Investment Pitches

Pitch Summary:
Bio-Techne: Coveted Life Sciences Asset On Sale Due to Academic Pressures

Summary Thesis:
1) Market leading life sciences reagents and instrument company. Recurring consumable revenue, strong profit margins, healthy free cash flow and a net cash position.
2) Concern around US academic funding is weighing on shares of TECH, pressuring the stock to its lowest valuation since 2017.
3) Revenue growth rate inflecting higher in FY '27 (6/30 FYE) as Company laps one-time NIH budget reset and growth assets propel consolidated revenue.
4) Coveted asset as evidenced by recent M&A transactions, which supports a significantly higher valuation than implied by current share price.

Bio-Techne ("TECH") develops, manufactures and sells life science reagents, instruments and services for the research, pharmaceutical, diagnostics and bioprocessing markets worldwide. Founded in 1976 as Research and Diagnostic Systems, the company IPO'd in 1985 when it merged with Techne Corporation. TECH has been a leader in manufacturing high-quality antibodies and proteins used in life sciences research. The Company also manufactures instruments that utilize these reagents, creating a razor/razor blade model. In 2013, the Company embarked on a strategy to accelerate revenue growth by utilizing cash flow from its Protein Sciences business to acquire higher growth products leveraged to its existing customer base. Today, 80% of the company's revenues are consummables, driving highly recurring revenue for the company. Customer concentration is minimal given TECH's broad product and customer base. Today, the Company operates in two segments: Protein Sciences and Diagnostics & Genomics.

Protein Sciences – TECH's Crown Jewel

Protein Sciences represents the original TECH business that sells reagents and instruments into research and diagnostics markets. Key customers in this segment include research institutions, biopharma, pharma and diagnostics companies. TECH's proteins and antibodies are widely used in academic research, which in addition to patent and trademark protection, provides important validation for the quality of the products. Academic citations also serve as a strong marketing tool for TECH's products and help to drive future sales. On the equipment side, TECH's growing installed base of instruments provides visibility into ongoing utilization of TECH's products.

More recently, TECH has broadened its customer base and now sells GMP grade proteins that are utilized in the production of cell and gene therapies ("C>"), both in clinical trials and FDA approved commercial products. The C> business represents a growth opportunity for the segment as clinical trial customers (85 today) ultimately convert to commercial customers (4 today). The core reagents and instruments business has historically grown at mid to high single digit rate as ongoing innovation in drug discovery and development has fueled strong demand for TECH's products. While comprising only ~11% of Protein Sciences revenue today, TECH's emerging C> business is projected to sustain its +20% growth rate over the next few years, supporting ongoing growth for this segment. Gross margins for the Protein Sciences segment are ~75% and the business generates an impressive 45% operating margin. The Protein Sciences segment accounts for ~70% of TECH's revenue and 95% of consolidated operating income. This is the crown jewel of Bio-Techne.

Diagnostics and Genomics – TECH's Venture Capital Portfolio

TECH's Diagnostics and Genomics business represents a collection of assets that have been acquired since the 2013 strategy shift. Many of these businesses are small and each one specializes in niche diagnostic and research markets. Key areas of focus include spatial biology, liquid biopsy, molecular diagnostics and diagnostic reagents. Understanding each of these businesses in detail is very difficult as the science is beyond my comprehension. Instead, I think of this segment as the venture capital portfolio of TECH. Each of these businesses represents a call option for a potentially significant business. Given the small size of each company in this segment, it is difficult to underwrite significant value from any individual asset today. Given that many of the businesses in this segment are emerging and require significant marketing and R&D, operating margins for this segment are depressed at ~7%. While not a meaningful source of earnings today, there is significant potential from this portfolio via operating leverage and a focus by management on margin improvement. I trust that TECH is appropriately sizing its bets in these markets and that the portfolio will ultimately deliver shareholder value.

Investment Opportunity – Customer Budget Concerns

TECH's stock has been hit hard by concerns around cuts to NIH/NSF funding, which will have a direct impact on the 12% of TECH's revs that are generated from US academic customers. As proposed today, the 2026 fiscal budget would cut the NIH budget by 40%. TECH's revenues should be less exposed to the full 40% cut for a myriad of reasons (less indirect cost exposure, consummables focus, priority funding areas, etc), but this figure is a good baseline to run sensitivity analysis around NIH exposure. TECH also has risks related to China revenue (8% of revs) and general uncertainty around pharma and biopharma spending. No matter how you slice it, it's hard to envision TECH generating significant revenue growth in FY '26 (6/30/26 YE). This uncertainty has weighed on not only TECH's stock, but also the broader healthcare sector and life sciences tools industry. While the chart below illustrates Healthcare's underperformance for large caps, the same dynamic is occurring in small caps.

As a result of the pressure on the healthcare sector broadly as well as specific risks to TECH's revenues, the Company's shares traded down to a multiple not seen since 2017. While the absolute multiple by itself is likely at or near a floor, it was interesting that TECH's multiple also approached that of Thermo Fisher ("TMO"). TMO has always been considered a natural acquirer given that TECH already has a commercial distribution agreement with Thermo in its Protein Sciences segment. Additionally, TECH's CEO, CFO and President of Protein Sciences all held previous roles at TMO. As can be seen below, TECH's shares have historically traded at a premium to TMO given faster revenue growth rates and an embedded take-out premium (from TMO or any other larger cap player). This provides some comfort that shares of TECH are likely at or near a trough valuation.

Financial Outlook and Valuation

It's reasonable to assume that TECH's revenue in FY '26 will probably be flat with FY'25 as pressure on US academic revenue is offset by growth in C> and other smaller growth assets. Margins can likely be maintained in '26 as margin compression in Protein Sciences is offset by improvement in Diagnostics. More importantly, FY '26 is likely to represent trough earnings for TECH. Once the Company digests the one-time reset of the NIH budget cuts, growth assets should support consolidated revenue growth in 2027. Additionally, TECH will continue to generate strong free cash flow during FY '26 and, absent M&A, will operate in a net cash position within the next year. TECH is unquestionably one of the highest quality assets in the life sciences space and it appears that we are buying this A+ asset at a trough multiple on trough earnings. Investors may need to wait 12 months for the market to recognize that earnings are inflecting in 2027, but this is exactly the type of market inefficiency that the Headwaters Capital portfolio seeks to exploit via a patient and elongated investment time horizon. Management believes the business will return to long-term double-digit revenue growth after next year and margin expansion should support mid-teens earnings growth. Given the scarcity of this asset and strong growth and margin profile, TECH will likely trade at a 20-25x EBITDA multiple once growth resumes. Using a 20x multiple on my 2027 EBITDA forecast yields a price target of $64, or +27% upside from the $50 average purchase price. 25x yields a $78 price target or +57% upside.

M&A Value

Readers may notice that TECH's Protein Sciences segment is similar to a previous Headwaters Capital investment, Abcam, which was ultimately acquired by Danaher. I was initially attracted to Abcam through research I had done on TECH years ago. I always admired TECH's protein sciences business, but I could never get comfortable with Bio-Techne's valuation which seemed to assign excessive value for its portfolio of smaller growth businesses. At today's multiple, investors don't need to ascribe any value to these growth businesses as the Protein Sciences segment itself is trading at a discount to recent transactions. Using comparable transactions in the antibody and protein space, we can see that there has been substantial M&A interest in peers over the last few years. A 30x EBITDA multiple on trough 2026 earnings would yield a price target of $82, or +64% upside. I sincerely hope that TECH would not sell the Company based on 2026 earnings, but it's a useful sanity check on the true value of the Company.

BSD Analysis:
Headwaters Capital presents a compelling contrarian thesis on Bio-Techne, arguing the market has oversold a high-quality life sciences tools company due to temporary academic funding concerns. The manager highlights TECH's dominant market position in reagents and instruments with 80% recurring consumable revenue, 75% gross margins in its core Protein Sciences segment, and strong free cash flow generation. The investment opportunity centers on NIH budget cut fears creating a trough valuation (lowest since 2017) for what the manager considers an "A+ asset." Key catalysts include the emerging cell & gene therapy business growing at 20%+ rates and expected earnings inflection in FY2027 as the company laps one-time budget pressures. The manager sees significant M&A potential given recent comparable transactions at 30x+ EBITDA multiples, with natural acquirer Thermo Fisher having existing commercial relationships and management connections. With price targets of $64-82 representing 27-64% upside, the thesis relies on patient capital recognizing quality fundamentals once temporary headwinds subside.

