Investment Pitches

Pitch Summary:
Alta Fox has followed EML Payments for over five years. It started as a payments company focused on the gift and incentive card program management industry. Alta Fox was briefly invested in the company with the thesis that the business operated in a uniquely profitable payments niche and the company was cheap on normalized earnings. The company "diworsified" in 2020, at the worst possible time, by acquiring PFS, a European payments company focused on reloadable cards that, unlike EML, owned its own European banking license. In general, Alta Fox is highly skeptical of transformative M&A, particularly at aggressive valuation multiples. We exited our shares at the time, but continued to watch the stock from the sidelines. The acquisition turned out to be worse than even we could have foreseen. In addition to acquiring the company at an excessive valuation level, PFS's largest operating company, PCSIL, nearly immediately began to run into serious regulatory problems, resulting in significantly negative free cash flow from this entity. EML's stock fell over 90% from peak levels. During this tumultuous period, EML was approached by both Bain and Nuvei offering to take the business private at materially higher prices - the Board declined to bring either offer to shareholders and the founding CEO resigned out of frustration. To add to boiling shareholder frustration, the Board appointed a new CEO from the existing Board without interviewing outside candidates. Alta Fox saw an opportunity. The company still had a very profitable and valuable gift & incentive card management business. Moreover, this business should be much more valuable today given the company is a significant beneficiary of higher interest rates, as they earn the majority of interest on the float of customers' card balances. However, we had zero faith in the current strategy of the Board and management team to fix the mess. Alta Fox became the company's second largest shareholder and worked behind the scenes to dramatically alter the company's future. Within six weeks of our official involvement, half of the Board had been replaced by me and two other recruited industry experts, the CEO resigned, and we began the extremely hard work to turn around a business with valuable parts but no cohesive direction. The day we joined the Board, the stock closed at $0.40 AUD/share. ~13 months later, Alta Fox successfully helped EML liquidate their problematic PCSIL business, launch a cost-cutting effort, and maximize interest revenue on their large and valuable float. This was a heavy lift that required late night Board meetings, numerous brainstorming sessions, and becoming intimately familiar with the European payment regulatory regime. Alta Fox exited our full position at $0.95, well over 100% higher than the day we joined the Board. The company, in our view, is also much healthier with stronger leadership than when we joined the Board.

BSD Analysis:
Alta Fox executed a successful activist turnaround at EML Payments, transforming a distressed payments company through board restructuring and strategic asset divestiture. The fund identified value in EML's core gift and incentive card management business, which benefits significantly from higher interest rates through float income generation. EML's problematic 2020 acquisition of PFS created regulatory issues and cash flow problems that drove the stock down over 90% from peak levels. Alta Fox's activist intervention resulted in board replacement, CEO resignation, and strategic focus on the profitable core business. The fund successfully helped liquidate the problematic PCSIL subsidiary and implement cost-cutting measures. Alta Fox achieved over 100% returns by exiting at $0.95 AUD versus their entry at $0.40 AUD. The turnaround demonstrates Alta Fox's operational expertise in distressed situations and ability to unlock value through governance improvements and strategic refocusing.

Pitch Summary:
Aubay is a family-owned French IT services company founded in 1997 and present in 7 European countries. The company generates just over half its turnover in France, with the remainder spread across other countries. Like LNA Santé, approximately 60% of Aubay is controlled by its founding families, ensuring alignment between management and shareholder interests. The company operates in various sectors, but has a strong exposure to the financial sector (60% of revenues), with clients such as BNP Paribas, Crédit Agricole and Banco Santander. Aubay's type of service, where reputation and certain switching costs play an important role, means that it has a very low client turnover. On the other hand, it is a business with limited capital employed and, therefore, high returns on invested capital, which has experienced a structural tailwind derived from the continuous digitization of processes and the drive for greater productivity across all industries. In the case of Aubay, the investment opportunity originates from the margin pressure that the sector is experiencing due to the halt in investments by some of its customers because of economic uncertainty. We believe that, at our acquisition prices, the market is discounting a permanent decline in the business's operating margins, as well as zero sales growth. In our opinion, Aubay's quality and positioning should allow it to recover its historical profitability and return to growth, which is why we decided to initiate this new position in the fund.

BSD Analysis:
Horos initiated a position in Aubay, a family-owned French IT services company, during a period of sector-wide margin pressure. The company operates across seven European countries with 60% revenue exposure to financial services clients including BNP Paribas, Crédit Agricole, and Banco Santander. Aubay benefits from high switching costs and strong client relationships, resulting in very low customer turnover and defensive revenue characteristics. The business model generates high returns on invested capital due to limited capital requirements and benefits from structural digitization trends across industries. Current weakness stems from client investment delays amid economic uncertainty, creating temporary margin compression. Management's 60% ownership ensures strong alignment with shareholders. The investment thesis centers on the market's overly pessimistic assumptions of permanent margin decline and zero growth, while Horos believes Aubay's quality positioning will enable margin recovery and renewed growth as client spending normalizes.

