180 Degree Capital Corp.

180 Degree Capital Corp.

$3.78
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Asset Management

180 Degree Capital Corp. (TURN) Q1 2021 Earnings Call Transcript

Published at 2021-05-12 09:00:00
Daniel Wolfe
Good morning and welcome to 180 Degree Capital Corp’s First Quarter Financial Results Update Call. This is Daniel Wolfe, President and Portfolio Manager of 180 Degree Capital. Kevin Rendino, our Chief Executive Officer and Portfolio Manager, and I would like to welcome you to our call this morning. All participants are currently in listen-only mode. Following our prepared remarks, we will open the line to questions. I would like to remind all participants that this call is being recorded, and that we will be referring to a slide deck that we have posted on our Investor Relations website at ir.180degreecapital.com under financial results. Please turn to Slide 2 that contains our Safe Harbor statement. This presentation may contain statements of a forward-looking nature relating to future events. Statements contained in this presentation that are forward-looking statements are intended to be made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.
Kevin Rendino
Thanks, Daniel, and good morning, everyone. Some quarters are better than others and this is one of the best quarters we've ever had. Slide 3 provides us summary of our first quarter. A quarter in which we grew our NAV by nearly 15%. This against the backdrop of reporting a 28% gain for our public company investments, led by Quantum, Maven, Potbelly, also Synacor, Babcock & Wilcox are nearly every name that we own. We achieved a $16.5 million gain in the quarter in our public and liquid securities and ended the period with $74.1 million. And as of this past Monday, our cash and liquid securities essentially equals our share price. We had a rather timely scaling of a new position in Armstrong Flooring, and it became a core position in what looks like great entry prices for us. Synacor tender was completed and the position was turned into cash at $2.20. We closed our positions in Verso and Manitex. On the private side, we had a $1.5 million decrease in value led by a projected decrease in BioVex Milestones, and ABSMaterials which the company was liquidated. The good news is the private portfolio is becoming more and more meaningless to us as it represents just 33% of our business at period end, the lowest it has been since 180 Degree started. We had similar performance from our SMA in the quarter, and that portfolio has grown in asset size from $25 million when we started less than a year ago, to just over $40 million today. On Slide 4, NAV at quarter end equals $10.60. The highest that has been in over six years. This has been achieved solely from our strategy of public market investing, which we will illustrate in just a little bit. Slide 5, this may be my favorite slide in best. Illustrates the progress we've made in remaking ourselves. I remember when I first started working at 180, an employee asked me, how will I know if we are successful? And then I don't have to worry about our viability. My answer was simply this, just follow the cash and liquid security levels. Cash is king in our business.
Daniel Wolfe
Thank you, Kevin. Please turn to Slide 18. As Kevin mentioned earlier in the call, we began building our position in Armstrong Flooring in Q2 2020, but it became a core position in Q1 2021. AFI designs and manufactures and sells resilient and wood flooring for residential, commercial and institutional construction sectors. New CEO, Michel Vermette joined the company in September of 2019, after serving as a longtime executive at Mohawk Industries. New CFO, Amy Trojanowski joined in October 2020 from Chemours Company. Together, Michel and Amy have led efforts at AFI to streamline operations and reduce costs with an eye towards improving EBITDA, gross margins, and cash flow. Our investment thesis for AFI was based primarily on two factors. First, the company announced in late 2020 that it was looking to sale at South Gate, California facility. Our due diligence led us to believe that the facility could be worth $50 million to $80 million. The company completed the sale of the South Gate facility for $77 million in Q1 of 2021, which dramatically improve the company's balance sheet and removed liquidity concerns. The second part of our investment thesis was that with the liquidity issues resolved Michel, Amy and the management team would be able to focus on fixing business. We believe that process is well underway and AFI is well positioned as a recovery play. Please turn to Slide 19. This slide lists our 10 largest from legacy privately held holdings by value as of the end of the quarter. For the quarter our private portfolio, as Kevin mentioned, decreased in value by $1.5 million or $0.14 cents per share. The largest decreases in value were due to the potential future milestone payments from the sale buybacks group to Amgen due to a material reduction in the probabilities of receiving these payments, resulting from the termination of a phase three clinical trial in Q1 2021 for futility.