Pitch Summary:
Assa Abloy was created in 1994 through the merger of Sweden's ASSA and Finland's Abloy, though many of its brands are centuries old – one dates back to 1645. Assa Abloy supplies the full suite of 'opening solutions': mechanical and electromechanical locks (53% of sales), entrance automation systems such as sliding doors (30%), and security doors, hardware and identity technologies (17%). Its products protect everything from the front door of a South Korean apartment block to the perimeter fence of a European data centre. We believe that Assa Abloy is well positioned for the future. This is in part because of a crucial secular trend, in which access is shifting from the analogue to the digital. Purely mechanical locks are giving way to electromechanical, software-defined and, increasingly, cloud-connected solutions. In 2003 only 30% of Assa Abloy's relevant revenue was electromechanical. Today that figure is almost 60%. Digital locks command higher upfront prices, attract service revenues and shorten replacement cycles. Penetration remains low in many industries, particularly residential, so we expect strong organic growth for many years. Assa Abloy has a powerful market position to take advantage of this trend. Access solutions sit in the 'low price, high cost of failure' quadrant. A door opening accounts for perhaps 0.1% of a building's construction budget, but a malfunction can be catastrophic. When people buy access solutions they therefore often turn to a trusted name. Assa Abloy has roughly USD 14 billion of revenue and a market capitalisation of USD 33 billion, making it two to four times larger than its nearest competitors. Assa Abloy's dominant position in this market is an important 'moat' that can be hard for its rivals to breach. After selling clients hardware, Assa Abloy provides them with services over many years. Indeed it generates more than two thirds of revenue from the 'aftermarket,' comprising repairs, upgrades and service contracts. This represents a resilient, recurring cash stream that is largely decoupled from new construction. A market that can be highly volatile. The stability of the company's EBIT margins, through the global financial crisis and the COVID-19 pandemic, underlines the resilience of the business model. We think it is important to emphasise Assa Abloy's evolution from a hardware provider to a solutions provider. Let's take the example of an office building. In the old days, Assa Abloy sold the client mechanical locks via distributors, which would then be installed on the building's doors. The aftermarket revenue came from selling spare parts for those locks to locksmiths, and then key blanks for locksmiths to make spare keys. With the shift to electromechanical solutions, things improved a bit. Assa began selling more complicated locks – ones that are opened with an access card as well as a key. Here, the lock costs more and is more complex, requiring more frequent servicing. Assa moved up the value chain, though it still sold everything through distributors and did not really interact with the customer. With digitisation, the picture changes more significantly. Now the building's doors do not just have access cards. Rather, there is a centralised 'access control' system managed by software, which controls all access points, including their security and associated energy use. Now Assa provides a key system and its components, managing all the access points to a building. Assa also now interacts directly with customers. The company must be involved early in a building's design stage, to help the client plan how the access points of their office building will work. The aftermarket revenue is much more than just selling spare parts: it involves managing the entire system. Assa Abloy is adept at channelling strong demand into shareholder value. The company converts around 100% of earnings into free cash flow. It has a conservative balance sheet. This allows it to pursue bolt-on deals while still paying a ~40% dividend. Goodwill impairments over 30 years amount to just 4% of cumulative M&A spend – evidence, we believe, of disciplined capital allocation. The company is always thinking about the future. R&D intensity has increased from 2.7% of sales under the previous CEO to 4% today, with 22% of revenue coming from products launched in the past three years. Many of those innovations directly tackle climate or resource challenges. They produce a range of high-efficiency products that can support buildings in attaining green building certifications from respected standard setters such as BREEAM and LEED. In Europe especially, these products are in demand as low-efficiency commercial property is starting to command a discounted rental price. These products include battery-free locks that harvest energy from the turn of a handle; smartphone credentials that eliminate the need for plastic access cards; and entrance systems engineered to minimise air leakage and thereby cut building heating needs. Assa Abloy does not just produce system-positive goods and services; we believe it does so in a sustainable way. For instance, Assa Abloy has 1.5°C near-term and long-term science-based targets. It aims to cut Scope 1 & 2 emissions by 50% and Scope 3 by 30% by 2030, en route to net zero by 2050. The company has a clear pathway to achieve these goals. Nine successive manufacturing footprint programmes have consolidated plants, shifted production closer to customers and trimmed logistics miles. In addition, product engineers are encouraged to reduce metal content and maximise recyclability. We engage regularly with management to deepen lifecycle carbon analysis and to use the group's purchasing clout to decarbonise supply chains as 92% of its Scope 3 emissions sit in purchased metals and electronics. We are encouraged by the fact that the company is deeply committed to being transparent about its operations and its decarbonisation plan. Even the very best companies face key risks. As locks become connected, hacking becomes a greater threat. Assa Abloy invests heavily in encryption and over-the-air patching, but a high-profile breach could dent trust. We also watch closely how Assa Abloy manages the transition from analogue to digital access solutions. We cannot be certain that the company's moat will remain as impressive as it is today. We are also aware that Assa Abloy is somewhat exposed to the macroeconomic cycle. Roughly one third of revenue is tied to new construction markets, which are highly volatile. On the other hand, we value the fact that its customer base is highly fragmented – its largest customer accounts for just 2% of revenue – meaning that the risk of a large hit to sales is quite low. In conclusion, we believe Assa Abloy is to locks what Amazon is to e-commerce: a runaway global leader that continually re-invests in its moat. Its combination of a strong market position, disciplined capital allocation and a clear sustainability roadmap makes it, in our view, a system-positive compounder.

BSD Analysis:
Generation presents Assa Abloy as a compelling secular growth story driven by the digitization of access control systems. The fund emphasizes the company's evolution from a hardware provider to a comprehensive solutions provider, with over two-thirds of revenue now coming from high-margin aftermarket services that provide recurring, resilient cash flows. The secular shift from mechanical to electromechanical and cloud-connected solutions creates a multi-year growth runway, with digital penetration still low in residential markets. Assa Abloy's dominant market position (2-4x larger than competitors) in a 'low price, high cost of failure' category provides significant competitive moats and pricing power. The company demonstrates exceptional capital allocation discipline with 100% earnings-to-free cash flow conversion, conservative balance sheet management, and minimal goodwill impairments despite active M&A. Management's focus on innovation (4% R&D intensity) and sustainability initiatives positions the company well for future regulatory requirements and customer preferences, making it a 'system-positive compounder' in Generation's framework.

Pitch Summary:
We see healthcare tools as one of the most attractive niches. For one, tools-production companies are largely disconnected from the underlying pricing of their customers' drugs – useful at a time when drug pricing, especially in the US, is deeply uncertain. The barriers to entry, meanwhile, are formidable. There is entrenched intellectual property, regulatory moats and customer lock-in. This makes disruption rare. Yet within this market structure, innovation remains vibrant. A long-term shift from small molecules to biologics (large molecules) is under way. Biologics are more complex to produce and validate, which drives demand for specialised tools. Within the tools sector, it is important to differentiate between research and production. Research budgets are under pressure. But production tools are a necessity for established pharma and biomanufacturing firms. We therefore prefer those companies focused on production, including Danaher and Agilent. In our view Danaher in particular is a leader in precision manufacturing and life-sciences tools, offering long-term visibility and pricing power. These companies' innovations in manufacturing have significantly reduced the cost of producing biologics. This enables low-cost 'generic' biologics to be launched, which in turn allows for the broader use of life-saving drugs in poorer countries.

BSD Analysis:
Generation's investment thesis for Agilent mirrors their broader healthcare tools strategy, positioning the company as a beneficiary of structural industry trends. The fund values Agilent's exposure to production tools rather than research tools, given the essential nature of production equipment for established pharmaceutical and biomanufacturing operations. While research budgets face pressure, production tools remain non-discretionary spending for drug manufacturers. Agilent benefits from the same competitive advantages as Danaher, including intellectual property protection, regulatory barriers, and customer switching costs that create sustainable moats. The ongoing shift from small molecules to biologics drives demand for Agilent's specialized analytical and measurement tools required for complex biologics production and validation. The company's innovations contribute to reducing biologics manufacturing costs, enabling broader global access to life-saving treatments while generating attractive returns for shareholders through pricing power and market leadership.

