Investment Pitches

Pitch Summary:
One timely position to discuss is Bassett Furniture ("BSET"). BSET is a 120-year-old manufacturer, wholesaler, and retailer of upper-middle / upper-end furniture. This is an asset heavy company. On the back-end they own and operate 2 wood manufacturing facilities in Virginia, 2 upholstery facilities in North Carolina and Alabama, and 3 warehouses. They own and operate 8 retail locations that cover more than 200k sq feet of retail space; and they operate another 49 owned stores that are leased. Additional distribution comes from 31 Bassett branded retail stores operated by 3rd parties, as well as wholesale sales into other retailers. Up until 2022 BSET had an internal distribution (trucking) company; this was sold to J.B. Hunt for $87mm with part of the proceeds used for a special dividend. BSET has historically generated a 4-5% EBIT margin across its wholesale and retail business. Right now they are slightly loss making as the industry works through a glut in supply. LTM revenue is at $390mm which is right around where the company used to run pre-covid. Of course sales could dip further as retailers de-stock and demand lags given higher interest rates and slower home sales. But long-term I think it is fair to assume that this company could generate something like $20mm of EBIT. The current situation is not lost on management. In their most recent quarterly press release, BSET discussed plans the impetus to return to profitability and specifically noted a plan to reduce warehouse and delivery costs by 2% points. This will be accomplished through the consolidation of retail distribution facilities and improved capacity utilization. For each 1% increase to margins, the company would generate an incremental $4mm of EBIT. They also have a plan in place to improve their wholesale sales by showcasing their best products (custom upholstered furniture) with a slimmed down version of their store-in-store presence. The risk-reward here seems compelling. From a downside protection perspective, BSET is currently trading at a price of $13.50 but has tangible book value of over $19. Cash accounts for a large part of their book ($70mm or $8/share) and their real estate is not properly marked. For instance, the reported value of their 8 owned retail stores is just $24mm or $119/sq foot. My review of listings near these storefronts shows that most are offered at over $300/sqft. Assuming this low-end price, their retail properties are worth $36mm more than they are recorded at on the books (+4.19/share). Should BSET achieve $25mm of EBIT, a 5x multiple would put their enterprise value at $125mm and market value at $195mm or over $22/share (66% upside). This stock truly flies under the radar as it has just $120mm market capitalization and does not host conference calls.

BSD Analysis:
The manager presents Bassett Furniture as a compelling turnaround opportunity trading below tangible book value with significant real estate upside. BSET is currently unprofitable due to industry supply glut but historically generated 4-5% EBIT margins on $390mm revenue. Management has outlined specific cost reduction plans targeting 2% margin improvement through distribution consolidation and capacity utilization. The company trades at $13.50 versus $19+ tangible book value, with $70mm cash ($8/share) providing downside protection. Real estate appears significantly undervalued at $119/sq ft versus comparable market rates of $300+/sq ft, suggesting $4+ per share of hidden value. The manager calculates 66% upside potential if BSET achieves $25mm EBIT at a 5x multiple. The small $120mm market cap and lack of conference calls suggest limited institutional coverage, creating an under-the-radar opportunity.

Pitch Summary:
During the quarter I uncharacteristically built a position from nothing into our top holding. Clean Harbors ("CLH") is the largest US hazardous waste management company. Before digging into CLH I would like to diverge with a bit of personal history. In my early 20's I worked at Macquarie Bank where our team was responsible for acquiring investments on behalf of our managed infrastructure funds and the bank's balance sheets. One of my first assignments was the acquisition of a publicly traded municipal solid waste (MSW) management company (Waste Industries). While not technically infrastructure per-se, MSW has similar characteristics like being an essential service, operating regional monopolies, and controlling scarce assets. In any case we paid something like 8-9x EBITDA which was a premium to the then trading multiple. Waste Industries is now a small part of GFL Environmental which trades at 12x EBITDA. And GFL is actually at a notable discount to its peers of Waste Management, Republic Services, and Waste Connections that are at 15x. While hindsight is 20/20, buying into this asset class 15 years ago would have been a home-run given their strong cashflow and multiple expansion. While hazardous waste is not entirely comparable to their MSW brethren, CLH has many attractive attributes. They own and operate scarce assets including nine incinerators and eight landfills where new supply is limited by a complex permitting process and significant construction cost. They maintain vertically integrated operations that allow it to control waste from collection through transportation and disposal; this activity similarly requires specialized permits for which the company maintains over 500. As the largest player in the space, CLH has a proven history of managing waste properly – a key consideration amongst customers given environmental ramifications. They also have scale benefits that include route-based efficiencies, capacity utilization, and the deepest breadth of service offering. I view their business in broadly two segments, Environmental Services and Safety-Kleen Oil. Environmental Services provides waste remediation and cleaning services for various industries with particular concentration in chemical, manufacturing, refining, and auto service. Though many of these end-markets are individually cyclical, the diversification of their product offering and customer base will somewhat offset this. Additionally, these sectors should benefit from the ongoing shift to reshoring and increased regulatory / environmental scrutiny. Safety-Kleen Oil provides used motor oil collection and recycling; it is the most volatile part of CLH as profitability is largely determined by commodity prices. This business is currently depressed and accounts for just 13% of their consolidated EBITDA. CLH is taking steps to structurally improve these operations. For instance, by separating their feedstock during collections they can offer Group III base oils that receive a meaningful premium to Group II. CLH has historically operated the Environmental Services business at a low to mid-20's EBITDA margin. This is noticeably lower than the 30% range that most MSW operate in; this differential is even more jarring on an EBIT basis as CLH is less capital intensive than MSW. In early 2022 Republic Services acquired hazardous waste competitor US Ecology. A key part of their thesis was that they viewed the hazardous waste sector equivalent to the MSW sector 20 years go. Republic has said that they see 10 percentage points of margin expansion, to be achieved through further consolidation and a more rational approach to pricing. Since the acquisition, Republic has taken two double digit pricing increases and witnessed expanding margins. This approach is benefiting the industry as a whole, with CLH margins up 1.6% in 2023 to reach 24.5%. CLH is currently trading at 10.6x consensus EBITDA for 2025, a meaningful discount to their MSW peers. Assuming the base oil business is worth just 3.0x EBITDA, the remaining business is trading at 10.8x. This is entirely too low given their market positioning, essential service offering, and meaningful barriers to entry. Furthermore, this discounted multiple gives no optionality to further margin improvement. If margins were to increase another 500bps (obviously over the long-term), consolidated EBITDA would be 20% above consensus and the multiple would fall to <9x. Keep in mind that Republic acquired US Ecology at almost 14x trailing EBITDA.

