Chase Koch Wichita Startup Grind Summary and the Future of Koch Industries

On November 14, 2018 Chase Koch sat down with Wichita Startup Grind for an interview that began at 5:30 P.M. (his wife Annie was 15 minutes late since she was working) with many employees from Koch Industries in the audience to support Chase. Chase discussed his younger years, his time of living and playing music in Austin, working at Koch Industries, and his journey to how he got to where he is today.

Chase in the interview mentions how his father Charles Koch really studied philosophy and liked to read Hayek and Maslow and other free market thinkers, however at first this really didn't sink in for Chase. Chase would say the quote he would remember from Maslow is "What you can be you must be" which is something he has tried to carried with him. Every Sunday Chase and his sister Elizabeth would sit down for a 2-3 hours and have their father Charles Koch read to his children Human Action from Ludwig von Mises or have them listen to books on tape from Walter E Williams. Chase admits these days he says he has a "libertarian nature".

In his younger days Chase enjoyed playing tennis (his parents made sure their children lived up to their potential and found something they were good at-his sister Elizabeth was a runner). Chase was actually quite the tennis player and Sports Illustrated profiled him in their "Faces In the Crowd" which usually recognizes some of the best athletes in the country. Although, Chase was a great tennis player he started getting burned out and started throwing tennis matches so he could go home and party with his friends. This led to a meeting with his father where his father told him either he could give 100% on the tennis court or start working (he started working). So in the summer of 1993 when Chase was only 15 an old beat up pick up truck took Chase on a 5 hour drive to Syracuse, Kansas were Koch Industries owned feedlots with 55,000 head of cattle and shoving you know what. For the summer Chase lived on the couch and earned $7.50/hour and worked from 5 A.M. to 7 P.M. and worked 7 days a week and had to pay $350/month for rent for a guy that lived in a double wide trailer. After this summer experience Chase would say in this video he thought there was an evil Koch brother and he joked he almost turned in his father in for child abuse. Overall though he admitted it was a good experience because before this time period he had never worked a day in his life and if he had not worked he would have gone down the path of a country club brat.

Chase graduated Texas A&M University in 2000 (I bet he is a target for donor giving). He was recruited by former Koch president Bill Hanna who attended A&M with a business degree in marketing. He had the music bug and in college played in a band that covered Led Zeppelin, Phish, The Grateful Dead, and Pink Floyd. After he graduated was during the tech bubble of the early 2000's was a difficult time in job market. With the tech bubble burst companies aren't exactly looking to hire marketing (since this is one of the first things they cut). Chase decided to look around and see if he could still get work and decided to offer to work for free for a company (they would eventually pay him) so he could get the learning experience under his belt. Leslie Rudd (who was good friends of Charles Koch) had dinner with Chase and wondered what Chase was doing as Chase in his own words "screwing around in Austin". Leslie suggested that Chase go back to Wichita and go work for Koch Industries were he could learn plenty from Koch leaders and his father. He would join Koch Industries in 2003 starting out in the accounting group, moved to the tax group, then moved to the risk management group, then trading, and then business development. Charles Koch and other Koch leaders had planned out a "Koch-MBA" style training program for Chase. Often times in large companies you get exposed to many different areas in order to understand the basics of how the business operates. Koch admits that learning the basics of how Koch Industries was not exciting but admits he had to learn the business from the ground up. As his mother would say "you can either pay now or pay later". Chase had high expectations of himself which led to anxiety and he felt as if he had to work three times harder than everyone else. When Chase asked his father what percentage of his days should be good his father turned the question around and asked his son what percent of his days were good. Chase responded only 40% of his days were good and the other 60% were not so good. His father thought this percentage was actually pretty good. Running any company is no picnic-especially a conglomerate like Koch Industries that is a $100+ revenue company with so many different companies and subsidiary companies in 60 different countries.

When Chase was placed in charge of Koch Fertilizer he began to crack. He was running 5 different business units (sales, marketing, trading, and other groups). Chase was also working hard-coming in to the office at 5 A.M. and staying late (according to this article back in 2014 Charles was getting to the office around 7 A.M. and works until 6 P.M. ) At this point Chase approached Koch leader Dave Robertson for advice. Dave told Chase that any good leader has to do three things. The first is to set a clear vision of where you going. The next important thing is to get the right leaders in the right role. The third point is to help the team in a way that is mutually beneficial. Chase said he tried to learn from this and constantly apply what he was learning from other Koch leaders.

