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Operator: Hello, and welcome to the Third Quarter 2025 Investor Call for Pershing Square. Today's call is being recorded. It is now my pleasure to turn the call over to your host, Bill Ackman, CEO and Portfolio Manager.
William Ackman: Thank you, operator. So welcome to the third quarter conference call. We've had a strong year-to-date, certainly through Q3 and even up to the present, north of a 20% return and nicely in excess of the S&P for the year. But despite overall strong performance, we don't get them all perfectly right. So I thought we'd start the call just focusing on a couple of investments that have not performed well this year. And why don't I turn it over to Anthony to talk -- let's talk about Chipotle. Let's start there.
Anthony Massaro: Thanks, Bill. So we actually sold our remaining shares in Chipotle this year following the company's third quarter earnings report. This concluded an investment in the company that was over 9 years old. So a very disappointing conclusion to what had long been a very successful investment for us. The stock IRR from our inception to exit was just under 16% versus just over 15% for the S&P 500. But fortunately, we have previously sold 85% of our initial 10% stake in the company at various times over our 9-plus year holding period. That resulted in a realized IRR on the position of just under 22% and $2.4 billion in cumulative profits. So the big question is, obviously, why did we decide to sell the rest of it this year after a stock decline of nearly 50%. So just to give you kind of some context for our thinking, from the first full quarter that Brian Niccol was CEO of Chipotle, that was the second quarter of 2018 through the end of 2024, quarterly same-store sales averaged 9% and no quarter outside of one quarter that was impacted by COVID was below 3%. And if you look under the prior management team, in the 10 years prior to the 2015 food safety scandal that predated our investment, same-store sales also averaged 9%. So as the company started to report weak quarterly same-store sales this year, we believed based on the various sales-driving initiatives they had in the pipeline and also the remarkable long-term historical performance since the company went public, that trends would eventually improve. And unfortunately, underlying trends progressively worsened throughout this year including another step down during the current fourth quarter that was disclosed on the Q3 call. We do believe that macroeconomic weakness amongst low- to middle-income consumers and younger consumers is the primary cause of this same-store sales slowdown as evidenced by similar trends that peers are experiencing. But we don't know how long this weakness is going to last. We don't know if it's going to worsen before it gets better. And it's pretty clear that Chipotle and competitor management teams don't know either. They're doing the right thing by reinvesting in the customer value proposition by not taking price despite mid-single-digit food cost inflation, and they're, therefore, accepting kind of lower near-term margins. But we don't know if this will be sufficient, and there might be more kind of to come there. Year-to-date, of the kind of nearly 50% stock decline, forward earnings are only down 8%. Now that's not good, right, because they're supposed to actually grow. But forward earnings are down 8%, but the PE multiple is down 44%. So the vast majority of the year-to-date stock decline is due to multiple compression. While the current valuation of about 25, 26x forward consensus earnings is cheap if the company can quickly get back to achieving its long-term growth goals, we just didn't have enough confidence to underwrite this at this time. So the business has a high degree of operating leverage. So it's possible that if sales weakness persists for however long it persists, that consensus margin levels will be below even current levels. And this investment now has a much wider range and dispersion of potential outcomes around the company's near- and medium-term earnings power. That's just much wider than we had foreseen at the beginning of the year and frankly, at any time since we own our investment in Chipotle. And this made it a lot more difficult to continue holding the investment despite the fact that the company is now trading at one of its lowest multiples ever. And there's a new CEO running the company since Brian left for Starbucks in August. He's a talented operator, but he's certainly off to a rocky start as a first-time CEO. And in light of this, a return to the company's historical premium valuation multiple is uncertain. We do have tremendous respect for Chipotle, and we wish the company all the best as it navigates what's proven to be quite a challenging environment for them and for the industry.
William Ackman: Yes, we wish the company well. We think highly of Scott. We think he's a very good leader. He did a great job running COO of the company for a long period of time. So we wouldn't bet against Chipotle. And maybe someday, we have an opportunity to become a shareholder again.
Anthony Massaro: Totally agree.
William Ackman: So on the topic of less than successful investments this year, let's talk about Nike and maybe feel free to jump in as well, Manning, if you'd like. But Anthony, go ahead.
Anthony Massaro: Sure. So we also exited our investment in Nike Options earlier this month. Unlike Chipotle, Nike was an unsuccessful investment for us. So much shorter holding period. We first invested in the company this time around in June -- or sorry, in the spring of 2024. The cumulative return on Nike since we first invested was negative 30% versus the S&P, which is up 33% and the cumulative P&L was over negative $600 million. So the big mistake here was the initial underwriting. So as we've previously communicated, we underestimated the degree of near-term revenue declines and operating deleverage, aka margin declines that would be necessary to effectuate a turnaround here. So the prior CEO had lost the organizational focus on sport. They overemphasized direct-to-consumer sales at the expense of wholesale relationships, and they failed to create innovative performance products while overproducing big lifestyle franchises, and this really damaged brand heat in the eyes of the consumer. The prior CEO had admitted to kind of these mistakes in early 2024 and outlined a series of corrective actions, which is why we thought that the ship had kind of been set in a better direction, but the magnitude of the corrective actions that were required were far greater than we anticipated. Fortunately, for Nike, the company's controlling shareholder, Phil Knight, and the Board of Directors made the ideal management change in September of 2024 by bringing back long-time Nike veteran, Elliott Hill. We believe Hill is a fantastic CEO. He has an excellent strategy to return to profitable growth by renewing Nike's obsession with sport, accelerating innovation, creating bold marketing and rebuilding wholesale distribution, which he led for a very long time. At the start of this year, we converted our Nike common stock position into a deep-in-the-money call option position. We did this to preserve the upside potential of owning the stock while unlocking capital to make new investments. Since the start of this year, the turnaround is progressing a bit below where we projected for revenues, but materially below for margins. And the reasons for that are twofold. About half of that margin decline versus what we projected at the beginning of the year is due to tariffs, which were new this year and the other half is due to more aggressive clearance activity of legacy inventory. So Nike is down about 17% year-to-date. Most of that is forward earnings, which are down 15% and the multiple is effectively unchanged, down 2%. While we have confidence that Nike has the right CEO and the right strategy, we grew more uncertain of what long-term margins would look like as this year progressed. Can the company really get back to pre-COVID margins in light of tariffs, which don't seem like they're going away anytime soon and in light of the more competitive nature of the industry. It is a more fragmented competitive landscape in athletic footwear and apparel now than it was kind of for most of Nike's history. And to meet our return thresholds for a turnaround at the time of our sale would have required us to assume stabilized margins of at least 13%, which is consistent with what they did pre-COVID. And we didn't have enough confidence to make this assumption kind of in light of these new margin headwinds. We do believe that Nike's turnaround will be successful, but we don't know what success will look like from a margin perspective. The company has articulated confidence in getting back to double-digit margins, very different outcome for shareholders if that's closer to 10% than 13%, 14%. So we have tremendous confidence in Elliott, a tremendous admiration and respect for what he's doing at bringing Nike back to greatness, and we wish him and the team at Nike the best of luck.