BSD Analysis:
The manager built Clean Harbors into their top holding, viewing it as an undervalued essential services business with significant barriers to entry. CLH operates scarce assets including nine incinerators and eight landfills, with new supply constrained by complex permitting and high construction costs. The company maintains over 500 specialized permits and benefits from scale advantages in route efficiency and service breadth. The manager sees margin expansion potential driven by industry consolidation and rational pricing, similar to the municipal solid waste sector's evolution 20 years ago. Republic Services' acquisition of competitor US Ecology at 14x EBITDA and subsequent double-digit price increases validates this thesis. CLH trades at 10.6x 2025 EBITDA versus MSW peers at 15x, despite similar business characteristics. The manager believes further margin improvement could drive EBITDA 20% above consensus, creating significant upside potential.

Pitch Summary:
One such company that helps with these difficult situations is collision repair company Boyd Group Services. It happens to be Right Tail's newest investment and one that I would not be surprised to see double in value in the next 4-5 years. Like many Right Tail investments, it's a company I've been studying for a long time. I originally invested in the company in 2017 and have researched/invested in several companies which are tangentially related to collision repair. Boyd owns ~950 collision repair locations across the United States and Canada. The business has produced a track record of incredible growth and returns on capital. Boyd is headquartered in Winnipeg, Manitoba though 90% of its revenue is generated in the US. Its banner in the US is Gerber, which Boyd bought ~20 years ago. The company has an enterprise value of ~$6B. Like several of our other investments, Boyd does many little things well, which is a great source of competitive advantage. They buy and grow many smaller repair shops. They remain fastidious on what they're willing to pay for acquisitions, despite this becoming an industry that has attracted much private equity capital. In fact, as multi-site operators have become more expensive, Boyd has shifted its focus to buying single locations or building greenfields. They expected to receive 30% returns on capital for the greenfields though the returns take longer to achieve as the new sites mature. They balance growth and profitability rather than solely focusing on growth at any cost like many companies over the past several years. As a result, Boyd's return on invested capital has typically been greater than 25%. This fragmented industry continues to consolidate with the larger players leading the charge. The top 3 companies (Caliber Collision, Boyd, and Crash Champions/Service King) generate ~20% of industry revenue, a number which has grown significantly over the last 20 years though still leaves much room for further increases. It's a fun industry to research and develop unique insights with Boyd being the only company that is traded publicly. 60-70% of the locations in the industry are still single store, mom and pops. Often these smaller companies don't have the balance sheets to invest in technology to repair newer cars. I've spoken to a few operators and insurance partners who support our thesis. I have also needed to get some minor collision repair work done twice in the last year. Once I used a direct repair program and the other time I did not. My sense is that there still big improvement that can be made to further optimize these repairs and make them easier on consumers. Boyd provides significant value to its auto insurance partners and consumers. Consumers want their cars repaired well and quickly. If not, they may decide to change insurance providers. The insurance companies have preferred to establish Direct Repair Programs usually with the larger collision repair companies. The goal is to make the process as easy and simple as possible for the customer. The larger collision repair companies are usually better operators with the latest equipment to repair cars that are becomingly increasingly complex. Often the insurance company pays the collision repair company directly – in fact, 90% of Boyd's revenue involves insurance companies. In inflationary times, collision repair companies need to raise prices to cover their costs and insurance companies need to get prices approved by their state regulators. This process typically works well though time lags are normal. I expect Boyd to compound at a high teens to low twenties rate of return. This rate of return is achieved by a 2-3% cash yearnings yield + 3-5% growth without reinvestment + 10-15% growth from reinvestment. The most attractive piece here is that Boyd invests nearly all its free cash flow at 25% or higher incremental rates of return. The least attractive part of the equation is the current valuation but I expect the reinvestment opportunity to more than compensate us over a multi-year holding period. I expect Boyd to produce an IRR that I believe ranks near the top of our portfolio. Further opportunities exist if Boyd can get back to pre-COVID levels of profitability which have been impacted by higher labor rates or even higher levels of profitability as calibrating sensors on newer cars is a newer and higher margin opportunity. I also like that this business is less economically sensitive. People will still drive and maybe even drive more during tougher economic times. Industry specific risks could include a significant, permanent drop in accident frequency possibly driven by collision avoidance technology. Offsetting this risk is population growth, growth in miles driven and continued high levels of distracted driving. Another risk is that more cars are being declared total losses due to increased vehicle complexity and rising repair costs – that said, there continues to be more demand than supply for repair services and backlogs are often several weeks in advance. Put it all together and I think we have the chance for a five year double or better with a management team that's prudently allocated capital at high incremental rates of return. That it's a less cyclical business is also appealing as we'll encounter a recession at some point in the future. While getting in an accident is never a pleasant experience, I love how this company provides great value to its partners and hopefully will turn into a more than pleasant investment for us.

