Slide 1: Schmitt Industries: Value Creation Opportunity
SCHMITT INDUSTRIE VALUE CREATION OPPORTUNITY
Slide 2: Disclaimer
Disclaimer THIS PRESENTATION IS FOR DISCUSSION AND INFORMATIONAL PURPOSES ONLY. THE VIEWS EXPRESSED HEREIN REPRESENT THE OPINIONS OF SE NTE NTIA CAPITAL MANAGEMENT, LLC AND ITS AFFILIATES (COLLECTIVELY, “SENTENTIA”), AND ARE BASED ON PUBLICLY AVAILABLE INFORMATION WITH RES PECT TO SCHMITT INDUSTRIES
Slide 3: Table of Contents
I. Overview II. Our Involvement with SMIT III. Why Change is Needed IV. Our Plan Table of Contents 3 SENTENTIA
Slide 4: Overview
Overview • Sententia is the third largest shareholder with an 8.1% ownership stake • Sententia has attempted to reach an agreement for over three months • The Board remains unwilling to make changes we believe are necessary to unlock shareholder value and increase accountability and transparency Our
Slide 5: SMIT Overview
SMIT Overview • Market cap: ~$11 million • Headquarters: Portland, OR • Employees: 54 • 2 Segments, 3 core businesses: • SBS (Balancer segment) • Manufactures dynamic balancers for precision grinding machines • FY 2018 Rev: $9.0 million • FY 2018 EBITDA: $13 thousand • Acuity and Xact (Measurement s
Slide 6: SMIT is Undervalued
SMIT is Undervalued • Based on our calculations, Schmitt currently trades for the value of its hard assets and the market ascribes $0 of value to SMIT’s businesses • The stock is trading at a 50% discount to what we believe is Schmitt’s intrinsic value, based on a sum - of - the - parts valuation, a
Slide 7: Table of Contents
I. Overview II. Our Involvement with SMIT III. Why Change is Needed IV. Our Plan Table of Contents 7 SENTENTIA
Slide 8: Our Involvement with SMIT
Our Involvement with SMIT • Sententia is SMIT’s third largest shareholder and beneficial owner of ~8.1% of SMIT’s outstanding common stock • Initially passive investors as management was taking steps to unlock value • Became concerned with the Company’s direction when David Case replaced David Hudso
Slide 9: Table of Contents
I. Overview II. Our Involvement with SMIT III. Why Change is Needed IV. Our Plan Table of Contents 9 SENTENTIA
Slide 10: Reasons Why Change is Needed
5 Reasons Why Change is Needed 1. Poor Operating Performance 2. Destruction of Shareholder Value 3. Lack of Accountability and Misalignment 4. Disconnect in Pay vs. Performance 5. Poor Corporate Governance SENTENTIA
Slide 11: Poor Operating Performance
1) Poor Operating Performance • Schmitt has been a long - term money loser for shareholders with cumulative net income from fiscal years 2009 to 2018 totaling negative $7.5 million 11 SENTENTIA $7.9 $10.5 $11.5 $11.9 $11.4 $9.5 $6.8 $11.5 $14.4 $12.5 $12.1 $13.1 $11.7 $12.4 $13.9 '04 '05 '06 '07 '08
Slide 12: Poor Operating Performance (cont'd)
1) Poor Operating Performance (cont’d) • Key performance indicators show a lack of operating discipline, in our view 12 Working Capital SG&A Inventory SENTENTIA 49% 44% 46% 37% 45% 0% 10% 20% 30% 40% 50% 60% FY'14 FY'15 FY'16 FY'17 FY'18 % Sales 5-Yr Average Peer Average 39% 35% 40% 34% 41% 0% 5% 10
Slide 13: Destruction of Shareholder Value
2) