following posting belong to me and do not necessarily reflect those of Cove Street Capital “CSC” or any of its

employees. The information in this posting should not be considered as a recommendation to buy or sell any particular security or to

encourage anyone to invest with CSC. Past performance of CSC is not a guarantee or indicator of future results.

BB&T Conference Notes- 8/10/11

San Francisco 1-on-1 Conference

The Ritz-Carlton, San Francisco

Schedule for Benjamin Claremon - Cove Street Capital

Wednesday, August 10, 2011

07:45-08:25 am Diamond Foods, Inc.

Steve Neil, Linda Segre

09:30-10:10 am CIBER, Inc.

Gary Kohn, Claude Pumilia

10:15-10:55 am Perficient, Inc.

Jeff Davis

11:00-11:40 am Kansas City Southern

Bill Galligan, Mike Upchurch

12:45-01:25 pm Tyson Foods, Inc.

Julie Kegley, Dennis Leatherby, Jim Lochner

01:30-02:10 pm The Gorman-Rupp Company

Jeff Gorman, Wayne Knabel

03:45-04:25 pm Kirby Corporation

Steve Holcomb, Joe Pyne

Diamond Foods: CFO Steven Neil

Description

Diamond Foods, Inc., a packaged food company, engages in processing, marketing, and distributing snack products,

as well as culinary, in-shell, and ingredient nuts. Its snack products include glazed nuts, roasted and mixed nuts,

breakfast trail mix products, microwave popcorn products, and potato and tortilla chips. The company’s culinary

nuts comprise shelled nuts, pegboard nuts, and harvest reserve premium nuts. Its in-shell nuts consist of uncracked

nuts and mixed nuts; and ingredient/food service products include shelled and processed nuts, and custom-processed

nuts. The company offers its products under the Emerald, Pop Secret, Kettle, and Diamond of California brand

names. Diamond Foods, Inc. sells its products directly to retailers and indirectly through wholesale distributors, who

serve independent and small regional retail grocery store chains and convenience stores. The company offers its

products in the United States, the United Kingdom, Germany, the Netherlands, Spain, Italy, Canada, South Korea,

Turkey, and Japan. Diamond Foods, Inc. was founded in 1912 and is based in San Francisco, California.

Ticker DMND TTM EBITDA ($mm) $135

Current Price $71.85 TTM EPS $2.15

Market Cap ($mm) $1,579 5 Yr. Avg. Op. Margin 5.40%

Enterprise Value ($mm) $2,150 5 Yr. Avg. EBITDA Margin 7.06%

Dividend Yield 0.30% Trailing EV/EBITDA 15.9x

Average Volume (mm) 0.24 Trailing P/E Ratio 33.3x

*Data from Capital IQ





Market and Company Background

Nuts

o Planters is their largest nut competitor and is peanut focused

Emerald is focused on younger consumers

Share is about 10% of the market

o Diamond is the culinary nut brand with market share 10x the next largest brand

Popcorn

o 28% market share for Pop Secret

o Pop Secret is now in Sam’s Club and Wal-Mart after not being available for a while

o Much higher margins than nuts

Cost of corn is much lower than the cost of commodity nuts

Bought Kettle Brand in 2010

o Is an all-natural product

o 6 month shelf life instead of 3 months with other chips

o This acquisition got them outside of the US

Profitable business in the UK

55% revenue comes from the UK

The Pringles deal will close by the end of year

o Great brand, especially outside the US

Is the number 4 chip brand in the world in terms of sales

o It was an orphan brand

It was the last food asset at P&G

o Is a manufactured crisp

15-18 month shelf life

Means that it can go around the world

o Nice infrastructure for them to pick up

o Want to use Pringles to lever Kettle and other brands

o The acquisition will cause non-North America revenue to increase from 21% to 46% and move

snack from 58% of revenue to 83% of revenue

o Pringles is under-represented in grocery

Brand is in convenience stores to some extent but more so in mass stores like Target and

Wal-Mart

Want to focus more on grocery going forward

o All of their buyers are the same for the chips, nuts and Pringles

Which is why it is easy for them to integrate the additional brands

Biggest cost are commodities

o 30%-40% of total COGS

o The second biggest cost is trade funds

These are netted against sales so you never see it on the P&L

Represent how much you have to pay to market the brand to retailers

Have developed a lot of leverage with the buyers

Allows you to get more SKUs in their stores

Having all three brands in convenience stores is important





If you are negotiating with the same buyer, you have more leverage

Not being the biggest (Frito Lay is) is actually an advantage sometimes

o The stores want multiple brands on the shelves and they like brands to compete

2 nationally branded and one store brand

o They like to be one of the alternatives to the other major brands

o They can do wholesale delivery (which is much cheaper) or manage the shelf for the stores

Growth Drivers

What are three things that need to happen for revenue and earnings to go up and the stock price to rise? In

other words, what are the main drivers of Diamond’s performance?

o They are focused on profitable revenue growth

Normal growth is 2-3% in this business but they have grown 20%

o Increased scale in COGS or in OPEX

Revenue synergies

Brands make other brands stronger

o Execution

Have earned trust from Wall Street

Believe they are great students of the game

Try to get the analysts to their plants to educate them

o Want analysts to understand their business

Give full year guidance and the next quarter guidance

o Also give 5 year guidance

o Seasonality makes quarters lumpy depending on the timing of harvests

o Try to be transparent as can be

The non-retail business is a great cash generator and gives them scale

o But after they acquire Pringles, non-retail sales will not be that

impactful anymore

o Retail is going to 87% of the total

Pretty aggressive acquisition activity with Kettle Foods and Pringles recently

o What made the company believe that this was the right time to make acquisitions?

