söndag 11 november 2018

Intervju med Decisive Dividend

Denna vecka blir det ett ovanligt inlägg, nämligen en intervju med Decisive Dividend. Detta Kanadensiska bolag är ett av mina favoritinnehav och mina frågor har besvarats av deras Chief Corporate Development Officer, David Redekop. Om ni förresten har ytterligare frågor, ställ dem i kommentarsfältet på svenska eller engelska så kan jag förmedla dem och ordna en uppföljningsintervju om önskemål finns. Bolaget finns också på Twitter: @DecisiveDivCorp

Nog pratat, nu till intervjun. Och jag hoppas ni tycker mina frågor var vettiga!

1. Is the possibility to buy more companies linked to demography? I guess that baby-boomers are selling their companies to you, and that more of them will retire. I even think some statistics were mentioned in your first presentation. And since the sellers are old, are you always looking to change management after a few years?

You are correct, most companies we look at are owned by people of baby-boomer age (early 70’s), though this isn’t always the case. Our most recent acquisition (Hawk Machine) was actually from a person who was only 40 years old, so there is hope that younger people are looking at selling their businesses too, and not just baby-boomers.

In answer to your question on age, while the vendors probably don’t like to think of themselves as “old”, you do bring up a good point. In the case of Blaze King, the owners had already found a president that they were grooming to take over, and so no management change was required. With Unicast, we did make a management change, as the president was in his 70’s and wanted to retire.  The same thing happened with Slimline, and we were lucky enough to find a president (John McMillan) who was able to step in and start running Slimline from the day we took over (June 1, 2018).

So to sum up, yes, if the current ownership is “old”, we would be looking at a management change within a few years of acquisition.  This is a fact of the current demographics of our society.

2. Could you say a few words about the competition when you are buying companies. Is there less competition for smaller companies compared to bigger? What are the other "options" for those selling their company to you?

We compete against several other kinds of buyers, but the most common are companies known as “private equity”, which are private companies that buy companies with a mandate to grow and sell them in a specified period of time, usually five to seven years. For example, they would buy a company like Blaze King, bring in experienced management and capital, and then grow it and sell it for much more money than they paid, while paying no dividends. This differs from our model, as we buy companies to grow, with no set time period for when we would sell, if ever. We focus on maintaining sustainable cash-flow, and paying out a percentage of the cash-flow in dividends to our investors.

Another option for companies  to look at for their exit strategy are “Strategics”, a word used to describe another company that operates in the same competitive space.  In Blaze King’s case, this would mean another wood stove company, potentially much bigger, that would be buying them due to synergies in production and marketing. Strategics usually pay a higher multiple than Private Equity, due to recognized synergies.

When it comes to companies that are in the price range of $25 million Cdn or under that are the size of company we look at, there can be less competition from other buyers than say in the $30 -$50 million category, though we find that the competition also can be geographic as well as monetary.  There seems to be less interest from Private Equity in companies that operate outside of major urban centers in Canada. As Canada is quite large and the population spread quite thinly, this opens up a unique opportunity for companies like Decisive, who are willing to literally “go that extra mile” to find a company to purchase. All four of our acquisitions have been in smaller urban centers rather than near large cities like Vancouver or Toronto.

3. The name Decisive Dividend, will you give a background to that? Is the name intended for shareholders or do you also have the ones selling their company to you in mind? Maybe the dividend is even more decisive for them :-)?

There are a few ways to look at how we came up with our name, but the funniest story I tell is that the name is a play on the fact that when we were trying to name the company we had 10 directors, all of whom could not agree on what our name should be. This also was complicated by the fact that so many names are now trademarked in Canada and so it’s difficult to find a name that wasn’t already taken or spoken for legally. In a bout of frustration on how we couldn’t agree on a name, I started calling our company “Indecisive Dividend”, and the name stuck, though without the “In”. Everyone finally agreed on the name!! :)

4. About synergies, is that an important factor when you are buying new companies? Cross-selling is obviously a good thing, but could synergies come in other forms, for instance: IT, administration and R & D?

We do not factor synergies into our calculations when buying companies, however we do encourage cross-selling where applicable, and also volume purchases on items like insurance and benefit plans whereby all of our subsidiaries can benefit. IT is also something that can be centralized, and we are working on that.

