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.

21 kommentarer:

  1. Mycket bra intervju! Har varit skeptisk till bolaget, dels pga namnet, dels därför att jag i grunden inte är särskilt förtjust i när man mer eller mindre parallellt gör stora utdelningar och nyemissioner. Men det kanske finns någon tanke där?

    Hur som helst, bolaget stiger helt klart i mina ögon efter att ha läst intervjun. Gillar framför allt deras strategi att leta bolag utanför storstadsregionerna, och att Hawk inte verkar vara så smalt mot oljeindustrin som jag trodde. Kanske blir en liten position i sambons portfölj!

    1. Kul att höra! Jag är för egen del imponerad av svaren och har fått ett väldigt bra intryck. Just sånt som att de letar utanför storstäderna, fokuserar på kvalitet/konkurrensfördelar och att Hawk kan breddas och vara mindre cykliskt än man kan tro.

      Som det är idag har jag uppfattat att Hawk har ett stort kundberoende, men som sagt finns möjligheter att bredda och Turnkey-lösningen tror jag är en konkurrensfördel.

  2. Riktigt bra och intressant intervju - bra jobbat!

    Bolaget steg helt klart i min bok, blir spännande att följa utvecklingen framåt.

    1. Tackar! Instämmer, jag tycker svaren är klockrena och gillar deras filosofi.

  3. Stora pluspoäng att de svarar, tycker många utländska bolag är usla på det. Även kul att du kunde reda ut det här med namnet, alltid ett bra tecken när finansmän har självdistans. I branscher där många vill göra sig själva lite förmer är det alltid bra när någon sticker ut åt ett annat håll.

    1. Måste även ta och titta på deras förebild. Alltid bra med en blueprint att stämma av emot.

    2. Precis, det som sticker ut med förebilden är att de har rätt mycket inom flyg. Kan man tycka olika om, men det finns monopol-inslag om vi pratar högst regionala linjer. Men affärsmodellen blir lite mer beprövad när det finns en förebild.

      Och namnet, jag tycker det är en bra historia!

  4. Vill även jag plussa för intervjun. Väldigt sällsynt tillskott till bloggosfären, extra kul för mig som också redan är investerad i bolaget! :)

    Trevlig helg!

    1. Tack, och jag får rikta vidare det tacket till Decisive!

      Om det här uppskattas ska jag försöka få till intervjuer med fler bolag. Men det är inte alltid som bolag ens svarar när man mejlar, så det här är ett väldigt gott exempel!

  5. Tack för en mycket bra intervju med många bra frågor! Blir lockad att kolla upp båda företagen mera.

    1. Tack! Har kollat lite lätt på Exchange och för mig är det bland annat större bolag, exponering som flyg och högre skuldsättning som gör att jag gillar Decisive mer. Men man kan se flyg som monopollinjer.

      En del input på Exchange Income finns på Stockchase, men ofta är det bättre att lyssna på videointervjuerna eftersom texten bara är ett sammandrag. Se https://stockchase.com/company/view/3844/EIF-T och https://www.bnnbloomberg.ca/stock/EIF.TO

  6. Bra intervju! Riktigt intressant och klargörande på många punkter. Keep up the good work, helt enkelt :-)

  7. Tack för ett intressant blogginlägg och en bra intervju. Ska absolut kika närmare på bolaget.

    1. Tackar! Det är värt en närmare titt!

  8. Matnyttigt och klargörande. Nu blev även jag köpsugen.

    1. Ja, visst var det bra svar, håller med!

  9. Fantastiskt bra jobb Gustav!
    Gärna fler liknande intervjuer, de ger ju en värdefull inblick i de mindre företagen.

    1. Tack! Jo, ska nog försöka få till fler intervjuer. Men inte alltid att bolagen svarar. Men är inspirerad till fler intervjuer och öppen för önskemål!

  10. Fantastskt Gustav, vilket bra jobb du har gjort med denna intervju!! Kanske går att upprepa på andra innehav?:)

    1. Tack! Ska se om det går att få till fler intervjuer, men det är nog oftast lättast med riktigt små bolag.