180 Degree Capital Corp. (NASDAQ:TURN) Q3 2024 Earnings Call Transcript

180 Degree Capital Corp. (NASDAQ:TURN) Q3 2024 Earnings Call Transcript November 15, 2024

Daniel Wolfe: Good morning, and welcome to 180 Degree Capital Corp.’s Third Quarter 2024 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 a listen-only mode. Following our prepared remarks we’ll open the line to questions. [Operator Instructions] I would like to remind 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 our Safe Harbor statement on Slide 2.

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. 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. 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, 180 Degree Capital undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties. I would now like to turn the call over to Kevin.

Kevin Rendino : Thank you, Daniel, and good morning everyone. We’ve spoken in length at how difficult this environment has been for small cap stocks, relative to large caps, especially the largest of the large. The bear market for our asset class has lasted far longer and driven valuations down far further than I ever would have thought possible. 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. One near-term indicator for this transition is that since these events, the Russell Microcap Index has doubled the performance of the S&P 500. We continue to believe there is significant opportunity going forward for small cap stocks, 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 the similar way that we’re activists for our investee companies. How is 180 Degree Capital in the best position for value creation for its shareholders? The first five years of 180 Degree Capital were sensational for all our shareholders. The last three have been more than frustrating. So with 180 Degree Capital stock having retraced our 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 like to walk the walk, so let’s walk through some of the questions we are typically asking ourselves when assessing potential activism within our own portfolio holdings or in 180 Degree Capital itself.

Q&A Session

Number one, does the company have the right strategy? 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. 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, I’d be a billionaire. I’ve never succumbed to that advice and I never will. But having said that, you 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 of 180, we crushed it. 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 activists such as 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 provide acquisition financing and expand access to growth capital.

Ideally, these solutions can come from partners that have strong relationships with management teams and we are positioning 180 Degree Capital to be this partner. What we know is we can use a bigger balance sheet. The bottom line is that we need our holdings to do well, our activism to result in good outcomes, and the public markets to reward such results. While these outcomes can take time and the path is rarely along a straight line, these time frames are much more aligned with the expectations of public market investors than those of investing in early stage private companies. Number two is the company is going at a business risk if the strategy takes too long to implement. For our predecessor company, Harris & Harris, it was headed towards 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. This risk does not exist for 180 Degree Capital because we successfully transitioned our balance sheet to cash and public traded securities. This composition of our balance sheet along with permanent capital, enables us to be focused on building value through our investments and activism rather than worrying about whether the entity will survive through episodic or cyclical downturns as we have experienced during the last three years. Three, does the company have the right operating model and expense structure? 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 8,000 square feet of space in midtown Manhattan that previously cost over $350,000 per year to a small office space in Montclair that cost less than $40,000 per year. We went from two administrative assistants to zero. We used freeconferencecall.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-end management investment company because it allowed us to substantially reduce our auditing and compliance-related costs. We did this even though 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 one part-time employees. We have not paid performance bonuses to the management team for the prior two years nor do expect to do that this year as the result did not meet those expectations of value creation for stockholders. Four, are 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 own 13% of 180 Degree, with Daniel and I owning 2.5% and 7.9% respectively of this amount. I am the largest shareholder of 180 Degree Capital and Daniel is 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 with stockholders, I am not sure what 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 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 desired to purchase additional stock. Or two, management and the board were not permitted to purchase stock because of regulatory restrictions such as possessing material non-public information outside of black periods. I’ll leave it to you to determine which one you think it is. At the end of the day, 180 Degree Capital’s management and board are focused on a careful assessment of what will give 180 Degree Capital the best chance to succeed for its shareholders going forward. We are doing everything we can expect our investee companies to be doing. We walk the walk for ourselves and follow proper procedures and corporate governance along the way.

We did not have our 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 and the overall scale of our business. We appreciate that our largest and longest shareholders have expressed their support for these efforts and understanding that this process does not happen overnight. We look forward to discussing these efforts with all of our shareholders as is appropriate and when it’s 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 a few, Potbelly reported last week, beat on all metrics amidst a very difficult environment and provide positive update on the business and store openings for 2025. Looking forward to 2025, we think that the company is going to grow its 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 7 because of a sluggish consumer environment for most restaurant brands. Potbelly showed in the last quarter that they’re not one of those restaurants. As I said, they beat on all metrics and the stock resulted in a positive performance since the report climbing up to close to $11. You know we’re on the Board of Synchronoss, so there’s limited things I can say about what we are doing.

The company reported a very solid 2024 Q3 report with increase in midpoint revenue and EBITDA guidance for ’24 and announced the renewal of SFR, one of their clients. There’s continued delay in the receipt of the tax refund that came up, and I think investors were expecting renewal of the AT&T contract, which we also expect to come by the end of 2024. Next year, they’ve got some refinance of astounding debt that they need to deal, and hopefully they’ll have some new customer wins that they’ll be able to speak. Unfortunately, the stock declined 10% or 11% since they reported and actually went a little more down yesterday because of the delays in the tax refund and I think maybe some investors’ confusion and or expectation that the company would have announced the renewal of AT&T on the 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 members, there’s certain things I can tell you and there’s certain things I can’t tell you and we’ll leave it at that. Dan, do you want to take a few others?