William Ackman: Obvious question would be with respect to Nike. It's a company we've owned before and got right in the past in a meaningful way. Any sort of overarching lessons from either the Nike or the Chipotle experience that will help us avoid similar mistakes in the future, either a better exit from a Chipotle or a miss -- a better timing on our acquisition of shares of Nike.
Anthony Massaro: Yes. Look, I think we're still reflecting on kind of lessons learned, but I think I would point 2 high-level ones, one for each. On Chipotle, I think high PE multiple stocks can be dangerous when things turn. I think that if everything is going right and you have a very proven leader running the company, you can afford to hold it for a while longer. But I think with a high multiple stock, if kind of the trends slow for any reason, it's better to exit faster than to give management the benefit of the doubt. For Nike, I think one lesson that I and we, I think, have learned there is return thresholds for turnaround situations, even if the turnaround doesn't look like initially that it's going to be that severe, should be higher. So I think had we gone in with kind of a higher required -- had we had a higher required IRR for that one, perhaps we would have avoided making the initial investment.
William Ackman: Great. Why don't we focus on one other underperformer for the year, and then we'll get to why we're actually having a good year, but I think it's good. Let's focus on the negative first. Universal Music. Let's talk about that. Ryan, go ahead.
Ryan Israel: Sure. So Universal Music, the business performance has continued to be strong. In their most recent quarter reported a few weeks ago, the company showed, for example, that revenues grew at about a 10% rate on a constant currency basis and their adjusted EBITDA profit metric actually grew a little bit in excess of that about 12% rate. Those levels of business performance are actually very consistent with what the company has done since we helped facilitate a public listing nearly 4 years ago. So the business performance remains quite strong operationally in our view. But as you mentioned, Bill, the stock has underperformed this year. And in particular, it's really underperformed since the summer. So the share price was in July, a little bit above EUR 28 per share. And as of earlier this week, it was as low as about EUR 21.50, which is about a mid-20s percent decline in the share price. And actually, at one point earlier this week, the company was down to a 20x PE multiple based on consensus analyst earnings for the next year, which is the lowest multiple that the company has ever traded at in our little over 4 years of ownership. And we think the primary reason for the decline in the share price over the summer to now really due to technical factors. So for example, the largest shareholder of the company, the Bollore Group, there was a ruling in July by a French court that they would need to buy out another publicly traded company. And so there was a fear or perception in the marketplace that Bollore, who is the largest owner of UMG would be a forced seller for a chunk of -- a very large chunk of their shareholdings in order to fund this buyout that a French court was requiring. And so that forced seller dynamic, in our view, made it difficult for other people to want to buy the stock ahead of what could be a forced seller in somewhat unknown time frame and potentially unknown quantity. As we transition from that happening in the summer to the fall, the U.S. government shut down. And so the SEC was unable to kind of fulfill any sort of request for a U.S. listing and UMG's example, which we think created potentially further technical headwinds. Stepping back a little bit, our view has been that the business performance remains very strong, as I mentioned on the quarterly basis, this quarter as well as really over the last 4 years. And we think that a share buyback really could address the technical concerns that would have happened. So for example, the market perception that there is a forced seller that could be around the corner, hard to get market participants to want to buy shares in advance of that. Yet if the company is buying their shares, that could provide somewhat of an offset for the technical demand. And in general, for a company that has very strong operational performance, we think a buyback at the lowest multiple that it has traded at for the last 4 years would be a good idea as well. But maybe I can turn it back to you, and you can talk a little bit more about the upcoming U.S. listing.
William Ackman: So one of the package of rights we received when we became a shareholder of Universal Music was the ability to catalyze a listing in the U.S. And we felt strongly that it's a U.S. headquartered global business, but half -- even more dominant in the U.S. and a very significant percentage, effectively half of their business is a U.S. company. It is listed in Euronext that has limited the universe of people who can own the stock. Many U.S. investors by mandate are not permitted to own Euronext listed securities. And our view, materially more demand can come into the stock with the U.S. listing. We also think the kind of cadence of quarterly reporting and the kind of information that becomes available when a company is registered in the U.S. will provide -- enable better analyst coverage. The fact that the peers are U.S. listed companies will make, I think, easier, I would say, comparisons and I would say, better understanding of the company. And so we catalyze that listing by exercising our registration rights. Our registration rights require in order for the company to be obligated to register our shares in the U.S. and create a listing here for us to actually sell some stock. So we've agreed to sell $500 million of shares as part of the listing of the company. Now in light of the share price, we are not a -- we're a very reluctant seller, but we believe the value in terms of improved transparency as well as the improvement in the supply-demand dynamic overwhelms the cost to us of selling a portion of our position at the current share price. Now we've approached the company, and we've asked the company to simply seek a listing in the U.S. without the requirement for us to sell stock. At this point, the company has been unwilling to let us withhold the $500 million of stock in the offering. So we're going to go ahead with the offering, selling a portion of our stock at whatever the price is at the time the listing in order to catalyze what we think is a value-creating transaction for the company. Just further to Ryan's point, this is a company -- I've been on the Board -- I was on the Board for a number of years. I think it's an excellent management team that understands the music industry, where there seems to be a gap in understanding is in how the company approaches the capital markets and using -- taking advantage of the company's balance sheet, the free cash flow it generates and optimizing the company's use of capital. This is a business that's not going to require billions and billions of dollars of capital for acquisitions. The company has made that, I think, very clear. The nature of the company's dominant position in the marketplace also makes clear that it's very difficult for the company to do acquisitions of any kind of meaningful size in the industry. So we remain puzzled really as to why the company is not a more aggressive buyer -- or actually why it doesn't buy back stock at all and why in addition to pointing out that the stock is trading at the lowest multiple it traded at, it's also approaching the highest valuation for Spotify, a significant asset on the balance sheet. The company has intelligently held on to it at this point in time. But again, another opportunity for monetization and returning capital to shareholders. So that's our strong view on that topic. Okay. Let's focus to the positive. We are actually having a very good year. Let's talk about our largest investment at this point, Alphabet. And that's Bharath, who's going to take that on. Go ahead, Bharath.