Started off with a list of what companies they would like to buy and what was for sale

Pop Secret was on there as well as Pringles and Kettle

o Started going through this exercise 3.5 years ago

Had been speaking with the brands and investment banks at

that time

Were targeting companies that could come on the market that fit their strategic

goals

o Needed to be in the position to act when something came on the market

o Won’t go into frozen food because it is a different buyer

Will stay in their niche

o If a buy was a good idea, they were willing to pursue it, even if they

were in the midst of an integration

Have been able to start integration of Pringles now before the

close because of the Reverse Morris Trust





But that has not been a distraction as they are still

focusing on their core operations of their existing

business

Looking at fill-ins in Europe or Asia

o Are aggressive listeners

o Pop Chips is on the market

Investment firm that represents them is in the building same

building as Diamond

It is in their growth segment

Probably not making money right now due to the investment

in the brand

Somewhere near $1.3B in debt will be on the balance sheet after the Pringles deal—can you explain the

analysis that was undertaken to determine how the management team could be comfortable with that level

of debt?

o EBITDA is growing so fast with the Pringles deal that they are actually deleveraging due to the

acquisition

o Don’t care about the amount of debt as long as they have cash flows

Cash gives you choices

o Pure dollar amount of debt is not that important

o Margins are expanding as well due to acquisitions

Allows them to reinvest in their brands

o Any idea what gross debt/EBITDA will look like when the acquisition closes?

Going down to 3x from 4x now

Can you talk a little bit about the dilution and the mechanics of the deal?

o Is 29M shares issued still the appropriate amount?

29.M shares is the number

P&G realized some savings from the Reverse Morris Trust and that allowed Diamond to

pay less

Stock is expensive collateral

As long as they can pay down debt, they would rather issue debt

Being in food is a good thing because the revenues are somewhat stable

Diamond has funded debt

Banks get a return on the commitment

Banks are very selective these days but are knocking down their door

Look for accretive deals

Board and management own 7% of the equity and do not want to dilute the

shareholders

Margins

Which are the higher margin products mentioned in the 10-K?

o Does a fully integrated Pringles represent a positive or negative margin shift?

Couple hundred basis point increase in EBITDA margin

EBIT margins have gone from 2-5% in 2006-08 to 9.4% in 2010

o What is the main driver of that?





Higher margin products than nuts combined with operating leverage

Stock Price

What is Wall Street and the market in general missing about the company/stock at the current level?

o Contrarian thesis is that they can be effective against the larger brands

They are competing against two of Frito Lay’s lower margin products

Better to compete with a brand that is not high margin for Frito Lay because

they won’t be as aggressive in competing

They competed well with Planters and Orville Redenbacher as well

They have a track record of competing

o They have great shares in certain regions

Trying to leverage that around the nation

o People are wrong that Pringles is boring

It is value brand for sure

Down from 15% to 7.5% share to day in the US

Outside the US it is a great brand

Very edgy and targets the younger consumers

Have to get the same image in the US

o Very mature and profitable in the US

CIBER Inc: CFO Claude Pumilia

Description:

CIBER is a global information technology (―IT‖) consulting, services and outsourcing company applying practical

innovation through services and solutions that deliver tangible results for both commercial and government

clients. We compete in a large and growing marketplace offering services that include application development and

management, enterprise resource planning (―ERP‖) implementation, change management, project management,

systems integration, infrastructure management and end-user computing, as well as strategic business and

technology consulting.

Ticker CBR TTM EBITDA ($mm) $9

Current Price $3.31 TTM EPS ($0.77)

Market Cap ($mm) $239 5 Yr. Avg. Op. Margin 3.54%

Enterprise Value ($mm) $274 5 Yr. Avg. EBITDA Margin 5.18%

Dividend Yield N/A Trailing EV/EBITDA 30.9x

Average Volume (mm) 0.65 Trailing P/E Ratio NM


Growth Drivers


other words, what are the main drivers of CIBER’s performance?

o Increased offshore delivery will drive margin expansion





o Successful realignment of North American operating business

Need to improve efficiency

o Transforming process and people

Bringing the right skills to the right jobs

Being a successful service firm does not require rocket science

Excellent delivery is key

Fundamentally this is a turnaround

Have made lots of acquisitions and now have lots of P&Ls

o This is a weakness these days

o Believe there is standardization that could save money

Current Situation

The last few years have been tough for the company. What is going on with the North America division?

o The North America business ($500M in revenue) had 35 autonomous offices

The thought was that these would be entrepreneurial and drive their own profitability

Didn’t work as the company got bigger

Have recently blown up the branch model and have centralized

This has caused disruption in the sales force

The discipline required to drive project profitability had been lost

Are the government projects that come from the Federal division (11% of revenue) low margin?

o Federal business is very separate from the rest of the business

Very different contracting process

o Not a part of the core strategy

Something that could be a strategic opportunity

o Staffing when done right can be a good margin business

ERP Implementation and Competitive Dynamics

With so many companies implementing ERP systems and those projects often taking far longer than

anticipated and costing way more than projected, describe the opportunity for CIBER

o What is the company’s value proposition versus the competitors?

Big firm capability with smaller firm intimacy

You get all of their attention versus at Accenture where that might not be the

case

Best in class capability and not as costly

More effective because you have the best and brightest people

Don’t sell an experienced team and bring in young graduates

They are way more flexible

They don’t come in and tell people how to do things

o My next meeting is with Perficient. How would you distinguish yourself from that firm?

Cognizant, Accenture and IBM solutions are the companies they compete with the most

Don’t see Perficient in the market place as much

o Do they bigger players such as Accenture have any real advantage in this space?

Yes, they have a track record of discipline and process that CIBER doesn’t have





Thus, CIBER doesn’t get to realize the margins that they generate

Firms have to transfer knowledge between projects and Accenture is better able

to do that due to their long history

o But, Accenture has priced at the top and CIOs are looking for a way to

cut costs

o What is the main competitive point right now?

Is it price, speed, customization?

Combination of speed and price

o They don’t have the overhead that the other companies have and thus

can be more flexible with price

However, they don’t sell on price anymore

o They sell on value

But that has allowed them to ask for higher gross margins

Sales people now feel comfortable asking for a

higher price

o How would your partners rate CIBER (Microsoft, Oracle, etc.)?