BSD Analysis:
The manager presents a compelling bull case for Boyd Group Services, a collision repair consolidator operating ~950 locations across North America with a $6B enterprise value. The investment thesis centers on Boyd's exceptional capital allocation discipline, generating 25%+ returns on invested capital through strategic acquisitions and greenfield expansion. The company operates in a highly fragmented industry where 60-70% of locations remain single-store operations lacking the capital and technology to service increasingly complex vehicles. Boyd's competitive moat stems from its Direct Repair Program partnerships with insurance companies, which value the company's operational excellence and advanced repair capabilities. The manager expects high-teens to low-twenties annual returns driven by 2-3% dividend yield, 3-5% organic growth, and 10-15% growth from reinvestment at attractive returns. The defensive nature of the business model provides recession resilience, as accident frequency remains relatively stable during economic downturns. Key risks include potential disruption from collision avoidance technology, though population growth and distracted driving trends provide offsetting tailwinds.

Pitch Summary:
During the quarter, we purchased Northwest Natural Holding Company (ticker: NWN). Founded in 1859, NW Natural is a natural gas utility operating in Oregon and Washington. While the company targets long-term earnings growth of 4%-6%, earnings per share in 2024 are expected to decline by 7% to 15%. Earnings are being pressured by above average investments in the utility's infrastructure and higher than expected inflation. In response, management filed for a rate increase with regulators in December 2023, which would provide the utility with a 10.1% return on equity. If approved, new rates are expected to go into effect in November and should move earnings in 2025 closer to our normalized estimate of $2.80/share. NW Natural is currently trading at 13x our normalized EPS estimate and 1.2x tangible book value—both near historical lows. The firm has increased its dividend for 68 years in a row, and the stock offers a 5.3% yield. While there remains uncertainty related to regulatory decisions and interest rates, at its current price, we believe we're being adequately compensated for risk assumed.

BSD Analysis:
Palm Valley initiated a position in Northwest Natural, a 165-year-old natural gas utility serving Oregon and Washington. The manager views the current valuation as attractive at 13x normalized earnings and 1.2x tangible book value, both near historical lows. The investment thesis centers on temporary earnings pressure from infrastructure investments and inflation being resolved through regulatory rate increases. Management filed for a 10.1% return on equity rate increase in December 2023, with approval expected to boost 2025 earnings toward the $2.80 normalized estimate. The company's 68-year dividend growth streak and current 5.3% yield provide income support during the regulatory process. Despite near-term earnings headwinds of 7-15% in 2024, the manager believes the risk-adjusted return profile is compelling given the utility's regulated nature and historical valuation metrics.

