Q3 2024 180 Degree Capital Corp Earnings Call
Good morning.
Speaker Change: And welcome to 180, REIT capital Corp's third quarter 2024 financial results update call. This is Daniel Wolfe President and portfolio manager of 180, REIT capital, Kevin Rodino, Our Chief Executive Officer, and portfolio manager and I would like to welcome you to our call. This morning.
Speaker Change: All participants are currently in a listen only mode.
Speaker Change: Following our prepared remarks, we will open the line to questions. If she would like to ask a question. Please type star six on your phone or click the ask a question icon if you're participating by its Peter I would like to remind participants that this call is being recorded and will be referring to a slide deck that we've posted on our investor Relations website at IR Dot 180 to recapitalize, our com under financial results.
Speaker Change: Please turn to our Safe Harbor statement on slide two this presentation may contain statements of a forward looking nature relating to future events statements contained in this presentation are for.
Speaker Change: <unk> looking statements are intended to be made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995. These forward looking statements are subject to inherent uncertainties in predicting future results and conditions. These statements reflect the company's current beliefs and a number of important factors could cause actual results to differ materially from those expressed herein.
Speaker Change: Please see the company's filings with the Securities and Exchange Commission for a more detailed discussion of the risks and uncertainties associated with the company's business that could affect the company's actual results, except as otherwise required by federal Securities laws 183 capital undertakes no obligation to update or revise these forward looking statements.
Speaker Change: To reflect new events or uncertainties I would now like to turn the call over to Kevin. Thank you Daniel and good morning, everyone.
Kevin Rodino: Bowcan enough of how difficult. This environment has been for small cap stocks relative to large gaps, especially the largest of the large <unk>.
Kevin Rodino: Air market for our asset classes lasted far longer than driven valuations down for further than I ever would have thought possible.
Kevin Rodino: We think this phenomenon may finally be reversing following the fed move to cut rates starting in mid December and the removal of uncertainty around the outcome of the U S election.
Kevin Rodino: One near term indicator for this transition is that since these events. The Russell Microcap index is double the performance of the S&P 500, we continue to believe there is significant opportunity going forward for small cap stocks.
Kevin Rodino: Particularly given the backdrop of their historically low valuations in general and relative to large cap stocks before we go through a few of our names that reported earnings in the last two weeks I'd rather spend the time about what we are as an activist doing and being introspective about 180 degree in.
Kevin Rodino: Same similar way that were Actavis for invested companies. How is 180 degree capital in the best position for value creation for shareholders.
Kevin Rodino: The first five years of 180 degree capital were sensational for all our shareholders last three have been more than frustrating.
Kevin Rodino: So with 180 degree capital stock, having retraced or gains the current price sits at a place where I ask as an activist is there something else for us to be doing differently than we are doing currently we'd like to walk the walk so let's walk through some of the questions. We are typically asking ourselves when assessing potential.
Kevin Rodino: Activism within our own portfolio holdings or in 180 degree capital itself number one does the company have the right strategy.
Kevin Rodino: In terms of 180 prior to the inception of 180 and its investment strategy. The answer was no today I firmly believe the answer is yes.
Kevin Rodino: Having done this for 35 years I know that there are periods of performance, where you look like a genius and there are periods, where you look and feel like the complete opposite I've gone through both and unfortunately, that's the business. If I had a dollar every time someone tried to convince me to change my process at the bottom might be a billionaire.
Kevin Rodino: Never said come to that advice and I never will but having said that you'll learn from mistakes and you endeavor not to repeat them. We use additional information to try and make better decisions and we adjust our thought process to reflect the reality of today and any trends that may impact tomorrow. So let's look at the facts during the first five years.
Kevin Rodino: <unk> 80, we crushed at the last three we haven't unfortunately it happens we're focused on taking steps that will lead to a return to positive performance. We continue to believe that the universe of small cap public companies is the right place to be investing for 180 degree capital.
These companies are often in desperate need of help from constructive activist pushes us to help unlock value through the types of things we have done historically in particular, we believe this next upcoming investment cycle will present, the need for creative capital solutions to address upcoming debt maturities remove preferred stock overhangs or <unk>.
Provide acquisition financing.
And expand access to growth capital Ideally this solutions ideally these solutions can come from partners that have strong relationships with management teams and we are positioning 180 degree capital to beat his partner what we know is we can use a bigger balance sheet.
