Yet Another Value Podcast - HSP Capital's Harris Perlman unpacks vegetable canner, Seneca Foods $SENEA

Episode Date: October 6, 2023

Harris Perlman, Principal at HSP Capital, joins the podcast to discuss his thesis on Seneca Foods Corporation (NASDAQ: SENEA), one of North America’s leading providers of packaged fruits and vegetables, with facilities located throughout the United States. (Note Harris' audio is not the greatest on this, but we did our best to adjust where we could.) Harris' write-up: https://drive.google.com/file/d/1wAm1w3eEZCHCfY-e1Lzu0gvyGW7uN4KL/view Chapters: [0:00] Introduction + Episode sponsor: Stream by Alphasense [1:46] Overview of Seneca Foods $SENEA and why its interesting [6:22] Asset value / LIFO accounting [14:24] Why $SENEA isn't the ultra-commodity terrible business most people associate with canned vegetables? [22:36] Canned vegetables industry [24:46] $SENEA corporate history and background [31:38] What happened with $SENEA from 2021-2023, specifically with inflation [36:16] $SENEA understanding downside risks, specifically regarding insider control, governance, debt [44:12] Investing in capital expenditures - expand Del Monte capacity [46:48] How Harris thinks $SENEA thesis will play out [48:41] Private label trend [53:37] $SENEA competitive analysis [57:09] Recent $SENEA financial performance [1:00:40] Final thoughts on $SENEA Today's episode is sponsored by: Alphasense This episode is brought to you by AlphaSense, the AI platform behind the world's biggest investment decisions. The right financial intelligence platform can make or break your quarter. AlphaSense is the #1 rated financial research solution by G2. With AI search technology and a library of premium content, you can stay ahead of key macroeconomic trends and accelerate your investment research efforts. AI capabilities, like Smart Synonyms and Sentiment Analysis, provide even deeper industry and company analysis. AlphaSense gives you the tools you need to provide better analysis for you and your clients. As a Yet Another Value Podcast listener, visit alpha-sense.com/fs today to beat FOMO and move faster than the market.

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But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls and a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. All right, hello, and welcome to the another value podcast. If you like this podcast, we mean a lot if you could rate, subscribe, review it wherever you're watching.

listening to it. You know, obviously value investors love five star ratings. With me today, I'm happy to have my friend Harris Roman. Harris is a private investor. Harris, how's it going? The ill-timed drink of water there. But Harris, really great to have you on the podcast. Let me start this podcast the way I start every podcast. Disclosure to remind everyone, nothing on this podcast is investing in advice. You know, that's always true, but maybe particularly true today.

The company we're going to talk about actually has a. decent market cap here. But, you know, insiders own a pretty hunky steak. It got kicked out of a few indexes. It is a little bit more on the illiquid side. So everyone should just remember all those carry increased risk. Please do your own work, do your own diligence, all that type of stuff. That out the way, Harris, the company we wanted to talk about today is Seneca Foods. The ticker there is S-E-N-E-A. You've kind of lit the microcap Twitterverse sphere on fire with you've done incredible research on this thing. There was a little bit of an venty angle. It trades at a huge count, but I am rambling. I have a history with this stock as well. I will just turn it over

to you and ask you, what is Seneca and why is it so interesting? Thank you. And you're right. This has been a very controversial idea, which is a little surprising to me because I think the metrics are not that hard to understand, but this company is the largest vegetable canter in the country in the United States. So, So when you go to the supermarket and not everybody buys canned vegetables, but they're very cheap, so especially if you're trying to save some money, you go to the supermarket and you buy a can of corn or green beans or peas, there's a very high likelihood that that can was canned packed by this company, Seneca Foods.

So it's a company that has a lot of hard factory, you know, hard real estate, they have factories, they have warehouses, and roughly once a year, depending on the crop, they are going to bring in a lot of labor from outside of state, mostly from like the Texas area, and they're going to have a massive multi-month pack, which is after the food is harvested, it goes straight, from the farm to their factory and within, you know, 24, 48 hours, it's in a can. And then they're selling it off to stores the rest of the year. And that's the business.

No, that's perfect. And I think there's a lot of things we can start with. But let's start with the reason I initially got interested in again, I had a position and I sold it. And as you said, it's not too late. Even though the stocks said, well, it's not too late to get back in. But let's start with the event angle that I think attracted a lot of people because I do think it sets us up nicely to talk about everything else.

So I'll turn it over to you. The event happened in, from memory, it was June. But why don't we talk about the event that I think got a lot of people interested, probably got you doing the work that you did? So this company is on a smaller end of, you know, small caps, sort of on the large end for microcaps. The market caps around $400 million. The event angle is that this company had been included in one,

of the S&P indices, not the S&P 500. For people who know, there's tiers, there's S&P 500. For the midcaps, then there's the S&P 400 for midcaps. The S&P small caps is the S&P small caps. I don't know why they choose different numbers for large caps, midcaps and small caps. But this company had been in the S&P 600, so some number of index funds owned the stock because it was in the index. And it got kicked out of the index.

And it got kicked out of the index because it was too small. So naturally, you know, with the wisdom of indices being what it is, when something is too small, in this case, because it was very cheap, they kick it out of the index and then everyone sells it because they're required to. So the stock went down from, you know, $60 at the start of the year and got down to almost $30 in around. July 4th and I was buying it at that point even though I didn't know the company that well because I thought at that point the numbers were just egregiously cheap even if you didn't think

the company was a decent company and there was this clear you know force selling right so when something's got foreselling um the thing that you know the reason I'm really really excited about it now is because I've done a lot more research since that initial event and I realized now through this research that the company is actually much better than I initially thought it was. And

I think now there's actually an incredible amount of upside more than I thought there was when I was first buying stock. So yeah, that's why I want to, you know, that's why I keep talking about it. That's why I wanted to come on and talk today. And, you know, I don't know how you want to steer this, but I'm happy to explain why

I think if the company is much better than what I initially believed. So the way I want to steer it is the first, like, I think there are three angles to the investment, right? And the first angle is the one that me and a lot of people played in like kind of small size. You know, like, hey, the stock went from 50 to 35 on an index kick. We bought it in the mid-30s. We sold it in like the mid-to-high 40s as like the index kicks normalized. So that's number one.