Pitch Summary:
We see healthcare tools as one of the most attractive niches. For one, tools-production companies are largely disconnected from the underlying pricing of their customers' drugs – useful at a time when drug pricing, especially in the US, is deeply uncertain. The barriers to entry, meanwhile, are formidable. There is entrenched intellectual property, regulatory moats and customer lock-in. This makes disruption rare. Yet within this market structure, innovation remains vibrant. A long-term shift from small molecules to biologics (large molecules) is under way. Biologics are more complex to produce and validate, which drives demand for specialised tools. Within the tools sector, it is important to differentiate between research and production. Research budgets are under pressure. But production tools are a necessity for established pharma and biomanufacturing firms. We therefore prefer those companies focused on production, including Danaher and Agilent. In our view Danaher in particular is a leader in precision manufacturing and life-sciences tools, offering long-term visibility and pricing power. These companies' innovations in manufacturing have significantly reduced the cost of producing biologics. This enables low-cost 'generic' biologics to be launched, which in turn allows for the broader use of life-saving drugs in poorer countries.

BSD Analysis:
Generation presents a compelling bull case for Danaher centered on the structural advantages of healthcare tools companies. The fund highlights Danaher's insulation from drug pricing volatility while benefiting from formidable competitive moats including intellectual property, regulatory barriers, and customer lock-in. The secular shift from small molecules to biologics creates sustained demand for specialized production tools, where Danaher holds leadership positions. Management emphasizes the critical distinction between research and production tools, noting that while research budgets face pressure, production tools remain essential for established pharmaceutical and biomanufacturing companies. Danaher's innovations in biologics manufacturing have democratized access to life-saving treatments by enabling cost-effective generic biologics production. The company's precision manufacturing capabilities and life sciences tools portfolio provide long-term revenue visibility and pricing power in an attractive, defensible market niche.

Pitch Summary:
Zimmer Biomet is a leading medical device company and a pure play in orthopedics. In our view, orthopedics is an attractive product category that should benefit from long-term tailwinds stemming from an aging population, greater activity levels among seniors and increased adoption of specialized robotics that improve surgical efficiency. In addition, market share within the space tends to be sticky, as physicians are typically trained to use leading brands like Zimmer Biomet, reinforcing long-standing brand loyalty. New management recently completed several multi-year initiatives that we think will streamline operations and reinvigorate product innovation. The market has yet to ascribe value to these improvements, providing the opportunity to initiate a position in a dominant, growing company at a discounted valuation to peers and the broader market.

BSD Analysis:
The manager presents a compelling demographic and technology-driven thesis for Zimmer Biomet's orthopedics franchise. The investment case is anchored on powerful secular tailwinds including aging population demographics, increased senior activity levels, and surgical robotics adoption that should drive sustained demand growth. The competitive moat is particularly strong due to physician training and brand loyalty creating switching costs and market share stickiness. New management has completed operational streamlining and innovation initiatives that have yet to be recognized by the market, creating a valuation opportunity. The manager emphasizes the pure-play exposure to an attractive end market with defensive characteristics. Trading at a discount to both peers and the broader market provides attractive risk-adjusted returns for a dominant player in a growing, demographically-supported industry.

Pitch Summary:
Salesforce is a leading technology company that offers a collection of software products aimed at providing businesses with a full front office productivity suite. We believe Salesforce is a wonderful business going through a transformation into a profitable, shareholder-focused enterprise. Since management announced their renewed focus on operating discipline a couple years ago, Salesforce's margins have increased substantially. In our view, there is further room to improve as the company leverages its unique position to help businesses deploy AI and continues to restructure its sales organization. Since exiting our position in Salesforce in December, the stock price has declined by over 30% despite continuing to report fundamental results that are in line with our expectations. We were pleased to buy the stock, but we first established our position using a put writing strategy to lower our entry price. We believed the puts were overvalued as they implied that Salesforce was among the most volatile large companies, which was completely at odds with our assessment of its business value.

BSD Analysis:
The manager presents a compelling re-entry opportunity in Salesforce following a 30%+ decline despite solid fundamental performance. The investment thesis centers on the company's successful transformation toward profitability and shareholder returns under disciplined management. Margin expansion has been substantial since the strategic pivot, with further improvement expected through AI deployment capabilities and sales organization optimization. The manager demonstrates sophisticated entry tactics using put writing to achieve better pricing, indicating confidence in the business stability versus market perception. The disconnect between fundamental performance and stock price volatility creates an attractive risk-adjusted opportunity. The manager's characterization of Salesforce as a "wonderful business" undergoing positive transformation suggests strong conviction in the long-term value proposition and competitive positioning in enterprise software.

Pitch Summary:
Nike Cl B is a global leader in athletic footwear, apparel, and equipment. The company has built a leading global brand through decades of successful product innovation, marketing and partnerships with premier athletes. Since peaking in 2021, Nike's stock price has declined to roughly a third of its previous high, largely due to challenges in its direct-to-consumer initiative and concerns over tariffs. In our view, Nike's new CEO is implementing a credible plan to improve fundamental performance by bolstering wholesaler relations and diversifying distribution while further increasing product innovation. We believe these actions will help to improve the health of the business over the medium term, resulting in better growth and enhanced margins. These concerns provided us with the opportunity to purchase shares at a meaningful discount to our estimate of intrinsic value.

BSD Analysis:
The manager presents a turnaround thesis for Nike, capitalizing on significant valuation compression from operational challenges. The stock has declined approximately 67% from its 2021 peak, creating an attractive entry point for a quality brand franchise. The investment case hinges on new CEO leadership implementing strategic changes to address direct-to-consumer struggles through improved wholesaler relationships and distribution diversification. The manager emphasizes Nike's enduring competitive advantages including global brand strength, innovation capabilities, and premium athlete partnerships. The thesis anticipates margin expansion and growth acceleration as operational improvements take hold over the medium term. The significant discount to intrinsic value provides substantial downside protection while the turnaround strategy offers meaningful upside potential for patient investors.

Pitch Summary:
Amazon is the world's largest online retailer and provider of cloud services. The company is a dominant player in massive end markets with secular growth tailwinds. Amazon benefits from a wide competitive moat supported by scale, customer loyalty, and network effects. We think it is a well-managed business that will use AI to improve operational efficiency, enhance customer experience, and fuel long-term demand growth at Amazon Web Services (AWS). Despite this favorable outlook, Amazon's stock price fell recently due to a combination of tariff and short-term macroeconomic concerns. We were pleased to purchase shares in what we believe is one of the world's best companies at a discount to our estimate of intrinsic value.

BSD Analysis:
The manager presents a compelling bull case for Amazon based on its dominant market position and competitive advantages. The thesis centers on Amazon's wide moat characteristics including scale, customer loyalty, and network effects across both e-commerce and cloud computing segments. The manager emphasizes AI as a key catalyst for operational efficiency improvements and AWS growth acceleration. The investment opportunity arose from temporary market concerns around tariffs and macroeconomic headwinds that created a valuation discount. The manager's confidence is evident in describing Amazon as "one of the world's best companies" and expressing satisfaction with purchasing shares below intrinsic value. The pitch highlights secular growth tailwinds in both core business segments, suggesting sustainable long-term value creation potential.

Pitch Summary:
Meanwhile, Elite Material (EMC), the global leader in high-speed copper-clad laminates (CCLs), reported earnings 7% ahead of Bloomberg consensus. EMC's tailwinds came from strong demand for higher-priced CCLs, predominantly used in Application-Specific Integrated Circuit (ASIC) servers, which drove a 70% YoY bottom line acceleration. The reaffirmation of US hyperscalers' (the end customers for AI servers) capex plans has reinforced EMC's positive outlook.

