Monthly Archives: April 2016

Warren Buffett’s 2015 letter to the shareholders of Berkshire Hathaway and 2016 annual shareholder meeting

Every last Saturday of February, a must read for the weekend comes out: Warren Buffett’s letter to the Shareholders of Berkshire Hathaway [PDF, 2.4 MB].

Me at BRK 2011 annual shareholders meeting.

Me at BRK 2011 annual shareholders meeting.

This year’s letter was published on February 27th, and despite the fact that I normally share some lines about it in the blog just after having read it (1), this year I wanted to wait a couple of months before writing this post in order to conveniently share it today, the day before the annual shareholders meeting, to be held tomorrow Saturday April 30th, as it will be streamed live for the first time ever. I had the chance to attend such shareholder meeting in 2011 (see my review here) and I strongly recommend to those who haven’t to take a look at the stream at Yahoo Finance, from 9am Central Daylight Time.

From this year’s letter, I wanted to bring attention to the description of the acquisition at the end of 2015 of Precision Castparts Corp (for 32bn$ cash), the highlight of the year, and to the following quotes or passages on their hands-off management style, on their flexibility to allocate capital, on what a 2% real GDP growth means, on mortgage risk retention on the side of lenders, the discussion on the linkage between productivity and prosperity (a bit too long to be transcribed as an excerpt – from the page 20 of the letter to the 22) and on the need to act on climate change.

***

On their hands-off management style:

After the purchase, our role is simply to create an environment in which these CEOs – and their eventual successors, who typically are like-minded – can maximize both their managerial effectiveness and the pleasure they derive from their jobs. (With this hands-off style, I am heeding a well-known Mungerism: “If you want to guarantee yourself a lifetime of misery, be sure to marry someone with the intent of changing their behavior.”)

On their flexibility to allocate capital:

Our flexibility in capital allocation – our willingness to invest large sums passively in non-controlled businesses – gives us a significant edge over companies that limit themselves to acquisitions they will operate. Woody Allen once explained that the advantage of being bi-sexual is that it doubles your chance of finding a date on Saturday night. In like manner – well, not exactly like manner – our appetite for either operating businesses or passive investments doubles our chances of finding sensible uses for Berkshire’s endless gusher of cash. Beyond that, having a huge portfolio of marketable securities gives us a stockpile of funds that can be tapped when an elephant-sized acquisition is offered to us.

On what a 2% real GDP growth means (2):

America’s population is growing about .8% per year (.5% from births minus deaths and .3% from net migration). Thus 2% of overall growth produces about 1.2% of per capita growth. That may not sound impressive. But in a single generation of, say, 25 years, that rate of growth leads to a gain of 34.4% in real GDP per capita. (Compounding’s effects produce the excess over the percentage that would result by simply multiplying 25 x 1.2%.) In turn, that 34.4% gain will produce a staggering $19,000 increase in real GDP per capita for the next generation. Were that to be distributed equally, the gain would be $76,000 annually for a family of four. Today’s politicians need not shed tears for tomorrow’s children.

On the different views to be taken of certain intangible assets amortization no matter what accounting rules say about them (3):

[…] serious investors should understand the disparate nature of intangible assets. Some truly deplete in value over time, while others in no way lose value. For software, as a big example, amortization charges are very real expenses. Conversely, the concept of recording charges against other intangibles, such as customer relationships, arises from purchase-accounting rules and clearly does not reflect economic reality. GAAP accounting draws no distinction between the two types of charges. Both, that is, are recorded as expenses when earnings are calculated – even though, from an investor’s viewpoint, they could not differ more.

[…] We now have $6.8 billion left of amortizable intangibles, of which $4.1 billion will be expensed over the next five years. Eventually, of course, every dollar of these “assets” will be charged off. When that happens, reported earnings increase even if true earnings are flat. (My gift to my successor.)

I suggest that you ignore a portion of GAAP amortization costs. But it is with some trepidation that I do that, knowing that it has become common for managers to tell their owners to ignore certain expense items that are all too real. “Stock-based compensation” is the most egregious example. The very name says it all: “compensation.” If compensation isn’t an expense, what is it? And, if real and recurring expenses don’t belong in the calculation of earnings, where in the world do they belong?