Would rate them quite highly in their respective areas

What you run into with CIBER is that there is a huge different between Europe and North

America

Won an award in the Netherlands because of their excellent service

They do not have strength in SAP in North America but they do in Europe

o SAP would say they need to prove themselves in the US

They are building the SAP business in the US

Think they can leverage the European relationship in the US

o Do really well when they focus on individual verticals and horizontals

as they build out specific expertise

Oracle: good work in the public sector

Microsoft: have a great relationship with the company across the world

Economy and Markets

How to you anticipate that your clients will react to all the turmoil roiling through financial markets?

o They have not seen people hesitant to roll out an ERP system in Europe

o They think they can capitalize on this turmoil and uncertainty by offering staffing and outsourcing

solutions

Many firms do not have a budget for full time positions anymore so they have to

outsource

o For a complex ERP system they might see some hesitance to invest

In 2008 they saw a breakup of big projects due to the financial crisis

But there is huge pent up demand because those projects were put off

Companies need to update and can’t really put these off any longer

What is your response to further fiscal contraction?

o The Federal business has been affected by budget cycle issues

o It is not like demand is changed; it is just pushed out

o Not having a budget for the US was an issue earlier in the year





International Operations

What is different about the European business?

o In Europe they decided to get more focused

Much less autonomy than there was in North America

Decided to be good in SAP

Were successful in making acquisitions

Kept driving the organization to create expertise in SAP and the utility vertical

Better management discipline and capability

Better financial management

Understanding cycles better

o What do you transfer over?

Bring organizational knowledge

Where are we in terms of adoption of management information systems in less developed markets?

o Probably in the 2nd

or 3rd

inning in these markets

o Huge opportunity and probably very expensive to venture into

So much so that they as ask themselves if CIBER should even be playing in these

markets

There are big pockets in developed markets where CIBER is not even in

o France and California for example

o Upside is more adjacent and easier to extract

Senior Credit Facility Repayment/ Covenants

Glancing through the list of covenants in the 10-K and the recent disclosure in the 10-Q, I see that your

lender waived the June 30th

restrictions and gave you some breathing room:

o $36M in EBITDA by December and a fixed coverage ratio at .95x are the newly modified

requirements

What are you doing to meet your targets?

EBITDA was dragged down by goodwill impairments

Are not having the fixed priced project issue anymore

Europe continues to grow (Q4 was strong)

Not going to have the loss in Q2 that they had in North America

They are taking out costs

o Blocking and tackling and cash optimization

o What have the conversations with your lender been like?

Discussions went surprisingly well

CFO is 3 months into the business

The covenants were written in 2009

o They have been amended the last 4 times

But they get charged $600K for the changes

Feels good about working with the bank

Wants to strengthen the balance sheet and get rid of debt

Can repatriate cash at a lower level due to NOLs and carryforwards





o What are your options if you are having trouble reaching compliance?

Is there a need to look at raising more capital or refinancing now?

Fundamentally opposed to raising equity given the stock at this level

Repatriation of cash and potential asset sales could provide capital

What are you looking to do with the $78M in repayments in 2012 with about $62M in cash right now?

o Strategic alternatives for businesses

o Want to get rid of the debt

Don’t want term debt

Don’t want a large credit facility

Stock Price


o Contrarian thesis is that the company is transforming more than the results would suggest

There has been an influx in talent which can transform the business

o There is not a track record yet of consistency

They think they can leverage their success in Europe to build the North America business

Bring the right people to the right spots

o The culture of CIBER’s consultants and sales people is a differentiator

o The stock has been struggling for so long, this is not a company where people are focused on the

stock price

Options were not a big part of compensation until recently

Self-worth of employees is based on a unit’s performance

Have started to communicate more with employees to let them know what is going and

how the turnaround is going so far

Perficient Inc.: President and CEO Jeff Davis

Description: Perficient, Inc. is an information technology consulting firm. The Company designs, builds and

delivers technology solutions using third party software products. The solutions include custom applications, portals

and collaboration, eCommerce, online customer management, enterprise content management, business intelligence,

business integration, mobile technology, technology platform implementations, and service oriented architectures.

The solutions include business analysis, business integration, enterprise content management, customer relationship

management, service oriented architectures (SOA) and enterprise service bus (ESB), business intelligence,

ecommerce, mobile technology solutions, technology platform implementations and custom applications.

Ticker PRFT TTM EBITDA ($mm) $23











Growth Drivers


other words, what are the main drivers of the company’s performance?

o Near term goal is to be at $500M run rate revenue by 2013

Will be close to $300M at the end of this year

Will try to reach $500M through a combo of organic growth and acquisitions

Have been an acquisitive company since the IPO in 1999

Started in 2004: have done 16 since then

Want to hit double digit organic growth

Think they could be a 12-15% grower

o Stability in the market from a macro perspective

Their issue is sentiment

Would be fine with a 1.5% GDP growth environment if people weren’t

screaming that the sky is falling

Saw that concern in Q2 2010 last year

But didn’t see that this year until now

o Are not seeing the impact to the bookings this year

But, the current turmoil feels like déjà vu all over again

Have levered up around verticals: health care and financial services

Are getting great traction in health care

o 24% of revenue and 34% of bookings in Q1

o Think that health care will be insulated from macro issues

Health care-related companied need to be more competitive

and efficient so they can’t put off investments

Financial services has seen a lot of acquisitions and firms are in the middle of a

lot of integration

o There are things they couldn’t do until the ERP systems were done with

that they are doing now

Buyers have plenty of cash—they have been hoarding cash for the last few years

o Gain scale to get a little more visibility in the market

Story is not followed that closely

Have seen a lot of expansion in gross margins

Think they can get to 40% gross and 20% EBITDA margins as a firm

o Those would be best in class for a US company

Acquisitions

You make it clear that you seek to grow through acquisitions. Can you talk about your strategy and

approach to valuations when it comes to acquisitions?

o A buy-side banker is the source of acquisitions

This is a highly fragmented business with many companies in the $10-$20M revenue

range

Focus is on enhancing the portfolio from a skills standpoint

These are strategic deals and are not done to just increase revenue





o Used to fill gaps in the portfolio

o Every deal fits this criteria

Also allows them to get a geographic expansion

o Pricing: 5-7x EBITDA multiple target

Have never paid more than 6x yet

The 4 they have done recently were very accretive deals

Company looks for deals that are cash accretive day one

Synergies are quite strong

Are able to help the acquisitions from a systems and a management process

standpoint

Get higher productivity out of sales guys and resources

The opportunity to cross sell is the most important thing

How do you think about using cash versus issuing shares?

o Pretty disciplined around shares

o Sometimes they will take principals out

For the most part it is half cash and half stock

Gives them retention and motivation

Have seen most people stay after the 3 year vesting period

Since 2004 about 60% have stayed

Focus on the US

Why have you decided to focus on the US versus someone like CIBER who generates a good amount of

revenue overseas?

o They are focused on the US and outside of the US only as their clients go outside

o This is an $80B industry in the US alone

There is no reason to take on the additional risk and stretch the infrastructure because the

size of the market in the US is big enough

The downside is that you don’t get the hedge

o What would make you change your mind and pursue expansion overseas?