That's up. And then I think there are two further levels to it, right? The second level is the one I want to go into next, which is there's a lot of asset value here, right? And the people who did number one were definitely thinking about that. And I think that's still in play, a lot of asset value. So I want to talk about that. And then number three, I want to talk about, hey, more than asset value, maybe it's not, you know, this isn't Apple in 2012 or 2014 or something. But there is a business here where I think a lot of people think, oh, you know, I would never pay more than 40% of book for a business that packs canned vegetables.

And I think what you're saying is, A, again, this isn't the growthiest business. This isn't the modiest business, but is a good business that will earn decent returns on capital. So let's go to number two, asset value, right? You and I are talking, the stock is in the low 50s today. There's a lot more asset value here. There's an accounting quirk that people who have done investing for a while are probably familiar with. But if you've been dealing with the apples and Tesla's of the world, you probably haven't

thought about LIFO accounting in a long time. So why don't we talk about asset value and kind of the accounting work here? Okay. So, yeah, I've been using the word LIFO more in the past months or two than I had in my entire life previously because I've been trying to explain LIFO. And the fact is, the vast majority investors, they just don't want LIFO list. LIFO is last in, first out, and it is different from FIFO, which is first in, first out. And it's a way of treating inventory and accounting.

So LIFO is a rarely used today, rarely used inventory accounting method. And I think there's a tendency, like the government probably has tended to want companies to use FIFO instead of LIFO because LIFO lowers a company's tax bill and the government likes it when companies pay more taxis. But the company is allowed to use LIFO and they've chosen to use LIFO to save on taxes. Yeah, I don't know if, I don't know if it's like, I think it's decently commonly used. Like I immediately pulled up US Steel and US Steel, if I remember correctly, uses LIFO. I think the two things are, A, you are correct.

The government, so I do remember there is a law. Look, if you want to use LIFO for tax accounting purposes, and LIFO last in, in an inflationary period, last in means your last things are the most expensive. So it will reduce your tax bill. And the government does have things that says, hey, if you want to use LIFO, great, but you can't report to investors, FIFO, so you've got higher earnings and then use LIFO for your tax bill. I believe that's a thing. And then the second thing is we went through 20 years where inflation was low, moderate, not very volatile, right? So with 20 years of that, I think you are correct. Investors kind of thought, oh, LIPO versus PIPO, you know, if inventory is turning over twice a year and inflation's 2%.

What's the difference? So I think a lot of people just forgot about it. And here you had, you know, vegetable and canned vegetable prices can already be volatile. But when you've got the huge inflation we saw in 2021, the supply chain issues, like it actually made a big difference for this company in particular as LIPO. So I've gambled a little bit. I'll toss back to you. So you're right. So LIFO, last and first out, means that you're counting your most,

your accounting inventory based on the most recent purchases of anyplace. So in this case, you know, have you seen the mean of LIFO versus FIFO accounting? I think I have, unfortunately, because somebody sent it to me after. I started running about it. It's a little graphic, but it's the best way I've seen to describe it. Lifeo is, look, last and first out, if you think of, if you take food in and then you end up, you know, accommodating it out, that's last and first out. FIFO, first and first out, if you eat food and then poop it out, that's FIFO, right?

Whatever you eat is the next thing that comes out. And just like FIFO, and just, you know, just in the real world, most people are much more familiar with the FIPO way of doing things. Hopefully. So, look, like in an inflation environment, this company is going to pay more for inputs like steel, which are used to make the cans, and it's going to pay more for the rest of the raw vegetables from farmers, and it's going to count its inventory as if the most recently purchased steel and vegetables are the ones that it's selling. And over time, this means that

it's always counting just the recent stuff. And as long as it doesn't sell all of its inventory in a short period, it's going to continue to have this kind of base inventory that's going to be calculated as from gap purposes based on prices from, you know, 15 years ago, which is actually when they first started using LIFO. The company did this switch. They switched from FIFO to LIFO, I believe it was 2008, to save on taxes. And it's been an incredible success. They've saved like $50 or $100 million so far on their tax bill.

But you're right. So they have to report to investors, and in the gap numbers and the SEC filings, they're reporting to investors on FIFO. And it makes the company look worse because they have less taxable income, right? They have a lower book value. So, yeah, when you get back to the FIFO, and it's, asset value for the company, I think the book value today is like a little under $600 million of leave. There's no intangible, so it's all tangible book value. But there's a $300 million

free taxed LIFO reserve. And if they don't switch back to FIFO based on a required switch, I mean, that's never, you know, hasn't been required to them, then those taxes are also not payable. So the value compounds tax free as well. So I just treated, you know, $300 million on top of the existing book value that gets you like to close to $900 million. That's not the whole story of the asset value here because they have an incredible amount of real estate. Not to mention all the equipment, but they have roughly 10 million square feet of real estate. And I think almost all of that, if not all of that, is owned outright by the company. And a lot of this is very old real estate.

You know, it's been depreciated. It hasn't been marked up for the effects of inflation. and the real estate market booming for warehouses. So, you know, that real estate could be worth hundreds of millions of dollars more than what is carried out on the balance sheet. And they have an incredible amount of equipment that's possibly worth a lot more. Certainly on a replacement cost basis, relative to where they calculate it. So I think on a replacement value basis, certainly the company is, you know, replacement costs

is well over a billion dollars for the equity. I don't know, is it $2 billion? Maybe that's the high end. I'm not really sure. But, you know, the current market caps 400 million. So the replacement cost is much, much higher than the current price. And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete?

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for 20 calls in a traditional expert network model. So, if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrrg.com to learn more. Thanks for listening and we'll catch you next time. And just to get, so, you know, right now again, the stock is about $54 per share. If I'm just using the Q1, 2024 numbers, they run on a different fiscal year. So Q124, if I remember correctly, is end of June. I think that's correct.

But Q124 book value is about $75 per share. Ares mentioned that's about just short of $600 million. So, you know, I think a lot of people might look and say, oh, you know, again, can canned vegetables, not the best business of the world, two thirds of book, maybe about right, but then you would rightly point out, and I think I rightfully pointed out when I first got involved, hey, the LIFO reserve is about $40 per share. So if you want to do that math, it's actually add the LIFO reserve back. You're at $115 per share-ish of book value.

Now we're talking about trading for, you know, 50 versus 115 well under half a book. Is this worth well under half a book? Probably not. And then as you said, those adjustments I just made for LIFO don't add. I had done basically no work on the real estate. They don't add back anything for having undervalued real estate that I think is on their books from the 1990s cause. Am I remembering that correctly? It's a lot of much earlier than that.

So, I mean, this company's been around in roughly 1950. Yeah, and the other side of the asset stuff is this is actually, you know, once you make the adjustment for LIFO, it's actually a net net, right? This is like a Ben Graham style thing, which is kind of funny because it's a decent business, I think. And I'm happy to get into the ladder part. So yeah, let's go. Most of my research has started focusing on is the quality of the business. Yeah, so the third hook here is, right, I think there was the quick event play. And then I think there's the people who are going to play this as, hey, they came on and they showed.

me healthy the lipo adjustments. Let's play this as a net net. And both of those are completely fine, right? But where I think you've done the most work is on, hey, this is a better business than canned vegetables would have you think. So I know quite a bit of what you've done just because you've been so generous on Twitter, but I just a little bit of you, why is this not the ultra commodity terrible business? I think people would associate with canned vegetables. So, yeah, the most money that you're going to ever made to the stock market is going to be figuring out a business fund. mentally, not just what the numbers stand down, right?

So yeah, it's a great point because everything we just did, maybe not the LIFO Reserve, I mean, life of reserve a computer could do, but it's all, you know, 30 minutes in the incomes, literally that's what I did, 30 minutes of the financial statements, S&P kick, boom, I could calculate a book value, book value was understated, boom, 30 minutes. The qualitative stuff that you're about to talk to is the stuff that, you know, this quantitative stuff 50 years ago before computers was where the real edge was, but this qualitative stuff. Anyway, please go ahead.

You have to do the qualitative stuff if you want to make, like, the real money in anything, I think. Because, yeah, like, it's really easy to buy. It was really easy to buy the stock in the 30s and say, it's got to be worth 50 or 60, right? I don't know if it was easy, but I didn't. Right. All right. Well, anyway, so the story, from my research, the story of the vegetable industry tune out if you're not interesting is very long

and then it gets kind of like faster and faster in more recent years. So canned vegetables, you know, canning was invented like 200 plus years ago. I think people attributed to like Napoleon who wanted to find a way to store food for his army and so they invented canning. But canned vegetables have been

around a really long time. And in the late 1800s and early 1900s, There were thousands of vegetable canneries around the United States. They were popping up everywhere, every little town. Basically, farmers were being told, you know, hey, you want to make some extra money, find a way to can your vegetables, and you can then sell them for more and they'll stay fresh longer. And so farmer associations were, you know, making little canneries,

and there were so many of these things popping up. And it was an awful, awful business. God awful, right? everyone was just running a tiny little operation and there was thousands of competitors and nobody was making any money these things were pop it up and going bankrupt within like years like not decades right um and that just continued for a long time canning was awful business um Del Monte ended up being one of the big consolidators in this industry um I think originally they were called California Packing Corporation

But, you know, they were around a really long time and they bought up lots and lots of canaries and they have their brand, the Del Monte brand. And they were making money because they have branded vegetables. They were originally kind of riding the wave of people like actually shopping for themselves in a grocery store, you know, because way back in the day, you didn't actually go down an aisle and pick out your food. You told the grocer at the dry goods store, hey, give me some of this, give me some of that. I'll go grab it for you, right? So now, like, the customers are picking their brands and Del Monte made money by riding that trend. And Del Monte was like the big dog and still is, a really big player. And it went through a lot of different changes of ownership. But meanwhile, there were these other little canneries and they were just going bankrupt left and right. And they were getting acquired. There was consolidation. So one of the big consolidators in this industry ended up being Chiquita, like a Chiquita banana. And Chiquita, was buying up, like, the remaining players in, like, the 90s, right? So, but it's still fairly fragmented, and Chiquita was in, you know,

no financial shape to really be doing this, but they were doing it anyway. And in the 90s, they were doing the consolidation. In the early 2000s, Chiquita went bankrupt. And they got out of the canned vegetable business. At the same time, there were a couple other companies that were kind of, rising they're on the you know the consolidation trend and the other big one here was uh seneca so seneca started out they were packing like frozen juice concentrate like old i mean no one buys like frozen grape juice anymore or whatever but like this was a product and um they moved into vegetables

i think they realized the juice business wasn't really you know where to be long term and so um They did a really interesting deal. They bought the plants from Green Giant, which was a subsidiary of Pillsbury at the time. In the 80s, they did this big deal. And they became the outsource manufacturer for Green Giant. And Green Giant is the number two brand after Del Monte. They did another deal. I think it was also in the 80s.

I might be mistaken to buy the plants and the brand from Libby's, which is the number three. So now they own the brand for Libby's. which is the number three brand of the canned vegetable space. And they also got some more capacity from that. So Seneca's, you know, growing. But still, they're not really making money in the 90s. And when Chiquita decides to sell off its vegetable canning business, that's when Seneca finally became like a big dog.

And Chiquita sold most of that business to Seneca, and they sold a little bit of the capacity to the other, now the other larger player in Falmouth, which is a private company. I don't know why it was structured like that, but I suspect it might have been like some FTC mandated thing. Like you can't just concentrate the business that much in one go. So maybe there's some anti-competitive thing to not sell it all to Seneca. But for whatever reason, that's how they did it in like 2003. And once that happened, the remaining players in the industry, the big ones, were Seneca and Del Monte and Lakeside.

Lingslid doesn't really have brands, but there are private label canner. And that's when the business started to be decent. So you can, you know, you can let me take a break there if you want to ask some questions because there's more of the story. There is more. I know what's coming, but just to sum up, like, look, historically, yes, canned vegetables. Maybe there's a little bit brand. You mentioned green giant Del Monte, like a little bit of brand value where you're walking

down the aisle in the similar way if you're walking down an ibuprofen aisle and you see Tylenol versus store brand, you might pay up 20 cents for ibuprofen because it's something that goes in your body, you associate with it, you know, I, I for myself know if I buy like the brand vegetables versus the generic vegetables, I kind of feel better and I feel like they're fresher, even though they're probably the same. So, but there might be a little bit of that, but until the early 2000s, you know, this is the history. Airline industries now is a great example, right? 20 years ago, this is the most brutal industry out there. Today, it still might be the most brutal out there, but it's consolidated so much. It's down to an oligopoly.

And once you get down to like three major players, you kind of like, you can start eking out some real economic profits once you get to the oligopoly level, benefits to scale. You know, if you're doing 200 million, if your customers are Kroger and Walmart, you're investing a hundred million into plants. Like, there is scale benefit there, right? It's no longer you and I have a little farm and we can start canning vegetables and sell to these people. Yeah.

You want an oligopoly because there's actually different behaviors that are economically viable in an oligopoly, meaning, you know, you don't have to be quite as aggressive on price and you want to be the biggest player if you're in an oligopoly because you have the greatest benefit to scale right so you know seneca they got like 20 plants they actually have their own canning facilities actually manufacture the cans that they actually use themselves they're vertically integrated they do their own seeds it's a very vertically integrated operation so there are benefits to scale in this business and and yes you're right so in an oligopoly it's good and on top With that, Seneca is, well, I can get into a little bit more with the story, but, you know, Seneca is much larger in the lake side and is also larger than Delante in the vegetable business. And they've expanded that relative size advantage over time. So, yeah, so you want to be an oligopoly, and you want to be the biggest player in an oligopoly.

Look, I think you did a great job with the story. I think you brought the story up to the early 2000s. I know there's a little bit more consolidation to come, so why don't we just keep diving into it? Right. Okay. So what happened after that is Stanka had a good stretch, you know, decent. They were doing a pretty decent from roughly 2003 to 2013. And that's when shit kind of hit the fan. Delamonte was a publicly traded company in the U.S. Way before that, this thing was like a hot potato. You know, this thing was owned by RJR. This was like, one of those, you know, it was in like all the big levered buyouts, food buyouts back in the day. This was like part of the, you know, stuff that was being shuffled around a lot. And it got taken back to the public market. And in, I think it was 2011, private equity bought it out again. They bought out Del Monte. And this thing owned a lot of pet food brands.

And it was really more of a pet food brand business. They have like a lot of the big names. So the private equity guys took them the pet food business. They sold it to smuckers for like. five billion dollars and then the vegetable business they had to find something to do with it and they ended up selling it to this weird little company in stanford that had um the del monte business based in the philippines which had been around for a hundred years as well but had been carved out in like the 80s and 90s when they were you know shuffling things around in these big

buyouts they like at some point they carved out the philippines business and three listed it in Singapore. And then it bought the American Del Monte business in 2014 and reconciledated most of the Del Monte brand for canned vegetables. And those guys just messed up the business, basically. I mean, they did an awful job. I don't know why they were so bad at managing it, but they were like really, really aggressive trying to... A question I ask myself all the time. I don't know why these guys are so bad at managing this company but they are so bad like it's not rocket science right um you have a they have a brand they have the strongest brand of the space and yet they found a way to lose money on this basic kind of

business right so um they were doing a lot of private label so you know del monte in rough terms i don't have the exact term the exact breakdowns today i think today more than half of canned vegetable sales are private label. Del Monte has a total share of like 20 or 25% in the market. So I think it's like private labels, like a little more than half. Del Monte is like 20% or 25%, green giants, maybe like 10%. Litties, which Seneca owns is less than that. And so like, you know, Del Monte was trying to, you know, keep selling a lot of vegetables partly by, you know, moving into private label more and more. And that really hurts Seneca. And they said that in their, you know,

investor, annual reports, but they have investor letters. I should mention there's not tons out here. This company doesn't do earnings calls or anything, at least to my knowledge, they don't. But their annual report and some of their proxy statements, if I remember quickly, they do actually, like, do a pretty detailed annual report that's like, hey, we'll talk about it when we get there. We're ramping up CAPX because we're buying back shares because we see value in our stock.

We're not buying back shares because we've got this huge inflationary issue and we want to make sure we pay down the, like they actually do disclose a decent bit. I mean, we're not talking like Warren Buffett, Berkshire style letters, but the disclosure a piece of a bit about the business and the annual reports, and I tracked them back for like five years and felt pretty comfortable. I'm sure you went further than that, but just to add that. Yeah. So this has had a really, really unreasonably aggressive competitor starting like 2014, 2015.

And the nice thing about, you know, unreasonable aggressive competitors is that they tend to not be able to do it for very long because they'll go bankrupt. And the Dalmante guy at some point realized that. And by 2018, they were kind of slamming on the brakes because they realized, okay, we're losing money somehow, even though we have this really strong brand and we're one of the biggest players in this industry. We shouldn't be losing money. And so they fired the old guys and brought in a new guy to run the U.S. business. And he looked at it and said, we shouldn't be losing money. And so we decided to get out of the private label vegetable space.

So they did that. 2019 was their last major harvest before they sold a lot of their capacity. They shut down a number of their plants and they sold a couple of them to Seneca. And once that happened, so recall previously, you know, I said there was Seneca, there's Del Monte and there's Lakeside. And Seneca and Lakeside are really focused on private label. Once Del Monte exited the business, now there's only two players that are. of any real consequence that are focused on private label. There was another company that I didn't mention because it's just more confusing to mention it,

but there was a company called Allens that was a family-owned company, and they were one of the larger players in Canning as well. They have some of their own brands. And that business went bankrupt 2013, 2014, and Del Monte made a mistake by outbidding Seneca for the assets from the Allen's bankruptcy, which just hastened the demise of Del Monte. So there was an additional quirk as well. There was more competition that was weaving. And once you got to this point, you know, Del Monte needs to slam on the brakes.