Wall Street analysts often play their part in this charade, too, parroting the phony, compensation-ignoring “earnings” figures fed them by managements. Maybe the offending analysts don’t know any better. Or maybe they fear losing “access” to management. Or maybe they are cynical, telling themselves that since everyone else is playing the game, why shouldn’t they go along with it. Whatever their reasoning, these analysts are guilty of propagating misleading numbers that can deceive investors.

Depreciation charges are a more complicated subject but are almost always true costs. Certainly they are at Berkshire. I wish we could keep our businesses competitive while spending less than our depreciation charge, but in 51 years I’ve yet to figure out how to do so. Indeed, the depreciation charge we record in our railroad business falls far short of the capital outlays needed to merely keep the railroad running properly, a mismatch that leads to GAAP earnings that are higher than true economic earnings. (This overstatement of earnings exists at all railroads.) When CEOs or investment bankers tout pre-depreciation figures such as EBITDA as a valuation guide, watch their noses lengthen while they speak.

On mortgage risk retention:

Barney Frank, perhaps the most financially-savvy member of Congress during the panic, recently assessed the 2010 Dodd-Frank Act, saying, “The one major weakness that I’ve seen in the implementation was this decision by the regulators not to impose risk retention on all residential mortgages.” Today, some legislators and commentators continue to advocate a 1%-to-5% retention by the originator as a way to align its interests with that of the ultimate lender or mortgage guarantor.

At Clayton, our risk retention was, and is, 100%. When we originate a mortgage we keep it (leaving aside the few that qualify for a government guarantee). When we make mistakes in granting credit, we therefore pay a price – a hefty price that dwarfs any profit we realized upon the original sale of the home. […]

Some borrowers, of course, will lose their jobs, and there will be divorces and deaths. Others will get overextended on credit cards and mishandle their finances. We will lose money then, and our borrower will lose his down payment (though his mortgage payments during his time of occupancy may have been well under rental rates for comparable quarters). Nevertheless, despite the low FICO scores and income of our borrowers, their payment behavior during the Great Recession was far better than that prevailing in many mortgage pools populated by people earning multiples of our typical borrower’s income.

On the need to act on climate change:

This issue bears a similarity to Pascal’s Wager on the Existence of God. Pascal, it may be recalled, argued that if there were only a tiny probability that God truly existed, it made sense to behave as if He did because the rewards could be infinite whereas the lack of belief risked eternal misery. Likewise, if there is only a 1% chance the planet is heading toward a truly major disaster and delay means passing a point of no return, inaction now is foolhardy. Call this Noah’s Law: If an ark may be essential for survival, begin building it today, no matter how cloudless the skies appear.

(1) See the review I made of 2009, 20122013 and 2014 letters.

(2) In relation to that I recommend reading Thomas Piketty’s “Capital in the 21st Century” (of which I may write a review at a later point in time). There he explains how for most of history, human kind has lived a small growth rate and we may well come back to that.

(3) Every year letter discusses that, always with some variation, I keep recommending a detailed look at it.

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El sol de Breda

ElSolDeBredaHace un par de semanas leí en la recién creada web Zenda libros, gracias a un retuit de Arturo Pérez Reverte, una entrevista que le hizo Miguel Munárriz en 1998 a Pérez Reverte con motivo de la publicación de “El sol de Breda”, la tercera entrega de la serie de libros sobre el personaje del Capitán Alatriste.

Dicha lectura no pudo ser más oportuna, dado que ese mismo día estaba terminando otro libro y en casa tenía un ejemplar de “El sol de Breda”, que no es mío, pero que había tomado prestado las últimas navidades de casa de mis padres. Así que me decidí a leerlo.

El sitio a la ciudad de Breda, actualmente en los Países Bajos, duró casi un año entre 1624 y 1625. Quizá el mayor testimonio del mismo se trata del cuadro del pintor Diego VelázquezLa rendición de Breda o “Las Lanzas”, que se exhibe en el Museo del Prado.

El libro de Perez Reverte ofrece una ficción basada en los hechos reales de dicha batalla. Mezcla personajes reales como el propio pintor, el escritor Francisco de Quevedo o el general italiano Ambrosio Spínola, al frente de los tercios de Flandes, con personajes ficticios como el Capitán Alatriste o Íñigo Balboa, un joven adolescente apadrinado por Alatriste a quien sirve en el tercio Viejo de Cartagena como mochilero aprendiendo el oficio de soldado.