BSD Analysis:
The manager maintains a bullish stance on Elite Material, highlighting the company's dominant position as the global leader in high-speed copper-clad laminates. The investment case is supported by solid Q1 2025 results with earnings beating Bloomberg consensus by 7%, though the real attraction lies in the underlying demand dynamics. EMC is benefiting from strong demand for higher-priced CCLs used specifically in ASIC servers for AI applications, resulting in impressive 70% year-over-year bottom line acceleration. The thesis is reinforced by US hyperscalers' continued commitment to AI infrastructure capex, providing visibility into sustained demand for EMC's premium products. The manager views the company as well-positioned to capitalize on the AI server buildout cycle, with pricing power in specialized high-speed laminates driving margin expansion. This represents a classic play on AI infrastructure demand through a specialized materials supplier with market-leading technology.

Pitch Summary:
For example, Chroma, a Taiwanese supplier of testing equipment, beat Bloomberg earnings consensus by 48% driven by a 11% increase in operating margin year-on-year, and a 55% year-on-year revenue growth. Demand for Chroma's power testers was supported by China's aggressive AI datacentre build out, and the company's outlook remains constructive for the rest of the year as it is entering a leading foundry's packaging supply chain with a customised metrology tool.

BSD Analysis:
The manager presents a compelling bull case for Chroma based on exceptional Q1 2025 results that significantly exceeded expectations. The company delivered a remarkable 48% earnings beat versus Bloomberg consensus, driven by strong operational leverage with an 11% year-over-year increase in operating margins alongside 55% revenue growth. The investment thesis centers on Chroma's exposure to the AI infrastructure buildout, particularly benefiting from China's aggressive datacenter expansion driving demand for their power testing equipment. A key catalyst is the company's entry into a leading foundry's packaging supply chain with customized metrology tools, positioning them for sustained growth. The manager views the constructive full-year outlook as validation of the AI-driven semiconductor testing demand cycle. This pitch exemplifies the fund's focus on high-quality technology companies with exposure to secular AI trends and strong execution capabilities.

Pitch Summary:
Kraft Heinz (KHC) is the third largest U.S. food and beverage company. KHC shares declined following mixed earnings results in the quarter. While organic sales growth over the medium term is likely to be just 1-2%, we believe the company can also make bolt-on acquisitions and share repurchases to further ensure positive earnings per share (EPS) growth. Modest EPS growth combined with a dividend yield above 4% should result in a competitive total return.

BSD Analysis:
The manager maintains a bullish stance on Kraft Heinz despite recent earnings disappointment, focusing on the company's ability to generate attractive total returns through multiple value creation levers. While organic growth is expected to be modest at 1-2% annually, reflecting the mature nature of the food and beverage industry, KHC has additional tools to drive earnings per share growth. The company's strategy includes bolt-on acquisitions to expand its portfolio and geographic reach, as well as share repurchases to enhance per-share metrics. The combination of modest earnings growth and a dividend yield above 4% creates an attractive total return profile for income-focused investors. As the third-largest U.S. food and beverage company, KHC benefits from scale advantages and strong brand recognition. The manager appears to view recent share weakness as a temporary setback rather than a fundamental deterioration in the investment thesis. The defensive nature of the consumer staples sector provides portfolio diversification benefits while the high dividend yield offers downside protection.

Pitch Summary:
NOV Inc. (NOV) is a leading diversified provider of oilfield capital equipment, consumables and services. The downturn in energy prices has reduced oilfield activity below sustainable levels, hurting NOV's sales and profitability. As activity rebounds, the majority of NOV's product lines should experience increases in volumes and pricing, while longer-term, the earnings power of the Rig Aftermarket business should also improve given a large installed base. A newbuild rig cycle – whether onshore or offshore – would provide upside to our normal estimates.

BSD Analysis:
The manager views NOV as a cyclical energy services play positioned for recovery as oilfield activity normalizes from unsustainably low levels. NOV's diversified portfolio of oilfield equipment, consumables, and services has been pressured by the energy downturn, but this creates an attractive entry point for a market leader. The manager expects the majority of NOV's product lines to benefit from both volume increases and pricing power as activity rebounds. The company's Rig Aftermarket business represents a particularly attractive long-term opportunity given the large installed base of equipment requiring ongoing service and maintenance. This aftermarket exposure provides recurring revenue potential and higher-margin earnings as utilization improves. A potential newbuild rig cycle, whether onshore or offshore, would provide significant upside to normalized earnings estimates. NOV's market-leading position across multiple energy service segments positions it to capture disproportionate benefits from an industry recovery. The current valuation appears to reflect trough conditions, offering attractive upside potential as energy markets normalize.

Pitch Summary:
APA Corp. (APA) is an independent exploration and production (E&P) operating offshore in Midland and Delaware basins in the Permian and onshore Egypt. The company has lucrative financial contracts that allow it to generate significant free cash flow (FCF) from differentials in natural gas prices. Investing in this company provides exposure to an energy market that was underearning versus normal levels of profitability and is currently generating significant FCF in what could be a perennially undersupplied market. Stock performance continued to be pressured throughout the quarter, driven by worries surrounding the Organization of the Petroleum Exporting Countries+ (OPEC+) barrels returning to the market, coupled with slowing demand. We believe that APA is misunderstood as investors are focusing on relatively shorter resource life in the Permian without factoring reinvestment opportunities in Suriname, Egypt, and potentially Alaska.

BSD Analysis:
The manager maintains a bullish view on APA Corp despite recent stock underperformance, viewing it as a misunderstood energy play with significant cash generation capabilities. APA operates in attractive basins including the Permian's Midland and Delaware formations, as well as Egypt, with lucrative contracts that capitalize on natural gas price differentials. The company is generating substantial free cash flow in what the manager believes could be a structurally undersupplied energy market. Recent stock weakness has been driven by concerns about OPEC+ production increases and demand slowdown, creating an attractive entry point. The manager believes investors are myopically focused on shorter resource life in the Permian while overlooking significant reinvestment opportunities in Suriname, Egypt, and potentially Alaska. These international opportunities provide substantial runway for future growth and resource replacement. The combination of current cash generation and future growth optionality makes APA an attractive contrarian energy investment. The market's focus on near-term headwinds has created a valuation opportunity for patient investors.

Pitch Summary:
F5 Inc. (FFIV) sells application networking and security software and data center appliances, where it has 50%+ market share in traditional ADCs (application delivery controllers) along with various multicloud networking and application security products. Demand for F5's products grows faster than gross domestic product (GDP), products are critical to the functioning of applications resulting in highly sticky customer relationships, and ~75% of annual revenue is recurring. F5 posted another good quarterly earnings report and raised revenue and earnings per share (EPS) guidance for the full year. We continue to believe the company is misunderstood and gets incorrectly classified as a legacy IT hardware vendor, resulting in an attractive valuation. Strong free cash flow generation and a net cash balance sheet provide downside protection. Capital allocation has improved significantly in recent years and management has committed to returning at least 50% of free cash flow (FCF) to shareholders.

BSD Analysis:
The manager views F5 as the fund's largest holding and a misunderstood technology company trading at an attractive valuation. F5 dominates the application delivery controller market with over 50% market share and benefits from highly sticky customer relationships due to the mission-critical nature of its products. The company's revenue model is highly predictable with approximately 75% recurring revenue and demand that grows faster than GDP. F5 recently delivered strong quarterly results and raised full-year guidance, demonstrating operational momentum. The manager believes the market incorrectly categorizes F5 as a legacy hardware vendor, creating a valuation disconnect. The company's net cash balance sheet and strong free cash flow generation provide significant downside protection. Management's improved capital allocation strategy, including a commitment to return at least 50% of free cash flow to shareholders, enhances shareholder value creation. The combination of growth, recurring revenue, and attractive valuation makes F5 a compelling long-term holding.

Pitch Summary:
Citigroup (C) is one of the largest US banks by total assets. Investment in its IT, compliance and risk capabilities have pressured margins and returns over recent years, obscuring banks strong core franchise. With these investments now largely complete we expect Citi's expense to decline and its margins and returns to be more consistent with peers. Citigroup performed well in the quarter on improved profitability and positive operating leverage. We think that C is very undervalued on our normal expectations and would still be attractive even if they do not fully achieve their goals.