There is a time when being in Europe and Asia will make sense

But they actually shut down their UK office at some point because it was not profitable

Client Retention

To what do you attribute to your high client retention rates (87% according to the 10-K)?

o Quality work and strong relationships with the clients

97% reference-ability with their clients

The 3% they don’t get are small clients that expect the world and don’t want to

pay for it

o Have to be scrappy as a small company

Every deal is critical to them

It is all about reputation





Every client has to be satisfied

Have to incentivize employees to focus on this

o 65% of revenue now comes from Fortune 1000

These firms often have a lot of work and can offer multi-year contracts

The progression towards larger companies is something that they focus on

o Some clients are never going to be good clients and will never be happy

Small clients are less sophisticated and expect a lot for nothing

ERP

With so many companies implementing ERP systems and those projects often taking far longer than

anticipated and costing way more than projected, describe the opportunity for Perficient.

o They don’t implement ERP systems specifically

But they do support management systems work, with IBM being their largest client

Oracle and Microsoft as well are clients

Are looking to get into ERP implementation

o What is driving demand is the need to gain greater efficiencies

Clients need to be more competitive and understand their customers better

Requires a lot of information gathering and data analytics

Competition

Who are you primary competitors?

o Smaller boutique firms that specialize in certain verticals

Do the bigger players such as Accenture have any real advantage in this space?

o Company’s win rate versus the big guys is in the 65% range

o Accenture (ACN) is a well-run firm and their advantage may be brand only

The challenge is getting the ability to compete with them

Lack of brand knowledge is the problem for Perficient

ACN does not value the technologists as a firm

Being a technology specialist is not a good way to advance at ACN

o They are very focused and have an expertise that stems from having greater depth than the big

guys

Their customers (IBM for example) know their name

This begins to shine as you go through the proposal process

What is the main competitive point right now?

o Is it price, speed, customization?

Pricing is important

ACN will try to compete at the same (lower) rate in some cases

Rates are competitive but they don’t give their services away

Right now the competition mainly surrounds confidence in delivery

Want to be on budget and on time

Most customers aren’t as concerned about saving $1M if the project can be done

right





Balance Sheet

Is having no debt an advantage when competing for contracts? In other words, do clients see it as a symbol

of your financial strength and ability to live up to you promises?

o It is not much of a concern for the customers or clients

o What helps more is being larger than the little boutiques as well as being public and transparent

Why would you avoid a modest amount of leverage?

o Cash is worthless now and they like to reinvest it in the business

o Like to have little cash and use it for acquisitions

o Have started a stock buyback program

Are $47M into a $60M buyback program

o Would take on debt for a quarter just to put on an acquisition

Consolidation

How is consolidation impacting the markets you serve?

o There will always be a lot of small shops

Due to very small barriers to entry

o There are a few companies that are still acquiring

A lot are hunkered down however

o Diamond was their size and was the only firm out there that was their size

Was taken out at somewhere around a 40% premium

Would it make sense to merge with a slightly larger player to better compete with the big boys and maybe

cut out some duplicative costs?

o It is likely that Perficient would be acquired once it gets to $500M in revenue

o The offshore guys are going to need a bigger US presence

o They are not running the business with that in mind, however

o PWC is a potential acquirer

They did buy Diamond but it is not as scalable a business

Tax Rate

I noticed the 42%+ tax rate over the last three years with a major component over the last 2 years having to

do with stock compensation

o Is there a way to reduce that rate?

Probably not

Stock comp is coming down at the end of next year

o Stock comp won’t scale with revenue because the new CFO has a

different philosophy than did his predecessor

They can try to get as much revenue from China as possible to lower the tax rate

Stock Price


o The Street generally is nervous that Perficient is not a good stock to hold if you have a bearish

sentiment at all about the economy





Thinks they are not as subject to the economy as people think they are

People are concerned about an economic pullback

But they are growing 10% when GDP is growing 1.5%

Institutional holdings are strong

o Prospect of selling the company down the road leads to a little premium

Kansas City Southern: CFO Mike Upchurch

Description: Kansas City Southern (KCS) is a holding company with domestic and international rail operations in

North America that are focused on the north/south freight corridor connecting commercial and industrial markets in

the central United States with many industrial cities in Mexico. The Company is engaged primarily in the freight rail

transportation business. It generates revenues by providing its customers with freight delivery services both within

its regions, and throughout North America through connections with other Class I rail carriers. KCS’ customers

conduct business in a number of different industries, including electric-generating utilities, chemical and petroleum

products, paper and forest products, agriculture and mineral products, automotive products and intermodal

transportation.