Pitch Summary:
PayPal has been a long-standing holding for Wedgewood, since 2015. After taking some of our gains around the company's COVID-19-fueled peak in 2021, we have been adding to the stock slowly over the past two years, taking it back to a significant position in the portfolio. We would like to update you on our current thinking. Like most "COVID-19 stocks", a variety of companies (e.g., Amazon) benefited from artificially high growth rates due to the COVID-19 lockdowns and subsequent stimulus; fundamentals at PayPal saw a normalization as the world returned to normal through 2021-2022. Similar to most of those companies, many PayPal investors had incorrectly assumed their artificially elevated growth rates during the COVID-19 period would continue for years and were surprised when the normalization occurred, leading to a decline in the Company's admittedly overheated stock. The big difference between PayPal and many of these stocks (e.g., Amazon once again) is that PayPal still has not recovered from this broad normalization period. When fundamentals at a previously loved company take a negative turn - as happened with many of the COVID-19 stocks when artificially high growth rates were normalized – we generally see investors tend to look past the obvious culprit and do their best to uncover other problems that may be problems at all. In this case, it seemed that a few bears could see the culprit that seemed rather clear to us - namely, the very rational normalization in growth rates after a period of wildly inflated growth. Certainly, we observed this phenomenon around the post-COVID-19 normalization, when not just at PayPal but at almost all the COVID-19 beneficiaries experienced a sharp decline. The impact of this event in the significant downturn in technology stocks as the market adjusts to a new normal. In PayPal's case, the winding down of the company's long-standing relationship with eBay also coincided with this period of normalization, contributing a bit more to the bust side of the boom/bust cycle everyone else was experiencing. The eBay situation had been coming for years, as anyone paying attention should have known - still, the timing of the final closure of the compounded the already negative PayPal stock sentiment. Investors then began to propose a variety of additional theories about what was going wrong. Many of these theories can be categorized under the broad heading of "share loss," where a variety of smaller payment platforms, digital wallets, ancillary service offerings all were (and still are) considered existential threats to PayPal. Before the Federal Reserve's significant rate hiking program, the Buy Now Pay Later (BNPL) providers were one of the theoretical issues for PayPal, for example. Setting aside the questionable business case of borrowing money in order to lend it to consumers at zero percent - a business case that became even more questionable as the cost of borrowing rose significantly - there was plenty of noise around PayPal losing share to BNPL providers, because investors could see outsized growth rates from those providers, whereas PayPal's growth rates were relatively lower. Obviously, smaller companies with mathematically have an easier time showing faster growth rates than larger companies due to growing from a lower base. More to the point, this also doesn't mean the large companies have necessarily "lost share" in the industry, if they continue to grow along with the broad industry. To track broad industry growth for PayPal, we follow the Company's total payment volume (TPV) growth in relation to Visa, MasterCard and broad U.S. e-commerce growth, among other things. As you can see in the chart below, PayPal routinely tracks at or near the top end of these broad industry trends, so arguments regarding share loss is puzzling to us. We need to emphasize too that one of the primary drivers of the investment case here is the payments market is still growing strong, and a large market growing at such rates has room for more than several players to succeed. A smaller player growing at a higher growth rate than PayPal means neither that PayPal is neither losing share, nor that PayPal is unable to continue as a successful business. Another component of the negative sentiment around the Company was uncertainty around the leadership of the Company. Long-time CEO Dan Schulman and CFO John Rainey both announced their retirements during the post-COVID-19 deceleration period. The Company spent a significant amount of time finding their respective replacements. Further confusing matters, some investors (including us) had been fans of the company's management team and hoped the Company would name replacements who would continue the long-time strategy of growing profitably; others hoped to see more growth-oriented leadership (or, in our thinking, growth that does generate much bottom-line profitability, common enough in large-cap tech). The Company named a CFO replacement, Blake Jorgensen, who had medical issues and had to leave almost immediately after his arrival. Subsequently, the Company has appointed replacements for both major roles. Alex Chriss joined as CEO from Intuit toward the end of 2023 and Jamie Miller joined as CFO from Ernst & Young shortly afterward. Although it is obviously early in this new leadership team's tenure, everything we have been hearing from them leads us to believe they will continue the company's successful long-term strategy of building lasting profitable growth. Although the negative commentary around the company has wandered from topic to topic, perhaps the most recent commentary has been some concern around the import of Company's declining profitability within their merchant services. We also agree this is one of the issues raised by the broad market on PayPal's current fundamentals that matters most. It definitely is true that the Company's margin on transactions has been declining over the past few years as it aggressively expanded its Braintree service, a payment platform for merchants that can accept almost all major forms of digital payments. While Braintree is unlikely ever to be more profitable than the company's flagship PayPal button on a transaction margin basis, its profitability has been artificially low while the company has expanded significantly, with the company sacrificing pricing to build a large beachhead of share in this service. Notionally, we are not fans of companies sacrificing margins to grow; however, what sets PayPal apart is that the total company remained quite profitable as it pursued this aggressive growth in one side of the business. We also would note that Venmo is another growing service that is less profitable than the core PayPal branded business, and the market absolutely loved Venmo not so long ago. We would be much more concerned with the Braintree growth, and its impact on total company profitability, if we expected the current growth rates and margins to continue into the many years ahead. However, the company has made it clear that it is at or near the end of the initial beachhead phase of its Braintree strategy. New CEO Alex Chriss has been addressing this topic specifically, saying they now have a solid position in the industry, they will be taking more normalized pricing, and they also will be expanding a variety of higher-margin ancillary services they can now roll out to their established customer base. We believe this will lead to improving transaction margins in the next several quarters and will begin to remove this particular concern for the market. Overall, the overwhelmingly negative sentiment in the stock of late, has given us the opportunity to reload our position in the stock. We continue looking at the fundamentals: for example, the company reported +23% earnings per share growth and +13% TPV growth for 2023, growing at or near the top end of the digital payments market. Perhaps the crisis imbedded in PayPal's current stock valuation is not so dire. Because the market ultimately acts as a brutal weighing-machine, thus we are strong believers that reality does win eventually, and the reality of the Company's improving fundamentals will eventually be reflected in a more appropriate higher stock valuation. We will admit we were a bit taken aback when the company provided its initial outlook for flat 2024 earnings per share growth versus 2023, announced on its fourth quarter earnings report in early February. It was difficult for us to see what would cause such a slowdown in the Company's growth rates while the Company was talking about initiatives to improve profitability - especially in the Braintree business. So, while the market beat the stock up again, our impression is that this guidance was quite conservative. Not surprising, in the couple of months since the Company provided this initial guidance, the management team has been presenting at investor conferences, acknowledging their conservativism. Trends within the business have remained steady in relation to the healthy 2023 trends. The Company continues to implement improved margin plans at Braintree and to push innovations that will be helpful to Braintree's platform of consumer, small business payors, and merchants. The Company is also cutting headcount by +9%, and management will buy back at least as much stock as it did last year, representing another -8% reduction in share count. All of which we expect to be supportive of notably better results than management's initial 2024 guidance. It is our experience these "wandering bear thesis" stories tend to come to an end at a point that is often difficult to predict. Shorter-term investors tend to move in a herd, meaning a stock can move meaningfully in a short time once the tide turns – that is, as both financial expectations and the multiple the market applies to those expectations rise simultaneously. We would highlight similar enough dynamics that played out at Meta Platforms, which has been one of our largest holdings for some time. Meta Platforms was a significant COVID-19 beneficiary; the boost to its e-commerce customers led to significant advertising growth rates for the company. With hindsight clarity, they too saw the broad normalization that most everyone else experienced. However, it is important to recall at the same time the normalization was happening, the Company was dealing with a few additional issues - most importantly, changes Apple had made to make it more difficult for the Company to target ads to Apple hardware users, plus seemingly out of control out-sized billion-dollar capex spending. Just as we are seeing with PayPal now, as Meta Platforms investors started looking past these concerning issues, valuation improved noticeably from very low levels. In the fullness of time, the tide turned in sentiment of a secular fundamental turn because the company made some good choices on expense control and capital allocation. The result was rapid and significant move in the stock as reported earnings continue to rebound sharply. Per our three-decade playbook, it is important to have significant positions in these types of situations before the turning point arrives. While we are certainly not forecasting a similarly-sized move in PayPal stock as in the booming stock of Meta Platforms, we continue to maintain a larger position in PayPal stock in anticipation of this turning point, and we are confident it is coming.

BSD Analysis:
Wedgewood Partners presents a compelling contrarian thesis on PayPal, viewing the current negative sentiment as a buying opportunity. The fund argues that PayPal's post-COVID normalization has been misinterpreted by the market as fundamental deterioration, when in reality the company continues to grow at the top end of the digital payments industry with +23% EPS growth and +13% total payment volume growth in 2023. The manager dismisses market share loss concerns, noting PayPal tracks at or near the top of industry growth trends versus Visa and MasterCard. While acknowledging margin pressure from the aggressive Braintree expansion, Wedgewood believes new CEO Alex Chriss will normalize pricing and expand higher-margin services, leading to margin recovery. The fund sees parallels to Meta Platforms' successful turnaround and expects PayPal's conservative 2024 guidance to be exceeded given ongoing cost cuts, share buybacks reducing the count by 8%, and steady business trends. With the stock trading at depressed valuations despite solid fundamentals, Wedgewood maintains a significant position anticipating a sentiment reversal.