They're getting on a private label. That's when the business became not just an oligopoly, but like practically a duopoly. So Seneca is like, you know, probably. three to four times the size and canned vegetables relative to lakeside. And lakeside's the biggest competitor. So now it's not just that you have, you know, a few players. It's like Seneca's the guy who's going to can your vegetables if you're a grocery store, right? And you can try to go out there and find somebody else and there are probably a couple of their small players out there. But, you know, they're the big dog. And so they're going to have the biggest economies of scale and they're

have the most pricing power. That was a fantastic background. Let me ask you one question just for listeners. Like, like this is not a duopoly in the sense that, you know, Facebook and Google and whoever can have a duopoly. Google and Apple have a doopoly in iPhones, right? Like there are competitors.

There are substitutable products here, right? It's canned, private label canned vegetables that we're talking about. You can, again, you could go with Damani, so you can buy a brand. Or you could just buy fresh vegetables. And yes, that's not always action, but there are substitutes. So it just so, like, how much? Like, how much of canned vegetable business is private label versus branded? Well, I think they said, I think it's probably a little over 50% practice.

Yep, perfect. Okay, great. So we're kind of up to date, right? We're up until 2020, 2021. Del Monte's pulled back from the fresh, from the can, private label canned vegetables. I think 2021 to 2023, people can kind of guess what happens with inflation, everything. I don't know if you want to quickly speak to any of that. Obviously, we talked about it a little bit in the LIFO reserve, but that's what makes this business.

hard to understand today. That's what's made the last couple of years seem not quite as good as they are. Okay, so, yeah, so it got to like, you know, 2019, 2020. Seneca's probably the, you know, dominant player at this point. COVID hits. People stock up on canned food, fill up their pantries. It's a great year for canned vegetables. Seneca has, like, their best year effort.

And after that, inflation really hits. Steel prices are shooting up. Food prices. I mean, you know, prices, they have to pay their farmers to grow vegetables are skyrocketing because they're war in Ukraine because there's a need for farmland because Ukraine's farmland was kind of like taken out of the global supply. So there's massive inflation. And as a result, the company is obviously going to have to raise some.

of prices. But there's going to be a time lag. And one of the big questions that's still not fully answered, but I think I've had a better handle on it than maybe some other people have had, is how quickly does this company raise prices? In the past, in a few of their past annual reports, their shareholder letters, they've said that they have some degree of annual contracts. And on top of that, Del Monte has made some comments about, you know, having longer-term contracts and having to take some time before they can raise prices. When you're not able to raise prices the day of an inflation shock, look, you find out steel prices just went up whatever, 20% in a month or two, well, what are you going to do? Well, if you're locked into some longer-term contract, six months or a year, you can't just make that up next tomorrow. So you're going to have to wait and then you're going to raise prices.

what that means is that your FIFO numbers are probably going to benefit a little bit from inflation. I'm not really sure if that's even true, but they're not benefiting enormously from inflation. I think some people had this idea of like, oh, you've got this big warehouse full of canned vegetables

and steel prices just went up yesterday. So today, you're going to sell those canned vegetables for much more than you would have sold them yesterday, which means that you're capturing this massive benefit on a FIFO basis from inflation. And there have been some people who have said, I don't think FIFO is a real number for this company because you're just riding the inflation trend, right? You're just selling your vegetables for more because they're worth more today and they were

yesterday. Let me know what I think that's that simple. Let me provide two. One support one question. Like the reason people like to use FIFO is FIFO is generally how you manage a business, right? Because you make a product and that's the product you're going to sell. Think about if you're stocking a great. grocery store, right? You stock from the back. So the person takes the front thing and then

you put the freshest product at the back, hoping that the people take the thing at the front because that's the oldest product. That's the nearest section. So you're trying to sell the first things in and then the last things at the back. That's why FIFO makes the most sense. Like to your point, could you benefit from a FIFO wave? Yes, it just depends how much inventory you're carrying. Right. Like if Seneca was sitting here with 15 years worth of inventory in their warehouse, yeah, inflation would be, they would just be riding the inflation trend. But from memory, I think they turn over their inventory like two or three times. I can't remember.

Of course, it's like two or so. Yeah. So they, yes, it is true. They are going to benefit from a little bit of inflation in a FIPO accounting. But that's a one-time benefit. And as you said, it's not going to be huge. I mean, look, they go ahead. The first point about how much inventory you have is one of the important points.

The second point is how quickly. prices change. And that's something that people have not really addressed. And I think the company has said that their prices do not change immediately when input costs change. So it's those two things, both the inventory quantity and the time lag to get better prices, those two things have to take it together to come up with some intelligent estimate of how much this company benefits on a FIFO basis from inflation. So let me move to the two most interesting things to me here at this point.

Okay. Number one, on the downside. So this is the thing I had the most trouble with the company when I was looking at them, right? Like, people can go look. They've historically actually done a really nice job. They tried to do, for memory, they tried to do a tender offer for a lot of shares. That tender offer, I think, failed because they couldn't get enough shares tendered. But then they just went out and they historically have bought back a lot of shares.

You know, I'm looking in 2000, where's my numbers? In 2000, in fiscal 2020, they buy back 8.5% of the company at $50 per share. And the CEO, you know, if I remember from an annual letter, they say, hey, we're going to keep doing this as long as it makes sense for shareholders and we think it does. So that's a huge point in their favor. The thing I had, and we can talk about that if you want, but the thing I had the most trouble with was this is a very controlled company, you know, right? Sena, we talked about S-E-N-E-A is the publicly traded share. There's also S-E-B, which is the shares managed community controls, which gets 20 times the vote as the class A shares, very controlled. And then the thing I thought was especially weird, there's all these weird preferred shares outstanding that are convertible, get special designation privileges, has special dividend rights, that the insiders control.