Pitch Summary:
This quarter, we also added the French companies LNA Santé and Aubay to our fund. The former is an entity founded in 1990 that manages nursing homes, rehabilitation and health centers, psychiatric clinics and home health care. LNA Santé manages 49 nursing homes in France (mostly) and Belgium, as well as 24 health clinics and 10 hospital care at home structures. It has also recently entered the Polish market with the acquisition of two rehabilitation centers. In total, the company has around 9,400 beds and 85 centers. The investment opportunity arises because the healthcare sector has experienced a succession of unprecedented problems, such as the coronavirus pandemic, malpractice scandals (which have not involved LNA Santé, but other companies such as Orpea) and significant cost inflation that they have not been able to counteract with price increases (many prices are set by regulation). All this, together with the historically high debt of companies operating in this industry due to their presumed stability, has led to bankruptcies and major stock market collapses. Nevertheless, LNA Santé's more conservative balance sheet management, as well as better practices in the management of its centers, have enabled it to weather this sector downturn with solid results, while taking advantage of the situation to pursue inorganic growth. Meanwhile, as in many other countries, the demographic dynamics in France are a structural tailwind for this business. Finally, it is important to note that the company is just over 60% controlled by the founding families and employees, which ensures a good alignment of interests with the rest of shareholders. All these factors, coupled with its sharp market correction in recent times, convinced us to invest in this company.

BSD Analysis:
Horos invested in LNA Santé, a French healthcare operator, capitalizing on sector-wide distress that created attractive entry valuations. The company operates 85 facilities with 9,400 beds across nursing homes, rehabilitation centers, and psychiatric clinics in France, Belgium, and Poland. While the healthcare sector faced unprecedented challenges from COVID-19, regulatory scandals, and cost inflation, LNA Santé differentiated itself through conservative balance sheet management and superior operational practices. The company avoided the scandals that plagued competitors like Orpea and maintained solid results during the downturn. Management has opportunistically pursued acquisitions during the crisis, expanding into Poland. The investment benefits from structural demographic tailwinds in aging European populations and strong governance with 60% family/employee ownership ensuring aligned interests. The thesis combines defensive healthcare exposure with recovery potential from current depressed valuations.

Pitch Summary:
The first new stake to highlight in the quarter is Acerinox. This stainless steel company, present in our Horos Value Iberia fund, has been penalized along with the rest of the sector by the weakness in demand in its European business for several quarters, both due to the fall in real demand, as well as that derived from the accumulation of inventories by its customers to cover the bottlenecks that have persisted in recent times. However, the situation seems to be coming to an end and we should at least anticipate a market bottom and a gradual recovery. Meanwhile, Acerinox has an enviable competitive position in the United States, where the dynamics are much more favorable for the company. Additionally, the company's robust financial health has enabled it to make value-accretive acquisitions in higher value-added segments. For example, in 2020 Acerinox acquired VDM Metals (a German manufacturer of high-performance alloy products and solutions) and, more recently, announced an agreement to purchase the U.S. company Haynes International (still pending approval by the various regulators). All these factors, combined with a very attractive valuation, led us to add the company to our international portfolio.

BSD Analysis:
Horos initiated a position in Acerinox, viewing the Spanish stainless steel manufacturer as attractively valued amid sector-wide weakness. The manager believes European demand headwinds are temporary, driven by inventory destocking and reduced real demand, with a market bottom and gradual recovery anticipated. Acerinox's competitive advantage lies in its strong U.S. market position where business dynamics remain favorable. The company's robust balance sheet has enabled strategic acquisitions in higher value-added segments, including VDM Metals in 2020 and the pending Haynes International acquisition. These moves demonstrate management's focus on expanding into more profitable specialty alloy products. The investment thesis centers on cyclical recovery potential combined with structural improvements from value-accretive M&A, all available at compelling valuations during the current downturn.

