Investment Pitches

Pitch Summary:
U.S. Bancorp shares are ensnared in the bank-run panic that began late in the quarter. Two large banks failed in early March as depositors rushed to withdraw money on concerns that the banks would suffer from liquidity problems. That's a self-fulfilling prophecy, of course, but in the case of the two banks, it was prompted by the revelations of utter mismanagement of their securities portfolio. Bank models are, essentially, to borrow short and lend long. This sounds dangerous of course, and it would be if not for the deposit guarantee provided by the FDIC. The history of the U.S. banking system can be divided into two eras – pre-FDIC, when bank runs were fairly common, and post-FDIC, when bank runs have been close to non-existent. However, FDIC protection has its limits, and it remains incumbent on management to properly manage its assets and liabilities. The two banks in question didn't do that. By taking down the share prices of all banks, we think investors are shooting first and asking questions later; they are not distinguishing between the strong and the weak. U.S. Bancorp, as one of the largest and best-managed banks in the country, appears to be a net beneficiary so far of the panic among some depositors, with a pick-up in net deposit inflows in recent weeks. We don't dismiss the probability of industry contagion – in a true nationwide panic, the big banks will suffer along with the small banks, and the well-managed ones will suffer along with the badly-managed ones. But we think the odds of that are quite small, and recent steps by federal regulators confirm that they will do everything in their power to prevent such a scenario, given the calamitous impact that it would have on our economy. We tightly manage this risk by limiting our exposure to the banking sector.

BSD Analysis:
Madison's managers view U.S. Bancorp as a high-quality bank unfairly caught up in broader banking sector panic following the March 2023 bank failures. They argue that investors are indiscriminately selling all bank stocks without distinguishing between well-managed institutions like USB and the poorly managed banks that actually failed due to securities portfolio mismanagement. The fund highlights USB's status as one of the largest and best-managed banks in the country, noting that it has actually benefited from deposit flight with net inflows in recent weeks. While acknowledging contagion risk, they believe the probability of a nationwide banking panic is low given regulatory backstops. The managers demonstrate disciplined risk management by limiting overall banking sector exposure while maintaining conviction in USB's superior management and competitive position. This represents a classic contrarian value opportunity where temporary sector-wide fear has created attractive entry points in quality franchises.

Pitch Summary:
During the quarter, we established a new position in Oracle as the company's growth profile has improved from a low single digit revenue growth company to high single digits. The key drivers of improved growth come from the company's Software-as-a-Service applications and the Oracle Cloud Infrastructure (OCI). Oracle's software applications power the Enterprise Resource Planning and Human Capital Management functions of large and small-to-medium sized businesses and are growing in the mid-teens. OCI is a differentiated cloud infrastructure provider that is gaining share due to its strong value proposition in speed, performance, and security. In addition, we believe that the company's operating margins will improve from scale benefits in OCI and cost efficiencies from its recent acquisition of Cerner.

BSD Analysis:
The manager initiated a new position in Oracle based on the company's transformation from low single-digit to high single-digit revenue growth, driven by cloud transition success. The investment thesis centers on two key growth drivers: SaaS applications growing in the mid-teens and Oracle Cloud Infrastructure (OCI) gaining market share through superior performance characteristics. Oracle's enterprise software applications in ERP and HCM serve mission-critical functions for businesses of all sizes, creating sticky recurring revenue streams. OCI's differentiated value proposition in speed, performance, and security enables share gains in the competitive cloud infrastructure market. The recent Cerner acquisition provides additional scale benefits and cost synergies that should drive margin expansion. This combination of accelerating growth, market share gains, and margin improvement creates a compelling transformation story for the legacy software giant.

Pitch Summary:
Healthcare insurance stocks have been weak due to a ruling by CMS (Center for Medicare & Medicaid Services) in late January where claw back payments totaling $4.7 billion were due from insurers that overcharged Medicare. The claw back payment period goes back to 2011. We remain confident that UnitedHealth Group can deliver long term double digit earning per share growth from its value-based care offerings for both its government and private sector customers.