Ticker KSU TTM EBITDA ($mm) $714







Port Arthur Crude Terminal Opportunity

Their partner in this venture (Savage Companies) is private, highly regarded and experienced in this

business

o Savage actually came to them and said suggested they establish a partnership to take advantage of

this growing opportunity

o Savage wanted to bring light sweet crude down and KCS had a great property at Port Arthur,

Texas for storage

Port is close to largest refineries in the US

The partnership is not yet finalized

Savage will likely have an exclusive agreement

3 unit trains per week is the base case

o Savage has been building a facility in the Bakkens oil sands in Canada

It is like the Gold Rush up in this region

Savage is working with Burlington North (BNSF) to bring the crude down to Kansas City

and then KCS will bring it down to the Gulf Region

BNSF could take some further down but not that much

o They would rather work with the other railroads

o It will not take Savage that much time to build a facility on KCS’s property

Will be built at Savage’s cost and Savage will potentially lease the land





Think the deal could be finalized by the end of the year

May start seeing revenue by the middle of 2012

There is not going to be a pipeline anytime soon so this could grow into a very nice

business

o They will not make any investments unless they have a contract for long-term business

More likely that Savage or the oil company would make an investment in any necessary

equipment

o Have owned the 500 acres at Port Arthur for many years

Coal Opportunities

There is a possibility that they have a new coal contract

o They can’t really talk about it until January

o There are 10 plants on their system; they serve 8 now and will likely serve 9

Over the next 2-3 years there will likely be another coal opportunity in Arkansas where a new power plant

is being built

Margins

Are your EBITDA margins in the high 30’s achievable consistently?

o High 20s operating and high 30s EBITDA margins are achievable

o They guide to 150 basis improvement each year

They are in the process of mining out costs

Have removed costs since the recession that have led to 500 basis points of cost

reduction

o They have taken out much of the low hanging fruit

o There are still opportunities on the labor side

o More costs cuts may be hard to take out

Volume increases and pricing increases help increase margin as well

If we are heading into a slowdown, what can you do to cut costs and hold margins?

o Grain and coal move no matter what part of the cycle you are in

Coal is more weather dependent

o The rest of the commodities move up or down based on the economic cycle

Electronics and automotive move down with the cycle

Mexico Opportunity

Think they have a great franchise in Mexico that benefits from the manufacturing shift to that country

o What inning are we in in terms of the industries being on their lines in Mexico?

Transportation of goods from China to Chicago is 5 times more expensive than the trip

from Monterey to Chicago

Plus Mexico is a better place to do business

It is easier to manage your supply chain from Mexico than from China

Think there is going to be a large shift to manufacturing in Mexico

Wages in Mexico could go up

They are not seeing it yet but it is a consideration





Unemployment in Mexico is low and GDP growth is strong

Have not seen an impact from the drug war issue

Working on the railroad is seen as a plus job in Mexico

o Regulations in Mexico

There were restrictions of some goods that came from Asia to the US

KCS found out about this restriction and were able to have it eliminated

The relationship with Mexico is as good as it has ever been

The hurricane last year was eye opening for the government because it showed how

reliant the country was on KCS’s lines

The relationship was solidified by how efficiently KCS got back online

Consolidation


o They are the smallest of the 7 Class 1 railroads so people are always asking if they are for sale

o They would be attractive to larger class 1 operators

o They claim they are not for sale and think they can generate shareholder value through execution

o Would they be interested in acquisitions?

They are small compared to larger carriers and likely could not buy them

They don’t see buying short line companies as valuable

It would have to be a nice piece that fits in their network

The real question is why would you even pursue acquisitions

There are few remaining synergies given the hassles

There wouldn’t be much of the cost takeout

It would be more about revenue synergies and what is going in Mexico

o That is the opportunity

Buffett Buys a Railroad

What does it say about the state of the industry that accompany like Berkshire Hathaway, a company that

always shied away from capital intensive industries, was willing to buy BNSF?

o When you look at the model it is very difficult to replicate the franchise and network

o It is insulated from competition and generates huge cash flows

o Personal belief is that Buffett got a great bargain in buying BNSF

o The business is going to be around for 50 years

o There will continue to be the opportunity to chip away truck traffic share and move more by rail

o The move by Buffett to by BNSF may be an inflation play.

Does inflation in commodity prices actually help them?

Despite rail rates going up, they go up much less than the underlying commodity

prices

If commodity prices continue to go up they will be able to raise prices

o Buffett definitely saw price increases coming





Current state of the industry

Is this year indicative of a normal year?

o Rates have gone down since the industry was deregulated

o Irrational behavior was driving prices down

o Industry got a grip that winning share was not the best way to go forward

o Productivity and service level have increased meaningfully in recent years

o Regulation of trucking industry makes it hard for trucks to compete with rail

Lazaro Project

Lazaro (Mexico) Phase II

o The government is in the process of awarding a 2nd

concession

o All of the port operators are interested in this concession

o Think it could be 3-4M in TEUs [twenty foot equivalent units—a measure of capacity] over the

next few years from 750K now

They are the only company able to service this industry as stipulated by the current

concession

They will take all of the growth from this and it will be one of their top 4 growth

opportunities for the company as a whole

o The port could be as much as 10M TEUs in the next 10-15 years

Ownership

o They have a 50 year concession on the tracks that expires in 36 years and then have a 50 year

option after that

o Own most of the train cars and almost all cars are in use

Have a few locomotives that are idle right now but they are older machines

Not interested in refrigerated intermodal

o They haven’t been looking into it very carefully

o They have a lot of other venues for growth and are not interested in refrigerated intermodal at a

high cost

Stock Price


o There has been concern about a double dip and that the company will not hold up as well from a

margin standpoint

People point to what happened in the last recession

Believe KSU is a stock for an up cycle; not a down cycle

They have taken out a lot of costs since the last cycle

Are in much better position to weather another cycle

They have taken out $150-$200M costs out of the business

They took a lot of interest expenses out as well

Margin deterioration in Q4 2008 to trough was 8.9% versus the industry at 8.3%

They don’t think they are as at risk this time around





Operating ratio was traditionally higher than the industry average but KCS is a different

company today

People are seeing the growth opportunities

Are now even above 2007 levels of volume and are up far more than the

industry

Tyson Foods: CFO Dennis Leatherby and COO Jim Lochner

Description:

Tyson Foods, Inc. is a meat protein and food production company. It produces, distributes and markets chicken, beef,

pork, prepared foods and related allied products. Its operations are conducted in four segments: Chicken, Beef, Pork

and Prepared Foods. It operates a vertically integrated poultry production process. Its integrated operations consist

of breeding stock, contract growers, feed production, processing, further-processing, marketing and transportation of

chicken and related allied products, including animal and pet food ingredients. Through its wholly owned subsidiary,

Cobb-Vantress, Inc. (Cobb), it is engaged in poultry breeding stock supply. It also processes live fed cattle and hogs

and fabricate dressed beef and pork carcasses into primal and sub-primal meat cuts, case ready beef and pork and

fully-cooked meats.

