Q4 2021 180 Degree Capital Corp Earnings Call
Communicate for free Q&A session has started the recording has started years of decay in our book value to five years of growth at the exact time that we've changed our strategy five years ago centering on a value based public market activism strategy.
On slide four we show the trend of our cash in public assets over the course of our history.
We presently or in a market that is very difficult for our asset class what's interesting to me about this chart.
Despite our success in running our cash in public assets from $20 million to nearly $8 $80 million in five years, we've gone through some very difficult markets along the way.
Fourth quarter of 2018 was one where there was a 25% hiccup to our cash.
And public assets from the prior quarter and I don't need to remind anybody about the painful market dislocation at the onset of the pandemic, but for US we saw a 33% decline in our liquid assets from the quarter before so whatever pain, we're living through today.
Comforted by knowing that at some point it will and if we get the names right to invest in during this period. We can continue along the trajectory that started in the fourth quarter of 2016.
We've shown this chart. The next one for the 20 quarters of 180 <unk> history. Obviously the goal is to narrow the discount to our NAV as best we can and to do this our strategy revolves around turning our balance sheet into public assets and building enough scale in our assets that over time, we can contemplate.
Distributions to our shareholders without sacrificing our ability to grow our assets from our public market stock picking.
As for the sources of change in our net assets for Q4, please turn to slide six.
Here, we show that we achieved 64 cents of gains from our public stocks 15 cents of losses from our private portfolio and <unk> <unk> of expenses, which included a bonus accrual for our persistent performance, we end with a $10 66 book value the <unk>.
Following slide shows our calendar year 2021 sources of change in assets and amplified version of the prior slide.
We achieved $2 15 of gains in our public assets, while losing 20 in our privates you can see our full operating expense number which included the bonus pool, which I spoke about that our board approved given our outperformance.
Not only the past year, but for the three years prior.
Slide seven is all you need to know about whether or not our strategy has created value for our shareholders over our five year period, we've achieved $6 67, a gains in our public portfolio and despite recent headwinds from our private portfolio.
Because of our starting point encompass the privates being the majority of our assets. We have had to have material outperformance from our public stocks to enable our NAV to grow over 50%. Unfortunately, we have had just that and as you'll see in one of the future slides in this presentation.
Slide eight is our quarter to date performance for each of our public companies as I said in total we generated a six 1% return for the quarter, 9%, including the SMA versus that two 7% decline in the Russell Microcap index.
We achieved good performance for most of our companies in the quarter.
Some bullet points on the next few slides synalloy reported much better results than expected in the new management team. There has been the driving force in the big turnaround of both the metals and chemical businesses the.
The company did a rights offering in the quarter, we participated at our fair share, including oversubscribed and oversubscribed beyond our fair share.
Nathan is no longer the maven and is now called the Arena group and finally, you have seen the company habits numbers up to date and subsequent to the end of the year. The company has long awaited uplifts and conducted a $30 million raise to help fund. Our recent acquisition, we think the opportunity from this starting point valuation today given the <unk>.
Decline is significant as we look out a year or two.
Ever spin announced better than expected results in the stock when vertical rising from 50% to 13.
In the quarter and we use the right to sell our entire position at nearly $11 a share $10 67.
To be exact.
The stock is at 13 to our entity this quarter.
<unk> also continued to execute and provided Q3 results and guidance that exceeded expectations. We all know understand the pandemic and the effect. It has had on the supply chain for the information technology universe. Some companies have been able to navigate it through it better than others. For example, you know we own quantum and they have.
Sales in the current.
Timeframe and their ability to navigate through it.
As you can see from their recent earnings report will then <unk> on the other hand is run by Paul Pickle, and so far they've navigated through a beautifully and the stock has reflected the operational excellence and which he is run the company.
Potbelly hurt us in the quarter, although they did report solid improved results in Q3. The omicron variant appeared around Thanksgiving cases spikes here and around the world and the psychology around owning a restaurant stock turn negative as investors became fearful that this would impact their business.