Bharath Alamanda: Sure. And maybe to rewind back to when we originally initiated our position in Alphabet more than 2.5 years ago, our investment thesis was that Google's leadership position in AI was being severely underappreciated. And our view then was the company had a unique full stack approach to AI that came with several structural advantages, namely frontier research capabilities, world-class technical infrastructure, scale distribution and the access to immense training data. And you could argue then that the main open question was around execution and whether the company would be able to harness all those inherent competitive strengths into their product road map. I think since we made our investment and one of the reasons the share price has appreciated meaningfully both this year and over the life for our investment, but we still continue to remain very optimistic shareholders, is they've really stepped up to that question and done an excellent job on the execution front and leveraging their strengths. And maybe to just provide a few recent examples of that. Earlier this week, Google released their latest and very widely anticipated Frontier AI model of Gemini 3.0. Not only did it immediately jumped to the top spot on all of the benchmark evaluation leader boards, more notably, they integrated Gemini 3.0 directly into search and the Google apps the same day that it was released, kind of highlighting the company's focus on improving the product velocity. Gemini 3.0 was also led by the DeepMind team, which was a start-up that the company had very presciently acquired all the way back in 2014, and that lab continues to be the leading kind of frontier research lab. On the hardware side, the company has spent the better part of a decade optimizing their technical infrastructure to specifically run machine learning and AI workloads. And as a result of that, they can now run those workloads at sort of industry-leading lowest cost per token. And they've developed their own proprietary TPU semiconductor chips, which has not only reduced their reliance on NVIDIA's GPUs for running internal workloads, but I think what we've seen more so over the last year is they're gaining increasing traction from third-party Google Cloud customers. On the scale distribution front, Google has incredibly valuable digital real estate and consumer mind share. And that's probably best seen through the rollout of AI overviews, which are the summary AI search responses that are directly embedded in search. AI overviews is now being served to more than 2 billion users. And if it were to be considered its own stand-alone app would be by far the most widely used AI app. And then lastly, kind of on the data front, we believe Google's ability to train kind of on a wide corpus of first-party data, including YouTube videos for image and video generation as this is a very valuable long-term differentiator. Tying all those advantages to the operating results, those advantages are now being clearly reflected in the company's ability to grow at scale. So for context, Google generated $100 billion of quarterly revenue in Q3, and those revenues grew at a 15% rate, right? Just their core search and YouTube franchises, despite their maturity, are continuing to grow at a low teens rate, and their cloud business, which is now a very scaled $50 billion run rate business, growing at an incredible 32% rate. So while the share price has appreciated meaningfully this year, we still think that the valuation is quite reasonable in light of the business quality, their leadership position in AI and their ability to continue to grow earnings from this point on at a high teens rate for a very long time.
William Ackman: Great. Thank you so much. Why don't we go to Uber, Charles?
Charles Korn: Sure. Thanks, Bill. So as a reminder for everyone, we invested in Uber early this year, what we believe was a very highly dislocated valuation with extremely strong fundamental and operational performance overshadowed by concerns regarding disintermediation risk. And big picture, we feel increasingly confident that the market structure is evolving consistent with our underwriting hypothesis. And over the course of 2025, basically, what Uber has done is they've advanced a number of partnerships with various autonomous vehicle and technology companies. And taken together, they're strategically advancing geographically focused commercial pilots with line of sights to thousands of autonomous vehicles covering major metro cities on their network within the coming years. And since our last update, one notable call out is a marquee partnership Uber announced with NVIDIA this past month. The partnership is interesting. It coalesces around NVIDIA's DRIVE AV platform as a reference compute and sensor architecture to make any vehicle an autonomous vehicle, i.e., L4 ready, which enables OEMs and developers to accelerate their AV technologies, respectively. And it offers an extremely credible counterpoint to Waymo and Tesla's respective architecture. So you essentially have what was looking like a potentially 2-player market developing to a credible third alternative, which can help some of these small long tail of AV players kind of accelerate their respective technology developments. And Uber's role here is they're going to be contributing valuable training data to an NVIDIA data factory, which will support a foundational model upon which others can draw. And the partnership overall, it's designed to lower cost of development and accelerate commercialization efforts for our industry participants. Now against this backdrop, Uber continues to operate commercial operations for Waymo in several markets, including exclusively in Austin and Atlanta with strong utilization data reinforcing Uber's unique value proposition. We expect the market structure will continue to evolve over time to maximize vehicle utilization and operating profits. And we believe basically Uber is positioning itself to become a technology and hardware-agnostic partner of choice for the AV ecosystem. Transitioning to discuss operating performance. In short, financial results continue to be excellent. Notwithstanding their market-leading scale, growth is actually accelerating with operational metrics achieving new all-time highs in users, engagement, frequency and trip growth. And so top line results also notably this growth is actually balanced across both the Mobility and Delivery business segments with 19% and 23% growth in the most recent quarter, respectively, which just gives you some scope of the scale and growth here. And that roughly 20% blended bookings growth translates to 33% adjusted EBITDA growth and more than 50% growth in earnings per share as the company is scaling margins off a relatively low base, which is very impressive. Notably, the company is achieving this level of operating -- attractive operating leverage and earnings growth while continuing to make investments to see the next generation of products and geographies, which we believe will sustain Uber's high rate of growth over the coming years. And to just kind of double-click on this concept of investment, so the stock has been relatively weak the last few weeks. And part of this, I think, was actually -- some people may have seen DoorDash, which is a primary competitor in the delivery space, announced an unexpected round of major investments, which caught investors off guard. The stock was down nearly 20% in response to that, and that's their primary competitor in delivery in the United States. So I think there was some concern, is Uber also going to need to make a similar round of investments? Or is the competitive intensity of the business increasing. And our perspective on this is basically DoorDash. They -- basically, the company has grown very rapidly. They're very strong operators, but they didn't have amazing kind of forward-looking vision on the product architecture. And so their technology stack kind of became slightly more outdated at a faster rate than one would anticipate for a newer, relatively speaking company. They've also done a number of acquisitions, and so they're using this as an opportunity to kind of integrate these acquisitions and rebuild their tech stack. But primarily, this seems like it was a miscommunication around the kind of IR and external communications from DoorDash, and we don't think this represents a fundamental shift in the competitive intensity or kind of a desire for DoorDash to lean in. And importantly, we don't think that Uber has to make these same kind of investments. They're making such investments while simultaneously achieving their multiyear financial targets. And so we think this is kind of a unique issue to one of their competitors. And so big picture, taking a step back, Uber is basically trading at a mid-20s multiple today, which we think is an extremely cheap valuation considering their high rate of earnings growth and attractive outlook.