Pitch Summary:
Media conglomerate Warner Bros Discovery was the top detractor in the quarter. The market disliked the company's lack of guidance for 2024. While there are tentative signs that the advertising market is slightly improving, we understand why the market remains in show-me mode on this part of the business. The Warner Bros Studio has gone from a big hit with the Barbie movie last summer to some misses lately. As we have discussed before, April 2024 represents the two-year anniversary of Warner Bros and Discovery merging. After this date, the company will have more options to go more on offense. Unfortunately, this is overlooked in the near term by daily Paramount headlines. We are ready to see how the rest of this year plays out. WBD still generates substantial FCF and is de-levering its balance sheet rapidly. The company remains dramatically undervalued today, but we need to see more positives before increasing our position further.

BSD Analysis:
Longleaf Partners maintains a cautious but constructive view on Warner Bros Discovery despite recent underperformance. The fund acknowledges market concerns regarding the lack of 2024 guidance and understands investor skepticism toward the advertising business, though tentative signs of improvement are emerging. The volatility in Warner Bros Studio performance, from the Barbie success to recent misses, highlights the cyclical nature of content creation. The approaching two-year merger anniversary in April 2024 represents a strategic inflection point, potentially unlocking additional value creation opportunities. While near-term sentiment is overshadowed by industry consolidation headlines, WBD's fundamental cash generation and rapid balance sheet deleveraging remain compelling. The company trades at a dramatic discount to intrinsic value, but Longleaf requires additional positive catalysts before increasing position size. This measured approach reflects the fund's discipline in balancing attractive valuation with execution risk in the evolving media landscape.

Pitch Summary:
The technology solution provider for financial institutions was another top contributor in the quarter. We first started buying this company last year when its bank customers were going through stock market turmoil after the failure of Silicon Valley Bank. We have learned how steady this industry tends to be even through crises, and FIS has demonstrated this once again with the company's core bank software business getting back to solid growth this year. CEO Stephanie Ferris is proving to be a great partner since she was elevated to the role less than a year and a half ago. FIS recently monetized a non-core business at a good value and is using the proceeds to repurchase 10% of the company. This is a stable company that is on offense yet still trading at a reasonable multiple of FCF – not easy to find in today's market.

BSD Analysis:
Longleaf Partners demonstrates strong confidence in FIS's resilient business model and new leadership under CEO Stephanie Ferris. The fund's contrarian entry during banking sector turmoil following Silicon Valley Bank's failure has proven prescient, as FIS's core bank software business has returned to solid growth. The stability of the financial technology industry, even during crisis periods, validates the defensive characteristics of FIS's revenue streams. Ferris's leadership has been particularly effective, with strategic portfolio optimization through non-core asset monetization and aggressive capital allocation. The decision to repurchase 10% of outstanding shares demonstrates management's confidence in intrinsic value and commitment to shareholder returns. FIS represents a rare combination of stability and offensive growth potential while trading at reasonable free cash flow multiples. This valuation disconnect in today's expensive market environment makes FIS an attractive investment opportunity in the financial technology sector.

Pitch Summary:
Global logistics company FedEx performed well for the period. The company beat consensus estimates in the quarter and showed material progress in its DRIVE cost reduction program that we have written about previously. FedEx also repurchased substantial stock in the quarter. Its 6% annualized repurchase pace is very strong compared to its history, and the company authorized another $5 billion share repurchase program. FedEx also lowered capital expenditures guidance for the fiscal year, further helping FCF generation. We believe the company is approximately halfway through its cost cutting program with more room to go that is still not appreciated by the market.

BSD Analysis:
Longleaf Partners expresses strong conviction in FedEx's operational turnaround and capital allocation strategy. The company's ability to beat consensus estimates while demonstrating material progress in the DRIVE cost reduction program validates management's execution capabilities. The 6% annualized share repurchase pace represents a significant acceleration from historical levels, supported by the authorization of an additional $5 billion buyback program. Reduced capital expenditure guidance enhances free cash flow generation, providing additional resources for shareholder returns. The fund believes FedEx is only halfway through its cost-cutting initiative, suggesting substantial additional value creation potential that remains unrecognized by the market. This combination of operational improvements, disciplined capital allocation, and unappreciated cost reduction runway positions FedEx as an attractive investment in the logistics sector. The company's ability to generate strong cash flows while returning capital to shareholders demonstrates the quality of the underlying business model.

Pitch Summary:
Natural gas company CNX Resources was the top performer in the quarter. It has been a tough natural gas price environment over the last several months, but CNX came into this year more hedged than peers and with a strong balance sheet that has funded continued share repurchase at a double-digit annualized pace. The company is also executing well operationally. Our partners CEO Nick DeIuliis and Chairman Will Thorndike continue focusing on growing long term free cash flow (FCF) and value per share. The quarter saw EQT, a larger competitor in the Appalachian basin, decide to recombine its pipeline business with its upstream business. CNX had already done this in 2020 at what we believe was a better time and a better price, so it was nice to see additional validation of this decision. CNX remains very discounted and one of our stronger value growers over the last few years, which is why we added to our position earlier in the quarter when it was trading at a larger discount.

BSD Analysis:
Longleaf Partners maintains a bullish stance on CNX Resources, highlighting the company's superior positioning during challenging natural gas market conditions. The fund emphasizes CNX's strategic hedging advantage over peers and robust balance sheet enabling aggressive share repurchases at double-digit annualized rates. Management's focus on free cash flow generation and value per share growth aligns with Longleaf's investment philosophy. The validation of CNX's 2020 pipeline-upstream integration strategy, as evidenced by competitor EQT's similar move, reinforces the quality of management decisions. Despite being one of the fund's strongest value growers, CNX trades at a significant discount to intrinsic value. The fund's decision to add to the position during the quarter reflects confidence in the company's operational execution and long-term value creation potential. The combination of defensive positioning, capital allocation discipline, and attractive valuation makes CNX a compelling investment in the energy sector.