Q4.
We haven't seen Q4, yet so the effects arent known I don't think there'll be significant at all but the stock has sold off in advance.
The pullback for US represents a great opportunity. This company is being run so well is being repaid and we think the stock will be.
Be materially higher over the next one or two years run by Bob Wright and Steve to rule Us at five we think it represents unbelievable value actually.
A quick peek at Slide 12, we will show our calendar performance for every stock we have owned Synalloy PFS Web Alta group, <unk>, Potbelly and para bellum, Sinacore, where our biggest contributors a desktop as well.
Synchronous and sooner and Saddam hurt.
All in all a 34% return or 38, 2% return, including the SMA.
A lot of lots to come over here on slide 13, but thats our performance for every single position we have owned <unk>.
And a desk, though on the prior slide actually is included in this slide in total 373, 6% return for 405% return, including the SMA.
Some notable facts on this page as we look at it and study the first five years of our existence. There are 35 names on this list. We have 26 winters in nine losers thats, a 75% batting average on our winners versus losers added 26 winter seven had total returns of over 100%.
In 2014 had gross IRR of over 100%.
The biggest percentage loser of any of our losers with Saddam at 29%. So this page for us.
It is a nice combination of showing how we provided our shareholders not only good batting average, but a terrific slugging percentage.
Skipping ahead to slide 15, what you see depicted here is what we just spoke of you have more winners than losers.
More winning positions in losing positions and four our winning positions. They are up a lot and while our while we've been able to contain the percentage losses of our losing positions. Most of this we believe starts with something that we say almost.
Every conference call is that our entry price as value investors. We believe the price that you pay for the business you buy is a key component of maximizing return while monitoring risk at the same time.
Chart 16 is the same chart, but in this case, which shows the total dollars earned on those investments almost half of our investments have had gains of $2 $5 million and above while <unk> is our biggest loser at $1 3 million.
Chart 17 sums it up for everyone to see that as our performance for the quarter. The year three years five years, obviously it is pleasing to try to look at and highlights the investment success we've had.
Since we started we feel really fortunate about the last five years, but we're not going to rest on our lower laurels. The first quarter has been a blunt reminder, that can never sit back or sits.
It still is.
As an investor and point to the scoreboard of years past. This chart is historic looking and says nothing about what the next five years are going to be I only hope that in five years' time, we're able to replicate or come close to replicating what those last five years have looked like.
And finally on slide 16, what you see here is the progress that we've made in remaking our business and our balance sheet.
Certainly don't take for granted what we've been able to do in the last five years and our overall goal is to have this chart comes close to having a 100% cash in public assets.
In it then versus where we started and where we are today and that's going to take.
Some rigorous analysis of public markets equities and really good stock picking that we've had in the last five years and we opened five years' time that this chart does in fact represent that.
Our balance sheet will reflect 100% of it in the public market strategy that we set.
Set forth when we started this company five years ago, Daniel why don't I turn it over to you.
Thank you Kevin.
Please turn to slide 19 for the quarter, our private portfolio decreased in value by $1 6 million or approximately 15 cents a share.
The largest decreases as Kevin mentioned in value occurred and emesis seaport Nacco pixel.
Increases occurred in our rights to future payments from the acquisition of Petro pharma and in D wave systems in almost every shareholder letter in almost every presentation.
Shareholder update call that we get we do we state that while we desire to shepherd, our existing private portfolio accidents.
Turning to sell our positions in those companies, we have the luxury of being able to sell our private holdings monetize them. When we believe it makes sense for shareholders rather than being forced to do so to survive.
As Kevin mentioned, we are pleased to report two events that we believe increase the likelihood we have the opportunity to realize cash payment from our rights to future milestone payments from the acquisition of <unk>.
Sure.
Aliens company and to monetize our position in D wave systems.
Can you talk a little bit more about both of those.