William Ackman: When does the Tesla overhang lift, if you will, the fear that Elon will -- there will be 10 million taxis driving around, charging people $5 to go unlimited distances.
Charles Korn: What's interesting, what I'd say is a factual statement, right, is that Waymo is far more capable today from a technology standpoint than Tesla, right? Tesla has grand ambitions. But if you just look at the facts, the issue is it's hard to -- it's impossible to scale a business if you don't have unit economics that work, and it's a bit of a catch-22 where until you have a technology, until you have a cost structure that works, you can't scale. So it's hard to say. I think 2026 is likely to be another year of kind of experimentation and kind of evolution rather than revolution. I don't expect to see kind of a major breakthrough. I think the nature, too, of scaling in robotaxis is there's a requirement to kind of validate and evaluate the models you're creating to make sure they're performing in real-world scenarios consistent with your modeled expectations. And that, by its very nature is kind of a slow methodical approach because if you released 100,000 robotaxis without knowing how the models perform in real-world settings, there's real-world consequences and people can die. And I think actually, Elon has been pretty measured and thoughtful around making sure that they are cautious in terms of their rollout of the products to make sure that they're performing as expected. In this regard, we'd say Waymo is clearly -- has best-in-class data, best-in-class disclosure around safety, disengagement, et cetera. I think it will be positive if kind of Tesla demonstrated more of that.
Ryan Israel: If I could add maybe one thing to that. I think the Tesla risk or the Tesla overhang is really centered on 2 variables. Number one, that Tesla itself will be the dominant market player in AVs and that if it is the dominant market player in AVs, it will not choose to partner with Uber. And so I think the way that this can resolve itself is that either one of those 2 premises shows to not be correct. So to Charles' point, if there are more AV companies such as Waymo and there's actually a handful of other potential AV companies that are showing very strong progress aside from Waymo, if those companies start to become more dominant in the space and/or they start partnering with Uber, I think the perception will be that this will not be owned by any one company for AVs, and therefore, it would be a much more balanced marketplace, which I think will help resolve some of that overhang. That may be knowable within the next, I would argue, 12 to 24 months, although the timing is a little uncertain. Secondly, to the extent that Tesla does become further along in actually deploying robotaxis at scale, which, to Charles' point, does remain to be seen. They're certainly behind a lot of the targets that they have suggested over the last several years. But once they start scaling up, to the extent they are more willing to talk about partnerships, that could be the other way that this overhang results. So I think there are multiple ways that will become clear over the next year or 2 in which this could resolve in the way that we think, which will ultimately be beneficial for Uber.
William Ackman: In short, we basically think the Uber platform is enormously valuable to Tesla and to all the other sort of AV companies and it's becoming even more valuable over time, embedded in the mind share and the consumer experience, a bit like Google's presence in search. Okay. Let's talk Brookfield. Charles, go ahead.
Charles Korn: Sure. So Brookfield, they've had a very active 2025 with strong operating performance, significant business building and corporate development activity, particularly in recent months, including the pending acquisition of Just Group, which is a U.K. pension insurer that they're going to be acquiring early next year and the recently announced buy-in of the 26% of Oaktree that they don't already own. To start, maybe I'll provide some perspectives on their financial performance, and I'll focus primarily for now on Brookfield Asset Management or BAM, which is, as a reminder, kind of comprises roughly 75% of the value of BN Corporation, i.e., the parent entity, which we own. BAM is generating very strong results. So they're seeing roughly 15% growth in fee revenues with particularly strong growth in their credit and renewables businesses. In renewables, they closed on their second transition fund earlier this year, which is driving some of that strength. That roughly mid-teens rate of fee revenues is translating into fee earnings growth at a slightly higher kind of 16% to 17% rate, which is basically strong operating leverage on the core BAM business, offset by lower margins at Oaktree, which we think is kind of a transitory development, which will reverse itself next year, setting the stage for even stronger kind of operating leverage. And so as we look to 2026 for BAM, we think they're poised for an excellent year with accelerating organic fundraising, further step-up in capital from BN Wealth Solutions. Again, part of this is that acquisition of Just Group and then efficiencies, which they'll garner from fully consolidating Oaktree within BAM. And so of note also, as you think about BAM for '26, they're going to be in market with multiple flagships next year, including their next-generation infrastructure and private equity funds and their recently launched artificial intelligence fund. And each of these flagships, these are large, chunky $10 billion, $15 billion, $20 billion, $25 billion funds, which drive step function increases in fee-bearing capital, fee revenues and, of course, operating profits. Now moving beyond BAM to the broader kind of Brookfield ecosystem and the cash flow streams that roll up to the parent BN, 2 kind of call outs. So one, carried interest is beginning to meaningfully accelerate at BN, growing roughly 150% the last few quarters off a relatively low base. Earlier this fall, the company provided a forecast for $6 billion of carried interest over the next 3 years, which should begin to meaningfully kind of show up in 2026. It may be somewhat back-end weighted, but it's basically setting the stage for very significant growth next year. And then second, I'd touch on Wealth Solutions, which is their annuities -- primarily the annuities business, that grew 15% this quarter, which was -- saw a strong earnings contribution from the relatively small P&C business they have within their wealth solutions portfolio, which is offset by lower growth in their annuities business. And here, what's happening is we believe they're repositioning the asset book for higher long-term yields, but it's driving some temporary dislocation, which we think will reverse itself in the near term. Taken together, so BN is tracking towards low to mid-teens distributable earnings growth this year, which we believe will meaningfully accelerate next year with step function changes, increasing both the earnings contributions from Wealth Solutions and a step-up in net carried interest realizations. Also of note, the company hosted their Annual Investor Day this past September, and they established a target for nearly $7 of earnings per share in 2030 or 25% compounded growth from here. And in that context, we note that -- we think Brookfield stock is extremely cheap. It's trading at roughly 15x our assessment of forward earnings, and we anticipate accelerated share price performance tracking with kind of the rate of earnings growth we anticipate to see from them over the next few years.