BSD Analysis:
The manager maintains a bullish long-term view on UnitedHealth Group despite sector headwinds from CMS claw back payments totaling $4.7 billion related to Medicare overcharges dating back to 2011. This regulatory issue represents a one-time adjustment rather than a structural challenge to the business model. The investment thesis centers on UnitedHealth's value-based care capabilities, which provide sustainable competitive advantages and growth drivers. The company's integrated model combining insurance, pharmacy benefits, and healthcare services creates synergies and cost efficiencies that support margin expansion. Value-based care arrangements with both government and private customers align incentives and drive better outcomes while generating superior returns. The manager's confidence in double-digit EPS growth reflects UnitedHealth's market leadership, diversified revenue streams, and ability to capitalize on healthcare industry transformation trends.

Pitch Summary:
Danaher has been trading lower since it reported fourth quarter earnings in January. The company lowered Covid-19 related sales for 2023 from $500 million to $150 million as pharmaceutical companies are switching their focus away from pandemic vaccines and therapeutics to the research and development of new drugs. Danaher's pharmaceutical customers will be working through existing inventory before starting to order new products. We remain confident in Danaher's strong competitive position providing innovative products to Life Science companies.

BSD Analysis:
The manager maintains a bullish stance on Danaher despite near-term headwinds from declining COVID-19 related revenues, which were reduced from $500 million to $150 million for 2023. The current weakness reflects a cyclical inventory normalization as pharmaceutical customers work through existing stock before resuming normal ordering patterns. Importantly, the underlying demand shift from pandemic-focused work to new drug R&D represents a return to Danaher's core growth markets rather than a structural decline. The manager's confidence centers on Danaher's competitive positioning and innovative product portfolio serving life sciences companies. The company's market-leading tools and services are essential for pharmaceutical R&D, creating recurring revenue streams and pricing power. This temporary cyclical downturn provides an attractive entry point for a high-quality franchise with strong long-term fundamentals.

Pitch Summary:
Eli Lilly was down during the first quarter after a strong 2022. Fourth quarter earnings were slightly better than expected but both Trulicity and Mounjaro, key growth drivers, missed expectations. The earnings per share beat was driven by higher gross margins and a lower tax rate. Mounjaro has additional obesity data reading out in mid-2023 along with the expected obesity approval in the second half of the year. Lilly is also working on next generation treatments for diabetes and obesity, with a new GGG and oral GLP-1 in the clinic which will report phase II data in mid-2023. Finally, donanemab for Alzheimer's has an important trial reading out in 2Q 2023 which should be supportive of full FDA approval in early 2024.

BSD Analysis:
The manager maintains a bullish view on Eli Lilly despite near-term headwinds from disappointing Trulicity and Mounjaro sales in Q4. The investment thesis centers on multiple upcoming catalysts that could drive significant value creation. Mounjaro's obesity data readout in mid-2023 and expected approval in the second half represent major market expansion opportunities in the large obesity treatment market. The pipeline strength is further demonstrated by next-generation diabetes and obesity treatments, including a new GGG and oral GLP-1 with Phase II data expected mid-2023. Additionally, donanemab for Alzheimer's disease represents a potential blockbuster opportunity with trial results due in Q2 2023 and possible FDA approval in early 2024. The combination of near-term catalysts and pipeline depth supports the long-term growth trajectory despite current execution challenges.

Pitch Summary:
US Bancorp stock suffered amidst the bank crisis in March. We continue to have a positive view on US Bancorp. First of all, we like the Union Bank acquisition and see strong accretion from this acquisition over the next two years and beyond. More importantly, US Bancorp has an A+ rated balance sheet by Standard & Poor's, very strong liquidity coverage ratio (122%), ample access to additional funding sources and has a culture of conservative lending. We have added to our US Bancorp position.

