Berkshire Hathaway 2017 Annual Meeting Audience Question # 55

Warren and Charlie talks about McLane

Warren Buffett:

Station 7.

Audience Member:


Warren Buffett:


Audience Member:

My name’s Grant Misterly from beautiful, historic Saint Augustine, Florida.

I’ve been a fan of yours and of Berkshire since I was a kid, looking through the stock pages and seeing one crazy stock that traded for $10,000 a share.

Unfortunately, I wasn’t able to convince my parents to buy it at that point. But now I’m a shareholder as an adult. And I’m here with my daughters, Mabel, who’s seven and Willa, who’s one year old, my wife.

I voraciously read the letter every year. And I love the stories of… from the different companies, GEICO and See’s, BNSF, that kind of teach investing lessons.

And this year, when I was looking through the accounting information in the back, I noticed that one company, McLane, contributes a lot of revenue, a large portion of Berkshire’s revenue and, to a lesser extent, earnings. But I don’t ever see much about it in the annual report.

So I’m curious why we don’t hear more about that company? And are there any investing lessons like we get from See’s and GEICO that you can share about that company?

Warren Buffett:

Yeah, McLane… the reason you see their figures separately is because the SEC has certain requirements that are based on sales. And McLane is a company that has an extraordinary amount of sales in relation to intrinsic value or to net income.

It, basically, is a distributor of… well, it’s a huge customer, for example, of the food companies, the candy companies, the cigarette companies, it… go up and down the line of anything that goes into convenience stores.

But we bought it from Walmart. And Walmart is our biggest customer. I can’t tell you the precise volume, but… well, if you get Walmart’s and Sam’s together, you know, you’re getting up to 20 percent-plus.

But it’s nationwide. But in the end, it operates on about six percent gross margins and five percent operating expenses, so it has a one percent pre-tax margin.

And, obviously, a one percent pre-tax margin only works in terms of return on capital if you turn your equity extraordinarily fast. And that’s what McLane does. Being a wholesaler, it’s moving things in, moving things out very fast, very efficiently. And it does this…

It also has a few liquor distribution subsidiaries that have wider margins. But the basic McLane business is, you know, 45 billion-plus, makes one percent pre-tax on sales.

But the return on capital is very decent. But it sort of has an outsized appearance simply because of this huge volume of sales that go through it.

Grady Rosier, who runs it, is exceptional. He was there when we bought it from Walmart, whenever it was, a dozen years ago.

And I’ve been there once. We’ve got thousands and thousands of trucks, big distribution centers all over the country. It is a major factor in moving goods at wholesale.

I mean, if you’re a Mars Candy or something of the sort, I mean, we… we’re… we’ll be the biggest customer.

But that pretty well describes the business. You know, it’s a business that earns good returns in relation to invested capital and in relation to our purchase price.

But, you know, every tenth of a cent is important in the business. In collect… moving your receivables exceptionally fast, and consequently you have… you know, you have payables moving big time.

So the sales are 30 times receivables and 30 times payables, you’ve got… and maybe, yeah, 35 or so times inventory. I mean, this is a business that’s moving a lot of goods. But, in terms of its…

It’s an important subsidiary but not remotely as important as would be indicated by the sales.

It’s still very important making the kind of money that shows up in the 10-K.


Charlie Munger:

You said it all.

Warren Buffett:

That was an interesting thing. Walmart wanted to sell it. They came to see us, and we made a deal. And the CFO came. We talked for a while. He went into the other room and called the CEO and came back and said, “You have a deal.”

And Walmart has told me subsequently that they never had a deal that closed as fast as the one with Berkshire. I mean, they… you know, we said what we would pay. It was cash. And we got it done very promptly. And they were terrific on their side.

Charlie Munger:

By the way, that reputation for being quick and simple, and doing what we promised and so on, has helped at Berkshire time after time.

Warren Buffett:

Yeah. Yeah, we wouldn’t have made that deal without, essentially, having that reputation. But they knew…

Charlie Munger:

Well, you bought the Northern Natural Gas Company in one weekend. And they wanted the Monday… that money on Monday.

Warren Buffett:

They needed the money on Monday.

Before the lawyers could complete the legal papers, we managed to do it.

Well, not only that, but I think it took some clearance by… in Washington. And, essentially, I think I wrote a letter and said that if they didn’t… if they decided after looking at it they didn’t want to clear it, we’d undo the deal.

But these guys needed the money so bad, we were going to give them the money, essentially, based on the deal clearing. And there wasn’t any reason why it wouldn’t clear, but that was just a procedural problem.

But most companies can’t do that. I mean, we can. We’ve got a flexibility that, really, in most large companies just plain doesn’t exist. There’s too many people have to sign off on it or something of the sort.

So the Northern Natural deal would not have been made if we’d had to follow the normal timetable. It…

Charlie Munger:

And it’s a lovely business to own.

Warren Buffett:

Yeah. Absolutely.

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