William Ackman: Thank you, Charles. So Fannie, Freddie, was it yesterday? It seems like a long time ago that we gave a presentation on our thoughts for a path forward for Fannie and Freddie. The President and members of -- Treasury Secretary and others have talked and posted on Twitter about potential plans for an exit from conservatorship and/or an IPO for Fannie and Freddie. We think someday, a public offering of shares by the government may make sense, but we do think there's an important step that should be taken beforehand. That's a much lower risk alternative. So what we've proposed both privately to the administration, we had the opportunity to share these ideas with the President with Secretary Ludnick, Secretary Bessent as well as Director Pulte in the recent past, which we then shared in a public forum that the administration could get a sense of the market as well as the various commentaries view of this -- of our, let's say, trial balloon is really a very simple next step. If you think about the Trump administration's first term where the President started to put Fannie and Freddie on a path to removal from conservatorship, the most significant step was reversing the theft or stopping the theft, I guess, I would call it, where Secretary Mnuchin basically ended the net worth sweep and allowed these entities to start building capital. That was a very important step for actually reducing risk in our housing finance system, making -- putting Fannie and Freddie in a position where they could, on a stand-alone basis, support the guarantees that they had outstanding. I think that was a critically important step. But we think the next step should be an acknowledgment, really, it's an accounting for the payments that have been made to the government. So basically, U.S. government injected $191 billion into these companies after the financial crisis and extracted an appropriate pound of flesh, which is a 10% return on that capital as well as warrants on 79.9% of both companies. They basically took -- it was a distressed bail out with very onerous terms, the most onerous terms of any of the banking financially related companies, only, I think, tied maybe even -- actually, ultimately, the amended version of AIG, I think, was even less onerous than Fannie and Freddie. Now the administration -- the companies have paid back $301 billion of the original $191 million, which is more than the 10% return they're entitled to. But from an accounting perspective, the preferred remains outstanding on the balance sheet. That's really a function of the net worth sweep previously -- never-seen-before transaction. So what we're recommending is that the payments to the government have to be accounted for. The result would be eliminating the preferred line item from the liability section or the equity section of the company's balance sheet. And the next step, of course, will be exercising the warrants. The government will become now very large shareholders of both companies and then the businesses are in a position to be listed on the New York Stock Exchange. Importantly, we think they should stay in conservatorship. What that means is we're now -- there's literally 0 risk to mortgage rates. The government is still completely in control of both enterprises. And now the necessary next steps can take place over however long they take in a very measured, thoughtful manner. And we believe this accomplishes all of the administration's goals, at least the stated goals of showing how much value has been created for taxpayers. The President did the right thing in not selling these entities in his first term and they've increased in value probably fourfold or so from the $100 billion offer that was apparently made to take these businesses private, I guess. And we think there's still a lot more room to run. So we think it's not a good time to do a public offering of shares because it would be dilutive to the taxpayers' ownership of both entities, but the government will be able to show a mark-to-market value and demonstrate incremental important progress without taking a risk to mortgage rates, and we shall see. The good news is that transaction -- again, the President has got a lot on its plate, and we're approaching Thanksgiving, but it's actually theoretically possible. We've spoken to the exchange about a relisting. They're obviously prepared to do whatever is required to get that done. So it could be a nice Christmas present for the long-suffering shareholders of Fannie and Freddie, which include more recently some institutions. I mean, Pershing Square has been around here a while, but other institutions have bought stock over the course of the past year, and there are literally millions of small shareholders who are cheering for the President to save them, and this would be a very nice Christmas present for that group of owners. Why don't we go to Amazon? Bharath, why don't you update us?
Bharath Alamanda: Sure. So earlier this year, we were able to opportunistically build a position in Amazon during the April market drawdown. It's a company we followed for a long time, and I always admired the fact that it operates...
William Ackman: What price did we pay in the drawdown?
Bharath Alamanda: Our average initial cost was around $175, which is a 25x entry multiple on forward earnings, the lowest multiple that the shares had ever traded at in their history.
William Ackman: Thank you.
Bharath Alamanda: So yes, it was a company we've been following for a long time, and we always admired the fact that they built and operate 2 of the world's great category-defining franchises between their cloud business, AWS and their e-commerce retail operations. Our view is that both of those businesses are supported by decades-long secular growth trends, occupy dominant positions in their markets and share the kind of core tenets of the Amazon ethos of focusing on the consumer value proposition and leveraging their scale to continue to reinvest and be the low-cost provider. Despite those compelling attributes, there were concerns around the growth trajectory of AWS and then coupled with the broader tariff-related market volatility, that kind of provided us the attractive entry point. And our view was that those concerns underestimated the resiliency of the business model as well as the duration of its growth runway. And while it's still early days, the company's operating results since then have kind of helped validate our thesis. So starting with the Cloud segment, AWS today is a $120 billion business that continues to grow at a high teens rate. And in fact, last quarter, the growth rate accelerated from 17% to 20%. Notably, that impressive growth rate was actually limited by capacity constraints as consumer demand for compute vastly exceeded the pace at which AWS is able to bring new supply online.
William Ackman: Is that constraint driven by just the time to build the new facility or GPUs or...
