Some notes on quarterly results of $KUT.V & $TBTC, brief comments on first and secondhand interviews with management teams, and some other stuff.

Starting with Redishred

Paper-

In late Q3 commodity prices of PS 37 (Sorted & Baled office papers) appear to be tailing off and prices have begun to decline. Sourced from a private interview, Jefferey Hasham has stated they’re budgeting for a roughly 30% decline in the prices of shredded office paper.

Of note Redishreds current mix of baled to non-baled recycling sales is reportedly 60:40. This baling process results in a meaningful premium for paper, so the mix can improve going forward to partially offset declines in prices. Annual customer attrition remains “under 5%”.

Review of costs

Controlling and maintaining the business costs/expenses in excess of the earnings from recycling is, in my opinion, ultimately a prerequisite to produce a desirable outcome for shareholders. It’s also a good litmus test for the difference route density and tuck in acquisitions can make. I believe this is the ultimate barometer for health of the company from an operational perspective.

That being said the figure, “operating income net less recycling revenue”, did poorly on a sequential and annual basis during the third quarter. This is not a good thing, but the business also wouldn’t exist if this were a dire circumstance, and it honestly shouldn’t be too surprising given the environment.

Management claims in response to a degradation of costs are:

Diesel prices being sustainably elevated Y/Y, inflation in costs for the supply of truck parts along with delays in the supply chain for receiving parts, being mark to market on driver wages as wages have climbed substantially (this was reportedly the biggest surprise they had in the budget this year), and a partial work through of service price increases in their markets.

There’s nothing they can do about diesel prices beyond improving the route density and planning of scheduled and unscheduled services. Time series data taken from EIA may help provide some insight to estimate forward costs here by calculating the integral of the time series of data & using the weighted average of fuel consumption by region. This isn’t an exercise I’ve done personally but it’s likely something that could be done by a diligent investor.

Everything else broadly makes a good deal of sense. The only troublesome part above worth grappling with as a shareholder is whether or not Redishred has the ability to raise scheduled and unscheduled service prices above the average rate of inflation of their costs. The difference of whatever those two rates are should matter more over time as the spread will compound gradually - for better or worse.

Table Trac Inc.

There’s less to say here as I haven’t had as long to think about the company and in general it’s just not as messy so there’s less to think about.

That said there was some recent and important developments that have taken place.

Firstly - the company has begun to return capital to shareholders via a small dividend ($0.02/share). Perhaps certain shareholders would prefer a buyback albeit I appreciate them giving shareholders a choice to do with the money at the moment. I’ve a feeling for small (and especially foreign) companies, establishing an active program where there’s excess money being returned to shareholders would help with the market assign a higher multiple. For something so small I expect the most obvious question to be as to why the money wouldn’t be reinvested. While I’m new to thinking about this company, there’s a history of pretty extreme frugality that makes sense of this behavior.

Beyond their basically nonexistent spending on capex, something that highlights cost controls well here is their lease liabilities. They have two locations they lease as offices and their liabilities sum to the value of roughly $51,000/year.

In terms of forward growth, some other figures which I think are pretty important to pay attention to going forward are the pipeline of scheduled installs and relative changes between their SG&A & recurring revenues (maintenance and service). These contract sizes are variable so in absolute terms their value isn’t super simple to pin down, but in general that figure is giving some visibility to what the NTM may look like for the less desirable "install revenues”. Changes in maintenance are broadly reflective of a high single digit, low double digit % of isntall revenues. It seems to be the case that the organization can scale to a higher base without incurring significant increases to SG&A, which is sort of an expectation of a functional software company.

That being said should the frugal nature of this small software company persist with continued installs, forward improvements to their operating leverage could prove to be substantial.

Last words - Given Greenetrack has reopened, and that Table Trac had recognized the prior install with costs recognized in Q2, there’s likely to be a slight unmasking effect that takes place should Greenetrack repay their liability to Table Trac. Because Greenetrack was forced to remove their “bingo machines” (typical slot games) and replace them with “historical horse racing machines”, it’s possible that this no longer remains a significant install for any ongoing contracts between Table Trac and Greenetrack beyond their debt. This isn’t something I’ve confirmed the details of but ultimately, it’s not very important. In 2023 or 2024 it seems probable their footprint will exceed 300 casinos.

Don’t hesitate to reach out.

Cheers & Happy Holidays - I’m looking forward to the new year.

-Left