BSD Analysis:
The manager maintains a strong bullish stance on US Bancorp despite sector-wide banking concerns in March, using market weakness as an opportunity to add to the position. The investment thesis centers on the Union Bank acquisition, which is expected to provide meaningful earnings accretion over the next two years and beyond. Most importantly, the manager emphasizes US Bancorp's superior credit quality with an A+ S&P rating, strong liquidity coverage ratio of 122%, and conservative lending culture that differentiates it from troubled regional banks. The combination of acquisition synergies and defensive balance sheet characteristics positions the bank to outperform peers during periods of financial stress. The manager's decision to increase the position demonstrates high conviction in the bank's ability to navigate challenging conditions while benefiting from strategic growth initiatives.

Pitch Summary:
Target reported a solid fourth quarter, exceeding expectations. Same store sales were positive with better-than-expected margins resulting in earnings for the quarter ahead of expectations. At the same time, Target provided guidance for 2023 that was below expectations, which sets them up to meet or exceed expectations after a difficult 2022. Target expects same store sales for 2023 to range from a low single digit decline to a low single digit increase, with operating margins in the 4.5% to 5% range. We continue to view Target as well positioned for long-term growth with its strong owned brand strategy and omnichannel offerings.

BSD Analysis:
The manager presents a bullish thesis on Target based on strong Q4 execution that exceeded expectations on both sales and margins. The conservative 2023 guidance creates a favorable setup for the company to meet or beat expectations, potentially driving multiple expansion after a challenging 2022. Target's same-store sales guidance of low single-digit decline to low single-digit growth, combined with 4.5-5% operating margin targets, suggests disciplined execution and margin protection. The long-term investment case centers on Target's differentiated owned brand strategy and omnichannel capabilities, which provide competitive advantages in retail. These strategic assets enable better margins, customer loyalty, and market share gains. The manager's confidence in Target's positioning reflects the company's ability to navigate retail headwinds while investing in long-term competitive advantages.

Pitch Summary:
TE Connectivity has performed well with continued strength in its Auto business (60% of sales) as content per vehicle continues to grow and drive revenues. TE's Communications segment has experienced softness as well as in some parts of the Industrial segment. Over the long-term, we continue to see growth for application-specific connectors and sensors in transportation as the base of EV's grow, as well as in industrial, medical, energy and communications which leaves TE well positioned.

BSD Analysis:
The manager maintains a bullish long-term view on TE Connectivity despite near-term headwinds in communications and industrial segments. The automotive business, representing 60% of sales, continues to drive growth through increasing content per vehicle, a secular trend supporting higher revenues. The electric vehicle transition creates additional opportunities for specialized connectors and sensors, expanding TE's addressable market. The company's expertise in application-specific solutions across transportation, industrial, medical, energy, and communications markets provides diversification and growth optionality. TE's engineering capabilities and customer relationships in harsh environment applications create competitive moats. While cyclical pressures affect some segments, the structural growth drivers in automotive electrification and industrial automation support the long-term investment thesis.

Pitch Summary:
Qualcomm stock was volatile during the quarter but moved higher in March. Qualcomm fundamentals have been hurt over the last several quarters due to excess smartphone inventories. Management messaged in their recent conference call that inventory issues peaked in their first fiscal quarter and should begin to moderate. They are also seeing excess inventory in their IoT (Internet of Things) business, which will take a couple of quarters to work through. By our estimates, Qualcomm fundamentals should trough in the June quarter with a second-half recovery. Qualcomm remains well positioned to diversify away from smartphones with long-term growth in Auto and IoT.

BSD Analysis:
The manager presents a cyclical recovery thesis for Qualcomm, identifying the current period as a fundamental trough driven by excess smartphone and IoT inventories. Management's guidance that inventory issues peaked in Q1 and will moderate supports the timing of a potential turnaround. The manager's estimate of a June quarter trough with second-half recovery suggests near-term catalysts for performance improvement. Importantly, the long-term thesis centers on diversification beyond smartphones into automotive and IoT markets, which offer higher growth and less cyclical revenue streams. Qualcomm's wireless technology leadership and patent portfolio provide competitive advantages in these emerging markets. The combination of cyclical recovery and structural diversification creates both near-term and long-term value drivers for the investment.