Pitch Summary:
Warner Bros Discovery (WBD) – Media conglomerate Warner Bros Discovery was also a detractor in the quarter. The market disliked the company's lack of guidance for 2024. While there are tentative signs that the advertising market is slightly improving, we understand why the market remains in show-me mode on this part of the business. The Warner Bros Studio has gone from a big hit with the Barbie movie last summer to some misses lately. As we have discussed before, April 2024 represents the two-year anniversary of Warner Bros and Discovery merging. After this date, the company will have more options to go more on offense. Unfortunately, this is overlooked in the near term by daily Paramount headlines. We are ready to see how the rest of this year plays out. WBD still generates substantial FCF and is de-levering its balance sheet rapidly. The company remains dramatically undervalued today, but we need to see more positives before increasing our position further.

BSD Analysis:
Longleaf Partners maintains a cautiously neutral stance on Warner Bros Discovery, acknowledging both the company's fundamental strengths and near-term execution challenges. The fund recognizes market frustration with management's lack of 2024 guidance and understands investor skepticism given the volatile advertising environment and inconsistent studio performance following Barbie's success. However, the managers highlight important structural improvements including substantial free cash flow generation and rapid balance sheet deleveraging. The approaching two-year merger anniversary in April 2024 represents a potential catalyst, providing management greater strategic flexibility for value-creating initiatives. Despite acknowledging WBD's dramatic undervaluation, the fund adopts a wait-and-see approach, requiring additional positive developments before increasing position size. This reflects disciplined patience in a volatile media landscape where fundamental value exists but operational execution remains inconsistent.

Pitch Summary:
Liberty Broadband – Cable and media holding company Liberty Broadband was the top detractor in the quarter. The company's investment in Charter Communications posted disappointing numbers for key metrics like subscribers and cash flow growth. Other broadband industry players have also produced disappointing results, and has been a "1 step forward, 1 step back" situation over our holding period. We do, however, believe that competitive trends should get better as the year goes on, especially as fixed wireless capacity is not endless. It was encouraging to see Charter increase the pace of share repurchase in the quarter, with a simultaneous uptick in insider buying. Unfortunately, our value has not grown as we thought it would, leading to this investment being a smaller position in the portfolio today.

BSD Analysis:
Longleaf Partners expresses measured disappointment with Liberty Broadband's performance, primarily driven by Charter Communications' underwhelming operational metrics including subscriber losses and weak cash flow growth. The fund acknowledges broader industry headwinds affecting multiple broadband players, creating a frustrating "1 step forward, 1 step back" investment experience. However, the managers maintain cautious optimism about improving competitive dynamics, particularly as fixed wireless capacity constraints may reduce competitive pressure on traditional cable operators. Positive signals include Charter's accelerated share repurchase activity and increased insider buying, suggesting management confidence in the business. Despite these encouraging developments, the fund admits that value creation has fallen short of expectations, resulting in position size reduction. The stance reflects a patient but increasingly skeptical view of the broadband sector's near-term prospects.

Pitch Summary:
FedEx – Global logistics company FedEx performed well for the period. The company beat consensus estimates in the quarter and showed material progress in its DRIVE cost reduction program that we have written about previously. FedEx also repurchased substantial stock in the quarter. Its 6% annualized repurchase pace is very strong compared to its history, and the company authorized another $5 billion share repurchase program. FedEx also lowered capital expenditures guidance for the fiscal year, further helping FCF generation. We believe the company is approximately halfway through its cost cutting program with more room to go that is still not appreciated by the market.

BSD Analysis:
Longleaf Partners presents a compelling operational turnaround story for FedEx centered on the company's DRIVE cost reduction program and enhanced capital allocation. The fund emphasizes FedEx's ability to exceed consensus estimates while demonstrating material progress on cost optimization initiatives. Management's commitment to shareholder returns is evident through accelerated share repurchases at a 6% annualized pace, significantly above historical levels, supported by a new $5 billion authorization. Reduced capital expenditure guidance further enhances free cash flow generation, creating additional flexibility for value-accretive activities. The fund believes FedEx is only halfway through its cost-cutting program, suggesting substantial additional margin expansion potential that remains unrecognized by the market. This combination of operational improvement, disciplined capital allocation, and underappreciated restructuring benefits creates an attractive investment opportunity in the global logistics sector.

Pitch Summary:
CNX Resources – Natural gas company CNX Resources was another top performer in the quarter. It has been a tough natural gas price environment over the last several months, but CNX came into this year more hedged than peers and with a strong balance sheet that has funded continued share repurchase at a double-digit annualized pace. The company is also executing well operationally. Our partners CEO Nick DeIuliis and Chairman Will Thorndike continue focusing on growing long term FCF and value per share. The quarter saw EQT, a larger competitor in the Appalachian basin, decide to recombine its pipeline business with its upstream business. CNX had already done this in 2020 at what we believe was a better time and a better price, so it was nice to see additional validation of this decision. CNX remains very discounted and one of our stronger value growers over the last few years, which is why we added to our position earlier in the quarter when it was trading at a larger discount.

BSD Analysis:
Longleaf Partners maintains a strong bull thesis on CNX Resources despite challenging natural gas pricing, emphasizing the company's superior risk management and capital allocation strategy. The fund highlights CNX's defensive positioning through better hedging compared to peers and a robust balance sheet enabling aggressive share repurchases at double-digit annualized rates. Management's focus on long-term free cash flow generation and value per share growth aligns with Longleaf's investment philosophy. The fund views CNX's 2020 decision to integrate pipeline and upstream operations as strategically prescient, recently validated by competitor EQT's similar move at less favorable terms. Strong operational execution combined with significant valuation discount creates an attractive opportunity. The fund's decision to add to the position during quarterly weakness demonstrates conviction in the company's value creation potential and management's shareholder-friendly approach.

Pitch Summary:
Fidelity National Information Services (FIS) – The technology solution provider for financial institutions was the top contributor in the quarter. We first started buying this company last year when its bank customers were going through stock market turmoil after the failure of Silicon Valley Bank. We have learned how steady this industry tends to be even through crises, and FIS has demonstrated this once again with the company's core bank software business getting back to solid growth this year. CEO Stephanie Ferris is proving to be a great partner since she was elevated to the role less than a year and a half ago. FIS recently monetized a non-core business at a good value and is using the proceeds to repurchase 10% of the company. This is a stable company that is on offense yet still trading at a reasonable multiple of free cash flow (FCF) – not easy to find in today's market.