Ticker TSN TTM EBITDA ($mm) $2,042







Growth Drivers



o The beef and pork businesses are best in class and sales are at all times highs

Believe this is ongoing and sustainable

Not likely to grow that much off of this base though

o Prepared foods and chicken are the growth opportunities

Currently the chicken industry is oversupplied versus demand

Competitors are losing money

Tyson achieved a 1% return on sales while others are losing money

As supply comes back online there will be growth

o Mexico is mature

o India is small but a good market

o Brazil is a good export play

o China is the exciting story

Especially as KFC and McDonald’s grow fast

o Trying to come up with the correct business model in these markets





Prepared foods range from bacon to pizza crusts to toppings

There is room for growth in prepared foods as well

o Expect to be investment grade in the coming years

The company is tainted by its past

Underperformed from 2006 to 2008

Management starved the core businesses from capital

Leadership change has focused people on the details and execution

o New team saw all of the poor decisions made by the previous

management teams and has learned how to incentivize people

Have subdivided the company into smaller business units so that they can focus

o FY 2010 was the best year in the company’s history

If the stock traded at a decent multiple, the stock could be $23

Plus, there is going to be growth on top of the current numbers

There is not one silver bullet to continued improvement

It will come from all around management execution

Raw Materials

What commodities are you most exposed to? What is the best way for the company to protect its margins

against volatile commodity prices?

o Major inputs

Corn & soybeans make up 42% of chicken COGS

Raise their own chickens

Live cattle

Do not raise their own; buy on spot market

Live hogs

Do not raise their own; buy on spot market

o Don’t think they are going to see a big decline in feed costs going forward

Think we are in new normal of higher costs

They have been investing in their facilities to make them more competitive

Are adding mix capability

Other competitors are now pulling back

o Can you talk about the hedging strategy a bit?

Strategy is to not take crazy trading risks and call it hedging

If they can buy call options they will to prevent runaway costs

Are willing to pay reasonable insurance premiums

Very conservative strategy

International Opportunity

Major export markets include Canada, Central America, China, the European Union, Japan, Mexico, the

Middle East, Russia, South Korea, Taiwan and Vietnam

Describe the international opportunity and especially the chicken opportunity in China

o In 2010 export revenue was about 32% of the total

o In China, KFC does not have franchisees





All company owned stores

In the US, KFC has a franchisee model and good new ideas often cannot pass to the

franchisees

The company-owned model has been one of the reasons for KFC’s success in

China

o The Chinese-based poultry industry is a small player, is segmented and not vertically integrated

These small players are only thinking about keeping birds alive using antibiotics

Not worried about genetics

KFC has a supply chain challenge of guaranteeing controlled production

They are not getting quality products and people are being poisoned all time in

China

o This leads companies to look for vertically integrated companies

Companies that owns their own distribution, have a supply

chain that works, can focus on genetics and can control the

feed quality

Believe they are going to have to go to company-owned farms in China

The outsourced grower model might not work

They will produce them cheaper than the current players in China

o Competitors’ leveragability is not good

o Cost to produce is 10-15% lower for Tyson

The competitors, over vaccinate, which is costly

o Have proven that the model works in India as well

The government has started to regulate the small producers

o Tyson is a huge protein producer and the Chinese government will

eventually get its arms around protein production

Controlled production is going to be a key and Tyson will be

able to charge more for it

There is 1 chicken producer in China that has done

well but the market as a whole is not that competitive

McDonald’s does not have any beef items on the menu in China

o You have to ask for beef to get it

Demand from the chains led the industry to focus on vertically integrated

companies

Land use rights have to be carefully negotiated in China

But, they think they offer the regions a lot and will be able to ―own‖ their own

land

o Protein production is a priority in China because it provides jobs and

offers China the ability to feed its people

Don’t want to go too fast but they are looking at 2 years to get things up and

running

In India live production is a competitive advantage

Expect it to be as big a play as China as well

This downturn may shake out the industry and be good for Tyson

How do international sale margins compare to those in the US?





o They think they can exceed the margins outside of the US but there are a number of challenges

o Think they can charge a premium for their controlled process

Capital Allocation

Is debt repayment a priority? Can you talk a little about the decision between debt repayment and

buybacks?

o They have gone through a change and have set a goal for the capital structure

Wanted to assure the agencies that they have liquidity

$1.8B in liquidity

Gross Debt to EBITDA: 1.3x or less

o 1.2x this quarter

Have been buying shares with excess liquidity

o But would rather make acquisitions

Are already spending more CAPEX than D&A

o They are investing in their business

Is it important to get your credit rating above BBB- on the revolver?

o Yes, they want to be rated investment grade by all the rating agencies

Margins

The difference in margins in hogs and cattle comes from much longer production cycle

o Supply does not get too high as easily as it is for chicken because it takes longer for the animals to

mature

Lag phase leads to higher margins

Acquisition Strategy

Domestic chicken market: very fragmented after Pilgrim’s Pride (17% share) and Tyson (22% share)

o Very small players below them

o Very diversified group of regional firms

Many of these are in financial trouble due to distress

Can’t really roll up these firms because the government will watch Tyson’s actions very carefully when it

comes to chicken to prevent a regional monopoly

o They would have to move out to the west coast for acquisitions

May be better off making acquisitions in prepared foods

o Most people don’t know how big they are in pepperoni, taco meat, and pizza crust

There are a lot of people who want to them to buy assets

Both bankers and companies themselves

o Pricing and assets have been right though

Stock Price


o There is no forgiveness for the past sins

o Chicken is being held against them





But chicken only represents 1/3 of their earnings potential

o Tyson’s Pork and Beef segments are big players in the industry

No livestock risk

Most of the supply comes from the spot market

Very competitive on the cost structure and location

Gorman-Rupp Company: President/CEO Jeff Gorman

Description:

The Gorman-Rupp Company (Gorman-Rupp) designs, manufactures and sells pumps and related equipment (pump

and motor controls) for use in water, wastewater, construction, industrial, petroleum, original equipment, agriculture,

fire protection, heating, ventilating and air conditioning (HVAC), military and other liquid-handling applications.

