Inventure Foods (NASDAQ:SNAK)
Inventure Foods is not a name you’d recognize at Costco while picking up some frozen berries or at Safeway getting some potato chips for game night. But their portfolio contains brands that you’d probably recognize: Boulder Canyon potato chips, Jamba frozen fruits, TGI Friday’s snacks, Burger King snack packs. They are not the most recognizable brands but they certainly command shelf space at big grocery chains and restaurants.
The Company (then operating as Poore Brothers) became public in 1996, and began reaching astronomical success gradually starting 2008. Without so much as a blink, the Company weathered the financial crisis in 2008 and started gaining momentum at the start of 2009, continuing its upward trajectory until the end of 2014.
What contributed to the Company’s success from 2008 – 2014?
And what contributed to the Company’s downturn in 2015 before picking itself back up at the start of 2016?
Source: Google Finance
First, what you should know about the Company.
Inventure Foods manufactures and markets both “healthy” and “indulgent” snacks under its own brands or licensed brands:
Source: Company Presentation
Over the last two decades, the Company has built national retail distribution channels across leading grocery, natural food store, super stores, convenience and foodservice channels:
Source: Company Presentation
Aligned With Health Food Trend (e.g. The Kale Craze)
Inventure Foods’ portfolio of branded products includes health foods, which they have been pushing to the forefront as the food industry trended toward healthy foods.
Since the turn of the millennium, the food industry has seen a higher growth rate of health and wellness foods than non-health and wellness foods (i.e. in the graph below, green line is higher than the grey line every year):
Source: Euromonitor International
All it takes is Sales Growth and Margin Stability
From 2008 to the end of 2014, Inventure Foods’ stock price experienced a ~600% growth (stock chart below). During this period, the Company reported an overall growth in sales (blue bar graph) and stable profitability margins (gross profit indicated by green line; EBITDA margin by grey line).
Just as the Company was gaining unstoppable momentum, at the turn of 2015, the market proved that a growth in sales doesn’t mean much if the bottom line is not profitable. In Q1 2015, the Company’s cost of goods sold spiked, hurting both the gross profit margin and eventually the bottom line. As a result, Inventure Foods’ stock dipped even though the Company hit record sales. The stock continued to decline throughout 2015 as the margins never recovered to past levels.
Source: Google Finance, Company Filings
2 questions emerge from this observation:
- How did Inventure Foods increase sales between 2008 – 2014?
- Why did the profitability margin fall to negative in Q1 2015? And could they have prevented it?
Important Facts and Major Events… and Oh No’s
To answer the question of what they did right between 2008 – 2014 to command such a notable increase in their valuation during this period as well as what went wrong in 2015, below outlines key events and strategies implemented by Management:
- Acquisition of Radar Farms in 2007 was immediately accretive to sales and earnings growth
- Launched Burger King branded snacks in 2007
- New customers have been targeted domestically, in Canada and overseas where the license has been expanded to include the U.K
- Boulder Canyon Natural snack products grew 27% while snack division sales decreased slightly.
- However, snack division was priced higher which improved profitability.
- Focus on operational execution – plant cost per pound produced was down.
- Focus also on paying down debt.
- One of the plants where their TGI Friday’s branded snack is produced is underutilized due to the snack’s decrease in sales – as a result, looking for private-label and co-packing opportunities. Challenging raw materials cost increase
- Boulder Canyon Natural products leading sales for the Company proved to the Company to implement new strategy for products: to focus on “better-for-you” products going forward
- Capital investment in the facility that produces Boulder Canyon to increase capacity and efficiency
- Proved the product’s success in 2008 and then received BK’s license expansion: Expands the popular Burger King snack products internationally including Latin America and Asia
- Grew the private label products (e.g. rice and bean chips for Trader Joe’s) – strong demand for premium private label products – increased FY2009 revenue by 42%
- Since the CEO change, many presentations at conferences marketing the company to investors
- Boulder Canyon Natural products continuing to contribute to significant sales growth as they expand distribution into more stores
- SG&A increased due to added labor and increased marketing for Boulder Canyon and Jamba All Natural Smoothies – the two of their leading “better-for-you” products
- Stabilized profits for their losing business, TGI Fridays by filling up capacity of the facility via adding private label and co-packing
2011 – 2012 –
- Introduced new lines of health-conscious snacks
- With the troubling TGI Friday snacks, they were able to turn it into a profitable product by improving efficiency in its plant and through successful execution of several large retail programs, growing the product sales 34% in FY2011
- Continued strategy of adding new lines of products in the natural and health categories and launching them at opportune times of the year (e.g. blend-at-home smoothie packs launched at the start of peak summer)
- Sold off lower margin business
- Key investments in facilities to improve capacity and efficiency
2013 – 2014 –
- Started reporting as two reportable segments: Snack and Frozen Foods. Licensing Jamba brand to roll out frozen smoothie snack packs has been overall one of the most successful product implementations. Jumped at the right opportunity at the start of the smoothie fad, partnering with a brand name that is well-known for smoothies
- Just as the Company was receiving accolades as best small company, added to Russell micro cap index, etc, Company runs into a major blimp. And here it is:
- Jan 18: Voluntary recall of Radar Farms smoothie blends due to possible health risk caused by a potential contamination of “Listeria monocytogenes, an organism which can cause serious and sometimes fatal infections in young children, frail or elderly people, and others with weakened immune systems. These recalled blends themselves did not test positive for Listeria monocytogenes. However, Listeria monocytogenes was detected on spinach and/or kale ingredients on another lot which is currently placed on hold. These spinach and kale ingredients used to manufacture the recalled blends were supplied by the same outside party.
Source: Company Website (Modified Pic Obviously)
- Just when they thought the bad streak was over:
- April 23: Their popular Jamba smoothie frozen vegetable and smoothie kits also had the possible health risk from the same bacteria and hence issued a voluntary recall.
- Unfortunately, the health risk was out of their control and could not be mitigated unless they tested every single batch for bacteria, an impossible task.
As I dug deeper into Inventure Foods, a pattern of success factors emerged.
- They were successful at execution of retail programs
- This meant getting into big retailers, marketing to consumers and pricing and margins
- Aligned corporate strategy with industry trend
- Introduced new products that were “healthy”
- Smart partnering with brands that would help promote their strategy
- They were smart in partnering with recognizable brands to help them market their healthy products
- Innovative and Constant Change to Product Portfolio to Capitalize on Products that Work
- They leveraged brands that were popular and introduced aa variety of new flavors and ingredients. One reason they were able to continually introduce new products though was because they had a far reaching retail distribution network, so it wasn’t a problem getting their new products in front of customers.