BSD Analysis:
The manager maintains a bullish stance on Citigroup based on the completion of significant technology and compliance investments that have weighed on profitability in recent years. The investment thesis centers on operating leverage as these one-time investments begin to generate returns through improved efficiency and reduced expenses. Citigroup's strong underlying franchise has been masked by elevated investment spending, but the manager expects margins and returns to normalize toward peer levels. The bank demonstrated positive momentum in the quarter with improved profitability and operating leverage. The manager views the stock as significantly undervalued based on normalized earnings expectations. Even if Citigroup fails to fully achieve management's operational targets, the current valuation provides an attractive margin of safety. The turnaround story appears to be gaining traction with tangible evidence of improved financial metrics.

Pitch Summary:
UnitedHealth Group (UNH) is a large US health insurer. Until very recently, UNH traded at a material premium to its peers, reflecting its status as a premium growth stock with momentum. We did not own the stock. However, recent negative headlines, combined with the first earnings miss in 10 years, resulted in a >50% selloff in the company's shares. This decline contributed positively to the strategy's relative performance vs. the index, where UNH was a meaningful weight. We purchased UNH shares after the selloff at what we believe is a compelling valuation.

BSD Analysis:
The manager initiated a position in UnitedHealth Group following a significant selloff that created an attractive entry point. UNH experienced its first earnings miss in a decade, coupled with negative headlines that drove shares down over 50% from previous highs. The fund manager views this as a compelling valuation opportunity for a company that historically traded at a premium to peers due to its growth profile and market leadership. The timing of the purchase suggests the manager believes the market overreacted to temporary headwinds. UNH's dominant position in the health insurance market and historical track record of consistent earnings growth support the bullish thesis. The significant discount to historical valuations provides an attractive risk-reward profile. The manager's decision to purchase after avoiding the stock at higher valuations demonstrates disciplined value investing principles.

Pitch Summary:
Japan Elevator Service Holdings (JES) is the largest independent elevator and escalator maintenance and repair service provider in Japan, with a 10% market share. Typical clients are building owners and real estate maintenance and management companies legally required to have annual inspections on their elevators and escalators. They generally enter contracts that include an annual inspection, monthly checkup, and repairs when necessary. This arrangement provides a recurring and stable revenue stream. There are over 900,000 elevators and escalators under such contracts in Japan, and the number has expanded about 3% annually during the past decade. When Chairman, CEO, and President Katsushi Ishida founded JES in 1994, the elevator and escalator service market was over 95% dominated by five manufacturers: Toshiba, Mitsubishi, Hitachi, Fujitec, and Japan Otis. The remaining 5% was shared by hundreds of independent service providers; manufacturers competed for new elevator and escalator sales and installation. However, in this business, once one receives installation orders, the maintenance service contracts naturally accrue the manufacturer, as it already has full understanding of the models; most importantly, it can easily set aside adequate replacement parts. Moreover, manufacturers have no incentive to take maintenance contracts for competitors' models, just like Toyota dealers will not actively seek maintenance work for Ford automobiles. As a result, the service price is set high enough to recoup the low profit, if any, resulting from the price competition around installment. Maintenance and repair services, even for a standard model, require thousands of parts. Covering available models of major brands with guaranteed timely service means having an inventory of more than 150,000 parts. The control panel is the most crucial, in that genuine manufacturers' control panels have unparalleled performance and durability compared to generic versions. The inability to secure these often hinders independent service providers from providing high-quality services on par with manufacturers, and is a hurdle in expanding service networks. Another obstacle is the ability to hire qualified inspectors. In Japan, only inspectors with a national qualification—which requires certain electrical and electronic engineering degrees and years of on-the-job experience—can conduct annual inspections. Independent operators need an appropriate number of such inspectors to sufficiently cover their customer base. At this point in the description of this industry, one might justifiably conclude that this slow-growth sector offers hardly any business opportunity for independent operators, other than competing in a zero-sum game to take small market share. However, in the early 1990s, Chairman Ishida—a licensed elevator inspector himself—saw a business opportunity in an industry whose high barriers to entry could actually become a competitive benefit upon overcoming them and achieving sufficient scale. Having worked for a building maintenance company, and for an independent elevator maintenance service provider, Chairman Ishida was convinced a well-run business could generate double-digit operating margins, even at half the price of the leading manufacturers. To seize market share, he was determined to build a company that would provide services at their level or better. So, in 1994, at age 28, Chairman Ishida founded the company alone—with no funds, no partners, and no employees. Nevertheless, he was determined to provide the highest-quality professional service from day one. When visiting potential customers as a salesperson, he would change into a business suit, then switch back to workwear to do maintenance and inspections. He reviewed inspection reports directly with customers before and after; this was not common among typical industry engineers, who would focus on the inspection work itself and delegate customer communication to a sales department. He often slept at the office to respond to emergency calls. As the number of contracts grew, he needed to hire and train more employees, and he needed to procure enough parts for timely service. For the first three years, JES was literally a hand-to-mouth operation, and Chairman Ishida had to fund the running cost with short-term loans just to meet immediate cash needs. Within ten years, though, the number of maintenance units reached 5,000. At this point, he managed to hire a full management team to run the business. In 2007, JES hit a milestone as an independent service provider: matching the service capabilities of the leading manufacturers upon developing a 24-hour remote monitoring and controlling service. This technology enabled the company to monitor elevator and escalator operating status 24 hours a day, seven days a week—and to detect small irregularities, which enabled targeted preventive repair and parts replacement to reduce the incidence of malfunctions and breakdowns. Until that moment, this type of service had only been provided by the leading manufacturers, as it required access to the control panel, and required resolving their unique data transmission and protocols. Toward this goal, Chairman Ishida had hired system engineers to research and develop a remote monitoring system compatible with various models of elevators and escalators, and even obtained a patent on the technology. That same year, JES established an original engineer-training program and internal qualification system called "Step 24." Even before this program, Chairman Ishida undertook a training program that systematized the skills and experience of top engineers, and collected and researched maintenance information and data for various models. Through what became a 24-lecture series and on-the-job training, new employees could acquire the skills and knowledge needed to attain a national inspection license in one year. Moreover, the program trained engineers to individually conduct full maintenance work for several models, enabling the company to provide equivalent quality services to the leading manufacturers. Critically, and unlike these competitors providing maintenance only to their brands, this meant JES was now able to leverage its operation as its engineers expanded their capabilities and productivities to include more elevators in a given coverage area. Being an engineer himself, Chairman Ishida respected engineers and always knew they were the cornerstone of the operation (later, in 2019, he