Jag samlade ihop några frågor till Decisive Dividend och har gjort en ny intervju med David Redekop. Min första intervju finns här. Frågorna är de som ni har ställt via bloggen och twitter, och jag kompletterade dessutom med två extrafrågor på slutet. Nyligen har de också kommit ut med en videointervju.
Tror knappast det undgått någon, men ska nämnas som en disclaimer att jag äger bolaget och (såklart) är positiv till dem.
Videointervjun
Till att börja med måste jag tipsa om denna färska videointervju som Decisive gjort med Proactive. 7 minuters trevlig och informativ video som starkt rekommenderas att ta del av Man får en fin beskrivning av Decisives bakgrund och filosofi. Bland annat nämns att de tittade på cirka hundra bolag (!) innan de slog till och köpte Blaze King. Och några ord sägs också om utdelningens hållbarhet.
Jag har inte sett att de medverkat i något sådant innan, men kul att företaget börjar uppmärksammas! Känner inte till Proactive tidigare, men de är verksamma inom finansiell media och finns i UK, USA, Kanada och Australien.
Min intervju
Nu vidare till min intervju med Decisive. Hoppas den uppskattas! Frågorna besvaras, även här, av David Redekop från Decisive. Jag tycker svaren ger en värdefull inblick i bolaget och hur de tänker. Och stort tack till David för att han tog sig tid att svara på frågorna!
Question 1: There has been two years since a dividend raise. How do you think about a raise compared to amortization of debt and increased stability in that way. How do you think about the high dividend payout ratio?
Our monthly dividend is evaluated carefully on an ongoing basis by management and our board of directors. We are still a pretty small company and have seen some fluctuation in the past in our pay-out ratio due to seasonality and other macro level impacts such as steel tariffs and oil and gas activity slowdowns. In Q3 2019 our management team completed two significant undertakings that will help address this: First, we worked with our lender to refinance our senior debt to be non-amortizing, increasing free cash flow. Secondly, we completed our fifth acquisition – Northside Industries Inc. Northside was attractive not only because of its strong EBITDA generation but also because it further diversifies our revenue stream to include the Forestry and Transportation industries. We also feel that Northside will add synergies with several of our other subsidiaries including cost savings on benefits and insurance, as well as volume purchasing as Northside has vendors in common with Slimline and Blaze King.
Question 2: How do you think about debt levels in the short and long term. Do you have any specific target regarding debt/EBITDA?
We recognized that after our acquisition of Hawk, our debt to equity ratio was quite low in relation to our peer group. We financed the acquisition of Northside with 90% debt and 10% equity in an effort to balance this measure. Long term we will continue to utilize our new debt facilities as we grow, along with equity as well, to keep a steady 1 to 1 ratio of debt to equity that we feel is conservative yet sustainable. Our long-term target debt to adjusted EBITDA ratio is 2:00:1, but this will fluctuate depending on timing of future acquisitions.
Question 3: Some may question that you both are issuing new shares and paying a dividend. What is the big reasons for not choosing a model with zero or low dividend, and then make further acquisitions from cash reserves. What are the advantages/disadvantages with the chosen model?
The model we have chosen is a tried and true model that has been used by a company called “Exchange Income Corp” since their first acquisition in 2004. The model tries to balance both debt and equity while delivering a solid steady stream of income to their shareholders. Other companies use internally generated cash for growth, and we do as well. We just pay out a certain level of our cash to our shareholders, as our goal is to deliver income and growth to our shareholders. We believe that our new debt structure is better aligned with this objective and the diversity gained with adding a 5th company will also only help to achieve this objective.
Question 4: More about your model. Can you in some way describe yourself being a “income fund” that is buying high yielding companies, not found on the stock market, and then redistributing the dividend to your shareholders? And also growing their profits. When Exchange Income was an Income Fund, they invested in “niche company with strong defensible cash flows that would be income fund candidates on their own except for their size”.
Our model is actually quite simple. We buy private cash-flowing manufacturing companies at private-company metric valuations (under 5x on a three year average of EBITDA) and then are able to receive a public company valuation on that EBITDA of 7 to 8 times. The net cash that these companies generate as a private entity is usually flowing into the hands of only one or two people (the owners). With Decisive, instead of those funds flowing into the hands of one or two people, a percentage of it is flowed out to our shareholders. We buy 100% of companies, so there are no minority interests. Our shareholders receive 100% of the benefits of owning these private companies.
We grow via two means – via acquisition, and via growing the revenues and profits of our subsidiaries. To grow the profits of our subsidiaries we implement various strategies including increasing the bench strength of our management and sales teams in each subsidiary, allowing them the horsepower to go after new markets and better service their current markets. We also invest in new capex that allows them to produce their products faster and more efficiently, improving product delivery times and overall service levels. This has worked quite effectively at subsidiaries like Blaze King, where the long-term effects of investment in new equipment, expanded sales teams and research and development into new models has had a positive effect on sales and EBITDA.
Question 5: Can you say something about the new acquisition Northside Industries competitive advantage and cyclicality? And is there any long term trends that can drive the growth?
Northside has a tremendous competitive advantage as they are extremely conscientious when it comes to servicing their clientele and delivering high quality product on time every time. They pay close attention to their customer needs and focus on ensuring their customers are always happy and serviced exceptionally. This attention to detail has created long term customer relationships that include growing revenue streams, as other suppliers fall out of contention.
Northside is subject to some cyclicality as their main customers are in the forestry and trucking industries, both of which are susceptible to economic downturns. To mitigate the effect of this cyclicality, DDC negotiated a low up-front multiple for the purchase of Northside at just over 3x TTM EBITDA, with a future potential earn-out should Northside exceed internal minimum targets. This shares the risk down the road with the vendor of there being an economic down-turn and mitigates the overall purchase risk for DDC.
Long-term trends that drive growth for Northside include growth in the forestry industry of course. As climate change continues to worsen and hurricanes become ever stronger and cause more devastation, there should be long-term demand for forestry products as rebuilding of homes becomes more and more a prevalent issue (as we are now seeing in Puerto Rico and the Bahamas). We also are seeing a long-term trend towards more fuel efficient trucking, which is causing a lot of replacement of current truck fleets that should be ongoing for several years to come.
Technology in the trucking space is growing with advancements being made in electric trucks, and also in driver-less trucking, two advancements coming in the future
Synpunkter?
Vad säger du om intervjuerna? Och om Decisive Dividend?