Kevin Rendino
Thanks, Daniel. Finally, for me are normal sum of the parts chart. If you give us full credit for our cash and liquid securities and I don't think there's any reason why you shouldn't given our performance and our ability to generate returns. You'll see on this chart that the market is effectively paying 1.7% for our private portfolio. The private portfolio that we think hopefully, by the end of this year will have a couple of monetizations. So all in all, while the stock price has done well, it's actually cheaper today than it was when we first started. And more importantly than that, we're going to continue to drive shareholder value by focusing on what we can focus on, which is providing investment excellence or at least attempting to provide investment excellence in our Graham & Dodd philosophy in the Microcap world with an activist style. With that, I think Daniel, we should open it up for questions. I look forward to hearing from you.
Daniel Wolfe
Our first question from . Please go ahead.
Unidentified Analyst
Hi, guys, thanks for taking my question. Kevin, you've touched on a few quarterly letters that Turn can receive about $87 million in future milestone payments from both direct ownership and Petra, do you talk more about what needs to happen for those payments to be received and what you think is the most likely outcome on those payments?
Kevin Rendino
So, Daniel, I'll take a quick crack and then you finish the rest, if you don't mind. We shouldn't have returned escrow to us less than a million dollars with more than zero this month. That was from the sign of the deal, I would say that, as it relates to milestone payments, what we did was basically NPV and discount, the potential value for all those payments. And that's why you see the value that what you see for it on our balance sheet, I would say the first payment is the most likely, which could come within a year or two. And I think that payment in and of itself is only reliant on the drug entering Phase 1 testing, I don't think the company would have been sold or the buyer wouldn't have bought the company, if they weren't anticipating having basically a Phase 1 trial. And that number in of itself, Daniel, I don’t have it in front of me. But I think that number is actually greater. That number itself is greater if we got full pay for it than what it's listed for us on our balance sheet, the rest is based on revenues, future revenues, and it's a bit pie in the sky. And it's a bit early to be able to assess. Daniel, I don't know what else you wanted to add?
Daniel Wolfe
Yes, no, as Kevin summarized it well. We're not really -- we can't go into specifics about the actual milestone, what triggers those milestones? And so really, as Kevin said, we do the probability weighting analysis, I think that when you look at these type of deals, and the opportunity to generate cash flows from them, there are a few that we believe could be in the near-term, I would say the majority of the full amount would be over a pretty significant period of time. But there's material now that could be in the near-term.
Kevin Rendino
Yes, in my opinion, much as my opinion, maybe uneducated. And it doesn't have perfect view. But one of the biggest dollar amounts of those revenues comes early, in my mind comes the easiest. And we'll see how it plays out. Again, when you're dealing with milestone payments that are multi-years out. I mean, really multi-years out, it’s really hard for us to ascertain especially when the drug hasn't even hit Phase 1 trial yet. Does that help?
Unidentified Analyst
Yes, thank you.
Kevin Rendino
All right.
Daniel Wolfe
Thank you. Hi, Whitney, please go ahead.
Unidentified Analyst
Thanks, Daniel. I've got a couple of questions here. The first one is, when I run out to the close of business yesterday, the portfolio existed on March 31. I have a Delta increases in math on the public side of just shy of $2 million. Does that sound right to you guys or do you prefer to not comment? And I appreciate if you don't.
Daniel Wolfe
No, so are you saying, if you took our portfolio March 31, and ran it out to Monday or Tuesday?
Unidentified Analyst
Yes.
Daniel Wolfe
Yes, you’re in the ballpark, you’re slightly on the low side actually.