Pitch Summary:
Alphabet reported a mixed fourth quarter but messaged a renewed focus on its cost structure. Google has already announced a headcount reduction as well as a reduction to its real estate footprint with additional cost savings benefits to be realized next year. Google also discussed its position on Artificial Intelligence (AI). It has been investing in this area for over six years and uses its AI capabilities across search, YouTube, and its ad quality systems. We remain comfortable with Google's position here.

BSD Analysis:
The manager maintains a bullish stance on Alphabet despite mixed quarterly results, emphasizing the company's proactive cost management initiatives including headcount reductions and real estate optimization. The focus on operational efficiency should drive margin expansion and earnings growth. Critically, the manager highlights Google's six-year investment in artificial intelligence, positioning the company advantageously in the AI revolution. The integration of AI capabilities across core platforms like search, YouTube, and advertising systems demonstrates practical application rather than speculative investment. This technological moat combined with cost discipline creates a compelling investment thesis. The manager's comfort with Google's AI positioning suggests confidence in the company's ability to monetize these capabilities and defend market share against emerging competitors.

Pitch Summary:
Analog Devices (ADI) performed well with a strong January quarter result (October fiscal year). ADI's core end markets of auto and industrial (75% of revenues) remain strong, up 30% and 25% year over year, respectively. Communications was also solid, up 18% while consumer was down 6% year over year.

BSD Analysis:
The manager highlights Analog Devices' strong quarterly performance driven by robust growth in its core automotive and industrial segments, which comprise 75% of revenues and grew 30% and 25% year-over-year respectively. The diversified end-market exposure provides stability, with communications also showing solid 18% growth offsetting weakness in consumer markets. ADI's positioning in secular growth markets like automotive electrification and industrial automation supports the bullish thesis. The company's analog and mixed-signal expertise creates competitive moats in these specialized applications. Strong execution in key verticals demonstrates ADI's ability to capitalize on multi-year technology trends. The manager's confidence appears well-founded given the company's market leadership and exposure to structural growth drivers.

Pitch Summary:
Digi International, Inc. (DGII): DGII has been a pioneer in wireless communication technology and has over 35,000 customers worldwide and owns more than 160 different patents. The company operates two primary segments: Products & Services and Solutions. The Products & Services division primarily sells hardware to enterprise clients to provide business continuity. The Solutions division offers a full suite of solutions for asset monitoring. The Solutions division revenues are recurring as customers typically sign three to five-year subscription contracts and they have been installing its sensors and control hubs in 3000-4,000 new sites per quarter for customers such as CVS, Olive Garden and Tim Hortons. We initially purchased DGII for our Micro Cap portfolio in 1Q20 and have now added it to the Small Cap portfolio in 1Q23.

BSD Analysis:
Conestoga presents a compelling bull case for Digi International based on its established market position and recurring revenue model. The manager highlights DGII's pioneer status in wireless communication technology, supported by a substantial patent portfolio of 160+ patents and a broad customer base of 35,000 clients. The investment thesis centers on the company's dual-segment approach, with the Products & Services division providing hardware for business continuity and the Solutions division generating recurring revenues through 3-5 year subscription contracts. The Solutions segment's growth trajectory is particularly attractive, with consistent quarterly installations of 3,000-4,000 new sites for major enterprise customers including CVS, Olive Garden, and Tim Hortons. This recurring revenue model provides predictable cash flows and demonstrates strong customer retention. The manager's confidence is evidenced by their decision to graduate the position from their Micro Cap to Small Cap portfolio, indicating successful execution and growth in market capitalization since their initial 2020 purchase.

Pitch Summary:
Digi International, Inc. (DGII): DGII has been a pioneer in wireless communication technology and has over 35,000 customers worldwide and owns more than 160 different patents. The company operates two primary segments: Products & Services and Solutions. The Products & Services division primarily sells hardware to enterprise clients to provide business continuity. The Solutions division offers a full suite of solutions for asset monitoring. The Solutions division revenues are recurring as customers typically sign three to five-year subscription contracts and they have been installing its sensors and control hubs in 3000-4,000 new sites per quarter for customers such as CVS, Olive Garden and Tim Hortons. We initially purchased DGII for our Micro Cap portfolio in 1Q20 and have now added it to the Small Cap portfolio in 1Q23.

BSD Analysis:
Conestoga presents a compelling bull case for Digi International based on its established market position and recurring revenue model. The manager highlights DGII's pioneering role in wireless communication technology, supported by a substantial patent portfolio of over 160 patents and a broad customer base exceeding 35,000 clients. The investment thesis centers on the company's dual-segment approach, with the Products & Services division providing hardware for business continuity and the Solutions division generating predictable recurring revenues through 3-5 year subscription contracts. The Solutions segment's consistent deployment of 3,000-4,000 new sites quarterly for major enterprise customers like CVS, Olive Garden, and Tim Hortons demonstrates strong market traction and scalability. The manager's decision to promote DGII from their Micro Cap to Small Cap portfolio after three years suggests confidence in the company's growth trajectory and market cap expansion potential.

Pitch Summary:
Nilorn designs and delivers tags and labels for European clothing brands. The company combines just-in-time delivery with quality design that can elevate the customer's products in the eyes of the end consumer. Management uses free cash flow to grow the business and pay a dividend. The company's returns on capital are about 30%.

BSD Analysis:
The manager presents a compelling value proposition for Nilörn Group based on exceptional capital efficiency and strong cash generation. The 30% return on capital is particularly impressive, indicating highly efficient use of shareholder capital and strong competitive positioning. The business model combines operational excellence through just-in-time delivery with value-added design services that enhance customer brand perception. This dual value proposition suggests pricing power and customer stickiness in what could otherwise be a commoditized market. The company's ability to both reinvest for growth and pay dividends demonstrates strong cash flow generation and disciplined capital allocation. The focus on European clothing brands provides geographic diversification within a stable, developed market. The manager's emphasis on returns on capital and cash flow characteristics suggests this is viewed as a high-quality compounding opportunity. The combination of growth investment and dividend payments indicates a mature, profitable business model with sustainable competitive advantages.

Pitch Summary:
GetBusy provides online document exchange systems—primarily for accountants in the U.K.—and its Australian/New Zealand and U.S. business are growing well. GetBusy spun out of Reckon in August 2017, and has continued to grow since then. GetBusy does not earn money, investing through higher expenses to grow its existing businesses and attempting to launch new products. The underlying businesses are profitable and sustainable in the U.K., and potentially in the U.S. and Australia/New Zealand.

BSD Analysis:
The manager presents a growth-oriented thesis on GetBusy, emphasizing the company's expansion beyond its core UK accounting market into Australia/New Zealand and the US. The pitch highlights the strategic investment phase where the company is prioritizing growth over profitability through higher operational expenses and new product development. The manager appears confident in the underlying business model's sustainability and profitability in the UK market, viewing current losses as temporary investments in future growth. The international expansion strategy suggests significant market opportunity beyond the established UK base. The spin-out history from Reckon in 2017 provides context for the company's independent growth trajectory. This appears to be a long-term value play on a profitable core business model with international scaling potential. The manager's inclusion in the concentrated portfolio (>5% position) indicates high conviction despite current unprofitability.

Pitch Summary:
We initiated a position in Louisiana-Pacific Corporation (LPX) during the quarter. LPX is a leading producer of oriented strand board (OSB) and siding, primarily in North America. In recent years, management has transformed the business from a focus on producing commodity OSB products into a "building solutions" company producing more value-add OSB products and engineered wood siding. The company is organized into two divisions – siding solutions and OSB. LPX's siding solutions segment produces a full line of engineered wood siding and related products. These products generally offer for homeowners superior aesthetics and performance properties and, for contractors, reduced labor cost and better ease of installation relative to competing alternatives. In addition, they have superior sustainability characteristics to most other siding substrates. As partial proof of its value proposition and growing market acceptance, LPX siding has grown 60% over the last two years, greatly outperforming U.S. single-family housing starts which grew just 1.4% over these two years. We believe LPX's siding business has barriers to entry that will make it hard for new competitors to replicate their success, including the relative capital efficiency of LPX's siding plants (which leveraged existing OSB assets), a large specialty sales force and growing national distribution. Technical know-how and the wherewithal to take on warranty liability also serve as barriers to entry. The economic profile of LPX's siding business and its historic growth profile are approaching best-in-class for the building products companies we have studied. Our expectation is that this business will continue to outperform the broader housing market as more potential customers become aware of the benefits of its products relative to alternatives. LPX's OSB segment owns the number two market share position in North America for OSB. OSB is a type of engineered wood panel commonly used in construction as sheathing for walls, roofs, and floors, among other uses. In many cases, OSB is a substitute for plywood and its market share relative to plywood has grown in recent years due to OSB's enhanced performance characteristics and relative cost effectiveness. Much of the OSB produced is considered a commodity product subject to price risk, depending on the prevailing supply and demand balance. LXP's strategy has been to shift its OSB asset base toward siding production and toward more specialized OSB products that add value for customers and reduce this commodity price risk for LPX. In 2022, specialized OSB products made up ~48% of LPX's OSB sales volume, up from ~24% in 2010. LPX management has a strong track record, in our opinion. They have pivoted the business toward the highest value area in siding and methodically moved away from lower value activities. Costs have been tightly controlled, and the balance sheet has been managed conservatively (at year-end the company was in a net cash position). After investing significant sums to expand the siding business, management has returned excess cash to shareholders in a major way - shares outstanding have decreased by approximately 50% since 2017, when the current CEO was promoted. From a valuation standpoint, we believe the market is likely underappreciating the quality of the company's siding business and its management team and is, of course, more focused on the near term, whereas we are focused on the medium to long term in our underwriting. We believe LPX's niche dominance, financial flexibility and management adaptability position the company well to overcome today's housing market uncertainty and produce long-term reward for shareholders.

BSD Analysis:
SouthernSun initiated a new position in Louisiana-Pacific, viewing the company's transformation from commodity OSB producer to value-added building solutions provider as a compelling investment opportunity. The siding solutions segment has demonstrated exceptional growth with 60% expansion over two years, significantly outpacing housing starts growth of 1.4%, indicating strong market share gains and product acceptance. Management has successfully created competitive moats through capital-efficient plant conversions, specialized sales force, national distribution network, and technical expertise that create barriers to entry. The economic profile of the siding business approaches best-in-class metrics among building products companies studied by SouthernSun. The OSB segment maintains the #2 North American market position while strategically shifting toward specialized products, with value-added OSB comprising 48% of sales volume in 2022 versus 24% in 2010. Management's track record includes disciplined cost control, conservative balance sheet management with net cash position, and aggressive capital returns with 50% share count reduction since 2017. SouthernSun believes the market underappreciates the quality transformation and management capabilities, focusing excessively on near-term housing market concerns rather than the company's long-term competitive positioning and financial flexibility.

Pitch Summary:
WestRock Company (WRK), a leading provider of corrugated and consumer packaging in the U.S., reported fiscal first quarter results that were below expectations and was a top detractor for the quarter. Strong pricing drove 1% sales growth in the corrugated packaging segment and 7% growth in the consumer packaging segment, but sales in the global paper segment declined 17% in the quarter due to weak export demand for containerboard. Consolidated EBITDA was down 4% for the quarter, impacted by weakness in the global paper segment and economic downtime taken throughout the mill system. WestRock ended its first fiscal quarter with net debt to trailing 12-months EBITDA of 2.35x, slightly above its targeted range of 1.75-2.25x, driven primarily by the acquisition of the remaining interest in Grupo Gondi. While macroeconomic weakness continues to weigh on demand for packaging, we believe WestRock operates a resilient business model with exposure to a diverse range of end markets. The business has generated over $1 billion in free cash flow in each of the last seven years, and we believe they will exceed that level again during fiscal 2023. Management has demonstrated a commitment to improving returns on capital by shuttering older, inefficient mills, selling its uncoated recycled board mills, and increasing exposure to the growing Latin American market through its acquisition of Grupo Gondi. We believe that shareholders will benefit from these efforts over the long term.