Pitch Summary:
Arrow Electronics ("ARW") is the world's largest authorized electronics components distributor (15% market share including larger shares in key markets) serving both electronics OEM customers and component suppliers. Most large component manufacturers buy directly from component suppliers. ARW has over 220,000 customers with a 90% customer retention rate and over 3,700 suppliers. ARW also distributes IT products such as servers, software, storage and computer security products. ARW has over 22,000 employees at over 219 sites located in 85 countries, including 39 distribution centers and 180 offices. Over 67% of its revenue is associated with products that include value-added services such as component design services and supply chain management services. The large portion of components associated with value-added services allows ARW to generate industry leading operating margins of 5.3%. Arrow Radio, the predecessor to ARW, was founded in 1935 on Radio Row in New York City. In 1946, ARW was incorporated. In 1961, ARW had $4 million in sales and went public via an IPO. In 1968, Mr. Glen, Green and Wadell bought a controlling interest in ARW and executed a leveraged roll-up strategy. By 1970, ARW was generating $9 million in sales and was the 12th ranked electronics distributor. At that time, Avnet was the largest. By 1979, ARW had $177 million in sales and was the second largest distributor listed on the NYSE. In 1980, Mr. Green and Glen were killed in a fire and Mr. Wadell stepped in as CEO until 1982 when Mr. Kaufmann became CEO. In the 1980's and 1990's, under Kaufman's leadership, ARW participated in more than 50 mergers and acquisitions transactions, expanded its range of products distributed and spread geographically around the world. In 1988, Arrow joint ventured (JVed) with Maruban to distribute components in Japan. In 1994, ARW entered the IT products distribution market with the purchase of Gates/FA. In the 2000s, under the leadership of Mr. Duval and Mitchell, ARW continued to purchase 17 distribution firms worldwide. In the 2010s, under the leadership of Mr. Long, ARW purchased an additional 40 distribution firms. In 2022, Mr. Keirnes became CEO, and is currently serving this role. ARW has been recognized over the past 11 years as one of Fortune's "Most Admired Companies". ARW has repurchased about 50% of its shares over the past 10 years most of that in the past 5 years as the pace of consolidation has slowed down. These repurchases have been accretive as ARW has sold between 5 and 10 times earnings over the past 10 years despite revenue and profit growth in-line with overall semiconductor sales growth. This has resulted in mid-teens EPS growth rates which I believe will continue if not accelerate as component demand increases through the end of the decade. Historically, ARW's revenue has grown with the growth in worldwide component sales. A distribution productivity measure is return on working capital, pre-tax profit/working capital. One of the best distributors in Europe, Bergman & Beving, has a goal of 45% pre-tax return on working capital. ARW's competitors have returns on working capital of 14% for Avnet and 24% for Manica. ARW's pre-tax return on working capital ranged from 20% to 30% over the past few years. This far exceeds its competitors and compares well even with the best among distributors. ARW has generated 20% to 30% free cash flow returns on tangible equity over the past 10 years. The ability to generate these returns is the result of high customer retention rates (higher than 90%) and high free cash flow conversion ((CFO less cap-ex/CFO) - 90%). These are characteristics of a business with a durable moat. During the 2010s and into the 2020s, ARWs return on equity increased as the acquisitions and divestitures generated high incremental returns on capital. ARW has five levers for cash flow growth: 1) electronic component market growth; 2) expanding the distribution franchise to new suppliers; 3) operational improvements; 4) paying down debt; and 5) distributing excess cash by buying back shares. The firm generates cash flows in excess of what is needed to modestly grow the firm, which is used to purchase firms in its target or adjacent markets. If no firms can be found that meet management's operational and valuation criteria, then management will buy back shares as the shares have typically traded at modest valuations reflecting modest organic growth. ARW currently spends about 10% of operational cash flow on capital expenditures leaving 90% for buy-backs and mergers and acquisitions. The business sector in which ARW competes is subject to economies of scale from distributing and value-added services and have route density characteristics with respect to the distribution of components. Evidence of the increasing scale is ARW'shigh margins compared to its authorized distributor competitors.

BSD Analysis:
The manager presents a compelling case for Arrow Electronics as a dominant player in electronic components distribution with significant competitive advantages. ARW commands a 15% global market share with over 90% customer retention rates and superior returns on working capital (20-30%) compared to competitors like Avnet (14%) and Manica (24%). The company has demonstrated exceptional capital allocation discipline, repurchasing 50% of shares over the past decade while maintaining mid-teens EPS growth rates. With 90% free cash flow conversion and returns on tangible equity of 20-30%, ARW exhibits characteristics of a durable moat business. The manager expects continued growth driven by AI and IoT trends, projecting 5% organic market growth with additional upside from acquisitions and share buybacks. At current valuations of 7x earnings, the stock appears significantly undervalued relative to the manager's $256 short-term target, implying substantial upside potential. The investment thesis centers on ARW's ability to compound returns through operational leverage, market consolidation, and disciplined capital allocation in a growing end market.

Pitch Summary:
Channel partners can track the company's business activity and consumption trends in real-time, offering an opportunity to front-run the financial announcement; the partner shares material nonpublic information and is unlikely to be controlled by the CEO or the management.

BSD Analysis:
Snowflake offers cloud-based data warehousing with consumption-based pricing. Bears argue growth is slowing as enterprise budgets tighten and hyperscalers like AWS, Azure, and Google expand competing services. Heavy stock-based compensation inflates adjusted profitability metrics, masking underlying dilution. While gross margins are strong, operating leverage remains unproven. With valuation embedding sustained hypergrowth, even modest deceleration could trigger sharp multiple compression.

Pitch Summary:
Amsterdam-based enterprise payments processor, Adyen, posted a quarterly update that was largely (at least in our opinion) business as usual. The company reported processed payment volume and net revenue growth of 46% and 21%, respectively. During the period, over 80% of the volume growth was derived from existing clients and volume churn was less than 1%. The pace of hiring has also slowed significantly to 26 net-new joiners in the quarter compared to 313 in the second half of 2023, which bodes well for margins moving forward. That said, Adyen shares sold off post the result as the market focused on the lower incremental take rates, a factor of having processed volumes relatively higher than net revenue growth. Management attributed the lower incremental take-rates to client mix, where the company experienced higher volume growth from larger merchants with lower rates, and not from any structural change in terms of how pricing is determined. In addition, management emphasised that the focus is to increase net revenue growth, not take rates. As the company has a relatively fixed cost base, every dollar added to net revenue improves the company's profit margins. With a longer-term view, the company's ability to gain wallet share and retain existing clients, coupled with a more normalised cost base, bodes well for future profitability and we remain patient holders.

BSD Analysis:
Lakehouse Capital maintains a bullish long-term view on Adyen despite short-term market concerns about take-rate compression. The manager emphasizes strong underlying business fundamentals with 46% payment volume growth and 21% net revenue growth, driven primarily by existing client expansion (80% of volume growth) and exceptional client retention (sub-1% churn). The significant deceleration in hiring from 313 to 26 net additions suggests improving operational efficiency and margin expansion potential. While the market focused negatively on lower incremental take-rates, management clarified this reflects client mix shifts toward larger merchants rather than structural pricing pressure. The fund appreciates management's focus on net revenue growth over take-rates, given the company's relatively fixed cost structure where incremental revenue flows directly to margins. Lakehouse views Adyen's wallet share gains, client retention capabilities, and normalizing cost base as positioning the company well for future profitability expansion, justifying their patient holding approach.

Pitch Summary:
US-based software company, ServiceNow, provided another strong result, continuing its long and consistent track record of 20%-plus revenue growth combined with healthy profitability. Subscription revenues grew 25% year-on-year to $2.5 billion and free cash flow grew 47% year-on-year to $1.2 billion. The company's core operating metrics were also impressive with remaining performance obligations growing 26% year-on-year to $17.7 billion (i.e. roughly 2x 2023 revenue) and renewal rates holding steady at 98%. Performance was evenly spread across segments, products, and geographies, with notable strength in the US federal government. The company now boasts 1,933 customers generating in excess of $1 million in Annual Contract Value (ACV), which is pleasing to see as it implies multiple solutions are involved and that the company's platform model is increasingly resonating with customers. In our view, ServiceNow is one the highest quality software businesses globally as the combination of consistent growth at scale, robust free cash flow generation and a large addressable market make it a compelling opportunity.

BSD Analysis:
Lakehouse Capital positions ServiceNow as one of the highest quality software businesses globally, emphasizing its consistent execution and strong fundamentals. The manager highlights impressive growth metrics with 25% subscription revenue growth to $2.5 billion and exceptional 47% free cash flow growth to $1.2 billion, demonstrating strong unit economics. The 26% growth in remaining performance obligations to $17.7 billion (roughly 2x 2023 revenue) provides significant revenue visibility, while the 98% renewal rate indicates strong customer satisfaction and sticky platform adoption. The expansion to 1,933 customers with over $1 million ACV suggests successful platform cross-selling and enterprise penetration. Notable strength in the US federal government segment adds diversification. The fund views ServiceNow's combination of consistent 20%+ growth at scale, robust cash generation, and large addressable market as creating a compelling long-term investment opportunity in the enterprise software space.

Pitch Summary:
Alphabet delivered a strong quarterly result that came in well ahead of analysts' expectations. Revenue grew 15.4% (16.0% constant currency) to $80.5 billion and operating income grew 46.0% to $25.5 billion. Revenue growth accelerated across Search, YouTube Ads, and Google Cloud, all whilst the company delivered its highest operating margin since 2021 – showing meaningful progress in the company's efforts to durably re-work their cost structure. On the Generative AI front, management emphasised the company's infrastructure advantages including 5th generation TPUs (chips developed by Google specifically for AI training and inference), high performance data centre architecture, and AI models that are 100x more efficient versus 18 months ago. Overall, we believe that Alphabet is well placed for the AI opportunity ahead and still has significant latent earnings power. When combined with a relatively undemanding valuation of 21x forward net profit and over $100 billion of cash on the balance sheet, it's not hard to see why we remain positive on the range of outcomes in the years ahead.

BSD Analysis:
Lakehouse Capital presents a compelling bull case for Alphabet based on strong Q1 2024 fundamentals and AI positioning. The manager highlights impressive financial metrics with revenue growth of 15.4% to $80.5 billion and operating income surging 46% to $25.5 billion, demonstrating effective cost management with the highest operating margin since 2021. The acceleration across core segments including Search, YouTube Ads, and Google Cloud indicates broad-based strength. The fund emphasizes Alphabet's competitive advantages in generative AI, particularly its proprietary 5th generation TPUs and 100x more efficient AI models compared to 18 months prior. The valuation appears attractive at 21x forward earnings with over $100 billion in cash providing financial flexibility. The manager views Alphabet as well-positioned to capitalize on AI opportunities while maintaining significant latent earnings power, supporting their positive long-term outlook.

Pitch Summary:
Hotel commerce platform, SiteMinder, reported a positive quarterly update with revenue and annualised recurring revenue (ARR) up 23.3% and 24.8%, respectively. The company is on the tipping point of profitability; reporting underlying free cash flow of almost breakeven and improving margins by more than 22 percentage points year-on-year. On the product side, management shared that the team is on-track, or ahead, of plans to deliver its key initiatives. For Channels Plus, the company has already signed 14 partners, including a large online travel agency, Trip.com. Further, momentum adding larger properties has kept its pace and will help fuel future growth when more transaction-based products are added to the platform. We remain strong supporters of the business and see a path for growth to accelerate from here.