- They licensed with famous brands and introduced a new line of products.
- Sold off/wrote off products that didn’t work
- Continuous investment and improvement at plant facilities to add capacity and improve efficiency
- Improving efficiency is one thing but their sales/partnership team also went out to find clients that wanted to manufacture their own private-labeled snacks, which was used to cut costs at plants by adding capacity
So far, similarities between Inventure Foods’ success and Crown Crafts’ (kids’ bedding company in my last post) success are striking. The 2 notable similarities are (1) in their respective industries, they both licensed with brands that were popular in their industry at the time; and (2) they constantly used feedback loop to update their portfolio of products. They discontinued products or divisions that were no longer forecasted to have potential growth and they designed, innovated and introduced new products that they found out to have potential in by assessing which existing products were contributing to their growth.
Source: Company Presentation
Crown Crafts (NASDAQ:CRWS) is the perfect example of how to turn around a company reporting losses every year into a company that not only survived the financial crisis but grew over 1300% in 10 years. The orange and red lines are the S&P small cap index and the Russell microcap index, respectively.
Source: Google Finance
Before we get into the factors that drove the Company to succeed, a little overview of what the Company does:
Crown Crafts designs, licenses, manufactures and markets infant and toddler products – mostly in bedding, blankets and bibs and a smaller percentage of sales in plastic-related products.
Source: Crown Crafts Presentation
Crown Crafts has an impressive distribution network of retailers:
Source: Crown Crafts Presentation
Baby care market has increased overall since 2011.
However, it is a very competitive market. Crown Crafts has had to be strategic and disciplined. And that’s exactly what they’ve done.
How Did They Grow 1300%? Key Success Factors:
Upon a detailed analysis of Crown Crafts’ path reveals key success factors that contributed to the Company’s 1300% growth in 10 years. A more detailed analysis is below – with notes that point out significant events that caused the stock to reflect the value of the Company.
A lot happened in 2001. The Company IPO’ed, a new CEO was in charge, and they refinanced the debt from $106 million to $47 million. Management team vowed to turn the Company around. They started by selling off their unprofitable business in adult bedding products. This hurt their top line sales, but their focus was to cut costs and protect their profitability.
The next 5 years proved to be a difficult time, but throughout it all, the Management team continued to pay down debt every year and put in place a continuous feedback loop to determine which product divisions were working and which product divisions were not, i.e. they were ready to take appropriate risk measures in order to keep reinventing the Company.
2006 was a pivotal year. Crown Crafts refinanced their debt again, reducing the debt outstanding by more than 70% and just as importantly, extinguishing exercisable warrants that were attached to the debt, reducing the fully diluted shares by more than 70%. Overnight, the Company’s shareholders rewarded the Crown Crafts by more than 200% and the Company started gaining momentum. Crown Crafts’ CEO, Chestnut, also had a strategy to grow the company – to make meaningful acquisitions.
Since 2006, the Company continued to be profitable and it is evident that the Management team stayed disciplined. (Read through the detailed analysis of success key success factors below.)
To sum up the analysis, the key success factors that contributed to the Company’s success in the last 10 years (and continue to do so) are:
- Reducing debt first and foremost
- Share repurchase program
- Meaningful acquisitions
- Actively enter licensing agreements and partnerships to market other brands that are successful or distribute their brands to others, i.e. active business development
- Disposing of divisions/assets that are not profitable
- i.e. paying special attention to what works and what doesn’t and not being afraid to cut off cancerous products
- Protecting profitability and controlling costs – saying no to retailers who are going to suck their margin
- Cash dividends but only after the company has paid down debt and can
Detailed Company Analysis of Success Factors (and Failures)
Letter on the stock chart indicates key events discussed below in detail.
Source: Google Finance & Microcap.co (corresponding letters discussed below)
- Refinanced debt from $106 million which was refinanced in July 2001 to $47 million. Debt to equity was reduced from 1.9x to a negative debt to equity of -2.9x due to huge losses, deeming shareholders’ equity to be worthless. No wonder the stock had been crawling before major changes to turn around the company.
- Along with E. Randall Chestnut named new CEO; had been VP Corporate for the Company since 1995.
Source: Company Filings
- Also sold off the adult bedding division to the former CEO. Key efforts to turn around the company: New CEO, new debt structure, and new product segment mix.
A. July 2006
- Underwent a MAJOR refinancing reducing debt by more than 70% AND extinguishing with it fully diluted shares by more than 70% (i.e. exercisable warrants that came with the debt).
Source: Company Filings
- Since the CEO change in 2001 along with adult bedding division being sold off and refinancing of the debt, the Company’s financials started seeing improvements, including:
- Debt being paid off every year. In 2002, debt to equity was 2.9x and by 2006, debt to equity was reduced to 0.8x (less than 1.0x for the first time!)
- While debt is being paid off, holding off on cash dividends (As much as shareholders want to get a cash dividend Christmas bonus, the Company was stretching its dollars to the detriment of the Company’s profitability in the past)
- Positive net income (after having sold off the adult bedding division in 2001 which was contributing to its losses)
- Also in 2003, Company announced a shift in product sales mix. Their Pillow Buddies business was decreasing due to increased competition pushing royalty licenses of character licenses up higher. Decided also to take their Disney Consumer Products direct to retail starting early 2004. Considering Toddler Bedding (bedding with Disney characters) is in now (2016 FY) the second highest grossing segment of product sales, this was a good decision (i.e. toddlers + Disney characters).
- CEO announced that Company was going to grow via meaningful acquisitions going forward
Source: Company Filings
B. November 2006
- Reaching into Latin American market – entered licensing agreement to develop, produce, market and sell infant home furnishings and accessories under the Baby Mink brand, which has 80% of market share in Mexico.
C. December 2006
- Acquired all of the assets of Kimberly Grant, Inc., a designer of various infant and toddler products. Under the agreement, the founding designer will continue to develop designs.
D. February 2007
- Announced closure of their subsidiary Churchill Weavers (which sold beddings), which has been unprofitable. The Company tried to sell Churchill Weavers but could not reach an agreement, so they decided to liquidate.
- On Feb 14, 2007, announced Q3 results, which reported lower sales by $1.1 million YoY. The sales shortfall came from pricing pressures by two retailers. Company decided not to participate in those sales because they wanted to protect profitability and control costs.