What is interesting is Chase admits this role was not an easy one for him. He felt as if he had to understand all the details and even admits to micromanaging things (which frustrated him). The group Koch Ag looked at high efficiency fertilizer, high efficiency technologies and he would spend his time in Silicon Valley, Boston, and New York learning how technologies could help Koch Industries. This would lead into Koch Disruptive Technologies (KDT) which was created to look at technologies that are so disruptive that Koch Industries could use these technologies to expand and improve capabilities within the company. KDT is industry agnostic as well. Chase admits the division is pre-revenue which I translate into not producing any cash flow yet (which honestly I am surprised as Dave Robertson in this 2012 article mentioned that "Charles is focused on, really, the present value of the future cash flows, thinking long term". Perhaps when Koch has analyzed these projects they produced positive cash flow over a 10-15 year time horizon. However, the issue is these technologies change so quickly that is hard to model in any analysis. KDT has key criteria for whether or not they get involved. Factors such as how disruptive the company is, has the company demonstrated the idea in the marketplace, how much potential the idea has, if the founder of the company and leadership are proven principled entrepreneurs and if there is mutual benefit. Chase does echo what his father mentions in that any partnership (he uses his wife Annie as an example of this) that you need an aligned vision, assigned values, and complimentary capabilities. KDT is looking and excited about healthcare, industrial use technology (this could help the reliability and safety of Koch owned plants and facilities) and exponential data. Related to this one of the biggest challenges right now for Koch Industries is how much data the company throws off. According to Chase the amount of data at Koch Industries increases every year by 60%. The company is trying to use that data to optimize their businesses processes and use that data to make better decisions.

Chase admitted in the interview that he was a shareholder of Koch Industries which makes me wonder about what Charles Koch said years ago that he "had done estate planning for many many years". It could be possible that Chase Koch owns the stock through some type of trust. Chase admitted that as a shareholder of the stock he is still learning the risk of the shareholder and not to miss any potential opportunities and at times absorb risk in a responsible way.

Chase Koch has been working at Koch Industries since 2003 which would say he has a long history and understanding of how the company works (also he lived with the man who has run Koch Industries for many decades). Right now he is in charge of Koch Disruptive Technologies however, I would be curious to see if over time he gets moved into more executive roles. Chase currently reports to Chief Financial Officer Steve Feilmeier. Also Chase is on the board of directors for Koch Industries. He has been on the board since March 7, 2013  and in addition to being on the board is also a shareholder of Koch Industries stock. What is fascinating is how he went from screwing around in Austin playing in a music band to becoming an executive at one the largest privately traded companies in the country. He said here that "it took me until I was 25 or 26 that "You're an idiot if you don't go back to Koch" and really capture the opportunity to go learn, and stop screwing around in Austin, Texas".

If something were to happen to Charles Koch tomorrow though I think Koch would not select Chase given he is only 40 years old (fun fact his birthday is January 1st) and perhaps may give it to Dave Robertson who has been with Koch since 1984 and served as the Chief Operating Officer and President of Koch since December 2005. Time will tell what happens but there is no doubt Chase Koch has come a long way and has paid his dues with this time, energy, and hard work at Koch Industries. It will be interesting to see how he shapes the future of Koch.

Koch Industries Reinvestment Policy of 90% of Earnings vs. Other S&P 500 Companies

What has struck me as interesting is how much Koch Industries reinvests back into their company. The company has a policy of investing 90% of their net income back into Koch Industries. Koch uses their earnings to improve, build, and expand existing capabilities. This reinvestment policy has led to exponential growth which has lead to substantial increase in the amount of dividends of the years. I calculated in this post that Koch Industries increased their dividends by an average of 19% per year (most large companies may increase their dividend 3-4% (if they even increase the dividends at all)). If any public company increased their dividends 19% per year they would be viewed as crazy. However, the question I wanted to look at is how does Koch Industries reinvestment policy compare to other publicly traded companies?