El libro se supone basado en las memorias de Balboa, y establece una descripción del sitio y de las batallas con todo lujo de detalles, desde las inclemencias del tiempo, las condiciones en las trincheras, las heridas de guerra, el miedo, la incertidumbre, la falta de alimentos, etc.

Como curiosidad me llamó la atención la correspondencia ficticia entre Quevedo y Alatriste y Balboa, y la relación entre Balboa y Velázquez para describirle el sitio de Breda y que el pintor pudiese realizar su cuadro.

Por otro lado, me imagino que deberé leer algún otro libro de la serie de Alatriste para conocer mejor al personaje, dado que si bien es uno de los principales caracteres, tampoco se centra del todo en él.

Por último, quería compartir algunos pasajes del libro en los que Pérez Reverte vierte su siempre crítica visión de España, el carácter de los españoles y sus constantes luchas internas:

“[…] y a ello hemos de añadir la decadencia de la propia España, donde un rey bien intencionado e incapaz, un valido inteligente pero ambicioso, una aristocracia estéril, un funcionariado corrupto y un clero por igual estúpido y fanático, nos llevaban de cabeza al abismo y a la miseria, con Cataluña y Portugal a punto de separarse de la Corona, este último para siempre. Estancados entre reyes, aristócratas y curas, con usos religiosos y civiles que despreciaban a quienes pretendían ganar honradamente el pan con sus manos, los españoles preferíamos buscar fortuna peleando en Flandes o conquistando América, en busca del golpe de suerte que nos permitiese vivir como señores, sin pagar impuestos ni dar ni golpe.

“[…] y como de costumbre, según esas mismas lenguas y sus tierras de origen, tomaban partido unos contra otros, valencianos a una parte y andaluces de la otra, leoneses frente a castellanos y gallegos, catalanes, vascongados y aragoneses cerrando para sí mismos y por su cuenta, y los portugueses, que alguno teníamos, viéndolas venir agrupados y en rancho aparte. De modo que no había dos reinos o regiones de acuerdo; y mirando hacia atrás; uno no lograba explicarse lo de la Reconquista salvo por el hecho de que los moros también eran españoles.”

“Y pronunciada en castellano, la palabra reputación era entonces mucha palabra. No en balde los españoles peleamos siglo y medio en Europa arruinándonos por defender la verdadera religión y nuestra reputación; mientras que luteranos, calvinistas, anglicanos y otros condenados herejes, pese a especiar su olla con mucha Biblia y libertad de conciencia, lo hicieron en realidad para que sus comerciantes y sus compañías de Indias ganaran más dinero; y la reputación, si no gozaba de ventajas prácticas, los traía al fresco. Que siempre fue muy nuestro guiarse menos por el sentido práctico que por el orapronobis y el qué dirán. De modo que así le fue a Europa, y así nos fue a nosotros.”

“A ellos, españoles de lenguas y tierras diferentes entre sí, pero solidarios en la ambición, la soberbia y el sufrimiento, y no a los figurones retratados en primer término del lienzo, era a quien el holandés entregaba su maldita llave.”

LasLAnzas

Estos párrafos los escribió Perez Reverte en 1998 pretendiendo haber sido escritos en el siglo XVII pero son perfectamente aplicables a 2016.

Nota: este libro en la edición que yo tengo tiene unas 250 páginas, con letra grande, líneas espaciadas, cómodo de leer. En su lectura habré invertido unas 7 horas, ideal para unas cortas vacaciones.

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Ailes Anciennes Toulouse, Visites Cockpit (April 2016)

Ailes Anciennes Toulouse is an association that preserves and restores old airplanes and helicopters. It is located in Blagnac, close to the museumAeroscopia. In its collection has over 50 aircraft, some of which are being worked on, some are displayed in their field and others are ceded to Aeroscopia (e.g. the Super Guppy being one of them).
VisitesCockpitApril2016About three or four times a year, Ailes Anciennes organizes what they call Visites Cockpit events. In those days, most of the aircraft on display are opened for visitors to enter in them, sit in their cockpits, experience them, get explanations from enthusiast volunteers of the association, walk through their cabins and cargo hold compartments. Last year we went for the first time. See here the post I wrote then about it.