BSD Analysis:
SouthernSun maintains a constructive view on WestRock despite disappointing quarterly results, emphasizing the company's resilient business model and diversified end-market exposure. While the global paper segment experienced significant weakness with 17% sales decline due to weak containerboard export demand, the manager highlights positive pricing momentum in corrugated packaging (1% growth) and consumer packaging (7% growth) segments. The company's consistent free cash flow generation of over $1 billion annually for seven consecutive years demonstrates the underlying strength of the business model and cash conversion capabilities. Management's strategic portfolio optimization through mill closures, asset sales, and the Grupo Gondi acquisition reflects disciplined capital allocation focused on improving returns on invested capital. The slight elevation in net debt to EBITDA ratio to 2.35x, above the target range of 1.75-2.25x, is primarily attributed to the Latin American expansion strategy rather than operational deterioration. SouthernSun views the current macroeconomic headwinds as temporary and expects the company's diversified platform, operational improvements, and geographic expansion to drive long-term shareholder value creation. The manager's confidence is anchored by WestRock's defensive characteristics and management's proven ability to navigate cyclical downturns.

Pitch Summary:
Darling Ingredients (DAR), was the top detractor for the quarter. A global leader in renewable energy and sustainable food and feed ingredients, DAR delivered strong year-end results with a record $1.541 billion in EBITDA despite margin pressure from the company's recent acquisition of Valley Proteins and fires at two rendering facilities. The company ambitiously acquired three companies in 2022, Op de Beeck in Belgium, Valley Proteins in the U.S. and FASA Group in Brazil. Darling just completed its announced acquisition of Gelnex on 3/31/2023, and are on track to complete the announced acquisition of Miropasz by the third quarter of this year. Darling has furthermore deployed capital at its Diamond Green Diesel facility in Port Arthur, Texas, increasing renewable diesel production to 1.2 billion gallons per year. These investments have unsurprisingly increased the company's debt ratio to slightly over 3x, but have also further strengthened Darling's vertical supply chain integration and market presence to an impressive degree. Finally, the company announced in late January that DGD will invest $315 million in a Sustainable Aviation Fuel (SAF) project at the Port Arthur plant. Upon completion in 2025, the plant will have the capability to upgrade 50% of its current 470 million gallon annual production capacity to SAF. In a global market seeking to decarbonize, Darling addresses this critical need while processing 1 out of every 7 animals into food ingredients, feed ingredients and renewable energy. We continue to be impressed with management's ability as well as their track record to capitalize on opportunities and enhance optionality to ultimately drive value over the long term.

BSD Analysis:
Despite being a top detractor in the quarter, SouthernSun maintains strong conviction in Darling Ingredients' long-term transformation into a renewable energy leader. The company delivered record EBITDA of $1.541 billion while executing an aggressive acquisition strategy, completing three major deals in 2022 and two additional transactions in 2023 to strengthen vertical integration and global market presence. Management's strategic capital deployment at the Diamond Green Diesel facility has increased renewable diesel production capacity to 1.2 billion gallons annually, positioning the company as a major player in the energy transition. The announced $315 million Sustainable Aviation Fuel project represents significant optionality, with capability to convert 50% of current production to SAF by 2025. While the acquisition spree has elevated the debt ratio to slightly above 3x, SouthernSun views this as temporary given the company's strong cash generation and strategic positioning. The manager emphasizes Darling's unique market position processing one out of every seven animals globally, creating a sustainable competitive moat in the decarbonization theme. Management's proven track record of value creation through strategic investments and operational excellence supports the long-term investment thesis despite near-term headwinds.