In our presentation to investors in December 'twenty 2021, Lilly noted for the first time that it actually was the entity that acquired Petro pharma.
And that is expected to start human studies of the mutant selective <unk> inhibitor developed by Patrick in the first half of 'twenty two.
Although <unk> not assure our investors when such an event media core occur if at all such an event would trigger contractual payment.
Thank you Petros former shareholders, including one eight.
$6 $8 million payment Q1, 80, it received would increase cash per share by approximately 66 cents.
<unk> also noted.
Let a further development milestone could occur in 'twenty three contingent on achieving clinic.
Clinical proof of concept.
One of them would receive an additional approximately $5 5 million of this milestone is achieved or <unk> 53 a share.
As such the cumulative proceeds from these two milestones if they occur.
It would be $12 3 million or $1 19 per share versus our current carrying value of $7 6 million or 73 per share.
Next on the D wave systems announced its intent to become a publicly traded company.
The merger with <unk> capital, which trades under the symbol X P O a special purpose acquisition company or snack.
Do you as an ex Poa stated the transaction values the way that an equity value of approximately one 2 billion U S dollars.
For perspective, our valuation of 180 shares of D wave.
As of the end of 'twenty, one of $5 7 million equates to an equity value of the company of approximately $750 million if.
If the transaction is completed as it's currently agreed to by each party 180 would hold approximately 900000 shares of common stock of the merged company.
As you can see from slide 19, we only have a handful of private portfolio companies left that have material value.
As Kevin mentioned earlier, we will discuss in a bit. We are currently optimistic that there will be other opportunities to monetize some of these remaining private portfolio companies and 22.
Please turn to slide 20.
As we have noted in previous letters, we have dramatically reduced their cost structure under our new strategy in 2016 before our funds changed in investment focus and management team our operating expenses, excluding stock based compensation and interest on outstanding debt averaged approximately $1 3 million per quarter.
For Q4, 'twenty, one a regular operating expenses, excluding a little bit of severance costs equaled approximately 750000.
The large material difference in our personnel related expenses shown on the slide on a year over year basis.
He used to a one time reversal last year.
In our medical benefit.
Tyrant benefit accrual for certain prior employees.
We will maintain a lean cost structure outside of fixed expenses for being a public company focusing our expenses on activities solely designed to enhance our investment performance or to increase our revenues from managing outside capital.
With the conclusion of 180 degrees first five years of existence. We believe it is the time to be more proactive about telling our story and to getting 180 in front of new investors.
This effort includes the launch of a new website that went live after the close yesterday that includes new contents, such as white papers that discuss our perspectives on the market and where we believe opportunities exist to generate favorable risk adjusted returns.
We have also engaged a firm peak strategies to help us expand our public relations and thought leadership efforts. We're proud of what we've accomplished since 2017.
And look forward to more actively getting in front of new shareholders and clients potential clients.
Please turn to slide 21, and 'twenty two we continue to anticipate the reductions in our operating expenses as a percentage of net assets will be based on growth in our net assets rather than further reductions in our expenses.
You can see this reduction come through in 'twenty, one with the increase in our net assets of approximately $14 3 million driving the reduction in our day to day our expense ratio.
Three 6% and 20% to 3.0% in 'twenty. One. It is also important to note that the carried interest generated in our SMA covered a significant portion of our total operating expenses, including annual bonuses.
We remain committed to treating every dollar of shareholder money with the utmost care and consideration. It is much easier for us to grow NAV when the expense hurdle rate is where it is today.
Please turn to the next slide.
Here, we present, our annual scorecard based on certain metrics. We are proud of this performance and our ability to continue to grow value for our shareholders across all of these metrics.
Please turn to slide 24.
Finally, as at the end of Q4 'twenty one.
Wondering if you give full credit to the aspect of.
And cash public securities in other net.
One of the assets and liabilities and including the carried interest from our SMA you would look at and say that that was about $7 28 per share we traded turn traded at about 69% of NAV.
With our stock price being at 735, if we received a 100% credit the market is ascribing value of approximately <unk> <unk> per share or $700000 from our private portfolio.
Our private assets are valued at approximately $35 million the market is discounting the value of our private portfolio assets by approximately 98% under this scenario as of Q4 'twenty one.
As a reminder.
As I mentioned earlier, if achieved the first milestone payment and the acquisition of Patriotic turn is approximately $6 8 million or <unk> 66 per share. The combination of the first two payments was $12 3 million or dollars 19 per share.
I'll now turn the call back over to Kevin.
Thanks Danielle.
Okay. That's what was let's talk about what is the.
The current environment, which has been.
A brutal and there's no hiding from that to start the year investors.
They're focused in fixated on the inflationary and disrupted supply chain environment that is likely to lead to higher interest rates.
COVID-19 never seems to go away and now we have a Russian invasion of Ukraine, which is causing panic and concerns for risk assets.
Put simply it's a market filled with fear.
The inflationary supply chain issues are real and are providing a serious headwind for the market and the economy.
I think as you know I love reading about some of the worlds.
The best investors in.
I stuck this in our shareholder letter, but Warren Buffett once said that quote over time people get smarter, but not wiser they don't get emotionally stable.
All the conditions for extreme overvaluation in undervaluation, absolutely exists the way they did 50 years ago.
You can teach people all you want you can tell them to read grams book, you can send them to graduate school, but when theyre scared, they're really scared and quote well the markets are presently experiencing extreme volatility vicious selling.
And our truly scared.
While our investment results for the history of 180 have shown great outperformance, we are not immune from the sell off that has occurred to start the year and we've had our fair share of disappointing stocks now somewhere down for good reason like quantum but.
But most are down and the companies haven't even reported their earnings yet so I don't really know what to make make of that we've had a number of large sell offs in our five year history and yet through all of it are public and related asset growth as I mentioned earlier total return is 373%. So I mentioned the two timeframes too.
2018 fourth quarter marked down 25%.
Pandemic 2020 market down 33% and this is another one.
Since November the Russell Microcap is down 25%. So it's not as though the market has been to some extent discounted a lot of bad news and while it's never fun to live through the sell off.
And the Big picture you need washouts like Youre currently experiencing define the stock stocks that offer the most.
Enormous upside.
These are also the type of cycles that show the importance of having permanent capital and those other two crashes that I spoke of.
And it's one we're not forced to liquidate and we don't have redemptions to meet of course at some point you need to get to the other side and you need to pick the right stocks when the other side happens.
And when Youre going through it you don't know where the bottom is but having permanent capital is a very big advantage for us because nobody is tapping on the shoulder and telling us to exit the arena.
Yes.
Finally, and remember.
We do have a private portfolio and while the news over the last five years has not been great news in recent months has been very good.
You've seen our too.
Announcements and Daniel alluded to the fact that we may have others are public market strategy is build out our private holdings.
Whose total value has struggled to keep up with breakeven.
Throughout the last five years, but as I said, you've seen two significant announcements on our privates and we do think there is potential for more and while it's early in the quarter and this is not a promise.
But it is possible that by the end of this quarter. The private holdings will provide a significant buffer and offset that.
To some of the declines that we're seeing in our public assets and that would be.
Welcome President given it's been the complete opposite for the last five years.
Sort of a statement of fact, we know more than you do.
We can't talk about a lot of it and it's not a promise.
I guess call it a forecast, but knowing what we know today it would be a pleasant welcome to have some sort of cushion offsetting the public markets selling that we've seen at least in the first two months of the quarter of course March could be completely different from February .
So again just to reiterate not a promise, but you also know we're fairly careful about the words that we choose so all in all Q4 'twenty. One was good relative to the indices. It was a very good year, it's been a great five years.
And we always think it's better to judge us on the totality of five years relative to even judging us on one quarter, even though Q4 was a real good one. So those are my thoughts were happy to entertain any questions you might have so Daniel you may want to open it up for questions and fire away.