set up a "Engineer Meister Program" with five accreditation levels to incentivize engineers with the best skill sets to maintain the service quality). At the same time, Chairman Ishida sought to publicly list JES to increase its credibility and transparency in furtherance of expansion. It took just over a decade to prepare for the listing; the focus was on human resource development, enhancing technology and capability, and securing genuine parts. JES went public in 2017. The same year, JES completed construction of an R&D test tower and innovation center with ten elevators to examine control systems and motors. It conducted thousands of tests—allowing further improvement on maintenance and repair offerings and operational efficiency—and developed new services for the market. In 2018, the company developed its next-generation control system, Quick Renewal, which was compatible with the general models of all the equipment manufacturers. Typically, elevators' stated useful life is 20 to 25 years; in practice they operate 25 to 30 years. At that point, they need a full renewal, which entails replacing the control system, motors and all electric systems—and requires about one full week of downtime. Quick Renewal necessitates just a half-day of down time, and at half the price. Illustratively, a building operating for 60 years usually requires three full equipment renewals. With Quick Renewal, three controller system replacements are needed, but only two motor replacements, leading to a significant reduction of customers' downtime and maintenance cost. For JES, Quick Renewal was an important offering to induce customers to switch maintenance companies and add to its service contracts portfolio. The growth in the number of maintenance units accelerated following the company's IPO and introduction of new services. JES's market share reached 10% in 2023; in 2024 it added over 13,000 units, taking another 1.3% of market share. It is important to recognize this "the only one" position Chairman Ishida has built since founding JES. Its maintenance units' failure rate is as low as 1%, equivalent to that of leading elevator and escalator manufacturers, and one-fifth that of the independent service providers. The JES offering price remains about 30% to 40% below that of the leading manufacturers. For independent service providers, it is not easy to set a competitive price without operational scale, since they need to hire licensed engineers and procure parts, essentially where JES was in its early years. As a result, the company is taking market share both from the manufacturers and the smaller independent providers. In the recent inflationary environment, those competitors have been raising their prices, while JES continues to focus on advancing its market share, thereby accumulating more maintenance contracts. The company is also expanding its coverage area, entering second- and third-tier cities and acquiring smaller independent service providers, which usually start from a loss-making position until the branch achieves sufficient scale. Even with the advancements to date, having improved the operating margin from 12.7% to 17.7% during the last five years, management appears confident about reaching 20% in the coming two years. In the longer term, once the growth investment spending decelerates, management sees a 30% margin as a natural, sustainable profitability level. Most recently, inquiries from real estate management companies are rising as they try to lower elevator and escalator maintenance costs as part of broader building maintenance cost reductions. JES also established strategic tie-ups with banks that are financing new real estate development or re-development as another avenue to secure new maintenance contracts. There is an opportunity for even more expansion domestically. In other developed markets outside Japan where major maintenance providers compete, independent service providers typically represent a 50% market share. That should be possible in Japan, too. For the near term, JES is aiming to take at least a 30% market share, approximately three times its current level. At a glance, the company's stock does not appear undervalued relative to its global peers, with a price-to-earnings ratio of 43 and an enterprise-value-to-EBITDA ratio of 24.8. In fact, this would be significantly overvalued for the global-scope companies, which effectively occupy the same mature industry. For instance, Otis Worldwide and Schindler Holding's average annual revenue growth during the past five years were, respectively, 1.8% and flat. However, the valuation figures are quite misleading if viewed on a forward-looking, normalized operating basis. For one thing, as discussed further below, JES could raise its revenues 50% if it were simply to match its incumbent competitors' pricing. But it sees greater long-term value, still, in maintaining its growth spending and market share capture strategy. As the only independent firm of the bunch, Chairman Ishida sees a blue ocean market that is large, substantially untapped, yet—in practical terms—is without significant competitors. Following annualized revenue growth of 18% in the past five years, and annualized per-share earnings growth of about 26%, the company still has only a 10% market share. More importantly, it achieved this with the highest EBITDA margin, 1.3x greater than the next most profitable competitor, and a return on equity that is 1.5x the next-highest among its peers. During the same growth period, JES continued investing in its operational capacity expansion; the number of employments and the inventory accumulation grew about 10% and 28.5% annually. Upon eventually reaching a mature stage at, say, 30% market share, similar to where leading manufacturers are, the company's intensive expansion spending and investments will no longer be necessary. JES could shift focus to improving operational efficiency to reach the 30% operating margin goal, in which case it could generate about $200 million in net income annually. This is based on the revenue reaching $975 million by simply multiplying its current revenue by three, which would happen upon increasing market share to 30% from the current 10%. JES could achieve this by taking shares both in existing markets and new second- and third-tier cities, and reaching 30% operating margin as nationwide service network branches become profitable and reach scale in matured stage. What is not included in this assumption is the overall market growth driven by inflation and the 2-3% volume growth observed in the industry during the past decades. Most importantly, this does not include the potential price hike JES can conduct, which is 50% today. But the difference is widening as competitors are raising prices. The JES share price today represents just over 12x this stable net profit stream. While the industry shares a recurring-revenue-stream business model, JES does not—unlike its peers—manufacture elevators or escalators. It is a pure service company, not constrained operationally as it can target elevators of various brands (installment is mid-single-digit operating margin business). Revenue growth potential is an important factor in determining the future operating cash flow and, hence, the enterprise value with a benefit of compounding. Annual growth of 20% to 25% results in a doubling of the earnings every three to four years. Chairman Ishida owns 21% of JES. As with typical successful owner-operators, this represents more than just a number of shares in financial terms. It is the ownership and responsibilities in operational excellence, safety, building strong corporate culture, and achieving the ultimate goal of surpassing those leading manufacturers. Bringing the shares public is not the goal, but rather a tool to achieve the goal. Owner-operators have no compromise in achieving such goals. Given that JES undercuts its competitors' service prices by 30-40%, it could easily hike prices by about 50%. In an environment where competitors are raising prices, JES keeps them flat and focuses on taking market share—a decades-long strategy. Professional management would find it daunting the point of impossibility to replicate that single aspect of Chairman Ishida's multi-dimensional, generation-long strategy-set. Raising prices in the JES circumstance by just a couple of percentage points could lift margins and annual earnings sufficiently to meaningfully benefit an executive's career and stock-based compensation, at least in the short term. This is the essence of the agency problem in linking management incentive systems to performance. The situation is distinctly different for business owners—they're not hired agents, so the agency problem is nonexistent for them. This is the opportunity—not stocks, per se, but the owner-operators in which we truly invest. And in this instance, their opportunities often exist solely because of the uniquely Japanese business culture.