Last April 2nd, we went there again (as over 540 other enthusiasts), as it is always a nice experience to walk around those pieces of craft, plus this time we went with my father-in-law.

In relation to last year’s visit, this time there was a new restoration hangar, named “Ateliers Louis Breguet” after the aviation pioneer and it was possible to enter into the double decker (“Deux Ponts“) Breguet 765 Sahara, an antecessor to the Airbus A380, designed in the 1940s, introduced in service in the 1950s with 20 units built.

The best way to give some flavour of the place is sharing some pictures:

Facing Caravelle back door.

Facing Caravelle back door.

Seated on a Sud Aviation Caravelle.

Sitting onboard a Sud Aviation Caravelle.

Dassault Mirage III.

Dassault Mirage III.

Side view of Breguet 765 Sahara.

Side view of Breguet 765 Sahara.

Upper deck of Breguet 765 Sahara.

Upper deck of Breguet 765 Sahara.

Interior of Breguet 765 Sahara.

Interior of Breguet 765 Sahara.

Cockpit of Breguet 765 Sahara.

Cockpit of Breguet 765 Sahara.

Playing 1 Playing 2

Hangar Louis Breguet.

Hangar Louis Breguet.

De Havilland Vampire T11 built in France by SNCASE.

De Havilland Vampire T11 built in France by SNCASE.

Cargo hold of Nord 2501 Noratlas.

Cargo hold of Nord 2501 Noratlas.

I recommend the visit to Ailes Anciennes in its Cockpit days (10€ for adults). Take a look at their website to see when the next one is scheduled (normally in spring).

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Montolieu, “village of books”

Yesterday, I was referred via a tweet from my friend Javier to an article about a village in Spain, Urueña, a village with more book shops than bars. I strongly suggest the reading of that article (here, in Spanish) as the village seems to be wonderful, a destination for a future trip to Spain.

The article refers to a couple of other such “Village of Books”:  Wigtown (United Kingdom), Tuedrestand (Norway) and Fontenoy-la-Joûte (France). This reminded me of another village of books in the South West of France which we visited last November, Montolieu. What best occasion than to share some lines and pictures about Montolieu than today April 23rd, the International Day of the Book.

In fact, it is interesting to know that there is an International Organisation of Book Towns (see here the article about it in the Wikipedia in English and French – more descriptive). There are about 40 such villages, a couple of them in Spain, some 7 of them in France; the first one to become such a Village du Livre in France was Bécherel, the second, Montolieu, in 1989.

Montolieu 1Montolieu is located some 20 kilometres North from Carcassonne in the Aube department (1), and it has about 800 inhabitants, 15 book shops and a museum about book making (Musée des Arts et Métiers du Livre). We visited a few book shops, made some purchases, walked around the village and had a traditional lunch over there.

However, when we visited the village it was almost winter time, freezing, and the village was nearly deserted. I imagine that Montolieu is best visited in spring or summer, in order to enjoy lunch in a terrace and longer walks between the book shops (not all were open in last late November).

Until we come there again, I leave some pictures from that first visit.

Montolieu 2

Montolieu 4

Montolieu 3

(1) It is also just 5 km South from Saissac and not far from Lastours, two other small villages in the region with nice castles. See here a post I wrote about a flight excursion we did over the Cathar castles with some pictures of them.

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El ingenioso hidalgo don Quijote de la Mancha

BookShelfDesde hace un par de años tenía en mi estantería de “libros a leer con prioridad” una edición de bolsillo con las dos partes de “El ingenioso hidalgo don Quijote de la Mancha” publicada por la Casa del Libro en 2004 con motivo del cuarto centenario de la publicación de la primera parte (1605).

El pasado mes de marzo, conversaba en red con mi primo Javier sobre la dimensión de la celebración del cuarto centenario de la muerte de Miguel de Cervantes (22 de abril 1616). Y en ese momento pensé: “Javi, antes de pensar en homenajes, estaría bien leer finalmente el Quijote”, así que me propuse leerlo en el algo menos del mes y medio que quedaba desde el 11 de marzo en que acabé el libro con el que estaba en aquel momento y el 22 de abril (aunque finalmente lo terminé el pasado 13 de abril (*)). Y ese, leer su principal obra, y escribir esta entrada sobre la misma, es mi homenaje personal a Cervantes.

