So my query to the company was,
I am a small retail investor and I recently 'discovered' your business. It has many of the qualaties I look for, micro cap, illiquid, management with skin in the game, owner/founder involvement, good ROIC, profitable, durable and simple to understand.
In looking at your company I am impressed by the fact that it has been around 50 years and has been able to continue to pay a dividend over all those years, this seems to me to be a very stong indication of a management team that has its interests aligned with shareholder interests. I also like that you have been happy to have the company buyback shares when you calculate the share price to be undervalued, always a sign of good capital allocation.
I think that at the current share price I am basically buying the leather business at fiar value and getting everything else thrown in for free, which makes it a pretty compelling idea!
My concerns are firstly, is there any competitive advantage with the leather business? Could another manufacturer basically walk in to the luxury and large car manufacturers and take your place? Why do they use you now instead of the competition? Who is your major competitior? Who is the best run and managed competitior in your opinion? Also is there a risk that as the quality of 'fake leather' improves, car manufacturers will move away from leather, especially with the pressures from ethical and environmental considerations?
My other concern is succession planning, you have obviously been a passionate and dedicated business owner operator, but you are also of an age where you must be considering enjoying the fruits of your labour a little more! How well positioned is the board for you to take a less active part in the future and is there a clear generational plan of succession for the operation of the business?
Finally, what are the threats and challenges you see for the company looking ahead? How will you mitagate them to ensure Schaffer Corp is still around in 10 years?
Today Jason Cantwell, the CFO, rang me and spoke to me for about half an hour, I asked him to respond in writing so I could add his response to this forum, he obliged and this is his email below. (less detailed given that we had already discussed all the points at length on the phone.
As discussed earlier:
Competitive advantage
Size compared to some of the larger players
Focus on higher quality, higher margin product
Our focus on cost efficiency allows price competitiveness.
Competitors
Lear/Eagle Ottowa largest supplier
Others – Bader, GST, Hokuyo, Boxmark, Pasubio, Trevino, Rino Mastratto, Bridge of Weir
OEM’s typically have more than one supplier for the many car models they manufacture. This creates surety of supply and competitive tension.
Once you are awarded to supply a program (specific leather components for specific car model) you generally have it for the life of the program unless something goes very wrong.
So, it doesn’t happen that another leather supplier can simply walk in and be awarded your current supply programs.
We believe we are used by our customers for various reasons including our partnership relationships, price competitiveness and delivery performance. Also, to be awarded supply, rigorous quality audits are performed at our facilities.
The risk of “fake” leather is something we are aware of. Quality leather is still an “emotional” purchase and something that enables higher margins to be made on car sales.
“Fake” leather is more harmful to the environment, not just because of waste from synthetic manufacture, but also because automotive leather is an effective use of a by-product from the meat industry that would otherwise become landfill.
Succession planning is considered, and we have appropriate alternatives in place.
Threats to profitability include global economic uncertainty and currency impacts. We focus on what we can control and achieve maximum efficiency and profitability for our businesses. We focus on profitable growth. Not growth for growth’s sake.
I got the feeling Jason was very sincere, unrehearsed and passionate about the company he works for. A tell for me was I asked him on the phone who the competitor they most admired was, he could have just brushed me off by dropping one of the names of the big competitors, but he went to some lengths to explain that they simply dont focus on what anyone else does, they see themselves as niche providers and focus on being as good as they can be at all aspects of business. He admitted he had not really looked too closely at what other companies in the sector do, and without wanting to sound arrogant, SFC feel they do what they do to the best of their ability and just focus on quality and costs.
All in all, the fact that the CFO took the time to personally call me and also reply to my email gave me a level of confidence in management, at about as high a level as I can hope to gain as a small retail investor, and that combined with my other research and analyisis has got me to the point where I will look to slowly build a position in the company.