BSD Analysis:
Horizon Kinetics presents Japan Elevator Service Holdings as a compelling owner-operator story in Japan's elevator maintenance market. Chairman Ishida has built JES from a one-man operation in 1994 to the largest independent service provider with 10% market share, disrupting an oligopoly previously dominated by five major manufacturers. The company's competitive advantages include proprietary 24-hour remote monitoring technology, a comprehensive engineer training program called "Step 24," and the innovative Quick Renewal system that reduces elevator downtime from one week to half a day at half the cost. JES maintains superior service quality with a 1% failure rate while pricing services 30-40% below incumbents, demonstrating exceptional operational efficiency. The investment thesis centers on significant runway for market share expansion, with independent providers capturing 50% market share in other developed markets versus JES's current 10% in Japan. Revenue growth of 18% annually over five years and earnings growth of 26% support the expansion narrative. The valuation appears reasonable when considering normalized earnings potential at 30% market share, where the company could generate $200 million in annual net income on $975 million revenue with 30% operating margins, implying a 12x multiple on this future earnings stream.

Pitch Summary:
Texas Instruments is a fairly new holding in the fund, added in January of 2024. We view TI as a great example of the type of business we can own for many years despite participating in what is probably one of the most cyclical and volatile industries in the world. As we will hopefully demonstrate in the next few pages, cyclicality should not be detrimental to strong returns and long-term earnings growth provided it is approached with the right strategy and culture. The semiconductor industry has been an extraordinary sector to have exposure to, growing at ~8% per year for the past 40 years. This growth trajectory has been propelled by exponential innovation and the integral role semiconductors have come to play in our daily lives. However, not all segments within this thriving industry offer the same stability or longevity. History shows that many former chip industry leaders such as Fairchild, Motorola, and Philips no longer exist today. These fallen titans focused largely on digital or logic chips – the "brains" behind electronic devices. Developing the brains of a computer inherently pits you in a never-ending cutthroat race to bring the newest technology to market. Recent investor enthusiasm around GPU chip developers once again highlights a common investor preference for chasing the winners within these fast-moving subsegments. We prefer to spend our time differently. An often overlooked yet indispensable part of the semiconductor industry are analog chips. There are no fast-paced products found here. In fact, the first analog chip – an amplifier designed by Fairchild in 1964 – still sells billions of units annually (see below). These analog chips go into virtually everything. In contrast to digital semiconductors, which process binary information (0 or 1), analog semiconductors condition analog information which is continuous. This information is best thought of as 'real world' signals, like temperature, sound, pressure, and electrical current. Analog chips are thus often used in conjunction with sensors as well as any system using power. But not all analog chips are created equal. An intuitive way to think about an analog chip is to consider a dimmable lamp. Chances are you have seen one flicker at certain ranges. Similarly, you have heard a radio make white noise or heard microphone feedback on a video call. These imperfections might be acceptable for simple lamps or radios, but medical equipment, airplanes or the hundreds of battery cells in your EV require highly precise signal conditioning. These are the chips that Texas Instruments, Analog Devices and Infineon develop. Despite its use-cases being seemingly simple, high-performance analog chips are often not. In fact, they are more difficult to design than GPUs. When you amplify a continuous signal, there will always be some noise in the signal itself which will be amplified along with the signal. An analog designer will try to create a differentiated amplifier which manages this signal-to-noise ratio, or an amplifier which filters out certain frequency ranges while amplifying others. Such requirements do not come for free – power consumption might increase or the device will become slower. Trading off certain specifications to create a high-performance device requires designers to have deep knowledge of circuits as well as fundamental electronics/physics. It also involves a lot of intuition. In addition, a broad analog chip portfolio requires you to have at least 50,000 SKUs (a car might contain a thousand analog SKUs), whereas digital chipmakers often only have a handful. The complexity of design and breadth required is part of the reason why the leading analog companies several decades ago not only continue to dominate today, but have consolidated their market significantly. Texas Instruments ("TI") is the largest analog company globally. It has not always been that way. In the 50s, TI invented the first silicon transistor and several years later TI's young engineer Jack Kilby co-invented the semiconductor chip, for which he received a Nobel prize. On the back of this innovation, TI became one of the largest producers of chips in the world, and ventured into consumer electronics, communication equipment and even missiles. In the 90s mobile phones started to surge, to which TI became the key supplier. Nokia's global dominance in mobile phones made TI heavily dependent on this partnership, but the decline of Nokia's handset business in the late 2000s severely impacted TI's business. After the decline of the Nokia handset business, which had reached ~20% of revenue, TI completely revised its corporate strategy. The company shifted its focus toward analog chips with multi-year or even multi-decade product cycles, in contrast to mobile phones which change every year. Every R&D project was required to demonstrate a clear and measurable return, which for TI meant standardized chips with applicability across products and sectors. The company prioritised sectors with fragmented customers bases for these long-lived products, like automotive, factory automation and defence. TI also started communicating its stated goal, "growth of FCF per share over the long-term". Over the years TI made more changes to further strengthen its competitive advantages. Besides long-lived positions and a broad portfolio, TI started to cut out distributors to reach its customers directly. It also started to vertically integrate its supply chain, manufacturing the vast majority of chips in-house. Today, industry associations state TI has ~20% market share in analog chips. We believe this framing oversimplifies the reality of the market. Analog chipmakers are not competing with each other in large parts of their portfolios. TI chose to focus on catalog or standardized analog chips, where most peers like Analog Devices chose to deploy R&D dollars into customised chips which will only be used for one product and customer. Many analog players also still focus on consumer end-markets, where quality and safety requirements are lower. Peers are also increasingly relying on distributors for customer reach instead of cutting them out, and are outsourcing most incremental manufacturing capacity to foundries instead of vertically integrating. Why does TI do everything so differently from its peers? Most people think that TI's market power comes from the large portfolio of analog chips it maintains. While having 80,000 products that take years to design is necessary, we think that TI's market power comes from its focus combined with operational excellence. All the above decisions TI made, but its peers diverged away from, tie into TI's decision to focus on catalog analog products. Catalog products are high-volume, off the shelf and generally applicable. Manufacturing those products internally at scale is very sensible due to high investment requirements and a large fixed-cost base, whereas manufacturing a custom Bose audio chip is not. Catalog chips can also be kept in inventory for years, sometimes decades, making underutilisation of a fab's manufacturing capacity a smaller problem (in downcycles TI can continue producing its catalog parts for inventory). TI offers a broad portfolio of those chips as they are generally applicable and sells them to a wide range of customers for whom TI can deliver all standard chips on the board, instead of developing one much higher ASP custom chip. TI wants to be 90% for 50 customers instead of 100% for one. TI makes very high quality products, but is not an innovation leader. New projects will not be greenlit if (i) the product cannot be manufactured at scale, and (ii) the product does not have broad appeal to many customers with minimal support from the company. Besides focus, operational excellence is crucial for this strategy for two reasons. First, 'fabs' are simply very difficult to run. Peers increasingly say they prefer outsourcing manufacturing to foundries for flexibility, but in reality they often struggled with manufacturing the chips themselves. TI has consistently executed building and running its fabs. It regularly completes construction ahead of schedule. The only other company in the world that can finish fab construction early is TSMC, whose founder coincidentally was previously one of TI's most senior executives. Both TI and TSMC achieve this from an extremely process-driven and lean way of working. TI's absolute SG&A and R&D expenses were flat between 2012 and 2022 while gross profit doubled. Insourcing manufacturing and distribution will allow the company to further reap the benefits of its operational excellence. It will be very difficult for other analog companies to follow TI's path. A modern greenfield catalog fab requires $5bn annual revenue to run optimally, which respectively only TI and ADI generate. Distributors are incentivised to sell high absolute value parts to customers, less so the catalog parts TI sells. Only TI's catalog-focused peers could consider cutting distributors, but for most peers distribution has risen to over half of revenue now. A focus on industrial and automotive end-markets is something other analog players are trying, but it does require a large number of chip designers (which are scarce) as well as investment in safety and reliability testing for tens of thousands of SKUs. Regulatory-driven qualification and quality requirements are extremely high compared to consumer electronics. Automotive-grade products (which is an industry standard) have to demonstrate zero "DPM" or defects per million chips. Chips need to be able to operate for 25 years and between -40° and 125° Celsius (commercial grade is typically 0-70° Celsius). At chip-level, qualification will cost $100k or more for a single SKU. Every individual chip used in critical automotive applications are reliability-tested for 1,000 to 5,000 hours by the semiconductor manufacturer. It takes significant time and investment resources to build such a portfolio, and volume to justify it as TI's average chip costs $0.40. During the 2010s TI underinvested in its manufacturing capacity, meaning that by 2020 it was running close to fully utilized. The pandemic triggered enormous analog chip shortages. The semiconductor industry is notoriously cyclical. Capacity expansion has long lead times, while demand changes can be very sudden. Different layers in the value chain place double orders and build inventory, which inevitably has to be digested. In the beginning of the pandemic, automotive OEMs were quick to cut chip orders, while at the same time demand for computers, peripherals and electronics surged. When demand for cars rebounded faster than expected and automotive OEMs started double or triple-ordering chips, the industry had no capacity to respond quickly (which was further exacerbated by global supply chain disruptions caused by the pandemic). TI was already tight on capacity, and the largest analog chipmaker in the world was forced to forgo billions of dollars of potential revenue. In analysing this mistake, TI's management realized that given the longevity of their product, the opportunity cost of several months of missed sales is larger than several years of underutilised manufacturing capacity. TI thus initiated its largest capex cycle while the industry would go into one of its largest cyclical downcycles in its history, digesting the abnormal pandemic-driven upcycle – which exceptionally even troughed below the previous cycle bottom (see below). This was not taken well by the market, which usually dislikes spending while earnings are down. In our view, this capex cycle presents a reinvestment opportunity which will generate abnormal marginal returns for long-term shareholders like us. Analog fabs have a lifespan of multiple decades. TI is currently closing two fabs it built in the 70s. Importantly, ~70% of analog chips are manufactured in East Asia. TI is constructing multiple new fabs in Texas as well as Utah. In today's geopolitical world having US-based chipmaking capacity is a large asset, as companies like Apple, the defence industry and carmakers aim to source more locally. TI is expanding its domestic capacity ahead of the upcoming semiconductor upcycle, even if that means underutilisation in the short term. Unlike its peers, TI is deferring short-term profits for long-term benefit. As a rule of thumb, a $5bn capex analog fab will generate $5bn revenue per year for at least 30 years. At TI's superior cash flow margins this translates to a very favourable return on investment for those that can do it. Insourcing manufacturing also allows TI to reinvest all of its generated cash flows at attractive marginal returns, while peers outsourcing manufacturing to foundries are distributing generated cash to shareholders at lower returns. Deferring the short-term for the long-term is an important indicator of founder's mindset. TI is investing in its capacity now to support its FCF per share growth in the future. The company has also displayed capital allocation discipline in exiting lower quality businesses, pursuing only those that work for them. Moreover, TI consistently resists the temptation of custom contracts if the R&D cannot be spread across multiple products, meanwhile it continues to trade off short term profits by reducing its use of distributors in order to improve reach to customers in the long-term. As stated, these actions are in stark contrast to most peers, many of whom in our view portray less evidence of founder's mindset. TI's decisions breathe discipline, which can be seen across all layers of the organization. The company's sole purpose is to strengthen its competitive advantages to drive FCF per share growth in the long-term, as endlessly repeated by its CEO. Before we conclude, we wanted to write a quick word on the events that took place on Liberation Day and how they might have impacted TI. As the tension between China and the US escalated in the following days TI's advantage as the only analog chipmaker with US manufacturing capacity suddenly seemed to move into a disadvantage, although many details remained unclear. For example, would tariffs be imposed on where wafers are manufactured, or where chips are packaged and tested (by and large in Asia)? And what about tariffs on car components containing chips that already had tariffs imposed on them? Upon further analysis and conversations with the company in the weeks following Liberation Day we learned that TI could manufacture most of its chips for Chinese customers in its German, Japanese and Chinese fabs. Also, the interest in TI's US capacity has increased significantly as geopolitical instability is triggering reviews of supply chain vulnerabilities. TI is uniquely positioned to answer to this new need, and we have confidence management will continue to position the company to take advantage of it for the long-term. We believe TI's focus and operational excellence have put the company in a unique position to generate sustained free cash flow growth while adding significant incremental value to their customers. The company's employees think like long-term owners throughout the organization, which allows them to make decisions and take actions its peers are not able to. Management's clarity of communication on what their competitive advantages are and how they plan to reinforce those is something we rarely see as investors. We think that TI will be an exceptional business that can generate earnings growth of more than 12% per year while returning most of its free cash flow to shareholders. Looking through cycles and market volatility, we can expect low to mid-teens real IRR after assuming a fair amount of multiple compression. Finding these types of returns in a business as well managed and as resilient as TI is a gift that we gladly accept and we plan to hold for many years.