Bharath Alamanda: Yes, I think it's a combination of the above. So to that end, the company has been very focused on accelerating that build-out. So in the past 12 months, they brought online 4 gigawatts of power, which is more than any other cloud provider. And for context, Amazon has doubled their data center capacity since 2022 and are on track to double it again by 2027. So in light of the kind of supply-constrained nature of AWS' growth, we actually think those investments today to accelerate the build-out are very efficient and high return use of capital. And then kind of shifting to the retail business, they've seen very minimal, if any, impact from tariffs. And over a longer time frame, we're very encouraged by the potential for significant margin expansion in that segment. So if you were to look at peer margins and adjust for Amazon's business mix as well as taking into account their much higher margin and faster-growing advertising revenue stream, we estimate that Amazon's structural retail margins could be several hundred basis points above the 6.5% margins they're expected to realize in 2025. And in addition to that, they're also extracting a lot of productivity gains from their warehouse automation initiatives and their one-of-a-kind logistics network. And as just a proof point on that latter point, per unit shipping costs have been steadily declining for the last 8 quarters in a row. So stepping back, while it's still early days and while Amazon's share price has appreciated about 30% from our initial cost in April, it still trades at a very attractive multiple relative to peers like Microsoft and Walmart and especially in light of its ability to grow earnings at a nearly 20% rate for the next few years.
William Ackman: Thank you. Let's go to Restaurant Brands. Feroz.
Feroz Qayyum: Sure. Thanks, Bill. So Restaurant Brands actually continues to execute at a very high level, and its most recent results reinforce both the strength of its brands and the resiliency of its business model in what can only be described as a fairly tough economic backdrop for consumer businesses. During the quarter, the company-wide same-store sales grew at 4%, units grew by 3%, leading to 7% system-wide sales growth and operating income grew by 9%. So looking at their biggest businesses, Tim Hortons in Canada, they increased their same-store sales by about 4%, which outperformed the broader Canadian QSR industry by 3 whole percentage points. This now marks the 18th straight consecutive quarter of positive same-store sales. And that, by the way, has primarily been driven by underlying traffic growth. For several years now, Tim has been laying the groundwork in its Back to Basics plan with new innovation, both in cold beverage as well as afternoon foods while still maintaining their lead and providing good value for consumers in its core beverage, coffee and breakfast segments. Tim Hortons actually is also now growing its unit count in Canada for the first time in years, a market that many consider too mature. And these units are actually a lot more impactful to the company's bottom line than their units abroad because they're obviously higher unit volumes and Tims Canada has higher unit take rates as well. In the international business, same-store sales grew by 6.5%, also above the primary competitor, McDonald's, which has also been the case for actually several quarters now. The company also brought on a new partner to manage the Burger King China business, who will actually invest $350 million into the business shortly, and that will allow that BK China business to double unit counts over the next 5 years, and that will help restaurant brands, the total company achieve their 5% unit growth algorithm in the coming years. At Burger King in the U.S., same-store sales were up about 3%, again, also ahead of burger peers and one -- the results actually have also outperformed the broader U.S. burger category for multiple consecutive quarters. And that's really due to all the initiatives they've done under their Reclaim the Flame program. While investors were worried that competitors are pushing deeper into value, Burger King has actually done a really nice job striking a nice balance between innovation and premium offerings, doing nice tie-ins with movies and also providing everyday value with their Duos and Trios platforms. In what is -- can be best described as a very challenging economic backdrop, as Anthony alluded to, we think Restaurant Brands' results highlight the very nice defensive qualities of its business. So while low-income consumers have pulled back from spending many often skipping breakfast, Restaurant Brands has still continued to grow its sales as it's benefiting from the trade down for middle and higher-income consumers trading down.
William Ackman: So are Chipotle customers becoming Burger King customers?
Feroz Qayyum: Look, that's a question we've been discussing at length. I'm not sure it's specifically from Chipotle to Burger King, for example. But we do think what's happening, it's really a twin economy. So people that own stocks that are wealthy are doing incredibly well, and they're continuing to spend where they used to. At the same time, the low end of the economy is doing very poorly, and they're basically pulling back. So I think a brand like a Burger King or a Tim Hortons that caters to everyone is benefiting -- obviously losing those low-end customers, but it's benefiting from the mid-end trading down. But the fast casual space broadly, which obviously Chipotle is a member of, is missing that middle sort of demand vacuum where the high end isn't trading down, but the mid-end is trading down to the quick service category broadly. So that's certainly probably happening. What's also notable about restaurant brands is that it's obviously primarily franchise business model. And so it's also not as directly exposed to the labor and cost inflation to the same extent as others. And so thanks to its consistent growth and defensive business model, we expect that Restaurant Brands will actually still grow operating income at 8% this year, which is in line with its long-term algorithm. And the business still trades at a discount to its primary peers. So it's trading at about 17x earnings, whereas McDonald's and Yum! are trading at about 23x next year's earnings. We think a business of this quality with these characteristics should trade at a much higher valuation. So we're optimistic about the prospective returns from here.
William Ackman: Okay. Great. So I'll just cover Howard Hughes. The short story here is the underlying real estate business of Howard Hughes is performing extremely well. The company reported an outstanding quarter really on every metric of net operating income, land sales, profits from their MPC business and the appreciation of their existing land portfolio. The management teams at Pershing Square and Howard Hughes are working very well together, which is great. And we are working, as we've publicly disclosed on a transaction to acquire an insurance company that would become really the beginnings of our diversified holding company strategy for the business. Our goal is to complete a transaction as early as the -- at least announce a transaction as early as year-end or perhaps in the early part of the new calendar year. We'll have a lot more to say about that if and when we are successful in completing a transaction that makes sense. But the short version of the story is that, we intend to by a good insurance platform with an excellent management team that can run a profitable insurance operation with Pershing Square managing the assets of that insurance company, I would say, akin to the way that Warren Buffett has managed his insurance company's assets and the way really he's managed the insurance company operations itself. Why don't we go to Hilton? Ryan, why don't you give us an update? I'll just point out, Hilton has been an excellent investment for us over many years now. We have enormous respect for the management team, and it's one of the best businesses that we've ever owned. It's become a smaller part of the portfolio, unfortunately, because -- or fortunately, because everyone else has recognized the qualities of the business. So we still think it's an attractive investment from here, but lower on the IRR thresholds than obviously when we originally acquired our position. But go ahead.