BSD Analysis:
Lakehouse expresses strong bullish conviction on SiteMinder, emphasizing the company's approaching profitability inflection point with nearly breakeven free cash flow and dramatic margin expansion of over 22 percentage points. Revenue growth of 23.3% and ARR growth of 24.8% demonstrate solid execution in the hotel commerce platform market. The successful expansion of Channels Plus with 14 partners, including major OTA Trip.com, validates the platform's value proposition and network effect potential. Management's on-track or ahead-of-schedule delivery on key initiatives suggests strong operational execution. The focus on adding larger properties creates a foundation for future transaction-based revenue streams, which should drive accelerating growth. SiteMinder represents the fund's second-largest holding, reflecting high confidence in the hospitality technology sector's structural growth opportunity. The combination of approaching profitability, expanding partnerships, and product development momentum supports the manager's optimistic outlook.

Pitch Summary:
Netwealth provided a quarterly business update during April, with funds under administration (FUA) growing at an annualised 28.5% to $85 billion -- a healthy acceleration on the annualised 14.3% achieved at the same time last financial year. The quarterly change highlights the significant turnaround in net inflows, which were up 62.2% compared to the prior corresponding quarter last year. We remain comfortable with the structural growth of the business and are pleased to see stronger inflows returning after a slower, but still healthy, run last financial year. During the month, the founding Heine family reduced their collective Netwealth stake by 1.5 million shares, equivalent to 0.6% of the company, leaving them with a still sizeable 47.8% stake. As we've said before, we have no issue seeing the family progressively reducing their stake, particularly when you consider the company's market capitalisation of almost $5 billion has it sitting within ASX100 territory but will require further selling from the Heine family to meet the liquidity threshold.

BSD Analysis:
Lakehouse maintains a bullish stance on Netwealth, highlighting accelerating growth momentum with funds under administration expanding at 28.5% annually to $85 billion. The significant turnaround in net inflows, up 62% year-over-year, demonstrates the platform's competitive strength in capturing market share. The manager views the structural growth opportunity favorably, particularly as stronger inflows return after a period of slower but still healthy growth. Insider selling by the founding Heine family is viewed positively as a natural progression given the company's $5 billion market cap approaching ASX100 territory. The family's retained 47.8% stake provides continued alignment while progressive selling improves liquidity. Netwealth represents the fund's largest holding, reflecting high conviction in the wealth management platform's long-term prospects. The business model benefits from network effects and recurring revenue characteristics that align with the fund's investment philosophy.

Pitch Summary:
The company is a subsidiary of AIL. Extremely high number of allegations of kidnapping, assault and child grooming; fraudulent, dishonest and misleading sales tactics; unhealthy financials (high churn, cash flow issues). Update 5/10/24 - A report issued by the Insurance Department that an agent submitted thirteen fraudulent life insurance applications. Update 5/16/24 - The company is likely to be under SEC investigation. Update 6/7/24 - Follow-up: Agents continue to write fraudulent policies. Update 6/27 - The company is under SEC investigation. Update 7/31/24 - Follow-up report. Update 8/6/24 - Follow-up report.

BSD Analysis:
Global Atlantic Financial (subsidiary of KKR) focuses on life insurance and annuities. Shorts argue spread compression, rising hedging costs, and capital strain under higher rates create earnings risk. As an insurer, GL’s exposure to credit spreads, policyholder behavior, and asset-liability matching is key. Counterpoints: scale under KKR ownership provides diversification, but skeptics argue insurance equities often mask volatility until credit cycles turn. Catalysts/risk checks: statutory capital ratios, investment spread data, and reserve adequacy.

Pitch Summary:
Glass House Brands (OTC: GLASF) and Goodness Growth (OTC: GDNSF) both jumped more than 70% and Grown Rogue went up by 50%. These companies have been under owned and ignored by cannabis investors for too long. And their demonstrated operational performance has been outpacing the industry and investors are now paying attention. It's also no coincidence that these three companies are also disclosing the most granular data on their operations and are actively trying to help investors understand their businesses.

BSD Analysis:
The manager highlights Goodness Growth as part of a trio of undervalued cannabis companies that delivered exceptional Q1 performance with 70%+ gains. The investment thesis centers on the company being historically underowned and ignored by cannabis investors despite demonstrating operational performance that outpaces industry peers. The manager emphasizes the company's commitment to operational transparency, providing granular data disclosure that helps investors understand the business fundamentals. This transparency differentiates Goodness Growth from many cannabis operators that provide limited operational metrics. The strong Q1 performance suggests investors are beginning to recognize the company's operational excellence and value proposition. The manager views this as part of a broader trend where quality cannabis operators with proven execution are gaining market recognition. The position appears to be part of a concentrated cannabis strategy focused on operationally superior companies trading at discounted valuations.