So like, kind of the reason I, you know, and again, I'm putting my own historical trading bias here maybe, but I bought it on the index kick. It went up a little bit. Then I was like, you know, the last earnings report was great, which we'll talk about, it went up on that. but I kind of looked at and I was here for an index kick I never got comfortable with the control

and the prefts and everything and that to me was the biggest negative why I was like oh yeah I'm probably selling a half-ish of

book value but I just I'm really nervous about the control here so I threw a lot there I'll turn it over to you probably something that people

worry about until they don't lots of big tech companies are controlled either via you know prefer, you know, variable to share classes or just the owner who owns most of the company, right? You say it's something you worry about until you don't, and you're 100% right, but if you think of

2022, a lot of especially, you know, I think of Facebook going down is, oh my God, Mark Zuckerberg's going to light $30 billion a year on fire on this crazy metaverse thing and no one can stop him. And like the control, Facebook, Google, all those are high examples, but I can point you to a lot of smaller companies that are controlled that trade for huge discounts because everybody's like, oh yeah, they're going to pay themselves all the money and like everything on buyer. Because they're jerks, right? They're running the company. Well, the good news is that from Seneca's history, they're not jerks.

They don't pay themselves very much. The board is not just the management team, and the board also owns quite a bit of economic value of stock. So the board is actually, I think, you know, decently aligned with the other shareholders. And their history has been that they treated to shareholders very fairly, I think. Look, it wasn't a good business to be in for a very long time, but they've made money for their shareholders. And when they've had the cash, they've done buybacks. So I think the control is part of the reason why the stock is cheap. I think the reason why that is, is not so much because the control means that there are bad people who are going to take advantage of you.

It just means that there's been no potential for any aggressive fund to come in and try to juice things, right? Like, if this thing didn't have variable share classes, there would have been a couple activists who would have come in and try to, you know, get these guys to start having investor days, have investor presentations, have content calls for God's sakes, right? there are some things that the company could do to quickly get the stock off just by communicating more that's chosen not to do and because they don't have the threat of activism they've been able to continue like this right and i think that's the biggest you know quote unquote problem related to the dual share classes you know what's funny you mentioned an activist coming in and there's a few companies I'm in where I'm like, God, I wish an activist would come in here. If an activist came in, their first thing would be like, let's buy back a lot of shares at

a fraction of book value. Maybe let's tender for the stock. It's like, hey, that's exactly what the company is doing. Yeah, but today, so one of the knocks is that because there's been so much much much inflation and because the company also had to restock after almost, like they ran out a canned corn during COVID. It was, they were selling so much more than they expected. And they really wanted to beef up their inventories.

And then on top of that, there was a potential threat from a potential steel tariffs that were going to hit them. I mean, it wasn't going to happen necessarily, but there was some risk of that. So they loaded up on raw steel. The tariffs ended up being kind of like a nothing burger. But they really juiced up their inventories after, you know, COVID. And so they used to take on some more for debt to do that. And these guys appear to be so conservative that they've just paused. the buybacks. Now they had to take on this debt for working capital, which a hedge fund activist would

say, you know, don't do that. We're going to take on more debt and buy back more stock, right? And it's funny because sometimes you hear people say like, oh, I don't want to own them because they have too much debt. And then like the same day, you'll hear somebody else say, I don't want to buy it because they're not aggressive enough by taking out more debt to buy back stock. Like, there are people who will just be in one side or the other side saying that, you know, the company is doing it wrong, but they're just going to have their own opinion. Everyone's going to have their own opinion, right? No, look, A, I'm a little jealous because you front ran my next question here, but, you know, the debt has, it has ballooned up, right? Like, from, I'm doing this from memory, but I believe they used to peak at like the low hundred millions was this is a seasonal business, right? During the summer, harvesting and storing and then you kind of sell it all throughout the year. So it's a seasonal business. So the summer months, you build up inventory, you build up working capital. And from memory, I believe they used to in the summer months peak at like 100 to 150 million and kind of debt to fund that working capital.

And this year, right now, they're at about 450 million. And again, some of that's inflation and all that. But I think you've addressed most of it. I do think there is some people have the question of, hey, is this business now like you've pointed to the ROE, the company you turn? do people might say oh it's a more capital intensive business so like you know do returns come down or is it a riskier business because you have to invest more into this kind of inflated working capital I'm not sure where I'm driving but I know that debt number when you see it spiking up I think a lot of people look at that and get a little bit of balls it's another reason why people have asked

without doing more research is what it is um look they've got over 200 million dollars of by a Poked up, okay, on a debt to even that basis, it's less than two turns. You can easily lever up businesses more than that. When people say, oh, it's been going up, well, yes, in this period of extraordinary events happening with inflation, inventories have gone up. In addition to the other things that I described, people are generally very good at extrapolating, and they're usually not very good at understanding. So we're in a situation now where if you extrapolate recent history,

you will be worried. But if you understand the history, you probably won't be worried. And that's where I kind of come out on it. That's perfect. Let's just ask a completely separate question. The past couple annual reports, the CEOs come out and said, they clearly measure cap-ax against depreciation. And we've mentioned DNA, I've got off several times.

And I'm just looking at my quote from the two, In fiscal 2020, 2003, we invested 208% of depreciation into CAPEX, as well as, let's call it, 15% of our CAPEX finance through leases, which adds on top. And I believe in 2022, from memory, it was like 145 or 150%. So they're investing in excess of depreciation, which is one of two things. A, inflation has run up so depreciation is actually understated, right? This is all maintenance CAPX. Or B, they're investing in growth. I think the right answer is see some combination of the two.