BSD Analysis:
Longleaf Partners presents a compelling bull case for FIS based on the company's resilient business model and opportunistic management execution. The fund initiated the position during banking sector stress following Silicon Valley Bank's collapse, demonstrating contrarian timing when the market was overly pessimistic about financial technology providers. The core thesis centers on FIS's steady bank software business returning to solid growth, validating the defensive characteristics of mission-critical financial infrastructure. CEO Stephanie Ferris has proven effective in her leadership role, executing value-accretive capital allocation through asset monetization and aggressive share repurchases. The fund highlights FIS's 10% share buyback program funded by non-core asset sales, demonstrating disciplined portfolio optimization. Despite the company's stability and growth trajectory, FIS trades at reasonable free cash flow multiples, offering an attractive risk-adjusted opportunity in an expensive market environment.

Pitch Summary:
German-listed specialty chemical company LANXESS was also a detractor for the quarter. 2023 was a difficult year for the chemical industry. Energy prices significantly weighed on margins last year, combined with low demand out of China in addition to low industrial demand and destocking globally. Picking the exact trough is an impossibility and while those headwinds abated in the first quarter, they are far from fully reversed. The good news is that management is optimistic we are in the early stages of recovery, and indeed over recent weeks we have seen the first signs of improving data. Additionally, management took the opportunity of a challenging 2023 to remove structural costs across the company. This puts the company in a strong position as demand recovers, which will flow through into high operational gearing, leading to a strong rebound in EBITDA and cash generation. We believe there is a clear path to improving previous balance sheet concerns over the next 12 months. We expect weak first quarter results in May but expect the second quarter to be stronger and then accelerate in the second half of the year as comps get easier and demand improves. The company delivering solid EBITDA generation in 2023 despite utilization rates in the 50-60% range (where historically chemical producers would have been heavily loss-making) is a testament to the structural changes made by the current management team. Given their strong operational gearing we anticipate rapid value growth as end markets stabilize and internal cost measures take effect, which is clearly not yet appreciated by the market.

BSD Analysis:
The manager presents a cyclical recovery thesis for LANXESS, emphasizing the company's improved cost structure and operational resilience during the downturn. Management's structural cost reduction during 2023's challenging environment positions the company for significant operational leverage as demand recovers. The ability to generate positive EBITDA at 50-60% utilization rates demonstrates the effectiveness of recent operational improvements, contrasting with historical industry losses at similar levels. Early signs of demand recovery and management's optimistic outlook suggest the chemical cycle may be inflecting positively. The high operational gearing inherent in the chemical business model should amplify earnings growth as volumes normalize and easier comparisons emerge in the second half of 2024. Balance sheet concerns appear manageable with a clear path to improvement over the next 12 months. The market's failure to recognize the structural improvements and cyclical positioning creates an attractive risk-adjusted opportunity as the recovery unfolds.

Pitch Summary:
Korea's leading search and e-commerce platform was a detractor for the quarter. The key market concern is the increasing competition in the Korean e-commerce space from Chinese entrants like Alibaba and Pinduoduo. These entrants are growing quickly in Korea, but they are starting from a very low base. These competitors have less than 3% market share in a very fragmented market. Naver's recent deceleration in Gross Merchandise Value (GMV) growth is driven by their focus on monetization and exposure to long tail products which are more vulnerable to weak consumption sentiment. Naver is focused on profitable growth. They are increasing their take rates, with revenue growth much higher than GMV growth. Notably, this is a marketplace business with no inventory risk and the entrance of new players enriches the marketplace. As Chinese entrants come in, they will increase digital ad spend, which will benefit Naver. We continue to like Naver's competitive positioning in Search and E-commerce, and its runway for growth. We expect margins to improve as management's mindset shifts from topline growth to profitable growth.

BSD Analysis:
The manager addresses competitive concerns from Chinese e-commerce entrants while highlighting Naver's defensive moats and strategic pivot to profitability. Chinese competitors' minimal market share (sub-3%) in a fragmented market suggests limited near-term disruption risk to Naver's dominant position. The company's strategic focus on monetization over GMV growth demonstrates disciplined capital allocation, with revenue growth significantly outpacing transaction volume growth. The marketplace model's asset-light structure provides operational leverage without inventory risk, while new competitor entry actually benefits Naver through increased digital advertising spend. Management's shift from growth-at-any-cost to profitable growth should drive margin expansion and sustainable value creation. Naver's dual dominance in search and e-commerce creates cross-selling synergies and competitive advantages in the Korean digital ecosystem. The combination of market leadership, improving unit economics, and structural growth in Korean digital commerce supports the long-term investment thesis.

Pitch Summary:
The largest private sector bank in India, was the top detractor for the quarter. The merger between HDFC Ltd and HDFC Bank was completed in July of last year. The first couple of quarters post-merger have been challenging as some financial metrics, like Net Interest Margin and Return on Assets, are reset in the combined entity. A key concern is their elevated loan to deposit ratio. This ratio is elevated because HDFC Ltd was a wholesale funded Non-Banking Financial Company (NBFC) coming into the merger with HDFC Bank. The company is focused on lowering this ratio, which means near-term loan book growth will trail deposit growth, which is itself constrained by tight system liquidity. Despite this near-term headwind, we continue to like HDFC for its long-term compounding potential. It has around 15% lending market share and around 11% deposit share in India. We expect merger synergies to be meaningful in terms of higher cross-selling opportunities and lower cost of funds as the bank gradually replaces legacy high-cost borrowings from HDFC Ltd with low-cost granular deposits. The cost to income ratio is elevated currently due to accelerated branch openings and should come down as these branches mature. HDFC Bank is the best-in-class banking franchise in India with unparalleled multi-decade track record of growth, margins, credit quality and returns. We added to the position during the quarter.