It sounds great and if you have a question. Please type start snakes on your phone or could be asking the question icon, if you're participating by a computer.
Give a second for the Q2.
Open up for anyone that is interested in asking a question.
Hi, Whitney. Please go ahead.
Inherits Whitney.
Sorry, Whitney we can't hear you.
I'll move on to the next one and then if you can try getting back in the queue. We'll see if we can get that working.
Hi, Adam go ahead.
Wonder.
Texas, Florida can you guys hear me now.
Yes.
Kevin I don't know sorry about that I'm in an airport anyway reception I apologize.
Two topics I was hoping we can explore one on the private side marks and one on the third party capital side.
Starting with the <unk>.
I have it.
Asset portfolio marks.
You gave some incremental information on the call. So it looks like the D wave.
If it would be consummated on the current terms under the current share price.
Publicly traded its backward.
Keep your markup of about 35 cents a share before any tax implications.
The Petro milestone payments about another 66, so we're talking about a about a dollar a share is that all going well.
Through.
It can be Nols cover any tax obligations there.
No.
Daniel Yes, Adam.
We're not paying any taxes Daniel alright.
Yeah, So we have.
We have a lot of.
Operating loss carryforwards, as well as capital loss carryforwards that we can use to offset gains our operating loss carryforwards are approximately $80 million.
Capital loss carry forwards are approximately $18 million.
And the and add some of these private portfolio companies also fall off you see numbers that are on our books that youre valued at zero or pretty close to that.
Those haven't been realized and part of the reason is is because either we haven't been forced to because they haven't formally liquidated or also we have the ability to use other law historical losses offset gains so for the foreseeable future. We don't anticipate to be in a position where we'd be paying any taxes at the corporate level.
Okay great.
You all talked about Kevin.
Okay.
Not a not a certainty but there.
There could be other material developments here over the first quarter early second quarter.
The private portfolio, obviously, the big dog remaining there is AG bio.
Is there anything more you care to say are we.
Are we talking about something with egg by them or can you not comment.
Why wouldn't.
I wouldn't be able to comment specifically on.
What we're where we're talking about but as it relates to AG volume.
So our biggest holding in the private portfolio.
We actually sat and listened to their <unk>.
Board meeting yesterday.
Businesses.
Doing really well.
Singly enough and in an environment, where.
I mean, we import a lot of grains from Russia.
From that part of the world, so, whether it's wheat or cotton or corn.
We would ever have yet we do think there is a bull market.
Potential for farming in this country.
And the necessity for the products that AG volume provides could be more prevalent in the next five years than they have.
In the last five years so.
They did a big race.
And we'll see how that one plays out over time, we do think it's an exciting opportunity.
And given some of the.
<unk> that we've seen in recent months.
That we didn't understand the valuations. This is <unk> is a big idea and if it can become a big idea while at the same time showing significant growth.
Hopefully it will be an appealing stopped for the public markets.
So.
I can't really comment on on anything related to.
The activity that we're seeing within our private portfolio, but that's just a couple of snippets on that volume in general.
Yeah Fair enough. Thank you and then finally on the third party capital side, Obviously, you have the electric platform announcement in mid November .
Terrific five year track record on which to be raising third party capital. Obviously, so any additional updates or progress metrics. You can report on the third party capital side.
At this time.
And what does the pipeline look like thank you.
Thanks, Adam.
Here's what all.
Here's what I'll say about that we have a series of meetings starting next week actually so.
We showed you what our five year numbers are I would like to think to some extent.
My prior history of Maryland, Blackrock, coupled with what we've been able to do a turn.
And.
The current environment.
Which has not been a pleasant experience to live through by any stretch of imagination.
Would be a really good opportunity and time to invest in us.
Yes.
I always say at the end of the day that the price you pay for the business you buy is going to define your investment success or at least be one of the key components to it.