Ryan Israel: Yes. So I just wanted to make a quick point that I think this quarter's results are really emblematic of why we think Hilton's business model is unique and incredibly resilient. So for example, the company same-store sales metric RevPAR actually declined about 1.5% this quarter as there were some macro softness, which clearly has impacted some of our restaurant businesses, but that actually impacted some of the travel businesses as well. And typically, what you would expect when a company has declining same-store sales, you would expect a decline in the profitability of the business. Hilton actually grew its adjusted EBITDA, its profit metric, 8% this quarter despite the decline in same-store sales, which is very unique and really reflects the 2 fundamental drivers of the business that are incredibly attractive to us, which are they have an enormous opportunity to grow their unit or hotel count around the world because the brands that they have are able to take advantage of the increased travel trends, and they are better than a lot of the alternative brands. And other people put up the capital for that because it's a good return for them and Hilton is able to earn a very high franchise fee. And that is really adding 6 to 7 points a year of growth to the business, and that's a trend, I think, will continue for a while. And the second factor is just incredibly strong cost control due to just overall great management. So the company is able to really limit the growth in its expenses despite having a very strong steady revenue growth base. So profits still grow even when same-store sales decline, which is a typical anomaly in business, but it's part of Hilton's core model. And then on top of that, this company has just superb capital allocation. So it continues to buy back about 5% of its shares on a year-over-year basis. So with a kind of consistent underlying tax rate, the company would have grown earnings at a low teens percent this quarter despite not growing same-store sales due to some macro softness. And so I think to your point, one of the reasons why we continue to hold Hilton is those unique characteristics where if the business performs in a normal macro environment well, we think there's a clear line of sight to 16%, 17% earnings per share growth annually for a very long time. If the macro is a little weaker and same-store sales don't even grow, we're still able to get pretty comfortably above a 10% rate of earnings per share growth, which is very unique. And so the market has recognized, as you pointed out, that this quality of the business and the growth characteristics should be deserving of a higher multiple, and the company trades at about 30x next year's consensus earnings, which is part of the reason why we've reduced our position is we think that the growth profile will offer us a reasonable return, but there's less opportunity for an accelerated annual return beyond the earnings per share growth when the multiples, I think are reasonable at 30x. But we still think it's very unique and a very strong management team, which is why we continue to hold the position even though it's somewhat smaller as you've been trimming as the share price and the multiple has increased over time.
William Ackman: Let's do an interesting compare and contrast. Let's compare Universal Music to Hilton. They have some fairly analogous economic characteristics, and let's compare the trading multiple of one versus the other. And why is Hilton traded at 30x earnings and Universal traded 20 or 21x earnings?
Ryan Israel: So I think you're entirely right, which is that while they obviously operate in different industries, the economic characteristics are very similar. They are both royalty-like companies that are very capital-light with very strong operating margins. In Hilton's case, we believe over time, the company is likely to grow at something along the lines of maybe 8% to 10% a year for revenue and that adjusted EBITDA is probably going to grow a little bit in excess of that. Those will sound very similar because that is exactly what UMG is growing at. Its revenue is about 10% right now.
William Ackman: And management guidance -- let's stick with the management guidance on those numbers.
Ryan Israel: Correct. And that is in line with the guidance over time. So it's interesting that they look incredibly similar on the operational performance, if you will. The key difference, as we pointed out earlier, is UMG has not bought back a single share, whereas Hilton pretty much like clockwork buys back about 5% of its shares. They allocate all of their free cash flow -- the substantial majority of free cash flow to share buybacks. And because of the high margins and the significant degree of predictable revenue growth, they have a nice amount of leverage, which the business can support. And obviously, UMG has an unlevered balance sheet when factoring in its stake in Spotify. I think the U.S. investor base, U.S. listing of Hilton, combined with the capital allocation has given investors a lot of confidence, which has allowed them to price in a multiple of something like 30x. And as we mentioned earlier this week, UMG was trading at 20x, which is a very large gap between the 2 despite very similar economic characteristics and growth characteristics currently.
William Ackman: Let's go to Hertz on the other end of the balance sheet spectrum.
Feroz Qayyum: Yes. We're not unlevered, in fact, very levered and also has some operational leverage. But look, the interesting thing about Hertz is that it's actually making a lot of progress on its turnaround efforts, and the results in the third quarter showed those. So it was the strongest quarter in years. It actually generated their first positive EPS for the first time in 2 years and they demonstrated meaningful traction on the operational levers that we've discussed previously as our investment thesis. Number one, the fleet refresh. When we invested, they basically had an upside down fleet. Now they've completely refreshed it. The average vehicle in the Hertz fleet is now less than 12 months old. As a result, depreciation per unit per month DPU, which is their metric, was $273 during the quarter, well below their long-term target of $300. And importantly, next year's vehicle purchase negotiations, which some investors are worried about given some of the tariffs and inflation, they're also nearly complete. And the management team is confident that, that will also support strong unit economics with depreciation of less than $300. Operationally, the company is also making big strides. So this quarter, utilization was 84%, the highest level the company has ever delivered since 2018. Revenue per day or RPDs were down low single digits, but they continue to improve and improved in October as the company has been implementing changes and modernizing its pricing systems. On the cost side, they also continuing to make progress through automating processes, lowering headcount and rationalizing some of their footprint. And we expect both SG&A and DOEs, which is their measure for expenses per day to decline from current levels. So the company is well on its way to delivering sort of a mid-single-digit EBITDA margin next year and has line of sight into delivering $1 billion of EBITDA in the coming years. What makes Hertz very interesting from these levels...
William Ackman: $1 billion. It means $1 billion of annual?