E. July 2008 – November 2008
F. June 2009
- Reported earnings that doubled YoY
- From 2007-2009 through the global financial crisis, the Company made key meaningful acquisitions (Spring Global – infant and toddler line in Nov 2007) and entered into licensing agreements to introduce new popular branded infant/toddler products (licensed from Crayola – toddler beddings in Mar 2008, licensed Kimberly Grant toR. Gibson to use the brand to produce complementary toddler products like books and photo albums )
- increased sales while keeping costs low. The Company was profitable except for non-cash impairment charges due to lower value of carrying book value like goodwill
- Net cash on the books increased; lowered A/R and inventory
Source: Company Filings
G. July 2009 – December 2009
H. February 2010
- Announces cash dividends to start being paid in May 2010
I. May 2010 – December 2010
- Began distributing cash dividends again
- Debt is almost extinguished
- Second letter to shareholders in the last year to dissuade shareholders to listen to Wynnefield Partners Small Cap Fund, an activist fund, that had on several occasions induced proxy battle
- Also in the same month introduce bedding for pets – a new product category
July 2010 – December 2010
- Focuses on expanding international sales – adds an Executive to lead the international sales efforts
- Partners with ProjectNursery.com, a popular mommy blog run by moms, to increase social marketing by marketing directly with and to moms
- Presents at multiple investor conferences
J. July/August 2011
- Reached an agreement with the activist fund, Wynnefield, to replace one of their directors with one they nominated with
- Reported lower profitability despite increased sales for the quarter YoY. Also revealed lack of cash on their balance sheet compared YoY.
- Debt free
Source: Company Filings
Company’s value took a hit in 2011 as their gross profit remained in question due to rising costs for raw materials, labor, transportation, and currency translation. Along with decreased profitability and a losing “proxy”, throughout the year, there weren’t positive impacts that fueled the momentum they experience in 2010:
- Company continued to pay quarterly cash dividends and continued to marketing efforts through presentations at multiple investor conferences throughout the year.
- Introduced a bedding liner product for infants
- However, no new meaningful acquisitions or licensing agreements made
K. February 2012
- Reported growth in sales and profitability finally
Source: Company Filings
L. March 2012
- Announced 100% increase in the quarterly cash dividends to start in July 2012, representing an annualized yield of 7.4%
2012 – 2013
- Entered into licensing agreements and distribution agreements
M. June 2013
- Reported fiscal year end – although sales dropped slightly, income is higher – proving that their cost cutting and profitability protection strategy is working and that Management is disciplined.
- Announced reduction of board members from 7 to 5 directors to reduce board-related expenses
N. June/July 2014
- Yet again another increase in their gross profit and income. This time they also increased sales as well in their fiscal year end report.
Source: Company Filings
- In July, made another acquisition for $1.35m– Kidsline and CoCaLo brand names – only the rights to use the brand as Kidsline undergoes chapter 11 bankruptcy proceedings
O. June 2015
- Reported another increase in income and sales. Profitability margin decreased 300bps
Source: Company Filings
P. February 2016
- Reported another increase in income in absolute value and profitability margin despite decrease in sales. First time reporting over 30% in gross profit.
Source: Company Filings
Q. November 2016
- Reported a decline in sales and profitability.
Source: Company Filings
EnviroStar was founded in 1959. They started as a private distributor of laundry equipment and then went on to become a nation-wide distributor and provider of their own proprietary equipment. The Company was able to achieve success because of the founder’s innovative and entrepreneurial approach to business.
Their three business segments are very complementary to each other. They produce their own brand of products. They have a franchise business. And they’ve now added the nation’s largest distributor to their portfolio, from which they will have synergies through technician efficiency, inventory management, and exposure to clientele to market their products through the distribution business.
3 Complementary Operating Segments
- Steiner-Atlantic: Provides commercial & industrial laundry & dry cleaning equipment as well as providing maintenance and technical support for their products. Started in 1959 as distributor of laundry and dry cleaning equipment. While building the distribution business, Bill Steiner created and patented dry cleaning equipment that was more energy efficient and environmentally friendly.
- DryClean USA: License and franchise operation, with over 400 locations in the US, Carribean and Latin America. In 1977, Bill Steiner co-founded DryClean USA, which became the nation’s largest and most recognizable dry cleaning franchisor. Note that these are drop-off dry clean as opposed to do it yourself coin-operated laundromat.
- Western State Design: Nation’s largest distributor of commercial, industrial, and coin-operated laundry equipment and a provider of routine maintenance and technical support. Announced acquisition of Western State Design in September 2016 and completed the acquisition in October 2016.
Pricing & Customers
Steiner-Atlantic’s customers are primarily hotels, resorts, and correctional facilities that use industrial laundry and dry cleaning equipment everyday. In addition to their proprietary laundry and dry cleaning products and equipment, such as GreenJet – a dry wet cleaning machine that is energy efficient and environment friendly – their product offering has 12 brands which also include third party hot water boilers for industrial use. They believe their products attract their customers because it is a one-stop shop. Their prices for the products and machines range from $5,000 to $1,000,000.
DryClean USA’s customers are franchisees of the brand. Initial franchise fee can cost from $80k – $500k depending on location, size, and equipment. The franchise fee they collect from each location is $15k – $30k a year and the royalty fee is $5k a year. Terms of agreement are for 10 years with renewal fee of $5k. They don’t charge a fee for advertising. Other dry cleaning franchisors charge a percentage-based royalty fee around 6%. (Source: thefranchisemall) A profitable dry cleaner could be making $500k a year in sales, which translates to $30k a year in royalty fees at 6%. The fixed annual royalty fee could be their cost-leadership style. Although I can’t see what every franchise agreement looks like, there might be missed opportunity to structure the royalty fee as a fixed up to a certain amount of sales and then a fixed + percentage if they meet a certain target, provided that DryClean support advertising fees, etc.
Dry Cleaning Industry
Industry is Fragmented
The dry cleaning industry in the US is highly fragmented. The nation’s 50 largest firms only generate 10% of the revenue in the industry (Source: First Research, Dec 2016). In 2015, annual sales of the dry cleaning industry was $9 billion, brought in by more than 34,000 dry cleaners across the country (Source: IBIS, March 2016). In comparison, Walmart brought in $480 billion in revenue in 2015 alone from ~6,300 stores (Source: Statista). With the acquisition of Western State Design, they’ve now built a stronger presence in the coin-operated laundry industry. In the US, laundromat sales in the US was $5 billion, with almost 22,000 laundromats in the country (Source: IBIS, June 2016).