BSD Analysis:
Zeno presents a compelling long-term bull case for Texas Instruments centered on the company's dominant position in analog semiconductors and strategic focus on catalog products. The manager argues that TI's competitive moat stems from its operational excellence in manufacturing, direct customer relationships, and broad portfolio of standardized analog chips serving industrial and automotive markets with stringent quality requirements. TI's current capacity expansion cycle, while pressuring near-term margins, positions the company to capitalize on the next semiconductor upcycle with domestically-manufactured chips amid rising geopolitical tensions. The fund highlights TI's disciplined capital allocation and management's unwavering focus on free cash flow per share growth as key differentiators versus peers who chase custom solutions or outsource manufacturing. Management expects TI to generate 12%+ annual earnings growth while returning most free cash flow to shareholders. The investment thesis rests on TI's ability to compound returns through cyclical downturns by leveraging its manufacturing scale, product longevity, and founder-like mentality. Zeno projects low-to-mid teens real IRRs over the long term, viewing the current cyclical trough as an attractive entry point for a multi-decade holding.

Pitch Summary:
With the proceeds, we bought more FICO, which declined significantly because of comments made by Federal Housing Finance Agency Director Bill Pulte. He expressed displeasure over FICO's aggressive price increases and suggested that the administration is exploring options to reduce FICO's monopoly power. These comments, FICO's price reaction, and our decision to increase the position size serve as a good opportunity to discuss an important part of our investment process that we don't believe we've made explicit in past letters. Against this backdrop, FICO has raised prices in its mortgage division by hundreds of percent over the last seven years. Despite FICO's reasonable position that it is simply playing catch up after having kept prices constant for the first 30 years of the company's existence, these price increases, combined with FICO's consumer awareness, have made it a political target. However, we think this focus is misplaced and that regulatory interventions are unlikely to cap FICO's prices over the long term or displace FICO's essential role in the U.S. consumer credit ecosystem. Our confidence in this assessment is based on, first, the power of FICO's network and, second, the large gap between the price the company charges and the value its network creates. Because crowded information marketplaces are generally quite inefficient, requiring participants to maintain background knowledge on numerous providers and analytical methodologies, industries such as credit ratings tend to coalesce around one or two standards. In U.S. consumer credit, FICO has become this global standard. Furthermore, FICO's almost 40-year dataset uniquely enables global investors in U.S. consumer credit to contextualize the credit risk they're taking today compared to the past. Given this powerful value proposition, it's no wonder that over 95% of the total dollar volume of U.S. consumer credit securitizations solely cited FICO scores as their credit risk measure. This dominance is especially understandable when one considers that, despite raising its price per mortgage score by hundreds of percent, FICO still only charges the credit reporting agencies (Equifax, TransUnion, and Experian) $4.95 per score. Currently, each credit reporting agency probably pulls the score around one to two times when issuing a mortgage, meaning FICO probably gets paid $15 to $30 per each roughly $320,000 average mortgage loan originated. In percentage terms, this price works out to a one-time charge of roughly 0.5 to 0.9 basis points (a basis point is 1/100 of a percent) of the loan balance. In comparison, Moody's charges around 8 basis points per year to rate corporate issuers' debt. If FICO charged 8 bps per year to mortgage issuers, instead of receiving a one-time payment of $15 to $30, it would receive a payment of $256 in the first year and then a gradually smaller amount in each subsequent year as the mortgages were paid down over time. If you were to present value this stream of cash flows, FICO would receive thousands of dollars of value instead of the $15 to $30 it currently receives. In Moody's case, this 8 bps price is an incredible deal for corporate debt issuers because a Moody's rating likely reduces these issuers' borrowing costs by 30 to 50 basis points per year. While it's unclear whether FICO's value in reducing borrowing costs is lower, the same, or higher than Moody's value, we think it's quite clear that FICO's value to mortgage borrowing costs far exceeds the cost of its scores. Therefore, we believe the government will, ultimately, be unsuccessful in its attempt to dislodge FICO's dominant position in the mortgage ecosystem. In fact, we believe this episode echoes the period after the Global Financial Crisis (GFC) when governments around the world were trying to dislodge Moody's and S&P Global. In that case, Moody's and S&P Global didn't merely raise prices by a few dollars. Rather, they made serious ratings mistakes that partially caused the GFC, a crisis that almost destroyed the global financial system and resulted in trillions of dollars in losses for governments and investors. Despite these massive errors, the value of Moody's and S&P Global's rating systems as globally shared common languages used to communicate credit risk proved to be so massive that their market positions couldn't be touched. Fast forward to today (17 years after the GFC), and Moody's and S&P Global are more dominant and more profitable than ever.

BSD Analysis:
YCG Investments views FICO as a dominant network with massive untapped pricing power, using regulatory pressure as a buying opportunity. Despite government criticism over aggressive price increases in the mortgage division, the fund believes FICO's monopolistic position in consumer credit scoring is unassailable due to its 40-year data advantage and 95% market share in securitizations. The manager highlights the significant value gap between what FICO charges ($4.95 per score) versus the value it creates, comparing it favorably to Moody's pricing model which generates far higher revenues per transaction. YCG draws parallels to the post-GFC period when rating agencies faced similar regulatory threats but emerged stronger due to their essential role as industry standards. The fund sees FICO's network effects, data moat, and critical infrastructure role as providing long-term pricing power despite short-term political headwinds. This contrarian position reflects confidence in the durability of FICO's competitive advantages and the ultimate failure of regulatory attempts to displace entrenched network monopolies.

Pitch Summary:
Since the beginning of the year (and especially since Liberation Day), investors have aggressively sold down Apple's stock because of their understandable concern about tariff-related increases in manufacturing costs. Conversely, they have bid up Verisk, a firm that is largely immune from tariff risk because it sells mission-critical data to insurance companies. Because we believe Apple's network effects and pricing power are likely to remain strong over time and because we believe investors tend to overreact to near- and medium-term macro and geopolitical problems (which we call the market-timing mispricing), we used this divergent price action as an opportunity to trim our position in Verisk and add to our position in Apple. Subsequent to this portfolio change, the Trump administration has softened its stance somewhat and the consumer has remained resilient, leading to a strong market rally that has retraced most of the tariff-announcement-related losses (though not quite as much in Apple's case, where investors remain worried).

BSD Analysis:
YCG Investments views Apple as a victim of market-timing mispricing, where investors have overreacted to tariff concerns and manufacturing cost pressures. The fund believes Apple's network effects and pricing power provide durable competitive advantages that will persist despite near-term geopolitical headwinds. They used the tariff-induced selloff as an opportunistic entry point, trimming a position in the less tariff-sensitive Verisk to add to Apple. The manager's thesis centers on Apple's ability to maintain its dominant ecosystem and pass through cost increases over time. While the stock has partially recovered as tariff concerns have moderated, YCG sees continued investor skepticism as creating ongoing opportunity. The fund's contrarian approach reflects confidence in Apple's long-term fundamentals despite short-term macro volatility. This position aligns with their strategy of owning global champions with enduring pricing power during periods of market dislocation.