We are seeing some opportunities for Slimline and Blaze King to work together to help each other out during periods of high activity to ease bottle-necks, given the two companies are situated almost side-by-side in Penticton, B.C.

5. Is there a common denominator for all companies? Personally I could see "energy efficience" as a strong theme: Blaze King have the most effecient stoves, Unicasts wear parts lasts longer, and Slimline products leads to more efficient spraying. 

The common denominator for all companies is manufacturing, first and foremost. Another common denominator for all of our companies is quality. Blaze King builds one the best wood stoves on the market. Slimline makes excellent quality sprayers and evaporators. Unicast makes wear parts that are uniquely designed and last longer than other wear part products on the market. Finally, Hawk’s quality assurance focus and high quality product is what makes them so unique from their competitors.

6. Sustainability may be increasingly important for investors. Do you see your exposure to oil and gas as a risk? Or are you de facto sustainable by offering energy saving products for necessary industries? 

Oil and gas is definitely cyclical, and so Hawk does have exposure to this cycle given the high percentage of their product they produce for the oil and gas industry. They are a CNC shop, which means that they can produce many other products as well as products for the oil and gas industry. We are attempting to find other products for them to produce in other industries to find ways to reduce this risk and exposure. Their first product that Hawk ever produced when they were founded twenty years ago were ground rods for Canadian electrical utility companies, and they still do this today.  This is just as one example of other products they are capable of producing.

Sustainability is definitely one of the key aspects we look for when considering potential acquisitions and will continue to be high priority as we go forward with the companies we have already acquired as well as future acquisitions.

7. All companies are in to speciality manufacturing. Do you see a disruption risk regarding to technology? Could 3d-printers and new ways of manufacturing pose a threat? Or are you shielded by being in small nisches?

At this moment we do not see 3D printers or other technologies as a risk to any of our companies.  The companies we have have been in operation for many years and have continually innovated as the market has demanded, coming out with new products. We devote a portion of our annual operating expenditure budget for Slimline, Blaze King and Unicast to continual innovation and investment towards updating their technological capabilities to stay in step with our competition in each field.

We also attempt to monitor our competition to see what their latest innovations might be that give them a competitive advantage. As we are small, we can move very quickly in our decision-making process.

8. Diversification to different geographies is a good thing. The world economy is slowly moving to the east. Do you see Africa and Asia contributing more to your sales in the long term? How is Canadian companies regarded and competing on a global scale? In Asia and Africa, are you growing by selling to North american companies making business there, or to local companies? 

Right now here are the breakdowns of the opportunities we see on a per company basis in geographic areas outside of North America:

Blaze King - New Zealand. We haven't sold many stoves outside of North America, but are now starting to build a market in New Zealand, as we are able to get our stoves environmentally certified over there by New Zealand's version of the EPA (Environmental Protection Agency). We are selling our stoves there via local New Zealand distributors.

Unicast - Africa – mine sites and cement factories.  Asia – cement plants (Philippines), Australia – Mining, Latin America – mining and cement plants. For our cement wear parts we sell through the giant multi-national cement companies, no matter where their factory is located.  We have been starting to sell some cement products into Africa, but via the large cement companies, not to any specific African companies. We also sell mining and cement wear parts into Latin America, both to Canadian companies operating mines in Latin America, and to actual Latin American companies. We see large growth opportunities in Latin America and are focusing a lot of attention to this area of the world right now.

Slimline - Africa (mine sites for evaporators). Right now we only sell their sprayers in North America, though we have sold some evaporators outside North America, including a recent sale of evaporators to a company operating in the Caribbean. We are definitely looking at opportunities outside of North America, be it with Canadian companies operating in foreign jurisdictions or actual foreign entities requiring environmental remediation at mine sites. If you know of any Swedish mine sites that need their tailing ponds cleaned up and are looking for a solution, please let us know!

Hawk - we only sell in North America, primarily in the Canadian market.  We are working with current vendors to see if we can acquire more of their US business as well going forward.

Canadian companies are well regarded world-wide, almost as highly as Sweden! :)

We do see Asia as a big source of growth, however for Unicast especially, Latin America continues to be one of our biggest growth markets.

9. About Hawk, your criteria is that companies should operate in non-cyclical markets. How is Hawk matching that criteria? Could you say that commodity business is cyclical but the service-business part is much less cyclical? Also, is it possible to say something about Hawks "competitive advantage"? 