When the market is this fragmented, it means there is no loyalty from its customers, which makes sense since I am not going to drive 50 miles to my favorite brand of dry cleaners when I can go to the local dry cleaner’s down the street. There are advantages of a fragmented industry, which is that you are not competing against a Coca-Cola. There are also many pockets of niche that can be created to differentiate yourself.
EnviroStar’s Competitive Advantage
For EnviroStar, they’ve certainly been smart to brand their franchise business, DryClean USA. What they are missing in this business is the unique competitive advantage. Currently, their brand is known for average price, average service, average offerings. It neither caters to those who would pay extra for a reliable, high-quality job, nor the people who need it super fast and super cheap. Unless the company gobbles up other players in the industry to become the leading brand in terms of most recognized in customers’ minds, it’ll be hard to demand customer loyalty when there are dry cleaners that pop up down the street every year due to low barriers to entry.
DryClean USA’s franchise cost in upfront fees and annual franchise & royalty fees are in the middle of its peers (Source: Entrepreneur, thefranchisemall). So, the pricing they enforce or encourage their franchise stores to charge consumers depends on the profitability of the franchise stores and EnviroStar’s wiggle room to charge less royalty fees but with the strategy of putting more franchise stores across the nation.
One competitive advantage they have with their line of products that they sell directly to industrial and commercial customers, such as hotels, is that their products have been known for a long time as environmentally friendly and energy efficient. In this fragmented industry, if they continue to introduce new versions of products that are proven to be even more energy efficient and environmentally friendly, they’ll be able to position themselves to gain customer loyalty.
Surviving a Declining Industry
Unfortunately, what is working against them is the lack of growth in the industry. The annual growth of the last 5 years was -0.2% (Source: IBIS). Further adding to the decline of the industry is that clothing manufacturers are producing less clothes that require “dry cleaning only.” And there are more and more advanced washer and dryer for the home that will give you similar results from dry cleaning (Source: Capital, Jan 2016). Fortunately (but not really), the laundromat industry had a slightly better performance with 1.2% annual growth in the last 5 years (Source: IBIS).
EnviroStar – Last Man Standing?
- Organic Growth: When demand is shrinking, you have to try to capture as much of the remaining demand as possible. Especially in such a highly fragmented industry where there is a lack of customer loyalty, you are left with (1) being the cheapest, and (2) being ubiquitous. These are important transformative years, where more effort is exerted into marketing its brand to pervade every niche of the market but also to introduce cost-cutting programs in order to support low prices offered to customers. They also have the opportunity to grow internationally, either through their salesforce or M&A.
- Mergers & Acquisitions: When EnviroStar’s new CEO came on board in March 2015, one could say this is the 3rd chapter of EnviroStar’s story. The first was the founder, Bill Steiner, finding the foundation of the company, the second chapter was when his son, Michael Stiner, joined the company and together, they built the company to a company with a network of customers. And now with Henry Nahmad, a young and driven MBA grad, at the helm, he’s helped the Management team recognize the state of the industry, i.e. fragmented and declining, and has begun a buy and build strategy to survive it.
On that note, Western State Design was a smart move – adding a portfolio of customers to its distribution network. Was it a fair price? We’ll find out in their next financials. But with a purchase price of $28 million, we should expect to see around ~$30 million of sales added every year, with an average multiple of about 1.0x sales (Source: Fulcrum). It has certainly helped with international expansion, i.e. to the Caribbeans and Latin America. Western Design is located in Calirofnia, which plays into the strategic location to reach into their distribution network since EnviroStar is located on the opposite side of the country in Miami, Florida.
We should be seeing more transactions involving international reach in the coming years if Management’s buy and build strategy is in full force.
The market really seemed to like the acquisition, helping the stock jump 225% in 3 months since their announcement of the acquisition in September and still 2 months after the completion of the acquisition.
- Cut off the Tumor: This is obviously an extreme strategy, and one that should be employable in a desperate situation where the long-term vision of the industry is clearly terminal. Kimberly-Clark sold off its capital-intensive paper mills that were generating mediocre sales decades ago. At the time, the stock took a hit, but the CEO, Darwin Smith, understood that the long-term vision for its company in this industry was to be in the consumer business. So, surviving through the downturn of the stock, Kimberly-Clark pushed through in divesting the “cancerous” arm that was the paper-mill business and refocused its company’s resources into building the consumer paper-product business. Kimberly-Clarks became the #1 paper-based consumer products company (Source: Good to Great). Is there a segment that is sucking the resources of EnviroStar? Could it be better spent innovating and launching home-based washer and dryer products with all of the technology and branding lessons the company has learned over the years?
As part of their buy and build strategy, in addition to businesses they are looking to acquire, they are exploring technological advancements to make their current operations better.
Currently, apart from the “technology” of their products, EnviroStar hasn’t implemented new faster, better, and smarter way of doing business that gives them a competitive advantage via technology. For example, with the network of franchisee partners, they are more suited to head a consumer-based pick-up/drop-off drycleaner service mobile app than Flycleaners, who has to cut a margin to their partnered facilities (Source: Business Insider).
EnviroStar could also be implementing technology into their advertising and sales. Are they doing any online targeted advertising for their franchisees? Are they doing any digital advertising to young people who are looking to become entrepreneurs via franchises? Do they have an enterprise software where franchise owners can use it to manage multiple locations?
There is a lot of room for improvement in technology.
The Management Team is currently comprised of:
- Henry Nahmad – Chairman, CEO, President
Previously served as CEO of Chemstar Corp, a provider of food safety and sanitation solutions. Before becoming CEO, he held Executive Vice President and Strategy position at Chemstar. Prior to Chemstar, he served as Director of Corporate Development at Watsco, Inc, the largest distributor of heating, air conditioning and refrigerated products.
So, he’s a corp dev guy – no wonder as soon as he came on board EnviroStar, he’s implemented the buy and build strategy. Or conversely, the previous CEO, Michael Steiner, and the board may have been looking for new management to expand the business by way of acquisitions in his efforts to leave a legacy after his exit. In any case, for the buy & build strategy, he seems to have the right experience. However, after having servied as EVP for Chemstar since 2008, he left his CEO position not long after assuming the new role, which raises some questions. Although his experience has not directly been involved in laundry and dry cleaning, it has always been in industrial products and distribution, so it is somewhat aligned. A small, albeit, important finding is that the culture at Chemstar is such that employees did not approve of the CEO – most of the reviews are for after Nahmad left Chemstar, but there are some reviews for during Nahmad’s tenure as CEO there. And even if it is for after Nahmad had left, it does question the state of the company’s culture he had left it in (Source: Glassdoor).
