As we end the third quarter of 2022, we continue to observe particularly choppy markets. There are a few broad themes that appear to be driving market movements: central banks raising interest rates, geopolitical and energy supply uncertainty caused by the war in Ukraine, and durability of consumer demand caused by inflation and declining employment in the US. While we always keep a close watch on broad market conditions that can affect investments, we are particularly keen on collecting on-the-ground information during turbulent and uncertain periods within capital markets. Consequently, our research team has been pounding the proverbial pavement.
In the past few weeks our research team has talked to senior management for many of the companies in our portfolio as well as senior management of prospective portfolio companies. Each management team brings its own prediction of the direction of its respective industry, but importantly we gain deeper insight into the real-world, detailed factors that affect businesses. We subscribe to the saying, “Give a man a fish, you feed him for a day. If you teach a man to fish, you feed him for a lifetime.” Here, we learn to fish so that we know what to look for in each business intra-quarter and can recognize extra-company factors that may be leading indicators of performance.
We recently visited New York City to attend TravelCenters of America’s (TA) investor day. TA unveiled a new presentation that outlined its long-term strategy and communicated its internal view that it had “graduated” from the ongoing business transformation and is now pursuing stable, long-term growth. TA also had members of its management team who are typically not in the public spotlight in attendance to present on the business units that they manage. The enthusiasm that CEO John Pertchik and CFO Peter Crage have brought to the company was evident in each of the team member’s presentations and the company’s unified vision was woven into each of the discussions. After the presentations, we got the chance to talk to leadership for each business unit and gained valuable insight into projects they are working on and some of the challenges they face. We continue to view TA’s transformation (they would say they’ve graduated) positively, the opportunity for accretive acquisitions as favorable to TA, and management has executed on its plan superbly thus far.
While in New York, we also got to meet with the management of another portfolio company, Fluent (FLNT). Fluent was kind enough to host us in its offices and have a long discussion about the company. Specifically, we discussed and gained more insight into the relationship between Fluent and its customers and how customer-specific needs drive innovation of new product offerings from Fluent. We also were able to talk in person to its new CFO, Sugandha Khandelwal, and co-founder, Ryan Schulke, who both gave their individual views on the progress the company has made, and the changes needed to propel Fluent forward. Ryan gave us an interesting anecdote about the extent to which scale improves media buying price stating that in some instances purchasing at a higher volume can result in a 60% discount in costs on a per-unit basis. Overall, we walked away from the meeting with a positive view of the company and found senior management’s strategy and plan for execution very sensible.
Also during the trip, our team attended the Capital Link conference hosted by DNB Markets. Capital Link is a semi-annual meeting point for the shipping industry and draws in shipping executives, financiers, analysts, operators, and service providers. During the conference, we were able to exchange thoughts about many different areas of the shipping industry including upcoming eco-minded regulations in Europe and the effect today’s geopolitics may have on well-worn shipping routes.
One interesting discussion topic was that, despite going into effect on January 1, 2023, the Carbon Intensity Indicator (CII) regulations will not actually have a meaningful impact on the industry until two or more years down the road. Each ship owner will first have its ship’s carbon output measured during its next regularly scheduled inspection, which may not be until the end of 2023. After the CII measurement is reported, each ship owner then has additional time to submit its remediation and mitigation plan to regulators (if needed) then additional time after that to implement its plan. We are certainly simplifying a complex regulatory scheme for the purposes of this letter, but the takeaway is that the January 1 start date for CII regulations is misleading, and we don’t expect there to be an impact on global shipping capacity until at least 2025.
Because of the global nature of the shipping industry, we were able to meet people from all geographies. Many have a different worldview than we do and can challenge our team’s thesis on the industry. We welcome the spirited debate and always discuss any differing viewpoints internally to stress test our own thinking. All in all, Capital Link was well worth the time, and we look forward to attending in the future to gain more insight into the shipping industry from our colleagues, competitors, and partners across the world.
The trip was a productive one on many fronts and we walked away with a better understanding of multiple companies and industries. These types of fact-finding projects all result in our research team having an information advantage. As important as financial statements and company filings are, there are some facts and pieces of information that cannot be learned solely by reading documents on a screen (and certainly cannot be learned from reading another analyst’s opinion). That is why in today’s turbulent markets we continue to reserve ample time to have conversations with numerous management teams and analysts who all assist in developing our information advantage.
As always, please reach out to MIAM if you are interested in partnering or you would like to discuss a particular company or idea.
The MIAM Research Team
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