The Company operates principally in one business segment, the manufacture and sale of pumps and related fluid

control equipment and systems. The Company’s product line consists of pump models ranging in size from 0.25

inch to 144 inches and ranging in rated capacity from less than one gallon per minute to in excess of 750,000 gallons

per minute. The types of pumps which the Company produces include self priming centrifugal, standard centrifugal,

magnetic drive centrifugal, axial and mixed flow, rotary gear, diaphragm, bellows and oscillating.

Ticker GRC TTM EBITDA ($mm) $59







Growth Drivers



o Very diversified across markets but are heavily into the water sector

Want to be diversified so that one market can’t really hurt them

Their fortunes are tied to the broader economy but they are not totally at the mercy of out

of control factors

o How well capital goods move will be important in the future

Being in water is important because you cannot deprive people of water

o Acquisitions will play a part but they will not only grow that way

Has to be the right fit before they move but they currently have the room on the balance

sheet to make acquisitions

o International markets represent the most important opportunity

Based on the need for fresh water and sanitary conditions in emerging markets

Competition





Who would you saw your most formidable competitors are?

o Really depends on the market

o Most of the pump companies that are left are buried in the financial statements of bigger firms

Think it is an advantage to be independent

They are more flexible and can move fast

Of the comps I glanced at, it looks like GRC has some of the highest EBIT margins. What would you say is

your competitive advantage versus the rest of the industry?

o There is no cost advantage necessarily

Commodity prices are the same and the cost of the engine is the same

Gross margin line is the same

o However, the culture of the company stands out among all of the competitors

Still very much a family company

Quality is the most important factor

75 years of reputation in the industry helps them get a foot in the door and to maintain

relationships

Consolidation


o The whole pump industry is very fragmented

o Lots of mom and pop businesses

This is a niche product

o The National Pump acquisition was a good opportunity

National knew that it had to get into the international markets and thus had to marry up

with Gorman Rupp in order to capitalize on the opportunity

o There would not be an advantage to hooking up with a big company like ITT

IDEX has been pretty aggressive and ITT is now breaking up so they are not likely to be

as active as they have been

o The company has an eye out for acquisitions

Have no set target though

Have you taken any measures that would allow you to protect margins during the downside of the cycle?

o Came out of the bottom of the cycle a lot stronger

o Took some big hits as 2009 was a challenging year for all of their markets

But some of their markets did well in 2009 and it helped to be diversified

o Have benefitted as the top line grew more than expected

Have continued their capacity investments even when people thought they were crazy to

do so

How do you manage cost inflation?

o Are you typically able to pass along cost increases?

Company never has trouble passing along cost increases

Normally get a premium for their product

Quality of the product is there

Have a lot of loyal customers

International





Can you talk a little bit about the international opportunity?

o The key is having the right distribution

o Sometimes it takes a few years to get it right

o Tend to go with smaller, family-owned distribution

o Made an acquisition of National Pump that had low international sales

Think that National’s deep well pumps will do well internationally because the

distribution network is already set up

How do international margins compare to those in the US?

o Pretty much the same

In the total scheme the margins could be a bit less than in the US due to slightly higher

SG&A

Family Ownership and Control

How should we think about the family’s 25%+ ownership of the company and the fact that the top positions

are filled by Gormans?

o High insider ownership: 30% of shares are closely held between the 2 families

o Gorman Rupp is a profit sharing company when it comes to the employees

o Even though they are public it feels like a family-owned company

o Hard to find a company with a better dividend record

39 straight years of dividend increases

Recent share split was a way to get the shares out there in a controlled manner

o They want to increase the float

We like insider large insider ownership. Would you say that the incentives of management are aligned with

those of shareholders?

o Managers receive a base salary and then a profit sharing component that is a larger percentage

than normal

Capital Allocation

Talk to me a little about the decision process surrounding the choice of whether to make acquisitions,

increase the dividend or invest in CAPEX

o Each division manager has the ability to make capital expenditures

o Believe in reinvesting in equipment that helps them be more productive

o Do measure return on invested capital but it is not as important as other metrics

Especially since comp is based on profit sharing

Backlog

Is the backlog the best barometer of how the company is doing?

o Yes, for sure

o How much visibility do you typically have into the next year and beyond?

They have about a year of visibility

Some power generation business is longer-term and thus they have a little more

visibility

o Demand drivers of record backlog





A lot going on in the oil and gas industry

Spikes in the power generation business

National Pump acquisition

Owner was looking forward to retirement even though he is staying on

Blended well with their agriculture and municipal businesses

o It was an overall great fit

o They are not turnaround people

Like to pay EBITDA numbers under 10x

o Multiple on National was around 8x

o During the decision process, management reflects on a lot of things

Has to be a fair price

Has to fit with the firm’s marketing capabilities and product offerings

Has to fit culturally

Want to stay in the pump business

o Do not want to stray away from that

Lack of appreciation by people new to the company

The breadth and diversity of products is not well understood

There is a lot of opportunity out there domestically and internationally

People are always going to flush toilets

Just achieved ISO 14000, which is an environmental standard

o They have a love/hate relationship with the EPA

They believe they have to be environmentally responsible company more so than others

because they are in the water market

Day-to-day tasks of the CFO

Makes sure that the customers are satisfied and that employees are involved

Oversees the business on a day to day basis

Balance Sheet

Goal is to have no debt by year end

The National acquisition led to some debt that they expect to be outstanding for only 5 quarters

Stability and good dividends are important to investors

o Leveraging up the company to make acquisitions is not the way to go

o Most acquisitions are cash –based

Gives them a ton of flexibility

o Have great banking relationships and have access to capital that allows them to make acquisitions

or build plants whenever they want

Never have to worry about interest rate risk

o Never have to beg for cash

o Have leverage with banks





Stock Price


o Company has a strong balance sheet and is a dividend payer

For the most part people get the picture

Compounded returns since the IPO are very impressive

o Most holders have been in the stock for a long time

Economic Downturn

What does their world look like in a situation in which the US is in a prolonged state of fiscal contraction

and economic malaise?

o Agriculture markets can be cyclical

Make up about 5% of revenue

o Construction markets can be seasonal

o They are in 7-8 key markets

The biggest market is 20% of total revenue

o What about the municipal side of the business?