But what's kind of the growth that they're investing in for this capax? They bought the Del Monte capacity. So they bought a couple of facilities. And they've also upgraded to some of those facilities. So like, for example, there was one facility they bought in Wisconsin, which is one of the core states where they do business. They bought this facility from Del Monte. Because I guess they thought it was one of their better plants that they wanted to eat

rather than shutting it down. And they put a big addition on it. I think they built a big warehouse addition to it. And that's part of the strategy to have the most efficient operations. You want to be able to co-locate things as much as possible to reduce shipping costs. And they're just trying to have the most efficient base who passed out there, right? So, yeah, I mean, there's incremental stuff. I think they expanded some plant where they're processing pumpkin for canned pumpkins used for pumpkin tie.

but like yeah it's not there's not a lot of innovation that happens in the canned vegetable industry right so yeah like you'll have some upgrades and when they did a big thing like they bought the Del Monte plant and put some more money into them but I'm not really worried about the Cappex so much no I was just more asking the question of what they're doing

because I think the two things I was trying to drive that is A you know Cappex was let's use 2030 70 million of Catex versus $210 million of FIFO EBDA, like there's still plenty of kind of unlevered free cash flow on the back end of that. And B, as you said, some of these, some of this investment is an upgrade. So you're seeing the capax come out of the business. But, you know, again, this isn't like a 100% ROE business, but there should be earnings in

the near future from that growth capax is what I was kind of driving at. That's not in the recent past. Where else was I going to go? Look, I think we covered most of what I wanted to talk about. I guess, you know, how do you think, how are you viewing your investment? How do you think this plays out? Is it just waiting for, hey, I'm going to wait for it to get to kind of one-time's book value and then I'm going to sell? Or do you think the family eventually takes it private?

Like, how are you kind of viewing the end game for this investment? Well, at some point, they're probably going to sell, right? I mean, they can't buy too many more companies. Between now and the inevitable heat death of the game occurs, everything gets that. Well, look, my question is what it's important, right? And the good news is there have lots of cups, not just publicly traded cups, but deal cups, right? And I've done a lot of work to find every cop I can. And the upshot of the story is that private label food is generally considered a pretty good place to be.

because, you know, we didn't get into this so much before, but like, you go to a Walmart or whatever, and you're going to have Del Monte out of, like, you know, on the aisle, and you're going to have some store brand, and the store brand is probably going to be from SACA. And that Del Monte can of corn is going to cost, like, twice as much as the private label brand. So you're going to go to a store, you're going to have, you know, Del Monte sitting there at $1.40 or $1.50 a can, and you're going to have, you know, whatever, I don't know, Target brand or Kroger brand and it's going to be like 70 cents or something, right? And over time, customers in general consumers have wanted to, you know, get the same quality cheaper. And that's really what this is, right?

And so there's been more and more private label over time. And everyone wants to invest in this trend. Private label is a good trend. as you said it's it benefits every because this is something you know unless you are again there is something to the brand and stuff and we talked about the Thailand on everything but the stores have done a great job you know Costco is the original with kirklands but the stores have done a great job of turning their brands into like you know it's not the old sam's club the sams club terrible coke that you used to get you know a lot of these stores have

invested to make their brands better and if you think people want to save money and the store brands continue to get better. Like I think about Target and I've been getting hit with football, you know, the streaming, illegal streaming sites I use, they're sponsored, basically sponsored by the Target home brands. Like, if you think the stores continue to invest in the private label, because it saves people money and the stores make more margin, then the can goods should be, the private label can goods should be taking more share over time. So it's like a long-term mini tail end, I guess. Well, the question is, where do you want Gini in this business, right? Like,

A brand is probably going to continue to lose value over time, even what's going to happening, right? I'm sorry, I mean it's clear. And what that means is that more and more of the value is going to be going towards some other part of the value chain. And I think what's happening is more the value is going towards the largest, most competitively advantage manufacturer. Right? So, what used to be a good business in the space, Del Monte, is becoming less and less of a good business, because Del Monte is now still the largest brand, but not the largest manufacturer. In the future, when the manufacturers are the valuable part of the value chain, people aren't going to say things like, oh, this is a okay-looking business, but doesn't have a brand. Because, in my opinion, brands aren't even the things that are great anymore.

A lot of people have realized this. Post, right? You know, post is apparently very well run. People seem to really like the guy. And they really like the private label food space. They've done a lot of deals. Treehouse Foods is sort of a lesser well-known and not as well-performing private label-focused business. There have been other companies that have, you know, tried to roll up different areas and private label.

And a lot of these deals have taken place in the past, you know, five, ten years. And it's something like, you know, ten times even though. There was even another big deal. I think I just saw, you know, last year, like the biggest, the biggest manufacturer of bottling, you know, like bottling company, right? They just bottle, like, juices and sodas, refreshco. And I think KKR just bought them for like, you know, 11 times evens out or something. And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete?

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So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. thanks for listening and we'll catch you next time yeah look everybody everybody loves the bottling business i certainly hear what you're saying and i think the important thing is like this is four times bifo ebada six times lifeo ebada right so whether it's eight or ten like there there's a lot of upsides hitting that multiples and whether that's spife or lifo there's still a lot of upsides to hitting that multiple i hear you i definitely hear you on there's a tailwind of the brand is getting

less good you know like the the mega brands as as media fractures it's harder to support like a Del Monte brand, right? You walk into the store, you buy Del Monte because you've got the fresh association with it. It's harder when they have to micro-target everyone and they have to compete with like TikTok ads for video games for attention. Like I think a lot of people, especially you're my age, would just walk in and be like, oh, I could buy a can of green beans for 70 cents here or $1.40 here. Let's just get the 70 cents. So I definitely hear you in terms of all those tailwinds. You know, I'm somewhat, I'm somewhat skeptical that most of that value doesn't accrue to the conditions.