- Michael Steiner – Executive Vice President and President of Steiner-Atlantic
Has been President of Steiner-Atlantic since 1988, and during his tenure, was involved in growing the business in many different facets. It’s reassuring to see that one of the company’s veterans is staying in Management after control of ownership.
- Dennis Mack – Executive Vice President of EnviroStar; President and Founder of Western State Design
- Tom Marks – Executive Vice President of EnviroStar and Western State Design
Their financials ending Sep 30, 2016 is a bit cheeky. They had an outstanding revolving credit facility of about $2.2 million, which they wiped clean before September 30, so they declared debt to be $0 at the reporting date. But a week later, on October 6, they refinanced the debt into a $5 million term loan and a $15 million revolving credit facility. Of the $20 million available credit, the company took out $12.6 million to help pay for the acquisition of Western State Design. As a result, what is reported on their balance sheet looks ostensibly healthy, but their leverage ratios reveal otherwise.
- Current ratio is 2.2, which is pretty healthy even though a lot of it is tied up in accounts receivable which saw a 3-fold increase since June 30, 2016.
- With the $12.6 million loan outstanding, debt ratio is 1.3. Above 1.0 indicates they don’t have enough assets to cover their debt. In addition, their debt to equity is 2.3. Yikes. The loan is not due until 2021, and since we don’t know Western State Design’s financials, it’s hard to tell whether this will be a problem. For now, there isn’t enough information to make that call.
- My DCF valuation yielded $4.80/share – the price EnviroStar was trading at before the announcement of the acquisition of Western State Design. On September 7, 2016, the day before the announcement, it was trading at $4.76/share. Closing price on Friday Sep 16, 2016 was $15.45/share… Something is clearly amiss. (Discount rate was derived using a bottom-up approach)
- Here is how the comparables look in terms of multiples:
Again, the median of its peer multiples was in line with EnviroStar’s implied trading multiples before the inflation of its stock price following the announcement of WSD acquisition announcement. However, in the last 3.5 months, the stock price became way too inflated and now it is extremely overvalued.
|Positioned themselves to provide complementary products/services within their space. They target the commercial and industrial customers, which is easier to reach with their salesforce than individual customers. However, it is still a highly competitive industry.
|Declining industry, i.e. -0.2% annual decline in the last 5 years; highly fragmented – no customer loyalty. Competitive forces come from outside its direct competitors such as consumer-based washer and dryer products that can replace dry cleaning. Opportunity lies in international expansion and implementing its buy-and-build strategy until its captured most of the demand that it could.
|EnviroStar’s had a long history of innovation, not so much reinvention. When the company started out as a distributor of laundry and dry cleaning products, the founder, Bill Steiner, saw the opportunity to fill the gap in the market with more energy-efficient and environmentally friendly products. Henceforth they started providing their own products to industrial and commercial customers. EnviroStar saw the opportunity to enter the franchise market and now boasts ~400 stores. Since then, they have been building their distribution network and franchise segment, both organically and with the acquisition of Western State Design under the new CEO, Henry Nahmad. Their innovation and reinventing strategy will be more important than ever going forward with competitive forces at play in this declining and fragmented industry.
|They don’t currently have technology implemented into the way they do business. A part of their buy and build strategy does mention that technological capabilities is one area they will explore in potential investments.
|The company has the right mix of old and new. Steiner, the veteran of EnviroStar who grew the company to what it is today continues to assume leadership of Steiner-Atlantic. Meanwhile, Western State Design’s founder and EVP have now joined the team to build the distribution network, which in this highly fragmented business and where sales depends on distribution, is key. Furthermore, although the new CEO, Nahmad is young and lacks experience in the CEO role, his previous roles were aligned in a similar industry and his experience in corporate development/M&A could be what EnviroStar needs to expand.
|Strength of Financials
|High leverage ratios, but we are not sure how Western Design is going to contribute to working capital. It is a loose grade of C for now until the next 10Q.
|Right now, the stock is overvalued. However, that is not to say that the company does not have potential to be strong. I believe the company has a robust intrinsic valuation. It appears the stock is overvalued (but we will have to see WSD’s financials to comment further).
|Strong company but currently overvalued. Wait to see WSD’s contribution to the consolidated financials in the next 10Q.
I am impressed by the level of detail Neonode’s 10K goes into in terms of its customers, the market it operates in, and the very relevant risks to the business. One of the key criteria that Buffet looked for in his fundamental valuation of companies was whether the company’s management gave detail on the drivers for the industry and their company. So, I was excited to see that Neonode was asking and answering the right questions preemptively.
My hope was then shattered when I dove deeper into their numbers. The company is clearly trading on its future potential. But this is not a discussion of stock price, but a stripped down analysis of whether the company has substantial value. Let’s begin with who Neonode is and what they do.
Brief Company History
- Formerly known as SBE, Inc, incorporated in 1997. Merged in August 2007 with Neonode . Company continued operating as Neonode with principal office in Stockholm, Sweden, and US office in San Jose, California.
Products & Solutions
Core Business: Touch Technology Licensing
- Optical touch solutions under the brands zForce and MultiSensing. They have a portfolio of patents, but the touch screen functionality itself is not proprietary and thus they face many competitors.
- As of Dec 31, 2015, Neonode had 40 technology license agreements with global original equipment manufacturers (OEMs) and original design manufacturers (ODMs). This is an increase from 35 at Dec 31, 2014, which is also an increase from 33 at Dec 31, 2013.
- 16 of those customers are shipping products they’ve made using the technology license and more to enter commercial markets .
- Neonode’s touch technology is incorporated into products such as laptops, touch-screen monitors, printers, GPS devices, e-readers, tablets, touch panels for automobiles, household appliances, mobile phones, wearable electronics, games and toys.