BSD Analysis:
The manager maintains conviction in HDFC Bank despite near-term merger integration challenges, focusing on the long-term compounding opportunity in India's growing financial services market. The elevated loan-to-deposit ratio from the HDFC Ltd merger creates temporary headwinds but positions the bank for significant synergy realization as wholesale funding is replaced with low-cost deposits. The bank's dominant market position (15% lending, 11% deposit share) provides competitive advantages and cross-selling opportunities in an underpenetrated market. Management's focus on deposit growth over loan growth demonstrates disciplined capital allocation during the integration period. The elevated cost-to-income ratio from branch expansion investments should normalize as new locations mature, creating operational leverage. The manager's decision to add to the position during weakness demonstrates conviction in the long-term value creation potential. HDFC's multi-decade track record of superior growth, margins, and credit quality supports the premium valuation thesis.

Pitch Summary:
Leading manufacturer of tequila and whiskeys Becle contributed strongly in the quarter. The company is one of our more volatile holdings quarter-to-quarter in terms of its reported results, but not necessarily in terms of its stable and growing long-term value. The quarter saw reported results that were better than the market expected. There had been fears that the spirits industry was slowing and what that meant for its earnings power, but Becle guided for growth to continue in 2024 and beyond. After years of high agave pricing (a key input for tequila), this headwind is now abating, which should improve margins going forward. We believe the share price remains undervalued. This is a great business run by the Beckmann family who are aligned with us as big owners.

BSD Analysis:
The manager emphasizes Becle's resilient long-term value creation despite short-term earnings volatility, highlighting the importance of looking through quarterly noise. Management's guidance for continued growth in 2024 and beyond counters market concerns about spirits industry deceleration, suggesting company-specific strength. The abating agave price headwind represents a significant margin expansion catalyst, as this key input cost has pressured profitability for years. The Beckmann family's significant ownership stake ensures strong alignment with shareholders and long-term value creation focus. The manager's conviction in the undervalued stock price despite recent volatility suggests confidence in the underlying business fundamentals. Becle's position as a leading tequila manufacturer benefits from the category's premiumization trends and global expansion. The combination of improving input costs and family ownership creates an attractive risk-adjusted return profile.

Pitch Summary:
French hospitality business Accor was another top contributor for the quarter, with the stock returning over 25% in local currency. Continued strong operational performance drove returns in the quarter. The hotel industry continues to shift towards the biggest and most recognized brands globally, and Accor has one of the strongest brand portfolios, particularly outside of the US. It is well placed geographically as the market leader in Asia, Latin America, and the Middle East, all of which are structural growth travel markets with strong post-Covid recoveries now apparent. Accor also has a strong, investment grade balance sheet allowing increased share buybacks of undervalued shares. Previously the company was unable to use the capital on its balance sheet for buybacks due to a need to achieve an investment grade rating. That hurdle was cleared in the second half of 2023, after which management quickly utilized cash to execute a €400 million buyback at the end of 2023 and reauthorize another €400 million at the beginning of this year (which they have already fully executed). We remain excited about the Accor brand portfolio and geographic exposure for long-term growth, alongside our confidence in CEO Sébastien Bazin and the management team.

BSD Analysis:
The manager highlights Accor's strategic positioning in the consolidating global hospitality industry, where scale and brand recognition drive market share gains. The company's geographic diversification across high-growth emerging markets (Asia, Latin America, Middle East) provides structural tailwinds as these regions experience post-COVID travel recovery. The achievement of investment grade rating unlocked significant capital return flexibility, with management executing €800 million in buybacks within months of gaining the rating. This aggressive capital allocation demonstrates management's conviction in the undervalued stock price and commitment to shareholder returns. The manager's confidence in CEO Sébastien Bazin suggests strong leadership execution. Accor's brand portfolio strength outside the US market provides differentiated exposure to international travel growth. The combination of operational leverage from travel recovery and financial flexibility from the strong balance sheet creates multiple value creation drivers.

Pitch Summary:
International consumer goods and ingredients business Glanbia was the top contributor for the quarter. Continuing its strong performance from last year, the company reported strong full year results in the quarter. Its key brand, Optimum Nutrition, grew revenues 17% last year and is now a $1 billion brand which continues to show strong momentum in a fast-growing, underpenetrated category. The company demonstrated strong operational performance, delivering both top line growth and margin improvement ahead of market expectations. Glanbia executed significant buybacks last year and announced its intention for a further €100 million buyback in fiscal year 2024, starting with an initial €50 million. We are excited to see management continue to take the opportunity of the undervalued share price to create value for shareholders through discounted buybacks, while also actively investing in new products, expanded distribution and enhanced marketing. Over our holding period, we have engaged with management to simplify Glanbia's reporting structure. At fiscal year 2023 results, Glanbia was also able to highlight the clarified accounting treatment of the US cheese joint ventures for the first time, resulting in reported margins significantly increasing. We believe that the perception of Glanbia as a lower margin company has historically hindered its valuation, so to the casual observer this change makes the company far more attractive. With strong value growth and a management team taking active steps to address the undervaluation of the stock, we believe there is substantially more upside to come.

BSD Analysis:
The manager presents a compelling bull case for Glanbia based on strong operational momentum and strategic capital allocation. The company's flagship Optimum Nutrition brand achieved $1 billion in revenue with 17% growth, demonstrating pricing power in the underpenetrated sports nutrition market. Management's aggressive share buyback program (€100 million planned for 2024) reflects confidence in the undervalued stock price and commitment to shareholder returns. The simplified reporting structure and clarified accounting treatment of US cheese joint ventures has improved margin transparency, addressing a historical valuation headwind. The combination of organic growth investments in products, distribution, and marketing alongside opportunistic buybacks suggests a balanced capital allocation strategy. The manager's engagement with management on operational improvements demonstrates active ownership. Strong operational leverage and margin expansion ahead of expectations indicate effective cost management and pricing discipline.