Pitch Summary:
The Brink's Company (BCO), a global leader of cash and valuables management, digital retail solutions and ATM managed services, was the top contributor this quarter, driving annual organic growth up 12% year-over-year and annual organic operating profit up 23% year-over-year. Notably, the company delivered impressive gains in the Digital Retail Solutions (DRS) business with organic revenues up ~25% year-over-year and ATM Managed Services (AMS) business with organic revenues up ~50% year-over-year. The DRS and AMS businesses make up ~16% of overall company revenue and are key areas of strategic opportunity for further global expansion and improved operational efficiencies with these higher-margin services. Brink's is guiding for further growth in 2023, expecting revenues between $4,800 million to $4,950 million, a 6-8% increase over 2022, and an operating margin expansion of another 100 bps at midpoint of guidance range to about 13.1%. We have spent considerable effort getting to know the relatively new management team over recent quarters and believe Brink's has the right team for the task at hand. The market seems to question whether cash will survive long term and the question is a fair one. In our minds, and more importantly what we see in the data, is that cash will be around for quite some time and that Brink's has a solid foundation to generate real organic cash flow growth for years to come. All of this, combined with wise capital allocation, should deliver good value to shareholders.

BSD Analysis:
SouthernSun expresses strong conviction in Brink's transformation story, emphasizing the company's impressive organic growth of 12% and operating profit expansion of 23% year-over-year. The manager highlights the exceptional performance of higher-margin growth segments, with Digital Retail Solutions growing 25% and ATM Managed Services surging 50%, representing strategic diversification beyond traditional cash management. Despite these segments comprising only 16% of revenues, they offer significant expansion opportunities and operational leverage. Management's 2023 guidance projects continued momentum with 6-8% revenue growth and 100 basis points of margin expansion to 13.1%. SouthernSun has developed confidence in the new management team through extensive due diligence and believes they possess the capabilities to execute the strategic transformation. The manager directly addresses market skepticism about cash's long-term viability, asserting that data supports cash persistence and Brink's ability to generate sustainable organic cash flow growth. The combination of strategic positioning, margin expansion, and disciplined capital allocation creates a compelling value proposition for shareholders.

Pitch Summary:
Watsco Inc. (WSO), the largest distributor of air conditioning, heating and refrigeration products in North America, was the top contributor this quarter, delivering record sales (+5%) and adjusted EPS (+16%) in the fourth quarter and capping off the second consecutive year of strong growth. Although the pace of growth will likely moderate in 2023 as work from home and government stimulus tailwinds subside, roughly 80% of the business is driven by repair and replace and should be fairly stable whatever the economic environment. Management continues to focus on the long term, investing in proprietary technology solutions for contractors despite the near-term burden to profitability. We believe the company's long-term incentive plan, which grants restricted shares that only vest toward the end of an employee's career (usually age 62 or older), aligns management's interests with long-term shareholders and results in decisions like the tech investments mentioned above. The business remains conservatively capitalized with a net cash financial position, which should enable Watsco to pursue almost any-sized acquisition in the fragmented North American HVAC distribution market. Overall, we continue to believe Watsco has a long runway for growth, an owner-oriented culture and competitive advantages that increase with scale.

BSD Analysis:
SouthernSun maintains a bullish stance on Watsco, highlighting the company's dominant position in North American HVAC distribution and strong recent performance with record sales growth of 5% and adjusted EPS growth of 16%. The manager emphasizes the defensive nature of the business model, with 80% of revenues driven by repair and replacement activities that provide stability across economic cycles. Management's long-term focus is evident through continued technology investments despite near-term profitability impacts, supported by a unique incentive structure that aligns leadership with shareholders through restricted shares vesting at career end. The company's conservative capital structure with a net cash position provides significant acquisition firepower in the fragmented HVAC distribution market. SouthernSun views the combination of defensive cash flows, growth runway, owner-oriented culture, and scale-driven competitive advantages as compelling investment attributes. The manager expects continued market share gains and margin expansion as technology investments mature and acquisition opportunities arise.