Unidentified Analyst
All right, yes, that's what I thought because there will be changes, of course. My second question has to do with materials and energy. One of the slides that you presented showed materials, maybe 3%, or something, energy at zero. And of course, really strong area in the markets right now with the bubble and macroeconomic effects, including supply constraints among many materials, industries, and all the spending out of the government, not just our government, but governments around the world. Is there any contemplation directed towards adding to those areas? Or is that an area that you guys just don't focus on?
Daniel Wolfe
No, it's not that we don't focus on it. Everything is opportunity cost I guess. And we found what we thought or like the more Armstrong flooring for example, we think it was an incredible value at $4 because we think it's literally going into the mid-teens, I don't think that's a 100% return potential that's more like 300%, 400% return potential. And we've been interested, we bought Verso’s Paper Materials Company, we bought Babcock & Wilcox. Obviously, in an economy that's going to grow out of the pandemic, you want to have as much cyclicality as you can, all the group is a perfect example of a construction company, a dealership business for construction equipment. So yes, I mean energy fits that as well. The only issue with energy for us, and there's no energy in us owning it, we've owned a couple of names here and there, since we started. The only name, the only issue is you know many of them are levered. They have downside risk. They're dependent upon the price of oil. And you got to get a lot of things right when you're picking energy stocks. And you know that because you live in Houston, and you've seen good oil markets and bad ones, and you've seen great companies and ones. So it's not that we're against the group, Whitney, it's just been more of we found value in other areas. But we're continuing to dig in on the group, for sure. And if we can find a name or two that we like, we'll put it in the portfolio. We're certainly not. I mean, I've been investing in energy names for 30 years. I mean, I owned Exxon, before, it was Exxon Mobil. That's how old I’m. So and Halliburton and all the rest and we lived through the BP disaster. And there have been a lot of oil markets over the years both up and down. But it's like any other cyclical, you buy them, when everyone thinks they’re value stocks, and you sell them when everyone thinks they’re growth stocks, if you time them right, you can make a fortune, as you know. So, we're digging in, and we're still looking, if you have a few names, send them our way.
Unidentified Analyst
Thanks so much.
Daniel Wolfe
Thanks, Whitney.
Unidentified Analyst
And thanks for the color and thanks for the quarter.
Kevin Rendino
Always good to hear your voice, buddy.
Unidentified Analyst
Thank you.
Daniel Wolfe
Hi, please go ahead with your question.
Unidentified Analyst
Hi, good morning, Kevin and Daniel. And I'll sneak in a great quarter here. And I'm glad you guys remove all the mentions of the private stuff on this site. That's not who you guys are. And that's not the narrative you guys want people to build around. And Kevin, I know this is a long-winded question. I know it must bother you quarter-after-quarter, you guys proving your stay and showing your performance. And Slide 12 is really, you guys pin your version of the Sistine Chapel. So I was exchanging notes with a friend yesterday, then you guys should trade at a premium to NAV because you get this nice track record, right on that public equity side. And I think you guys done a fantastic job growing, educating your investor base. My question is, what's your vision on how Turn works in five years, you're gaining scale update, can you get. I'm a long-term investor here, because I believe in you guys. Forget the NAV discount, that's just the stock price right now, you run a growing asset management business. And I want to know, your thoughts on the operations. What does the business look long-term, you need more headcount with asset amount you're managing right now. And really anything else you want to add? Just curious to hear. Thank you.