Feroz Qayyum: Exactly. $1 billion of annual EBITDA in the coming years. They have a target for 2027 actually. What makes Hertz really interesting from these levels is that it also has a number of upside levers or call options available to the company. So first, the company has been setting up infrastructure to sell more used cars through its own retail channels as well as its partnerships. The company actually has a partnership with both Amazon as well as Cox, and it's now live with their rent-to-buy program in over 100 cities where you can rent a car, try it out and if you like it, you can buy it. We believe the company can turn this into a meaningful profit center that can lead to structurally lower depreciation costs because obviously, you sell a car to the retail channel at a much higher profit than the wholesale channel. And then it also allows an opportunity for them to sell additional F&I revenues. Second, we believe Hertz also has the potential of being a significant partner to the various mobility companies that are rolling out autonomous vehicles. Hertz has an expertise in vehicle maintenance, servicing, and it has a very significant scale of -- with its parking facilities that make it an ideal partner to help manage as folks try to roll these out. Both these revenue streams have the potential of being large businesses for Hertz in the future and helping it further leverage its fixed cost base and brand. On liquidity, the company is also now in a much stronger position. Recall when we invested, some investors were speculating the company may need to declare bankruptcy again, and that is definitively not the case today. It has more than $2.2 billion of total liquidity. We actually helped facilitate a convertible bond issuance earlier this year and actually increased our exposure to the company. And the company also entered into a capped call transaction, which means that the convertible bonds are not dilutive unless the stock essentially triples from current prices. So with its current liquidity, as I mentioned, of over $2 billion, they have ample liquidity to address their near-term maturities and to help grow their fleet next year, which will again help them lever their fixed cost base. So stepping back, Hertz today is a much more leaner, more efficient company with, frankly, an enviable young fleet that its peers don't have. And on top of the core rental business, the company is also developing multiple new profit streams, as I mentioned, such as the retail used car sales, servicing AVs as well as serving the broader mobility segment. So we continue to believe that Hertz has asymmetric upside from current prices. But obviously, in light of the fact that it's going through an operational turnaround, we have sized this as a smaller investment than our typical holdings.
William Ackman: Why is the stock so cheap in light of all of the above?
Feroz Qayyum: So it's not immune to some of the consumer issues that we're seeing in the broader space. What's also notable is that the government shutdown has obviously had an impact on travel broadly. And so people are traveling a little bit less. Hertz does benefit to an extent as people have been taking out what are called one-way rentals. So instead of flying, you just take a car. But certainly, I think it's probably a net negative if the consumer environment is weaker and then people are traveling as much. And there's also -- there's been broader concern around RPDs. We think that's a little bit misguided. The way Hertz sort of reports RPDs, it's really burdened by the fact that they have mix towards smaller cars, which certainly have lower prices, but they're EBITDA accretive. And so next year, that should be a tailwind. And candidly, I think these car rental companies are generally misunderstood. There isn't a lot of market cap for long investors to dig into and to get excited. And so both Hertz and Avis have the potential to gather some of these long-only investors as they come out of the turnaround starting next year. And I think Hertz specifically has a very interesting opportunity to grow its EBITDA from basically nothing today to $1 billion in the coming years.
William Ackman: Okay. Good. Thanks, Feroz. We've always received questions in advance of the call. We do our best to answer them during the pendency of the call. Just a couple that we didn't kind of get to. One is since both Howard Hughes and the Pershing Square funds are managed by Pershing Square, how should investors think about investing in Howard Hughes versus Pershing Square's core strategy? The answer is these are, I would say, different investments with some overlap. Howard Hughes, of course, the core business today is a master planned community business. It's a business we like. It's a business that we expect to generate a lot of cash over the next years and decades, and we think provides a very good base to build our version of a diversified holding company. With the acquisition of an insurance subsidiary or insurance company that becomes a subsidiary of the company, over time, as that business scales, that will become a more important part of the operation of the company. We intend to manage that insurance company portfolio, the float in U.S. treasuries, the equity and common stocks using the same kind of investment philosophy we have at Pershing Square. So there are clearly some similar elements. But it's an operating company. It's a C-corp. We intend to take the cash that the business generates over time and to deploy that capital in acquiring -- principally controlling interest in most likely private businesses. So the portfolio will look different. It's not a large cap or mega cap minority stake investment vehicle. It will be an operating company that will buy for the very long-term various businesses. Today, you're buying Howard Hughes at about a 15% discount to the price we paid for shares and an even bigger discount to kind of the, I would say, the NAV of the real estate portfolio. So that's a nice place to start an investment. But ultimately, the success of Howard Hughes will depend on how we do with our various initiatives there. I like Howard Hughes a lot, excited about what we're going to do there. An entity where you have -- that's a public company, we have access to the capital markets, may create some flexibility over time for us to do some things that we can't do in the Pershing Square funds. So over time, I would say they will be different entities, but the same investment principles will be applied and shareholder, I would say, orientation will be applied to both. And then I would -- the other thing I would say is that the Pershing Square management team has a very large investment in all of the above. So about approaching 30% of the AUM that we manage today is -- or I guess, 28% or so today is employee capital in the funds. And then on a look-through basis, therefore, the employees own an interest -- a meaningful interest in Howard Hughes. And then on top of that, the Pershing Square management company made a $900 million investment in the company. So we have, I would say, a very high degree of what you might call skin in the game in both the funds as well as Howard Hughes. I think Howard Hughes itself is at this point, still not well recognized. I think if and when we are successful in beginning to make this business look less like a real estate master planned community and more like a diversified holding company, we expect we deliver results and we expect the market to notice. With respect to hedging, our approach, as you likely know, is, one, we pay careful attention to what's going on in the world from a macro perspective, from a geopolitical perspective, from a political perspective, all these things can have an impact on markets. And we focus -- our first priority is what are the risks in the system that could cause a massive market decline. And to the extent we identify risks like that as we did pre-financial crisis or pre-COVID crisis or pre-Fed interest rate inflation, I wouldn't quite call it a crisis, but where the Fed was forced to raise rates very aggressively, we were able to hedge those risks because of the sort of surveillance of what's kind of going on in the world. Today, we really have no hedges in place. We don't try to hedge short-term kind of stock market declines or what some people might think of as a periodic -- the overall multiple, the market is above normal. There are lots of reasons why a market cap weighted index today appropriately should be trading at a higher multiple. If you think back to '09, we didn't warrant businesses, frankly, like NVIDIA, and we didn't have this massive growth driven by a major change in technology. We are seeing interesting places to put capital. We're doing due diligence. And our approach is to -- as we say, we sort of build a library of businesses that we get to know pretty well. Occasionally, new companies emerge, go public, get spun off. We track as many of them as we can in terms of ones that meet our criteria for business quality, and then every once in a while, they get really cheap. Amazon being kind of a recent example of a company we admired for years. It was always a little too expensive, but a business we want to own. And I think we started buying stock at something like $161 a share, which seem to be a really kind of unique opportunity. With that, I just want to thank you for joining the call, and we look forward to updating you. I think our next event will be our Annual Meeting that we will stream at some point in January or an Analyst Day. Thanks so much.
Operator: Thank you, everyone. This concludes your conference call for today. You may now disconnect, and have a great day.