On the surface a company plowing 90% of their net income sounds crazy from a corporate finance perspective. If you plow so much money back into the company how do you manage economic downturns? Companies like to keep a cash or liquidity buffer in case their economic situation weakens. Koch plows back 90% into the company and pays out 7% of its earnings as a dividend leaving about 3% for cash or liquidity needs. In this post I estimated Koch earned $5.6 billion after-tax and if you take 3% of $5.6 billion it would say the cash left over after paying out dividends and flowing back earnings into the company would be only $168 million! Remember Koch Industries has revenues of $100 billion+ of revenue. Since Koch Industries is a privately traded company the company doesn't have to release their financial statements. However, publicly traded companies have to release their financial statements to the public. Also publicly traded companies have to manage quarterly earnings, manage guidance of future forecasts of future earnings with analysts, and if they company pays a dividend manage that as well. Charles Koch isn't fond of publicly traded companies as is quoted as saying (from this 2006 Wall-Street Journal weekend interview) they have "the short-term infatuation with quarterly earnings on Wall-Street restricts the earnings potential of Fortune 500 publicly trade firms".

Although Koch Industries is a conglomerate and is a mix of many different companies. However, from a 2012 interview Dale Robertson mentioned a large portion of the revenue from Koch still comes from energy related things. In analyzing the reinvestment rate of companies I used Morningstar to analyze the 5 year average of the net income and also looked at the capital expenditures of these companies. Analyzing just integrated oil and gas companies (ExxonMobil, Shell, BP, etc.) it appears Koch Industries actually has a more conservative policy than the integrated oil and gas companies. For example ExxonMobil had an average net income of $20.66 billion and their capital expenditures were $23.75 billion. If you divide the capital expenditures by the net income this would get the reinvestment ratio. In the case of ExxonMobil their reinvestment ratio would be 115%. Now you might wonder how can a company plow more income back into the company than it makes? Well companies can borrow money using debt in order to finance their capital expenditures. Looking at an average for ExxonMobil, Shell, BP, and Chevron would show the average reinvestment ratio is 131% which says the integrated oil and gas companies have been borrowing money (primarily due to lower oil prices/also when you are pumping oil out of the ground you have to worry about constant depletion). Koch tries to stay away from debt. Moody's credit rating agency currently rates Koch Industries debt with a credit rating of Aa3 which is high level credit with a stable outlook. The Chief Financial Officer Steve Feilimer has said that Koch Industries can never have AAA credit (the best credit rating) since the company is not publicly traded.

If you compared it to other companies in the Standard & Poor's 500 tells a different story (using a 5 year average from Morningstar) of their reinvestment policy vs. Koch Industries. Apple who makes iPhones, iPads, and other iProducts reinvests 25% of their net income back into the company. The conglomerate Proctor and Gamble plows back 35% of their earnings back into the company while mega conglomerate Berkshire Hathaway run by mid-westerner Warren Buffett reinvests 50% of their profits back into the company. Investment banking company Goldman Sachs reinvests 35% of their net profits. The best comparison of Koch Industries would be a mix of an integrated oil and gas company (it should be noted that Koch Industries does not explore for oil-however is involved with the refining and the process of taking crude oil and using that to develop other products)/a company such as Proctor and Gamble (given Koch produces so many consumer products)/and perhaps Goldman Sachs (Koch has Koch Equity Development which lends and provides financing for other companies). If you took a weighted average and said Koch is 1/3 the average of the integrated oil and gas industry, 1/3 Proctor and Gamble, and 1/3 Goldman Sachs it would lead to a 66% reinvestment ratio. Again Koch reinvests 90% of their net income back into the company which is substantially more than their publicly traded peers.

According to a 1994 Wichita Eagle article in 1966 (the year before Fred Koch passed) Koch Industries earned $166 million of revenue (the company only had 650 employees at the time) and the company only paid out $300,000 in dividends (according to Sons of Wichita). According to Sons of Wichita during the early 1980's the total dividend pool for Koch shareholders was $28 million. Charles Koch grew Koch Industries dramatically by pushing back 90% of the net income the company earned into the company. This historically high reinvestment ratio is much greater than many large Fortune 500 companies.  Today, Koch Industries is a $100+ billion company and I estimated pays out between $380-$940 million in total dividends to shareholders (this estimate is closer to the higher end given testimony from Preston Marshall in a recent court case). This would say that the dividends are now over 3,000 times the amount after Fred Koch passed! The strategy of reinvesting a large amount back into the company has increase the revenues, dividends, and increase the net worth of Charles and David Koch along with the Marshall family. Although, the policy of reinvest 90% of their earnings back into the company may seem crazy for most public companies Koch has shown that this can be sustained for the long term.