Well I'd much rather buy this portfolio today than I would have December 31, now you can argue well, maybe it's better to buy it in June .
Maybe it is better to buy in June I don't know what June is going to look like I don't know if.
President Z convinced Putin too.
His arms down and go try and negotiate with the Ukrainian President next week, the markets up 10% or whether or not when are companies start reporting next week.
There is no reason why synchronous has gone from $2 60 to $1 60, or if quantum can get its waiver on a debt facility to stock can't go from $2 50 to five or potbelly when they report their numbers and talk about the next three to five years. The stock is not going to go back to nine.
So I only know what we own it's been frustrating as all heck too.
To see what's happened to many of our equities, despite them performing pretty well from a fundamental perspective.
And if I'm, a and somebody that's interested in spending some time with us and doing the work on us and wanting to become an LP.
Rob Bigelow, who runs our fund marketing yesterday in advance of our meeting on Monday that honestly, if we can't get them to give us money on Monday I don't want it.
Because we will never be able to convince them. So.
Raising capital is never easy as you know I feel like every time, we go try and do it something happens a pandemic starts the market.
Freaks out about seven ratings increases from the fed in inflation in.
Russia invade Ukraine, and there's always an excuse and a reason for an investor not to want to own something that they haven't invested in the past, it's not necessarily familiar to them. So we will keep at it Adam as you know we have an SMA that.
Basically returned over $2 million of capital back to us in our normal operating expenses of $3 million. So we basically offset the S. Before bonuses. So we offset the burned by having that SMA.
We'll go out and try and do more.
So all I can say about that.
Somebody wants to invest with us that's awesome.
We'd be thrilled to have people that believe in us and if they don't well there.
They don't and we will look the best views.
Is to make sure that we have as much permanent capital at 180.
Because nobody can ever take that from us and Thats the pool of money that one day, we can start paying dividends when we get to better scale than we have today, so thats long winded, Adam but thats the answer.
Well, thank you very much.
That is Oh, sorry, Adam the only thing I'd, yes.
Only thing I would add to that is.
Look the having that capital managing outside capital is great, but it has to be the undone also under terms that benefit shareholders and so we're not going to just take on capital to take on capital. It has to be from groups that believe and understand what we're trying to do and it has to be an attractive enough terms.
For it to really benefit our shareholders at the end of the day, because we are investing that capital alongside.
Our permanent capital and so at times, where we have.
We have a lot of cash on the balance sheet at 180 <unk>.
If we were banned all the external manager comparable or managing that you have to allocate between all of those pools of capital and so we have to make sure that there is the real opportunity for 180 to make enough off of that capitalized performed for it to make them most.
Most of it is no management fee.
It's not a mutual fund model I don't want 50 bps, or 33 bps or 75 bps to paper.
To.
To help spread the cost of 100 <unk>, it's about the carry and the carry has to make sense. So.
Else Adam.
So Jeff Thanks keep your turns up spring is just around the corner.
Is it it's an ice storm here in New Jersey today slid down the driveway and almost ended up in the middle of the Street.
I hope you're well.
The same in Chicago, but we're headed to California. So maybe that's my optimism sites there.
There you go well Safelight, Adam will speak too soon.
Thanks, Adam.
Again, if you have a question please type star snakes on your phone.
I'm not seeing any other questions in the queue.
Okay. Whitney you know you can always.
Pick up the phone and call us I've known you since 1990, probably so you know where we live and for all investors.
We wish you nothing but success.
For 2022.
We hope as Adam said that.
Spring is around the corner.
And hopefully there'll be some some optimism as we leave the winter months leaves most of the pandemic behind.
Hopefully, Russia gets straightened out.
For anyone that wants to chat further about the current environment.
Q4, our strategy, our specific holdings feel free to reach out and call and we'll schedule a time with you at your convenience.
So thanks very much.
Everyone have a good day.
Thank you everyone you may now disconnect.
Fine.