Pitch Summary:
Glass House Brands (OTC: GLASF) and Goodness Growth (OTC: GDNSF) both jumped more than 70% and Grown Rogue went up by 50%. These companies have been under owned and ignored by cannabis investors for too long. And their demonstrated operational performance has been outpacing the industry and investors are now paying attention. It's also no coincidence that these three companies are also disclosing the most granular data on their operations and are actively trying to help investors understand their businesses. For the past four years in cannabis, major building projects have generally taken too long, cost too much, struggled to operationalize and disappointed investors with the results. The complexity of cannabis, the different regulatory hoops to jump through and the relative inexperience of the industry are all reasons why so many capital projects have gone south. And then you have Glass House, which not only turned on its Ventura County, California state-of-the-art greenhouse on-time and under budget but has showed the country how it is possible to produce quality California greenhouse cannabis flower at a fraction of the cost of others. This past quarter, they announced that they again opened the new expansion greenhouse under budget and ahead of time again. I had the opportunity to tour the new greenhouse and see the rows and rows of flower that will hit the market in Q2. It was an impressive sight to see and a testament to the team for the quality of the flower now being produced by Glass House. The market has rewarded Glass House for its demonstrated competence and proven operational ability to do something special. And the market also loves companies that deliver not only growth, but growth in cash flow and free cash flow. Glass House is poised to do both in Q2 and Q3 of this year.

BSD Analysis:
The manager presents a compelling bull case for Glass House Brands based on exceptional operational execution and cost advantages in cannabis cultivation. The company has distinguished itself by consistently delivering greenhouse expansion projects on-time and under budget, a rare achievement in the cannabis industry where capital projects typically face delays and cost overruns. Glass House has demonstrated the ability to produce quality California greenhouse cannabis flower at significantly lower costs than competitors, creating a sustainable competitive advantage. The manager's personal tour of the facilities reinforced confidence in the quality of production and upcoming Q2 flower supply. The company is positioned for strong cash flow and free cash flow growth in Q2 and Q3, which should drive continued market recognition. The 70%+ stock performance in Q1 reflects growing investor appreciation for the company's operational competence and transparent reporting practices. Glass House represents a high-quality operator in a consolidating industry with significant barriers to entry.

Pitch Summary:
HEES – H&E Equipment Services, Inc. is one of the top equipment rental companies in the U.S., providing construction and industrial related equipment, parts, and services in 30 states to the commercial, industrial, infrastructure and residential construction markets. As the #4 player in a business geared towards local economics with a strong presence focused in the industrially active region of the Sun Belt in the US, the company has ample scale to demonstrate pricing power in markets that primarily operate based on local market share dynamics. The industry remains fragmented but is top-heavy, with the top four consolidating the industry and together now approaching 40% of market share. This industry structure provides scale benefits to HEES but also suggests small bolt-on acquisitions can move the needle on company financials. Here the company has a proven track record of entering new territories through tuck-in acquisition and expanding in tangential geographies organically, enjoying a post-pandemic branch CAGR of 10%. The largest company in the space, United Rentals International, Inc. (URI), is now approaching 1,500 branches in North America, nearly 11 times HEES' size, having pursued a successful bolt-on acquisition strategy dating back to Bradley Jacob's original founding of the company in 1997. Since then, the rental industry has achieved more sophistication than prior cycles as the largest players now have the size and technology to add pricing discipline to the industry. Equally importantly, the industry should enjoy secular growth tailwinds in the coming years. The Infrastructure Investment and Jobs Act (IIJA) allocates more than $1 trillion in funding over ten years for infrastructure projects, complementing the initiatives under the Inflation Reduction Act (IRA) and the CHIPS Act. In 2023, construction spending in the manufacturing sector reached $225 billion, more than doubling the previous peak in 2015. However, the combined expenditures of the IIJA and IRA represent a threefold increase in spending when adjusting for inflation, compared to the Federal-Aid Highway Act of 1956 and the post-World War II reconstruction efforts, illustrating the magnitude of investment soon to come. Today, HEES trades at a substantial discount to larger peers, despite a more attractive forward growth outlook and a greater margin expansion opportunity. It appears the market fails to appreciate the company's growth prospects but has also perhaps overlooked its somewhat recent transition to a high-margin pure play rental company after 2021 divestments of its crane distribution business. Pre-COVID HEES traded at or near parity with peers' 5-7x EBITDA multiple. Since the pandemic, HEES has traded at an average discount of two turns and today trades at a three-turn discount (5x EBITDA vs 8x). On a three-year view, we can envision the stock trading to $115-$140 with continued execution on its organic and tuck-in acquisition strategy and some multiple expansion towards peer levels.

BSD Analysis:
The manager presents H&E Equipment Services as a compelling infrastructure beneficiary trading at a significant valuation discount. As the #4 equipment rental company with strong Sun Belt presence, HEES benefits from local market dynamics and pricing power while maintaining acquisition optionality in a fragmented industry. The company has demonstrated consistent execution with 10% post-pandemic branch CAGR and successful geographic expansion. The investment thesis centers on massive infrastructure spending tailwinds from the IIJA ($1 trillion), IRA, and CHIPS Act, representing a threefold increase versus historical infrastructure cycles. Manufacturing construction spending doubled to $225 billion in 2023, indicating early cycle momentum. The company's 2021 transformation to a pure-play rental model following crane distribution divestiture improved margins and focus. HEES trades at 5x EBITDA versus 8x for peers despite superior growth prospects and margin expansion opportunities. The manager targets $115-$140 per share based on execution and multiple expansion to peer levels, implying significant upside from current valuation discount.