Kevin Rodino: The bottom line is that we need our holdings to do well our activism to result in good outcomes in the public markets to reserves such resort reward such results.
While these outcomes can take time and the path is rarely along a straight line. These timeframes are much more aligned with the expectations of public market investors than those who are investing in early stage private companies.
Kevin Rodino: Number two is the company is there going out of business risks if the strategy takes too long to implement for our predecessor company Harris and Harris. It was headed towards an insolvency if it kept operating under the same strategy with the benefit of hindsight. We now are more certain of this outcome given the poor returns from the legacy portfolio since we've been here.
Kevin Rodino: This risk does not exist for 180 degree capital because we successfully transitioned our balance sheet, the cash and public traded securities. This composition of our balance sheet alone with along with permanent capital enables us to be focused on building value through our investments in activism, rather than worrying about whether the entity will serve.
Kevin Rodino: <unk> through episodic or cyclical downturns as we've experienced during the last three years.
Kevin Rodino: Three does the company have the right operating model and expense structure.
Kevin Rodino: When Daniel and I took over 180 degree capital, we reduced our operating expenses overnight from $6 $5 million per year to approximately $3 million, we moved out of 8000 square feet of space in Midtown Manhattan that previously cost over $350000 per year to a small office space in Montclair that costs less than $40000 per year, we went.
Kevin Rodino: From two administrations administrative assistance to zero, we used free conference call Dot com to host our shareholder calls at zero cost we changed the regulatory structure of our firm from a business development company to a closed and management investment company because it allowed us to substantially reduce our auditing and compliance related costs, we do.
Kevin Rodino: This even though doing doing so disadvantaged management by eliminating the ability to issue stock as compensation to management and board, we look for and take advantage of opportunities to reduce costs wherever we can the costs. We do have are those required for us to operate as a public company and for the compensation of our three full time and.
Kevin Rodino: One part time employees, we have not paid performance bonuses to the management team for the prior two years, nor do we expect to do that this year as a results did not meet those expectations of value creation for stockholders.
Kevin Rodino: For our all our interests aligned with shareholders and have management and the board demonstrated this alignment through open market purchases. The interest of this management and the board are very much aligned with our shareholders, particularly since we collectively on 13% of on a 180 degree.
Kevin Rodino: Daniel and I, only two 5% and seven 9% respectively. This amount.
Kevin Rodino: I am the largest shareholder of 180 degree capital and Daniel as the fifth largest it's important to remember that neither management, nor our board received compensation in stock as mentioned above substantially all of our ownership was purchased in open market transactions at significantly higher prices than where 180 degree capital stock trades at today, if that is not being fully aligned.
Kevin Rodino: Stockholders I'm not sure what it is we have significant skin in the game and have endured the same pain as all of our shareholders have due to the pressure on our stock price. Additionally, since the inception of 180 degree capital members of management and our board have purchased common stock in the open market in every quarter, except one the prior quarter you might ask why there were.
Kevin Rodino: No purchases during this prior quarter.
As is the same for all public companies it could be one of two reasons, one neither management or the board desire to purchase additional stock or two.
Kevin Rodino: Management and the board were not permitted to purchase stock because of regulatory restrictions such as possessing material nonpublic information outside of black periods I'll leave it to you to determine which one do you think it is.
Kevin Rodino: At the end of the day 180 degree Capital's management and board are focused on the careful assessment of what will give 180 degree capital the best chance to succeed for its shareholders going forward. We're doing everything we can expect our invested companies to be doing we walk the walk for ourselves and followed proper procedures and corporate governance along the.
Kevin Rodino: Away, we did not have our head ends are in heads in the sand thinking that growth and value creation will solely come from returns on our existing investments, we're always evaluating strategic options to increase our assets and capabilities to take advantage of opportunities to build value in the overall scale of our business. We appreciate that our largest and longest shares.
Kevin Rodino: Elders have expressed their support for these efforts and understanding that this process does not happen overnight.
Look forward to discussing these efforts with all of our shareholders as appropriate and when it is permitted in the meantime, we will continue to execute on our investment strategy. The slides below provide an update of our holdings and what we are doing to constructively advocate for value creation at those companies and as a result for 180 degree shareholders just to touch on it.