Daniel Wolfe: Thank you, Kevin. So, continuing on this slide, just want to talk say Brightcove had a beat across the board and stock, as you see, responded really well from what we believe was a completely unwarranted level evaluation to what we believe continues to be a very unvalued stock, given its solid debt-free balance sheet, strong recurring revenue and cash-generated businesses or business. I would also like to discuss our investment in Ascent Industries, which is AT&T. Ascent is an often-overlooked company that has undergone multiple turnarounds in its history. The company operated two segments, metals and chemicals, that were cobbled together through multiple acquisitions that were not effectively integrated and we believe the business was not also well-managed.

We first became an investor in the company back when Ben Rosenzweig of Privet Funds and Chris Hutter of UPG partnered to run a proxy campaign to gain seats on the Board of Directors. Ben and Chris ultimately ended up taking over the company and beginning the arduous task of cleaning up the messes of the prior management team. They made material improvements across the Board with the company’s tubular steel business and bulked up the chemical business through acquisition. After benefiting from pandemic-related supply chain shortages and pricing power, the markets began to shift and Ascent found itself having to retrench and optimize its business. As part of this process, the company sold its tubular distribution business and hired a new head of its chemicals business, Bryan Kitchen, who has deep experience as a senior executive in chemicals-related businesses.

Bryan was ultimately elevated to CEO of all of Ascent. He brought in his former colleague, Ryan Kavalauskas, as CFO. Bryan and Ryan have done a remarkable job since their appointments to streamline Ascent, return it to generating positive EBITDA, and positioning it for substantial future growth. The sale of the tubular distribution business earlier this year enabled the company to eliminate its outstanding debt, and Ascent is now focused on monetizing its remaining tubular assets and becoming a pure play chemicals business, which trades at — which should trade at substantially higher multiple than a steel-related business, given the normalized EBITDA margins that can reach the high teens to 20%. We believe the near-term catalyst that could lead to additional appreciation in Ascent’s stock are the sale of the tubular assets, which we currently estimate could bring in between $40 to $50 million in cash to the company.

And two, the acquisition of additional chemicals-related assets that can drive additional growth capabilities, improve utilization rates, so Ascent can achieve the types of EBITDA margins we believe are possible from that business. We are excited about the potential for Ascent under Bryan and Ryan’s stewardship with near-term potential catalysts that we believe can drive material appreciation and stock price. It is a relatively unknown public company that we think is worth the look by other investors as well. Returning to the next slide, I would like to provide an update on our investment in Lantronix. As we have discussed in the past, we’ve been an investor in Lantronix at some level since 2017, and have traded around our position multiple times.

Lantronix provides connectivity and compute solutions that enable intelligence at the edge within markets including smart cities, automotive, and enterprise. Lantronix fiscal 24-year that ended in June of 24 was a bumper year for the company with over 20% top-line growth that was driven largely by a win with a smart grid customer Gridspertise. We always knew that fiscal ’25 was going to be a transition year given the digestion period for the initial order by Gridspertise, so we reduced our position heading into the end of ’23 and continued in 24. We spent the early part of ’24 getting to know the new CEO of Lantronics, Saleel Awsare. We had a constructive dialogue with him and determined that he and Lantronics could benefit from the experience and knowledge of two individuals we have worked with in the past, Narbeh Derhacobian and Kevin Palatnik, who are CEO and Director, respectively, of our former portfolio company, Adesto Technologies that was acquired by Dialog Semiconductor.

We reached agreement with the company to have these two individuals nominated to Lantronix board, and they were elected at Lantronix’ most recent annual meeting. We could not be more pleased with their appointment and appreciate the willingness of — their willingness to join Lantronix board and vice versa. The timing of these appointments could also not have come at a better time in our view. Lantronix 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. We foresaw some of these headwinds potentially impacting 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 700,000 shares by approximately half into the report.

After speaking with management and other due diligence following the report, we believe that these headwinds are transient in nature and that Lantronix is at strong position financially to continue to generate positive EBITDA on cash flows while it positions for a return to growth in its fiscal ’26 that begins in July of ’25. Given this view, we added to our position after earnings release and are now back close to where we ended the quarter. We are actively engaged with Saleel and Lantronix’ Board to 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 explores options for how it can grow even further to be — to a larger company, which we believe would make it even more relevant in the space and potentially attractive to potential acquirers.

I’d also like to note that following the end of the quarter, we sold our remaining assets of Aviat Networks and Hudson Technologies in October and no longer hold those positions in those companies, which is why we did not include them in these slides. We also want to mention that Arena reported its first profitable quarter in history following the close of the markets last night. The strong report led to an increase in its stock price after hours of over 200% and that strength continues right now with the stock up almost 250% in the free market. 180 Degree Capital owns approximately 1 million shares of Arena. 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, as Kevin mentioned, looking at ways to add to our capital base and provide the opportunity for an increase in value, narrowing of discount and increase in stock price for our shareholders.

Lastly, I’d like to note that we included in the appendix in 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 slides on the call today, but we’d be happy to be answering any questions on them any time.

A – Daniel Wolfe :

Kevin Rendino: 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 permitted we’re able to talk about certain things. You can find us in the office, you can e-mail, you can text and we’ll get on the phone and spend the time with any shareholder that wants to talk about 180. Thank you so much for your time, and we’ll see you next time.

Daniel Wolfe: Thank you very much.