Funding is an issue

The company caters more to smaller and medium sized municipalities

Demand is flat even though the need is high

Waste water is a priority

Municipalities tend to find the money somewhere and can jack up water rates if

need be

Margins are similar pretty much across the board, including municipal contracts

Offer a high amount of value engineering

o Design provides an advantage

o Nobody ever gets fired for buying from Gorman Rupp

Quality backed up by service

o Weak dollar has made their product more price competitive

International revenue is now near 40% of total

Dollar has stabilized but they have continued to execute

Kirby Corp Chairman/CEO Joe Pyne:

Description

Kirby Corporation is a marine transportation and diesel engine services company. The Company, through its

subsidiaries, conducts operations in two business segments: marine transportation and diesel engine services. Its

marine transportation segment is engaged in the inland transportation of petrochemicals, black oil products, refined

petroleum products and agricultural chemicals by tank barges, and, to a lesser extent, the offshore transportation of

dry-bulk cargoes by barge. The Company’s diesel engine services segment is engaged in the overhaul and repair of

medium-speed and high-speed diesel engines and reduction gears, and related parts sales.





Ticker KEX TTM EBITDA ($mm) $337







Growth Drivers



o Low natural gas prices are important

Natural gas is a feedstock for their customers and customers are hurt by higher prices

o Modest capacity additions

o A global economy that is growing

These 3 things would create an environment where the stock works

o Utilization of fleet right now is in the mid-90s because the petrochemicals business is growing

The whole industry is likely at these levels as well

State of the petrochemical market

Still getting better

Provides 2/3rds of revenue

o 20% black oil

o 10% refined products

o The rest is agriculture

This was about the same 4 years ago

Refined products percentage is going to increase as a result of the K-Sea

acquisition

o Black oil and chemicals are the best places to make money

Agriculture chemicals are carried by old barges

US fleet of tank barges

3100 total barges in US

o They have 830, a number that represents 27-28% of the market

o They are always price takers although the pricing has continued to go up

Expecting peak pricing next year, similar to 2008 (before the crash)

o They are still building barges but they are only replacement older equipment

They have taken out capacity

The industry will always overbuild but there is no significant capacity being brought out

since most of it is replacement-based

Can’t see real overcapacity for three to four years honestly

o Overall fleet age is 23 but will be down to 17 by 2012

Useful life is 30-40 years





Marine Value Proposition

Do you realize value for being the largest inland barge carrier?

o They get value from being the biggest

This was seen in 2008 and 2009 as they achieved rates higher than those of their

competitors

Safest, strongest balance sheet, well managed, lots of flexibility, ability to move

equipment and can cut costs for customers when needed

Biggest customer is Dow Chemical

o Dow is completely dependent on barges and Kirby serviced them

during the recent flooding

They have all of Dow’s barge business

Economies of Scale

It looks like there is a cost advantage versus rail and trucking. But how do you establish a competitive

advantage versus other barge carriers?

o Economies of scale

They think they have that on the Gulf Coast

It is easier to compete with Kirby in the river business but not in the Gulf Coast business

Can take costs out quicker than others and can stay profitable when others are

losing money

They went into the financial crisis with 80% of their contracts being long-term

o Their customers are so big that Kirby almost never have to deal with

people not being able to pay or trying to break the contract

They had some trouble with Lyondell

But now Kirby has all of Lyondell’s business and is

actually thinking about buying all of Lyondell’s boats

Margins

As fuel prices decline, do you more than make up for lost demand with cost savings?

o Fuel costs are passed on

Theoretically changes in fuel prices are earnings neutral

However, higher energy prices are generally not favorable because they hurt

customers and the economy as a whole

CAPEX and Acquisitions

Can you talk about the rationale for the K-Sea acquisition and discuss how the integration is going?

o K-Sea’s operations represent an extension of Kirby’s with the added benefit geographic diversity

Talk to the same customer at the same desk

Think they can move things inland and offshore

Think they bought it at the right time

K-Sea had too much capacity but that will rationalize over the next few years

Bought 58 barges and 63 towing vessels





This is high value, offshore equipment

There are backend synergies but they have not publicly quantified those as of yet

Going to spend the latter part of the year looking at those

Deal was the first example of a public company buying a public MLP

How do look at issuing shares versus taking out debt to make these acquisitions?

o Prefer not to issue shares

o Had to in the K-Sea acquisition because they did not want to get downgraded by the rating

agencies

Kirby wanted the agencies to see that the company was serious about the balance sheet

o Have bought back 21M shares since he has been the CEO

o They have more control over repurchases than a dividend

They would rather reinvest cash in their business than pay a dividend

But, they will never say never because they are close to generating enough cash

able to do everything (including a dividend)

New barges

What factors do you look at when you decide to bring on new capacity through new barges?

o He has been running the Marine side since 1984

Having been taking capacity out since then

Only started adding some capacity in 2007

Any new capacity would be added very carefully

Is the make versus buy decision all about the cost per unit?

o He would always prefer to buy versus make because when you buy you take off capacity and

when you build you increase capacity

Barge lead time

o It takes 3 months to build a barge

o In 2008 visibility was 12 months and now it 18 months

Backlog is good until the customer cancels

Is only as good as the next cycle

Consolidation

Does increased consolidation lead to more rational pricing and less knee jerk response to adding capacity?

o All capital intensive businesses face the overcapacity issue

There is always the risk of overbuilding during good times

o Pricing is rational right now

But if it gets sloppy, the pricing will get irrational very fast

Competition

Who would you saw your most formidable competitors are?

o American Commercial Lines has 10-11% share





Stock Price


o Most people who study the company think it is a great buy

o The issue is whether the price is fair or not

That has a lot to do with where earnings go

o He doesn’t think the street is missing a lot about Kirby

Look at who owns Kirby

Thinks long-term investors own the stock

The company kind of sells itself

If it’s not the right stock for certain investors then he doesn’t want them to buy it

o If we have more questions, he suggested that we call Steve Holcombe, Kirby’s IR guy

Said we should put him through the ringer

And then if we come to Houston we can see the equipment firsthand

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Notes from BB&T 1-on-1 Conference

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