Kevin Rodino: Q4.
Kevin Rodino: Potbelly reported last week.
Kevin Rodino: Beat on all metrics amidst a very difficult environment and provide positive update on the business and store openings for two.
2025 looking forward to 2025, we think that the company is going to grow at store count by 10% or better they're going to have positive same store sales growth increased cash flow and continued franchise pipeline expansion. This year. The stock has gone from 14 to seven because of a sluggish consumer.
Kevin Rodino: Our environment for most restaurant brands Potbelly showed in the last quarter that they're not one of those Ah theres not one of those restaurants as I said they beat on all metrics in the stock resulted in a positive performance since the report.
Kevin Rodino: Climbing up to close to $11.
You know around the board of synchronous. So there's limited things I can say about what we are doing the company reported a very solid.
Kevin Rodino: 2024, Q3 report with increase in midpoint revenue and EBITDA guidance for 'twenty, four and announced the renewal of FSFR one of their clients. There is continued delay in the receipt of a tax refund that came up and I think investors were expecting renewal of the AT&T contract, which we.
Kevin Rodino: Also expect to come by the end of 'twenty 'twenty four.
Kevin Rodino: Next year, they've got some refinements of its founding debt that they need to deal and hopefully we'll have some new customer wins that there'll be able to speak. Unfortunately, the stock declined 10 or 11% since they reported and actually went up a little more down yesterday.
Kevin Rodino: Because of the delays in the tax refund and I think maybe some investors.
Kevin Rodino: Confusion and our expectation that the company would have announced the renewal of AT&T on the court call that they had on Tuesday night investors will just have to be a little more patient for that but in general. The company is performing very well management team is doing a good job on the costs and we're very pleased with the progress and of course as board.
Speaker Change: <unk> there are certain things I can tell you in the certain things I can't tell you and we will leave it at that Dan do you want to take a few others.
Dan: Thank you Kevin.
Dan: So continuing on this slide just say when I talk to say Brightcove had a beat across the board in stock as you see responded really well from what we believe was a completely unwarranted unwarranted level evaluation. So while we believe continues to be a very undervalued stock given its solid debt free balance sheet strong recurring revenue.
Dan: And cash generative businesses.
Dan: Our business.
Dan: I would also like to discuss our investment in a cent industries, which is a C N T.
Dan: Is that is often overlooked company that has undergone multiple turnarounds in its history. The company operated two segments metals and chemicals that are cobbled together through multiple acquisitions that were not effectively integrated and we believe the business.
Dan: And we believe the business was not also well managed.
Speaker Change: We first became an investor in the company back when Ben Rosenzweig of private funds and Chris Hunter of your P. G partner to run a proxy campaign to gain seats on its board of directors, Ben and Chris ultimately ended up taking over the company and beginning the arduous task of cleaning up the messages of the prior management team.
Speaker Change: Made material improvements across the board with the company's tubular steel business in bulked up the chemical business through acquisition after benefiting from pandemic related slides supply chain shortages shortages and pricing power.
Speaker Change: The markets began to shift in a cent found itself, having to retrench and optimize the business as part of this process. The company sold its tubular distribution business and hired a new head of its chemicals business, Brian kitchen.
Speaker Change: Has deep experience as a senior executive in chemicals related businesses.
Speaker Change: Ryan was ultimately elevated the CEO of all of ascent and he brought his former colleague Ryan Kavakos as CFO, Brian and Ryan have done a remarkable job since their appointments to streamline a cent return it to generating positive EBITDA and positioning it for substantial future growth the sale of the tubular distribution business earlier this year.
Speaker Change: Year enabled the company to eliminate this outstanding debt and incentives now focused on monetizing its remaining tubular assets in becoming a pure play chemicals business, which trades that would should trade at a substantially higher multiple than it is steel related business given the normalized EBITDA margins that can read you reach the high teens to 20% we believe the near.
Speaker Change: Term catalysts that could lead to additional appreciation of <unk> stock.
The sale of the tubular assets, which we currently estimate could bring in between $40 million to $50 million in cash to the company and through the acquisition of additional chemicals related assets that can drive additional growth capabilities improved utilization rates. So.
Speaker Change: Sent can achieve the types of EBIT margins. We believe are possible from that business. We are excited about the potential for a cent under Brian and Ryan stewardship with near term potential catalysts that we believe can drive material appreciation in stock price.
