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Apr 16 2023
Notes from the Road

1Q23 Notes from the Road

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Notes from the Road

This quarter our team visited companies domestically in California, Nevada, Oregon, Illinois, and Pennsylvania. Globally, the team traveled to Poland, Japan, Vietnam, Sweden, Taiwan, and the United Kingdom. We also participated in a humanitarian trip, which is something we do as a firm every four years. Jesse Pricer, Executive Director of Client Relations, joined Amy Sunderland, PM, Tyler Glauser, PM, and Joseph Nydegger, Research Analyst, on the team trip to Poland and shares his thoughts below. We also share a highlight from our humanitarian work on the Navajo Nation in Arizona.

Poland Recap

Our team of Amy, Tyler, Joe, and I spent a week in February visiting companies and factories throughout Poland. The last time a team of Grandeur Peak analysts visited Poland was in 2019, so a visit was long overdue. During the week we had 16 formal meetings with CFOs and other C-suite executives, visited many retail stores, toured two auto parts warehouses, a discount grocer’s distribution center, an aluminum extrusion plant, a garbage bag production facility, a semi-conductor R&D facility, and saw a demonstration on how automated parcel machines work.

We came back with a conviction that Poland currently has a lot of value to offer investors and we are excited about several companies we don’t own today. Valuations, both absolute and relative, seem consistently low despite evidence of robust business revenue growth and heathy consumer demand. No doubt some of this undervaluation can be explained by the ongoing Russia-Ukraine war. Poland shares its southeast border with Ukraine. Despite good reason for some concern, we found many Polish companies to be resilient amid the geopolitical tensions and even unintentionally benefiting from the war.

For example, several companies we met with realized material increases in revenue because Russian competitors were forced to halt operations in the region due to the war. In addition, Poland has seen over 2 million Ukrainian immigrants enter the country since the onset of the war, which has bolstered Poland’s labor pool and suppressed wage inflation.

Poland’s centralized location in Europe gives it easy distribution access throughout the region. This, combined with the access to educated, low labor costs, has persuaded many European businesses to build distribution and manufacturing plants in Poland.

In addition, we learned that several Polish companies were finding ways to operate in Ukraine despite the war. For example, Inter Cars[1], a Poland-based auto parts retailor and distributor, has 38 retail stores in the Ukraine, and 37 are currently open for business. They have seen their overall revenue grow by 50% since the onset of Covid-19 and the war., a Poland-based online luxury clothing retailer, has seen its Ukraine-based sales increase significantly since the start of the war as Ukrainian consumers still have appetite for shopping and feel safer doing so online.

Inflation in Poland reached 18.4% in February, a 26-year high, before easing to 16.2% in March. Nearly every management team we spoke with cited elevated inflation as a concern. However, most were optimistic it would start to revert towards pre-pandemic levels (i.e., sub 4%) and the companies we liked most were confident that they can pass most of their price increases through to the end buyer.

All in all, we believe Poland has many key drivers in place to support long-term growth potential; low costs, a highly educated work force, a stable government, a stable currency, cheap labor, central location in the region and a relatively low GDP per capita with a lot of headroom to develop into a much larger European economy.

Given it was my first international trip with the Research team, I walked away with several valuable lessons learned that helped me to fully appreciate the Grandeur Peak investment process.

Lessons Learned

  • ‘You’ll know a high-quality company when you see one.’ – That’s what Amy Sunderland told me at the start of our trip. At the end of the week, it was clear in my mind what she meant. The higher quality companies we met with had straightforward business plans, a very clear path to earnings growth that could be modeled with relative ease. Their management teams had actionable key performance indicators (KPIs), responded to our difficult questions with honest answers (not what they thought we wanted to hear), and had a strong handle on their management of labor costs and inventory levels. They knew what their core competencies were and where they had a competitive advantage and where they didn’t.
  • Having boots on the ground mattersThere are just some things you can’t get from a Bloomberg terminal, reading the financial statements, or listening to the quarterly earnings calls. For example, we met with InPost[2], a package delivery and express mail company that specializes in making deliveries to package lockers or automated parcel machines (APMs). We learned that 60% of the Polish population lives in rural communities. Cities in Poland have a long history of being invaded and destroyed. As a result, many Poles feel more comfortable living in rural communities and commuting into cities for work. Given this demographic, it is very inefficient and expensive for parcel delivery providers to service rural communities by delivering to residential doorsteps. In response, companies like InPost deliver to APMs that are located near grocery stores and strip malls. APMs increase delivery efficiency, reduce package theft, and make returning goods purchased online very convenient. Seeing how APMs were utilized firsthand in the Polish market gave us an appreciation for the potential growth of this delivery method throughout the region and how important it is for future e-commerce growth.
  • “Global investing is a superior way to invest. Special companies can be found everywhere. We don’t put blinders on”.Those are words from Robert Gardiner’s memo to the small team of employees that were at Grandeur Peak on day one. Every new Grandeur Peak employee is asked to read this memo when they start. It’s what Grandeur Peak is all about. We’ll go anywhere to find small cap companies with great growth potential. Yes, even far out into the Polish countryside. We believe that our willingness and ability to go to great lengths (I mean that literally) gives us a competitive edge that will enable us to succeed in the long run. Our CEO, Blake Walker, has said, “We have spent the last decade finding all the great, high quality growth companies that exist in the world. We will spend the next decade getting to know those companies better than anyone else.” Spending a week driving across Poland was exhausting, but if we are going to find and know small cap companies around the world better than anyone, it will require hundreds of trips just like it. We are up for the task.
  • The Poles take Tłusty Czwartek or Fat Thursday very, very seriously. – The Thursday we were there, Poland celebrated Fat Thursday, their equivalent of Mardi Gras. On the last Thursday before the start of Lent, a Christian-based 40-day season of prayer, fasting, and almsgiving, the Poles consume ~100 mm donuts. That’s about 2.5 per person! We saw donuts on sale by the dozens everywhere we traveled. We had donuts in every meeting that day. After this trip, I swore I would never eat another donut again for the rest of my life…unless it is good. (PS- my standard for a good donut is low).

[1] As of 1/31/23, Grandeur Peak Funds owned no shares of InterCars S.A. and 48,253 shares of S.A.

[2] As of 1/31/2023, Grandeur Peak Funds owned no shares of InPost S.A.