consumer and then of the sliver remaining, I think it goes to partly the store and then partly the manufacturer. But even if they're capturing a sliver of value, that is a sliver they weren't capturing and they're getting larger. So, yeah. We can talk about the reason I came on this podcast in the first place is partly because I was listening to, you know, a couple of other pitches on the podcast about Lamb Weston. And Lamb Weston is a vegetable processor that processes potatoes and freezes them and cuts them into different shapes for french fries and lamb weston is in an oligopoly with i think three major players and it's a very high hourly business and uh that's a stock that people love um as you said

it trades at 18 times evada this is an oligopoly and senna is an oligopoly and vegetables and it trades at three times evada well so vegetables unfortunately canned vegetables are not growing at all In fact, they're probably shrinking by maybe 1%, 2% of year. I don't know the exact number, whereas French fries are still growing. So in a rational oligopoly, you'd prefer to be in the fry business than, you know, the camp court business, right? But besides that, you know, it's funny because your pushback against, you know, this being a decent business, it's fair, but it's pushback that I don't hear so much about something like Lamb Weston simply because the numbers have been there. long enough. To be clear, I wasn't pushing back on this being a decent business. I was pushing back on this being, I guess, an above decent business, if that makes sense. Like, I think this is

value like a net net, and I think it's a decent business. Land Weston has negative tangible book value. Negative, right? We're not talking about this thing as trading at or above tangible book value value. Land Weston, on a book value basis, is worth it. Right? Del Monte, actually, although it's not publicly traded, sorry, I should specify the U.S. Del Monte business, Del Monte Foods, which may in fact re-IPO in the U.S. near term because

the Singapore parent needs to raise the money. But that business also publishes financial reports specific for the U.S. business, and you can find them. Del Monte, the U.S. Del Monte, also has basically zero tangible book value. My

frustration has been that you know, people have chosen to focus on, like, is this worth one-time's book value? Could it ever get for one-times book value? Where I see lots of other companies that look similar, where people aren't even thinking about book value, and in fact, tangible book value is, you know, zero or negative. And they're looking at the earnings. And the reason they're doing that is partly because, well, they can't look at tangible book value. Because if they did, they look like an idiot, because you can't say any of these businesses are worthless, even though there's no Danville. I do hear you, right? I do hear you, right? I certainly hear what you're saying. But on the other hand, like, just to use LW. So I just pulled out their earnings saving. Like, they're going to do $1.5 billion of EBDA on it. And I'm doing this very quickly. But about $4 billion of tangible invested capital, maybe a little bit less. It's tough to do the working capital adjustments my head real quick. But, you know, like that is a fine, throwing taxes.

throw in like DNA is real that's a 20% return on invested capital business now it is lower growth like Senna again I think it's a decent business but I just think the structure like I don't think you and I are talking about it doing 20% return on invested capital right we're talking about it right now the price business is better at least at this point in time it is um look like the first quarter you know the June quarter of this year for Senna got was that was actually my last question yeah yeah I've heard a lot of pushback on the stock from people who also don't address the fact that they just reported an outstanding quarter in a quarter where things finally should be getting better because there's no inflation anymore at this business at the moment. And it's the seasonally weakest quarter of the year for them. Typically the second quarter, the September quarter, is much stronger.

part of that's because they sell the green giant I think most of their product every year in one big month once they do that harvest and pack and there's also seasonality in this business because people buy more of their products around the holidays

so if they just reported a seasonally week quarter and it's close to $3 of earnings and you can look at the seasonality is quite significant I've been saying publicly on Twitter I think the company is going to earn $15 a share. I don't even think it's aggressive.

I don't think $15 is like an aggressive number. I've heard a couple of people say, there's no way they're going to make $15. How can they make $15? The stock said $50 or something like that. It's like, well, what do you think they're going to do? How much money do you think they're going to make? I mean, there's no sell side expectation.

So it's like, it's funny you're getting pushed back on, it's funny you're getting pushed back on 50 because, I'm just looking at my trailing 12 months number is 14, right? And as you said, the Q1 earnings they reported in their seasonally weakest quarter now that like inflation, stabilize and everything was kind of a blowout. And I just kind of look at the two and I'm like, I mean, again, I've got you can provide pushback on the ideas. There's the control. Like, there's other stuff. There's the debt.

But it's hard to look at it and say, hey, they're not going to do 15 because if they just do what they've done over the past 12 months, they basically hit 15, right? You might not be excited about the Cannesional business because there's no growth, but is Campbell's growing? Is any packaged food company growing? Is it growing? I mean, it's a great question. Is Coca-Cola the product growing? I mean, like, lots, I looked at lots of cops, and like, lots of these packaged food companies, they're not growing. In fact, a lot of them are shrinking quite quickly relative to Seneca.

And people still like the stocks. They give the stock 15 times, 20 times earnings. But like here's something that probably is at three to four times earnings right now. And it's not even like really that hard to figure it out. And, you know, people are like trying to poke holes in it. But like, why is it hard to value this company at over 10 times earnings? I just don't see like the difficulty of doing it. And, you know, and that's the thing.

It's like, that's not hard. If it's a staple business with ROEs in the, in the 10 to 15 percent, right? Like, a cheat is 10 to 15 percent probably deserves to trade for one to 1.5 times book. Maybe people could start arguing too, but like we've laid out all the math. We've laid out all the reasons and you can kind of do your own. Anyway, any last words that you want to throw in here? I realize we're kind of approaching over an hour at this point. Okay.

I love people to, you know, find more information because, like, management is not generally available to speak to shareholders. I reached out to them. I have friends who also reached out to them. I haven't heard back. I know somebody who spoke with them at their annual meeting, but decides that they don't really have an interest in talking to their shareholders. I think the challenge here is that I haven't heard anybody else.

who has done research. Like, I've heard from people who have looked at the financials, but I haven't been anybody who's done research. And so I don't think I'm the best qualified to do the research, because I don't have a large research budget. And if people want to do some research and share it,

I would love to hear from them. I think that's how I'd leave it. Perfect. I like that. Well, you know, speaking of hear from them, I will include a link to Harris's Twitter in the show notes. And Harris has done a lot of posting some decent. I mean, one of the write-ups that, like, got a ton of people interested in Senate to begin with was your write-up. Everybody can find that on Twitter.

People can reach out to you if they want to swap thoughts on it, see more of that research and stuff. But, like, Harris, this has been great. I think this is a fantastic idea. I think, as you said, a lot of people, me included, did like, oh, here's the financial statements, but you did really excellent. fundamental research on this history of the industry and just appreciate you coming on and sharing it with the listeners and looking forward to having you on for the second time. Yes, I have to give an update at some point. Cool. All right. Hey, it was great. Have a good one, man. A quick disclaimer. Nothing on this

podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks. Thank you.