- Their technology is optical touch technology. There are various types of touch technology including capacitive and resisitive as the touch screen industry’s most common types of touch technology. According to a Medical Electronics Design article, pros for optical touch simply boils down to:
- Optical clarity
- Cost efficient
- Doesn’t need glass
AirBar: Neonode’s First Hardware Product
- In addition to licensing their technology, Neonode has launched their first consumer product called AirBar, which is a USB plug-in device that enables touch functionality directly on the screen of the non-touch PCs. It is actually a very cool product that I may think about getting – an airbar for my mac air. How it works is you place the AirBar on the bottom of your non-touch laptop/computer screen. AirBar then projects an invisible layer of optical technology onto your screen, which then allows the screen to be touch-enabled.
- AirBar was announced in 2015 that it was in development. They begain manufacturing in 2016 and officially released in October 2016.
- At the time of this report on Dec 9, 2016, 15.6″ AirBar is available on their website and retailing for US$69 + $10 for shipping (14″ and 13.3″ are marketed but are not yet available – prompts to sign up for email notification)
- It uses their zForce AIR sensing platform, the very technology that is licensed to many of their customers.
- Marketing the products to consumer electronics retailers, online stores, and resellers to the education and enterprise customers. Ingram Micro is their e-commerce, distribution and fulfillment partner. Also anticipating demand from PC OEMs to bundle AirBar with their non-touch notebooks.
- Primary customers are OEM and ODM manufacturers
- Touch interface displays
- In 2015, Neonode’s 10 automotive OEM customers had 20 automotive models in the market. Majority of these are in China and include SUVs (Boojun 560 and Haval H6 ) and the two top-selling sedans (Chevrolet Cruize and Buick Excelle). In 2014 Volvo also launched using their product called XC90
- Other products include:
- zForce AIR for keyless entry. Estimate first system to be available in 2017
- zForce DRIVE for detection of hands on steering wheel. Entered into agreement in 2015 to explore and industrialize.
- Also engaged with several global OEM manufacturers about developing automotive Human Machine Interface. But long development cycles of 4-5 years before any fees for licensing are collected.
- Printers and Office Equipment
- Interactive touch display instead of mechanical buttons
- Entered into agreements with 5 leading global printer and office equipment companies including HP and Samsung.
- HP started shipping consumer printers with touch technology in early 2014
- Lexmark released 7 new printers in January 2016 with their technology
- Samsung and 2 other customers are finishing development and will release products with their technology in 2016 and 2017
- E-Readers and Tablets
- Since 2011, more than 23 million units shipped with their technology
- Amazon, Kobo, Deutsche Telekom, Barnes & Noble and Sony use Neonode’s technology
- Sony is currently shipping a 13.3 inch writing tablet named “Digital Paper”
- LeapFrog Enterprises and LG are shipping tablets with our technology
- Computers and Monitors
- have technology license agreements and are in product design phase with tier one computer and monitor OEMs that we expect will begin shipping products in 2016. We are also in the process of attaining Microsoft Windows 10 certification on top of our already received Windows 8.1 certification
- Production facility in Sweden. Distributed and fulfilled (including online e-commerce setup) by Ingram Micro to customers globally.
A lot of heavy hitters for partnerships, but that isn’t reflected in their financials.
- Neonode’s revenues are unreliable as their technology can be replaced by their competition’s when the technology license agreement ends with the customer. For example, they had a blip in 2013 when they lost Amazon’s e-book reader business, but they’ve been able to gain back sales from other customers.
- In addition, their net revenue during the 9 months ended Sep 30, 2016 was lower by -10%, due to no engineering consulting service fees in 2016 as well as a decline in e-book readers. During this period, revenues came from 51% printers, 27% automotive, and 22% e-book readers, compared to 31% printers, 11% automotive, and 51% e-book readers during 9 months ended 2015. Their technology license fees are shifting away from low-margin consumer products such as e-book readers to high-scale and potentially standardized among multiple OEMs in the automotive sector as car manufacturers continue to infuse electronic gadgety type of products into cars.
- The concern is how high their costs are. They’ve reduced the number of corporate full-time employees from 8 in 2013, 7 in 2014, now down to 6 as of 2015 year end. Hopefully they will continue to operate under a lean, or even leaner, corporate team.
- No point in doing a discounted cash flow method for valuation since their revenues are too unpredictable forecast and they’re operating at a loss.
- Neonode’s comparables tell us that indeed their costs are way too high. The industry median SG&A cost as a percent of revenue is 13% and R&D as a percent of revenue is 18%. Neonode’s on the other hand is 79% and 56%, respectively. Their P/S and P/BV ratios are both not meaningful to even compare because of how ridiculously high they are. So far, the valuation of the company does not look great. They have a good technology and good partners, which is essentially what the company has. But in order for them to survive, they MUST cut down their costs.
Risks & Opportunities
- Revenues are highly dependent on the success of its OEM manufacturers. In other words, Neonode does not have a direct affect on the success of the end-user products or marketing and therefore sales growth.
- Revenues are highly concentrated in a few of their customers and the total # of customers they have is to major companies. Three companies represented 60% of revenues in 2015. For example, net revenue decreased from ~$7.1m in 2012 to $3.7m because Amazon did not use their technology for their e-book reader.
- Highly competitive space – in order for a commoditized product due to high competition to survive, have to choose between low price or high quality, and most often times, it is high quality that survives. (and continuous introduction of innovative products.
- R&D spend is not a measure of how innovative a company is according to this Forbes articles, but it gauges the growth of the company historically as a function of how much R&D they’ve spent and if they’re spending the same levels but the company has been declining, then obviously they’re doing something wrong. Hope they’re brewing some innovative products. If their sales don’t grow by at least 20%-50% by 3 years from now, then their R&D is not being spent to good use.
- Again, as noted above, their R&D % of revenue is more than triple that of the industry median. Even if development of new products take anywhere from 6 months to 36 months, the company is not at its infancy stage, so they should have proved their sales to support the levels of R&D spending by now.
- Their costs are simply way too high. Not only is R&D 56% of revenue compared to 18% for industry median, their SG&A cost is 79% compared to the industry mean of 13%. They need to make their team and their sales and marketing program has to undergo a major improvement. If costs continue to be a problem, the company will continue to operate at a loss, which will force them to close more private placements as they have done a few months ago and then draw down credit facilities. And, we all know the fate of those companies…
- Big car markets by country that they have not penetrated yet include UK and Norway, two countries where electric vehicles are the most popular. Are there regulations or patents they have to file separately in those countries that are keeping them from making sales there?