Pitch Summary:
PAR – Par Technology's Brink segment is getting bigger. When discussed in our last quarterly letter, the segment looked poised to grow to over $150M later this year in annual recurring revenue (ARR), from $20M four years ago, with announced deals in the pipeline further putting the segment on a path towards a $200M run rate next year. But now, after announcing acquisitions of Stuzo and TASK simultaneously in March, the company looks to be on a path for run-rate ARRs to approach $300M later this year, with substantial continued growth beyond as the company begins to penetrate new accounts and new geographies with an expanded menu of additive service offerings. Together, the two deals look like a masterstroke of capital allocation for CEO Savneet Singh, as both have strong strategic merit and impressive financial implications for the company's fundamentals. The Stuzo deal, which brings Par a loyalty platform software provider focused on C-stores and fuel retailers, will contribute nearly ~$50M in ARR by yearend at 40%+ EBITDA margins, and will also eliminate a competitor as the company was previously targeting this market with their Punnch offering. The TASK deal is equally exciting from a strategic perspective. As an Australia-based global foodservice transaction platform tailored for major global brands, it will also contribute ~$50M in ARR from its end-to-end transaction management platform with customers like Starbucks and McDonalds. This broadened reach opens a path to international geographies where Par had a limited ability to serve previously. The two deals plus other big recent customer wins like Wendy's and Burger King more than double the size of the ARR revenue base from a year ago and meaningfully improve the company's profitability profile. The deals were in part financed by a PIPE offering and came with just 20% shareholder dilution, partly aided by the expected sale of the company's Government business which looks increasingly likely. Contemplating further profitable expansion from here is no great stretch either, as the company now has relationships with multiple owners of multiple restaurant brands, who have shown a preference to use the same vendors where they can. Now, the company is truly positioned as a one stop shop of software unified commerce offerings, with far broader addressable markets to grow into internationally, within the convenience store space and with other adjacent product rollouts in payments, back office, loyalty, online ordering and drive-through that all connect to a restaurant's point-of-sale (POS) operating software. Today Par looks increasingly well-positioned to emerge as the winner-take-most with its mission-critical POS based software offering in the restaurant enterprise software space. Equally noteworthy, today the company also trades at a little more than half the multiple of ARR as most of its peers.

BSD Analysis:
The manager presents Par Technology as a compelling software consolidation story with exceptional growth acceleration. The Brink segment has grown from $20M to an expected $300M ARR run-rate through strategic acquisitions and organic growth, representing 15x growth in four years. The simultaneous acquisitions of Stuzo and TASK demonstrate strategic capital allocation, adding $100M in combined ARR at attractive margins while expanding addressable markets. Stuzo brings 40%+ EBITDA margin loyalty platform capabilities and eliminates competition, while TASK provides international expansion through relationships with major brands like Starbucks and McDonald's. The company is transforming into a comprehensive restaurant technology platform with mission-critical POS software at its core. Major customer wins including Wendy's and Burger King validate the platform's competitive positioning. The deals were executed with only 20% dilution, aided by the pending government business divestiture. The stock trades at approximately half the ARR multiple of peers despite superior growth and expanding market opportunities, creating significant valuation upside potential.

Pitch Summary:
SHAK – As for Shake-Shack, targeted marketing has helped spur an increase in foot traffic. Aided by self-help initiatives like kiosks and efforts to optimize supply chain efficiencies, incremental sales are beginning to flow through at higher profit margins than many had previously thought. Incoming CEO Rob Lynch of Papa Johns looks to expand on the recent profitability progress as the young brand continues a shift towards a coming-of-age era marked by greater professionalization relative to its scrappy upstart days when the concept began as a hot dog stand in Central Park. For a company with ample white space in its growth plans, the emerging improvement in profitability levels has been impactful to valuation.

BSD Analysis:
The manager highlights Shake Shack's operational transformation and margin expansion story. Targeted marketing initiatives are successfully driving foot traffic growth, while technology investments in kiosks and supply chain optimization are improving operational efficiency. The key insight is that incremental sales are flowing through at higher margins than market expectations, indicating strong operational leverage. The appointment of Rob Lynch as CEO from Papa John's represents experienced leadership to drive professionalization and scale. The manager emphasizes the company's transition from a startup mentality to a mature growth company with significant expansion opportunities. The combination of improving unit economics, technology-driven efficiency gains, and substantial white space for growth creates a compelling investment case. The emerging profitability improvements are beginning to be reflected in valuation, suggesting the market is recognizing the operational progress.

Pitch Summary:
CROX – In the case of Croc's, the stock continues to trade at an attractive high-single-digit multiple of earnings. Importantly the company is making significant progress in turning the tide for HeyDude after sales of the brand hit an air pocket due to higher-than-wanted inventories in the wholesale channel last year. Inventory levels have improved, enabling average selling prices to move higher while the new HeyDude distribution center in Las Vegas has also now become operational. Along with an expansion of HeyDude-specific outlet stores, which are very high margin and drive nearly a third of Crocs' brand North American sales, it looks like the Croc's playbook is nearly fully in place. And just last week, the company announced Terence Reilly would return to the company as president of the brand. Bringing Reilly back into the fold seems a very promising move. He deserves a great deal of credit for Croc's resurgence which he described as taking it "from meme to dream" when he was previously with the company as head of marketing from 2013 to 2020. He clearly seems to have a knack for creating buzz around a brand, given his recent success at Stanley where he was CEO after driving sales of the famed "Stanley Cup" up ten-fold to $700M in just four years. It seems prospective marketing success can often be as hard to predict as it is important to a brand's vitality. But here, it looks like Reilly is a proven winner. Might he again be able to create a sensation around a brand like HeyDude, one that has high affinity amongst existing customers yet still low-brand awareness more broadly? Given recent operational improvements, the brand seems well positioned to again focus on playing offense and improved brand performance may be right around the corner.