Speaker Change: It is a relatively unknown unknown public company that we think is worth a look by other investors as well.
If we turn to the next slide I would like to provide an update on our investment in land Tronox as we have discussed in the past we've been investor in electronics at some level since 2017.
Speaker Change: And around our position multiple times.
Speaker Change: <unk> provides connectivity and compute solutions that enable intelligence at the edge within markets, including smart cities automotive and enterprise.
Speaker Change: And then tronic fiscal 'twenty four year that ended on June 24 was a bumper year for the company with over 20% topline growth that was driven largely by a win with a smart grid customer grids for Ts, we always knew that fiscal 'twenty five is going to be a transition year given the digestion period for the initial order by grids for Ts. So we reduced our position heading into the end of 'twenty.
Speaker Change: Three and continued in 'twenty four we spent the early part of 'twenty for getting to know the new CEO of <unk>.
Speaker Change: We had a constructive dialogue with him and determined that he inland tronox could benefit from the experience and knowledge, but to individuals. We have worked with in the past <unk> and Kevin Plotnik.
Speaker Change: Who are CEO and director respectively of our poor former portfolio company of desktop technologies that was acquired by dialog semiconductor.
Speaker Change: We reached agreement with the company to have these two individuals nominated to electronics Board and they were elected at the <unk>. Most recent annual meeting we could not be more pleased with airplane and appreciate the willingness.
Their willingness to join <unk> Board and vice versa.
The timing of these appointments could also not have come at a better time in our view.
Speaker Change: <unk> ran into a number of headwinds during Q3 24 that led to a miss against estimates and a revision of full year estimates by analysts before I saw some of these headwinds potentially impacting.
Speaker Change: The company based on general weakness in the reports of other companies in the Iot space. So in October we began reducing our quarter ending position of 700000 shares by approximately half into the report.
Speaker Change: After speaking with management and other due diligence following the report we believe that these headwinds are transient in nature and that land tracks in a strong position financially to continue to generate positive EBITDA and cash flows while it positions for a return to growth in its fiscal 'twenty six that began in July of 25 given this.
Speaker Change: You, we added to our position after earnings release and are now back close to where we ended the quarter.
We are actively engaged with soil and land tracks as board position the company for what we believe can be a value creating events in the future as the company secures design wins returns to growth and explore as options for how it can grow even further to be to a larger company.
Speaker Change: We believe would even make it even more relevant in the space and potentially attractive potential acquirers.
Speaker Change: I'd also like to note that following the end of the quarter, we sold our remaining assets in networks and Hudson technologies in October.
Speaker Change: No longer hold those positions in those companies, which is why we did not include them in these slides.
Speaker Change: We also want to mention that arena reported its first profitable quarter in history. Following the close of the market last night.
Speaker Change: The strong report led to an increase in its stock price after hours of over 200%.
Speaker Change: Strength continues right now with the stock up almost 250% in the free market.
Speaker Change: Wondering if you're 80 degree capital owns approximately 1 million shares of arena.
Speaker Change: If you turn to the next slide as we stated in our recent press release, our board continues to evaluate options related to the discount management program and other strategic efforts that we are focused on and as Kevin mentioned looking at ways to.
Speaker Change: Two of our capital base and provide the opportunity for an increase in value narrowing of discount and increase in stock price for our shareholders.
Speaker Change: Lastly, I'd like to note that we included in the appendix at the end of our slide deck on our website that has additional information about our investment activity and operating metrics, we're not going to talk about those thoughts on our call today, but we'd be happy to answer any questions on them anytime.
Speaker Change: We would now like to open the line for questions.
Speaker Change: If you have a question. Please type star six on your phone or click the ask a question icon on your computer.
Speaker Change: Wait a minute to see if there are any.
Speaker Change: Any questions.
Speaker Change: I am not seeing any questions.
Speaker Change: As always Daniel and I will be available to anybody that wants to talk about specifically the quarter or the year or any of our comments that we made on this conference call prevented we're able to talk about certain things.
You can find us in the office you can email you can text and we will get on the phone and spend the time with any shareholder that wants to talk about a 180. Thank you. So much for your time and we'll see you next time.
Speaker Change: Thank you very much.
Speaker Change: Goodbye.