Quijote

En esta entrada no pretendo hacer un resumen ni un análisis de la obra sino sólo (1) confirmar por mi parte lo monumental de la misma: decenas de historias se van sucediendo añadiendo personajes y lugares, recreándose en historias o anécdotas paralelas, haciendo uso de multitud de figuras retóricas en una prosa cargadísima a la vez que rítmica, llena de guiños, giros y refranes, (2) compartir un par de reflexiones que me han llamado la atención durante la lectura y (3) dejar algunas frases o pasajes que me han resultado curiosos.

Los molinos. Si hay una imagen icónica de la locura de don Quijote en el imaginario popular es la de él mismo luchando contra molinos de viento creyendo que son gigantes. Mi sorpresa fue cuando vi que en toda la historia esto ocurre una vez. Don Quijote embiste  a un molino. Se da en su segunda salida, en  la primera aventura que tiene desde que sale con Sancho Panza (antes había hecho una primera salida en solitario). En el capítulo octavo (8) de cincuenta y dos (52) de la primera parte.

En el segunda parte, lucha contra otro molino, aunque esta vez es un molino de agua (aceña) y no va subido en rocinante, sino en una barca que queda destrozada por las ruedas del propio molino. En este caso no cree que sea un gigante, sino un castillo o fortaleza donde tienen encerrado a algún desaventurado que debe ser liberado. Esta historia del segundo molino se encuentra en el capítulo 29 de 74 de la segunda parte, me temo que sea el hecho de estar más cerca del final, lo que hace que haya recibido poca o ninguna prensa (como la mayor parte del resto de historias).

Sancho Panza. Otra reflexión viene a partir del contrapunto que supuestamente ofrece Sancho Panza a la locura del Quijote. Una vez leída la obra, me parece que en la sociedad se hace mucho hincapié en los dos estereotipos: que Sancho sea una persona cabal, racional, con los pies en el suelo, y que el Quijote sea un loco. A lo largo de la obra hay multitud de ocasiones donde es el Quijote el que ofrece juicios certeros (como ejemplo el capítulo dedicado al discurso sobre las armas y las letras), hace uso de refranes, da buenos consejos, cita pasajes de clásicos, etc. Y también en numerosas ocasiones el propio Sancho queda como necio, que es engañado con facilidad (por ejemplo por los duques, o siendo convencido por el propio Quijote una y otra vez sobre los encantamientos). Me parece que uno y otro andan a la par en cuanto a lucidez.

Algunos pasajes:

“[…] suele decirse que la alabanza propia envilece; pero mi escudero os dirá quién soy”.

“[…] andar de ceca en meca y de zoca en colodra”.

“Sábete, Sancho, que no es un hombre más que otro si no hace más que otro”.

“Ni yo lo digo ni lo pienso –respondió Sancho-; allá se lo hayan; con su pan se lo coman; si fueron amancebados, o no, a Dios habrán dado la cuenta; de mis viñas vengo: no sé nada; no soy amigo de saber vidas ajenas; que el que compra y miente, en su bolsa lo siente. Cuanto más, que desnudo nací, desnudo me hallo: ni pierdo ni gano […]”

“[…] la infinidad de dineros que allí sin provecho se gastaban, sin servir de otra cosa que de conservar la memoria de haberla ganado la felicísima del invictísimo Carlos V […]”

“[…] será mejor que nos estemos quietos, y cada puta hile, y comamos”.

“- No es la miel para la boca del asno –respondió Sancho; a su tiempo lo verás, mujer, […]” (eso es jugar con fuego)

“¿Qué diablos es esto? ¿Qué descaecimiento es este? ¿Estamos aquí, o en Francia?”

“Treinta mil volúmenes se han impreso de mi historia, y lleva camino de imprimirse treinta mil veces de millares, si el cielo no lo remedia”. (eso es confianza)

“- ¿Leoncitos a mí? ¿A mí leoncitos, y a tales horas?”