- Highly automated production facility set up in Sweden, but could they explore a lower cost country and lower export costs
- Virtual reality and augmented reality are expected to grow 181.3% CAGR from 2015 to 2020, in dollars that’s $5.2 billion to $162 billion (IDC report, Aug 2016). That doesn’t even include artificial intelligence which alone is expected to grow from $640 million in 2016 to $36.8 billion by 2025; that’s a 57-fold growth (Tractica report, Aug 2016). This is a growing opportunity. Aggressive sales should have started already. Hope they’re putting those huge sales and G&A costs to good use.
First of all, the Company operates in a very competitive space, as evidenced by them losing Amazon as a customer for the Kindle e-readers, which affected the business by a -48% decline year over year.
Revenues from engineering consulting fees have been about ~$800,000 a year. It’s not a bad idea to build this division out as it relates to optical technology implementation and vision consulting. It would be a more robust way to secure sales
The launch of their first consumer product, AirBar, is very timely as it coincides with Apple’s new “touch bar” on their Macbooks, so they’re riding the coat tails of Apple’s marketing as an introduction to the product. But it is still not widely known, so they need to be doing some more online marketing of their product. As they stated in their filing, they’ve never mass manufactured products before, and they’re about to find out how good they are at it.
Neonode has put themselves in a very interesting position. If they’re successful at marketing AirBar and PC users adopt this in lieu of Macbook with touchbar functionality, they can leverage their presence in the consumer market to launch new products using their optical technology, especially in the augmented reality/virtual reality space. It’s promising that they’re developing a human interface product with tier 1 automotive OEMs at the moment, but this will take 4-5 years as they said. If they’re smart, they’re probably working on an AR/VR product development as well, but this is also going to take at least a few years. So, the company can go down a few paths from this point on as I see it:
- Continue to supply optical touch technology to OEMs, aggressive sales efforts in existing industries including automotive, computer, printer, e-book reader, etc, but also in new areas in development including AR/VR, AI. A few other industries I’m thinking they could penetrate with touch functionality are fitness & gym equipment, health care/biotech medical devices, and smart home products to name a few.
- Continue to supply to OEMs but focus efforts on becoming a consumer brand, starting with AirBar. They could have a series of products ready to launch in successions.
- Get acquired by a computer electronics company, with some potential suitors being: Apple, Microsoft, Sony, Samsung.
- Get acquired by an ancillary consumer electronics hardware company such as Logitech, Razer, Facebook’s Oculus.
Regardless of their path, I don’t see this company failing anytime soon. Even though they’re operating in a highly competitive space, they’ve positioned themselves very well in the market with OEM partnerships and there are ample opportunities for their technology to be used in various avenues.
After accounting for capex and likely scenarios in each year of their production and sales, Craft Brew’s valuation doesn’t look very appealing. Craft Brew was an incumbent in the recent craft brewery trend but is now struggling as this trendy niche has now become an oversaturated mainstream market. Can Craft Brew survive the influx of competition into this niche space?
Craft Brew Alliance (CBA) was formed in 2008 through a merger of Redhook Brewery (from Washington) and Widmer Brothers Brewing (from Oregon). They also added to their portfolio in the same year, Hawaii’s oldest and largest brewery, Kona Brewing Company. CBA has 5 brands:
- Kona Brewing Company
- Widmer Brothers Brewing
- Redhook Brewery
- Omission Beer – #1 beer in the gluten beer segment
- Square Mile Cider Company – #1 in hard cider in the Pacific North West
- Resignation Brewery (through theCHIVE.com) – first ever virtual brewery through an online media platform.
The original CEO from the merger, Terry Michaelson, transitioned out of the role in 2013 but has stayed on as a senior advisor. The CEO that took his place, Andy Thomas, has been with CBA since 2011.
CBA distributes to retailers through wholesalers in the Annheuser-Busch network, and more than 90% of their sales comes from this channel.
CBA is riding the wave of the craft brew trend, but competition in this space is fierce, due to low barriers to entry and a relatively high margin drawing attraction. Many local breweries can start with a business loan from the bank. In the last decade, the craft brew market has seen a double digit growth year over year. Craft brew now makes up ~21.7% of the total US beer market (as of Sep 2016). US craft beer production grew 20% CAGR from 2010-2015:
Source: WSJ Article
Breweries Association reported that in Dec 2015, the number of breweries in the US surpassed the previous record in 1873 with 4,144 breweries, many of which came online in the recent part of the decade. But, craft brew supply has now reached the demand and will likely start to see a plateau.
The larger brands (Boston Beer, Sierra Nevada, New Belgium) have become stagnant because of an overflow of volume in the marketplace, and the growth of the market is now led by local breweries driving the growth of the market as opposed to the large brands. The 2 driving forces left in this competitive market to out-win competition are quality/innovative beers (such as introduction of nitro-infused beer) and lowering prices. (Source: Bevindustry.com Article)
The overall volume shipment of barrels has decreased in the last 2 years since 2014 because of declining popularity of Widmer and Redhook brands.
- CBA’s Q3 10Q reported a 9month year to date production decline of -4% yoy for beer distributed through Annheuser-Busch network; total FY decline of -5%
- Repositioning Widmer and Redhook brands in 2017 will see a decrease in shipment volume but offset by an increase of Omission and Square Mile
- Kona’s expansion of the Hawaii brewery to come online in early 2018
- Contract brewing has been experiencing a decline offset by international sales
Even though overall volumes have decreased, net revenue has increased because of a higher average selling price from shifting from draft to packaged goods sold. The Company unfortunately probably won’t benefit much more beyond the current draft to packaged ratio, and in fact, recent quarterly filing saw a slight shift back to draft:
Therefore, a similar level of draft to packaged goods ratio and therefore a similar level of average selling price per barrel are assumed in deriving revenue.
The only noteworthy things to mention in the above valuation are:
- I believe that with the expansions and greater marketing efforts to rebrand their dying brands, SG&A spend will increase in 2017 over budget. Then, they could see losses and in 2018, initiate a cost-reducing strategy, which will drive the SG&A back down to slightly below normalized levels going forward.
- Capex in FY2016 was estimated to be between $17-$19 million as reported in their recent quarterly. Capex of $20 million is expected to expand Kona brewery in 2017. Assumed conservatively for other brewery improvements to be only an additional $3 million.
- The Company has been operating with a negative free cash flow.
Key Risks & Opportunities Summary
Widmer and Redhook brands have been around for a long time, but they never gained popularity outside of the Pacific North West (and a bit of lower West Coast). With a crazy influx of craft breweries in the last decade with local brands winning the hearts of beer fans in their communities, older brands just can’t keep up with the competition.