One of the reasons we purchased Hawk was that it demonstrated economic viability and profitability even in years where oil and gas markets were weak. Hawk has the ability to pivot to other products in oil and gas downturns and we are working to diversify their product offering to avoid cyclicality and to keep their manufacturing facility humming, no matter what stage of the oil and gas cycle the world is in.

Hawk’s competitive advantage is their attention to detail and their focus on quality assurance. Their failure rate is much lower than other shops that produce similar products. They have a dedicated team on staff that watch quality closely. This has earned them a “turnkey” designation, in that they can ship straight to the end-user without requiring separate client inspection. This is a very large competitive advantage.

10. About Blaze King. Do you see stoves taking the same role in peoples homes if we get a warmer world? Anyway, it could of course also be regarded as an important interior decor. The question is more if you look 1, 10 or 15 years "forward" when you buy a company. Are you considering "megatrends" when buying companies?

In places like Alaska and most of Canada, a few degrees of warming, should this occur, is not going to be enough to cause people to reduce their requirement for energy to stay warm in our very cold winters. There may be reduced buying in traditional US markets if they are continually receiving much warmer weather than has been experienced in the past.

The larger threat to wood stoves is natural gas lines being installed in markets that have not had these lines in place in the past due to their remote locations. This has driven us to look out several years in the future and begin to innovate gas stoves as well as wood stoves.

We do look at future trends when we buy a company. This for example led us to be very interested in Slimline, as we see in the future the demand for food to continue to expand exponentially over the coming decades as world population continues to grow. This will lead to the continued increasing demand for Slimline’s agricultural sprayers.

We also see governments continuing to demand more environmental regulations in the future, which will require companies to be more diligent in cleaning up their tailings ponds from production of oil and gas and mining. This will drive demand for Slimline’s evaporator product.

11. How could your company and stock be less undiscovered? I guess its always a problem for small companies

We are always willing to speak with investors who approach us, but we have been very careful regarding spending money on investor relations (IR). There are many companies who seek us out and want us to sign up for their programs, but these programs can run up to $15,000 to $20,000 per month, with no real accountability or success metrics. We are currently evaluating several firms that have approached us, and are looking at developing an IR strategy for 2019 that should include some investor awareness campaigns.

We always look at our stock as a long-term investment that pays you while you wait. While we are willing to entertain ideas on how to promote our company and make our name more well known, we are unwilling to pay a lot of money for this at this early stage of growth curve. As we grow and potentially have more of a budget to spend on IR, we will look at also increasing the amount of money we will spend in this area.

We have launched Facebook and Twitter accounts and I encourage all of your readers to start following us!

12 You focus on non-discretionary products. Why? Is it because you want products with constant demand?

We focus on companies that make quality products. I believe that the fact that the products made are non-discretionary was not by plan, but just how our acquisitions happened.  We saw an opportunity to buy good companies making extremely good quality products, that needed some investment in capex and marketing, to take their products to the next level. But the foundation was there, and had been there for a long time, as the quality product and the team in place to build it had been created and assembled.

13. When you build your company, do you have any investors or other companies as inspiration? Peter Lynch, Warren Buffett or even Swedish companies, like Investor?

Our inspiration is a company called Exchange Income Corporation (TSX-EIF). They are in Winnipeg, Manitoba, Canada.  They started in 2004 and were the first ones to come up with the model that we are now emulating.  They are very disciplined in their investment strategy and always try to maximize their efficiencies to pay a good dividend to their shareholders. They are now a billion dollar company with fourteen subsidiaries.  We are only 10 years and 10 companies behind them!

Personally, I have always been a fan of Warren Buffett. He buys quality companies, and he always ensures that he doesn’t over-pay for these companies. That’s a tried and true model that I would recommend all investors study.

söndag 4 november 2018

LiveChat - katastrofinvestering och insikter

LiveChat (26,5 Zloty) är mitt sämsta köp i modern tid och jag är ner 50% före utdelningar. I enkelhet handlar det om att jag köpte ett tillväxtbolag som både tappade tillväxt och värdering. Lite H&M över det hela. Köp inte för dyrt är en simpel läxa, men det finns fler lärdomar.