Y por supuesto, recomendar su lectura, “¡viva la andante caballería sobre cuantas cosas viven hoy en la tierra!”

(*) Una referencia para el lector que se esté planteando leer el libro y, como me pasaba a mí, lo vaya posponiendo porque le parezca un muro infranqueable: la lectura de las dos partes me ha llevado unas 40-45 horas. Esta cifra es bastante ajustada, dado que he ido leyendo en tramos de 25 minutos. En cada uno de esos tramos no leía mas de 5-8 paginas (en general entre 6 y 7), dependiendo de lo densas que fueran (la edición que tengo tiene la letra pequeña, poco espacio entre líneas, no muy cómoda de leer) y lo despierto que estuviese. Esas 40-45 horas las he empleado en unos 34 días, de los cuales he debido leer en todos alrededor de una hora, excepto en un par de ellos (cenas con amigos) y algo más los fines de semana.

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Our son is born!

Some months ago we announced that we were expecting a second baby, today we proudly announce that last Sunday, 3rd April 2016, at 23:11, our son was born in Toulouse.

The delivery went smoother than the previous time (her mother’s words) and both Luca and the child enjoy good health at the moment, recovering in the clinique.

Looking forward to introduce him.

His sister, Andrea, looking forward to introduce him to the world.

David, the newcomer (design from uncle Jaime).

David, the newcomer (design from uncle Jaime).

David weighed 3,620 grams at birth and measured 51cm tall.

Little David, inscribed on Monday in the Toulouse registry as David Irastorza van Veen (1), seems to have light grey/blue eyes, looks like a good navigator to fly with at the side and asked us to thank you all for the interest and good wishes, and said that is looking forward to meeting you in the following days, weeks, months and years.

(1) To be inscribed in the Spanish registry in due time, Consulate time…

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Airbus, the biggest factory of France

Last Sunday, March 27th, the French TV channel M6 played, within its programme 66 minutes, the documentary “Airbus, la plus grande usine de France” (Airbus, the biggest factory of France). It can be watched in the website of the programme here (it lasts about 47′, in French).

A380The documentary opened with amazing scenes of the transportation of A380 components by road to Toulouse, it then covered different scenes of life at Airbus in Toulouse: the A380 final assembly line, the preparation and execution of flight tests (with again the A380 as flight test bed to test the Trent XWB 97k engine), inspections by the airlines of the finished product at the delivery centre, the factory and the Airbus lycée at Saint Eloi for apprentices, the cabin mock-up centre, last-minute negotiations and payment process at Airbus headquarters in Blagnac (“le quartier chic”)… It provides a good view of the life in Toulouse around aviation, including details down to traffic jams, lunch at the canteen, checks at the security gates, etc.

It was good to see the documentary with the family as it let us show where we wander around along the year.

In this post, apart from sharing the documentary I wanted to reflect on its title, “Airbus, the biggest factory of France“.

Airbus Group (1) employs over 130,000 workers world-wide. Over half of those work for Airbus, the division which builds commercial airliners such as the A380. This was the subject of the documentary. Airbus employs about 30,000 workers in France, over 15,000 in the Toulouse area (2).

To put this into perspective I will refer to and wanted to share the following sources:

MapThe reports and listings published by the French business weekly magazine “L’Usine nouvelle“. You can see here the latest listing of the top 100 factories in France. Be sure of it, Airbus Toulouse is the biggest one, followed by Michelin in Clermont-Ferrand and PSA-Peugeot Citroën in Montbéliard (Airbus Helicopters in Marignane comes 5th).

Even better, they published a handy map downloadable here [PDF, 5.5 MB] with those top 100 factories. If you want to study geography of France, you’d better start with this map.

 

An old post I wrote about the “Impact of Airbus in Toulouse employment” making some numbers using the concepts of direct, indirect and induced employment to gauge the impact of Airbus in a mid-size city like Toulouse.

(1) Formerly EADS, which encompasses Airbus commercial airplanes, Airbus Defence and Space (including military transport aircraft (e.g. A400M), fighters (Eurofighter) and former Astrium) and Airbus Helicopters (former Eurocopter).

(2) Between Airbus Operations and Airbus SAS (the headquarters or “le quartier chic” as labelled in the documentary).

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