Kevin Rendino
Well, those are awfully nice words. Anytime you mentioned the Sistine Chapel in a sentence, it's a high compliment. And we thank you very much for that. So let me start from the beginning. I was retired before I took this job. I was running my own friends and family fund, and wanted to do some board work and was nominated to the predecessor company called Harris & Harris, as you know. When I got there, and Danny and I spent some time together. I said to Daniel, this is going to zero. Like what's going on here, like I couldn't understand the math of having declining investments with significant costs. Dan is like I know, we need to fix it. That's why we wanted you to come on the board to help us fix it. So Daniel and I developed the strategy and it was basically doing what I was doing in my retirement having worked at BlackRock for 25 years. And the board asked us to run it, and we got out of Manhattan, we moved to Montclair, New Jersey, we cut our headcount by 70%, we cut our expenses in half overnight. And everything we do is going to be for shareholders and every investment we can make is going to be in the public markets. But at the time, I didn't know whether or not I was doing this as a turnaround, I didn't know if we would be successful, I knew what I wanted to do. But I didn't know what it would look like, four or five years, from the time we started, well, we're at four or five years. And to your point, we've actually built scale, we've been able to generate a $40 million pension account from a public company based on our performance. And we turned about $12 million of cash and liquid securities, which is what we had sort of at the end of ‘16, or middle of ‘16, and to close to $80 million today. And I humbly suggest that it's a lot harder to turn $12 million into $80 million, than it is going to be turning $80 million into $200 million. And $200 million is nearly $20 a share in cash and liquid securities and that essentially means our share price should be about $20. And so we turned the business around, a failing business, a business that was on its way to zero. And actually, I think now I'm actually more excited I wrote about it in our last shareholder letter. I'm more excited about being here today than it was when I started because I think we have a real company. And I didn't know if we're going to be able to have a real company four years ago, I just thought we were trying to survive into something and I didn't know what that was going to be. And so five years from now, I fully expect our share price to be close to $20 because I expect our cash and liquid securities to be $200 million. And like I said, that's going to, that's not an easy lay up by any stretch of the imagination, you have to have a decent backdrop to the markets, you have to have investment excellence, who knows what we can replicate our last four years of performance. But as I said, having scale makes it easier getting to $200 million than it was getting to where we’re from $12 million. And so with that, we'll continue to seek outside capital for those investors that actually want to partner with us. And I don't know why people wouldn't want to partner with us, given the performance we've been able to generate. And it has to be at economics that make sense for both us and the client, we get that, we're not going to just take on money for the sake of taking it on at one in 10. We talk about that in our shareholder letter towards the end, if you want to read that. But when we get a great client that loves what we -- we love what we do, I love our style. I love our activist approach, I wake up every day excited to try and create value for people. I'm a stock jockey all I've ever been, this is the only thing I've ever wanted to do. And if we can find people that want to invest with us, we're more than happy to take them along for the ride. And we would love to manage other people's money, we're only going to do it if they understand what we do and understand the timeframes associated with and making an investment in a small name where you need sort of two or three years for the investment to play out. And of course, the economics have to make sense. So five years from now, in my mind, I'm trying to get to a $20 stock, that's based on $200 million or so of assets. Hopefully, portfolio will no longer be a thing at all. We've got it down 33% in five years, I hope it's zero. And I hope it's zero, not because it's going to zero based on valuations. I don't think that's going to be the case. But I hope is zero because of monetization events and the rest. And then of course we'll take on added people only if we find investment ex ones in them. Anybody that can come in the door here and help us make money. That's the only thing I care about. I don't care if you live in California, Florida, New York, I don't care where you are, I don't care how often I see you, if you can help us make money, if you can help us pick stocks and create Alpha, you can get paid at 180 and so I think over the next five years, we'll probably have a couple of more analytical people in here as well. Does that help?
Unidentified Analyst
Yes, sir. Thank you very much.
Kevin Rendino
Thanks.
Daniel Wolfe
Thank you. I'm seeing no further questions in the queue.
Kevin Rendino
Well, thank you everyone for taking the time to join us today on our Q1 call. We look forward to reporting our Q2 call sometime in August. Until then, happy investing and I hope everyone stays safe and healthy. And let's hope this pandemic continues to end the way, it feels like it's been ending in the last couple of months. We'll speak to you soon. Take care.
Daniel Wolfe
Thank you for participating today. You can now disconnect.