Psykologiskt känner man sig givetvis som en smärre idiot som gör usla investeringar, men man får fokusera på att minska framtida risker och acceptera att allt inte går bra. Även mina förebilder och erkända superinvesterare gör misstag. Och det kan även ha varit rätt beslut men fel utfall.

Försäljningskanaler viktiga?
Låt oss gräva i vad som har hänt. Har grubblat en del, och när en kundbas på 25 000 kunder går från ökning på 400-500 st per månad till 150-200 per månad (augusti-september) vill man veta varför.

Jag har lagt till nya kunder i linjen längst ner

Det har inte varit riktigt tydligt varför det går så trögt, men ledtrådar finns i augusti-rapporten och då föll vissa bitar på plats. De har en bra produkt, men när det gäller försäljningskanaler har de åkt på en smäll. Så här står det i management discussion and analysis (sid 2)
In terms of marketing activities, LiveChat Software continues to develop its present customer acquisition channels and is working hard to develop new ones. Although the Group’s main strategy is based on organic acquisition of new users (without paying advertising expenses), in view of market changes, the Company decided to also test paid efforts and a pilot development of a sales team. 
Och längre i på sidan 6 i rapporten finns en mer utförlig förklaring:
In recent months the Company reported lower than before increases in the number of clients using the LiveChat product. This was due to, among other factors, the introduction of new business models by software comparison sites, mainly by Capterra, GetApp, SoftwareAdvise, which are one of LiveChat Software’s most important customer acquisition channels. After the takeover of these portals by Gartner, they changed their operating method which now focuses on paid auction model, contrary to the cost-free customer acquisition strategy. At the time of publication of this report, the Company is using the paid collaboration model proposed by these portals only to a limited extent. 
Detta är en förklaring som också väcker frågor. Är bolaget för svagt om det är beroende av försäljningskanaler? De har nog den bästa produkten, och då skulle man önska att den "säljer sig själv" ännu mer. Tror jag att bolaget får upp försäljningen igen? Varför betalar de inte för att synas och rekrytera kunder när deras churn (kundomsättning) är låg? Hur stor är sannolikheten att ett polskt säljteam kommer lyckas i införsäljning till USA? Jag vet inte, men i kursen är är nog en långsam tillväxttakt numera inprisad. Och bolaget är ändå bäst i en färsk utmärkelse. En sista fundering är om fler faktorer finns bakom tappet, kanske att gratisprodukter och konkurrenter blir bättre och bättre?

Man kan också fundera en vända på försäljningskanaler generellt. Att bolagen äger sina egna säljkanaler, eller inte är för beroende av andra, kan vara en viktig säkerhetsfaktor. Vilka andra bolag i portföljen kan drabbas av liknande problem?

Sälja förlorare?
De bolag jag funderar på att sälja brukar ofta fortsätta ner. Men inte alltid. Det är ändå en farlig tanke att "snart vänder det", och det tar emot att realisera en usel investering.

LiveChat balanserar på mina kriterier. Jag vill ha tvåsiffror revenue-tillväxt. Då krävs dryga 200 nya kunder per månad. Samtidigt kanske man ska ge dem tid att få igång andra säljkanaler? Eller så har de redan fått all tid som de förtjänar. Jag är bara rädd att kursen sticker 25 procent upp så fort man sålt. Det finns ju mycket värde i knappa 7% direktavkastning, på P/E 13 och ROE på 90. Även med modest tillväxt i försäljningen kan vinstutvecklingen bli god. Men kanske är riktningen i bolaget viktigare, och att vända något tar ofta längre tid än man tror. Prognoserna på 4-traders tyder på svag försäljningstillväxt framöver.

Vad säger du? Är det dags att plåstret från det blödande LiveChat-såret? Eller ska man avvakta om bolaget börjar sälja mera och då tom öka?  Vi har en kamp mellan "billigt" och "utvecklas sämre än jag trott". Jag vet vad Kavastu skulle gjort för längesen men själv är jag kluven. Sett ur kundbasperspektiv är det ingen katastrof, men jag har lätt att titta för mycket bakåt. Kanske ska jag kika hur Favoritfonden Grandeur Peak gör. Att sälja om de säljer kan vara en simpel ta-rygg-strategi. Att försäljningen växte till 230 nya kunder i oktober är positivt, är de på rätt väg nu?

Hur skulle du gjort?