Kona at least brings something unique, because it comes from “overseas,” so it could maintain some traction. And, CBA was smart to introduce Omission and Square Mile – something unique to the table. Continuing to introduce innovative products will be key to survival.
It is slightly of concern that Annheuser-Busch is CBA’s exclusive distributor and that over 90% of their sales come from this partnership. But, it is not too alarming, because that’s just the nature of the business, and it is unlikely that A-B will suddenly raise their fees to ridiculous levels.
CBA’s capex levels have been pretty high and their expansion of the breweries for ~$20million a piece seems egregious. Their opportunity to fill the new increased capacity will come from increasing their international sales efforts and if they acquire or introduce a new unique brand.
Could we see CBA dismember their alliance of brands and either (1) operate as a lean company of one or two brands or (2) divest their underperforming breweries and position their more popular brands to be acquired by large brew companies like Boston Beer?
- Marketing agency/consultancy that helps clients strategize a marketing program to acquire new customers and increase customer retention rate by developing better existing customer relationships. In 2014, initiated new strategy and revised operation into 2 divisions:
- Customer Interaction: Analyze clients’ customers’ behaviors from their data and using the insight, create innovative multi-channel marketing programs. Includes the following services:
- Agency & Digital Services – Implement targeted marketing online for clients through search engine management, display, digital analytics, website development and design, digital strategy, social media, email, e-commerce, and interactive relationship management.
- Database Marketing Solutions and B2B Lead Generation – Marketing database solution tools that the clients can use to identify models that provide them the most profitable customer relationships and then apply those models to win new profitable customers and retain existing customers.
- Direct Mail – Digital printing, print on demand, advanced mail optimization, logistics and transportation optimization, tracking (including proprietary prEtrak solution), commingling, shrink wrapping, and specialized mailings. Also maintain fulfillment centers with custom kitting services, product recalls, and freight optimization allowing customers to distribute literature and other marketing materials.
- Contact Centers – Teleservice workstations around the globe for inbound and outbound contact center services and support in many languages. Provide speech, voice and video chat, integrated voice response, analytics, social cloud monitoring, and web self-service.
- Trillium Software (Business sold – awaiting regulatory approval): global enterprise data quality solutions provider – industry specific (financial services, banking, retail, healthcare, manufacturing, risk professionals), global data profiling, data cleansing, enrichment, and data linking for e-business, Big Data customer relationship management, data governance, enterprise resource planning, supply chain management, data warehouse, etc. Fee from perpetual software licenses, annual maintenance and professional services.
- Successor to a newspaper business started by Houston Harte and Bernard Hanks in Texas in early 1920s. Company went public in 1972; became private in a leveraged buyout in 1984, and listed in NYSE again in 1993.
- Largest client comprised 6% of total revenues in 2015; largest 25 clients represented 57% of revenues in 2015.
- Valued at $1.73/share, put on Watchlist, with a reassessment of the Company when the sale of Trillium Software is completed and debt is paid down with the cash from the sale of Trillium. Key risks followed by recommendations below outline how the Company could bounce back to profitability and growth. The Company has the potential to turn itself around into a growth stock if they overcome key challenges they are encountering that’s causing the Company to be unprofitable (see Key Risks and the Recommendations sections).
- Company has seen better days. Its stock performed significantly lower than the Russell Micro Cap Technology Index over the last 52 weeks, currently trading at $1.52 with a peak of $3.73 in March 2016.
Source: Google Finance (Link)
- Discounted cash flow valuation (as of 12/3/2016) of base case yields $1.83/share:
- Long term growth rate of 5% assumed, which is between 3.9% of average projected nominal US GDP growth and 5.6% average projected nominal industry (online and traditional advertising) growth
- Discount rate of 15% used using weighted-average cost of capital build-up from risk-free rate of 2.7% (20-year US treasury as of the valuation date), its comparable peers’ data and company-specific borrowing rate and company-specific risk
- Using 0.3x trailing P/S multiple and 0.4x forward P/S multiple for US microcap advertising peers, relative valuation of Harte Hanks is $1.62/share:
Key Risks & Challenges
- Sales forces and sales groups are solution-specific to sell individual products and solutions. Direct sales forces, with industry-specific knowledge and experience, emphasize cross-selling of full range of marketing services, but are assigned to each sector to specific clients in that industry. There are some verticals that are not increasing in demand – retaining the industry-specific salesforce may cost more than the revenue able to fulfill in those verticals. Time to think about getting out of the non-profitable verticals. Is there also a way to consolidate the services or verticals such that the salesforce can be used laterally across verticals?
- Highly competitive space with rapid technological change, high turnover of client personnel who make buying decisions. Hard to retain client loyalty for this reason. Revenue depends heavily on salesforce.
- 22 domestic offices and 6 international offices – are they all strategically located and necessary?
- 5,529 full-time employees and 44 part-time employees, of which 2,333 are based outside of the US, primarily in the Philippines. Presumably for the contact center segment. What is the margin for the contact center? Not a business that sets HH apart from its competition – a pure margin business by numbers. Worth continuing to provide as a service to its clients?
- Clients are heavily concentrated – is the salesforce reaching its breadth of customers?
- Direct mail – declining business with postal rates not supportive of profitability.
- Very highly levered, but with completion of the sale of Trillium Software business, Company plans to pay down the debt.
- Dividends discontinued, but it’s not a risk. The fact that the company had introduced it means it could re-introduce it in the future when it’s profitable again.
- Labor as a percentage of revenue has grown from 46% in 2011 to 53% in 2015. 2014 recorded high labor costs due to severance. Stock compensation was the same in 2015 as 2013. Outsourced costs may contribute to higher labor costs, but could be offset from divestiture of Trillium.
Key Opportunities for Upside
- Although Trillium Software business was operating at a profitable margin, its success is highly dependent on maintenance and continued advancement of technology to keep up with competition. Talent fees for software development is a risk that could lead to bleeding cash. The successful completion of the sale of Trillium Software could allow HH to save on costs.
- Being a historical company that’s been around, the success of its offerings depends on acquisitions of target companies that are not only synergistic but that is in the growth stage with new technology. HH is relatively active in making the calls to divest when necessary and be on the prowl of acquisitions. Hopefully in the next year, we will see HH acquire a programmatic advertising company that has an impressive list of existing clients.