BSD Analysis:
The manager presents a compelling turnaround thesis for Crocs centered on operational improvements and strategic leadership changes. The HeyDude brand appears to be recovering from inventory challenges, with improved wholesale channel dynamics and higher average selling prices indicating pricing power restoration. The new Las Vegas distribution center and expansion of high-margin outlet stores demonstrate operational scaling capabilities. The return of Terence Reilly as brand president represents a significant catalyst, given his proven track record of transforming Crocs from 2013-2020 and his recent success driving Stanley's revenue from $70M to $700M. The stock trades at an attractive high-single-digit earnings multiple despite these positive developments. The combination of operational improvements, proven marketing leadership, and low valuation creates an asymmetric risk-reward profile. The manager views the brand as well-positioned for offensive growth strategies with potential for significant brand performance improvement.

Pitch Summary:
Alphabet (GOOG), a longtime holding in our Fund, stirred up considerable controversy earlier this year when the company released their proprietary AI tool called Gemini to the public. Suffice it to say, the images generated were historically inaccurate and the extreme political leanings of its creators were not even remotely subtle. On the one hand, we decided to maintain our position and do not expect this event to negatively impact near-term results. On the other hand, we also believe this poses a serious risk to the incredible economic moat surrounding its core search business and early warning signs for the potential erosion of that moat are worth paying close attention to. Alphabet was quick to suspend the use of Gemini and went into full damage control mode after the botched rollout. In an effort to mitigate reputational damage, the company cited poor training models, apologized for its shortcomings, and admitted that they "definitely messed up." Despite the official theoretically plausible explanation, we suspect their artificial intelligence product is working as designed and the outputs generated were exactly as intended, reflecting a specific ideological agenda of Alphabet's employees. Last week, CEO Sundar Pichai, published a blog post titled Building for Our Future AI which outlined some internal operational and structural changes, and more broadly discussed his vision for artificial intelligence. Below are two excerpts from the last paragraph that particularly stood out to us (emphasis added): 1. We have a culture of vibrant, open discussion that enables us to create amazing products and turn great ideas into action. That's important to preserve. But ultimately we are a workplace and our policies and expectations are clear: this is a business, and not a place to act in a way that disrupts coworkers or makes them feel unsafe, to attempt to use the company as a personal platform, or to fight over disruptive issues or debate politics. This is too important a moment as a company for us to be distracted. 2. We have a duty to be an objective and trusted provider of information that serves all of our users globally. When we come to work, our goal is to organize the world's information and make it universally accessible and useful. That supersedes everything else and I expect us to act with a focus that reflects that. The first excerpt clearly addresses Alphabet's severe corporate culture issues. We are encouraged Sundar Pichai recognizes he is responsible for running a business and employees need to be mission-oriented at the office. However, extreme cultural issues are exceptionally difficult to fix. Presumably the organization has layers upon layers of middle management filled with individuals who share the same radical political beliefs. How do you force an overwhelming majority of activists to be more moderate? Disney is dealing with similar internal issues that have already had meaningful negative consequences to business performance. Elon Musk reportedly had to fire approximately 80% of employees after acquiring Twitter, partly due to inefficiencies and because the business was hemorrhaging cash, but also partly due to ideological incompatibilities. The point is, recognizing it is one thing but executing a turnaround is more challenging. The second excerpt addresses the inherent biases programmed into Gemini and perhaps other Alphabet products, including legacy search. We are again encouraged Sundar Pichai envisions the creation of an artificial intelligence solution that strives to provide objective and apolitical information to its end users or, at the very least, maintains the perception of doing so. Again, this is easier said than done, but this blog post gives investors some indication that the management team is aware of potential reputational damage and is focused on preserving the valuable moat the business has spent decades building.

BSD Analysis:
The manager maintains a cautious neutral stance on Alphabet despite the Gemini AI controversy, viewing it as both a near-term non-issue and a long-term moat risk. The fund recognizes Alphabet's dominant search business as having an "incredible economic moat" but expresses concern about potential erosion from AI-related reputational damage. The manager suspects the biased AI outputs were intentional rather than accidental, reflecting deeper corporate culture issues that could threaten business performance. While encouraged by CEO Sundar Pichai's acknowledgment of problems and commitment to objectivity, the manager draws parallels to Disney's similar struggles and Musk's Twitter overhaul, suggesting cultural transformation will be extremely challenging. The analysis reveals skepticism about management's ability to execute a successful turnaround given the entrenched ideological issues within the organization. The fund appears to be holding the position based on the strength of the core search business while monitoring for signs of competitive moat deterioration. The manager's perspective suggests they view AI bias as a potential existential threat to Alphabet's trusted information provider status.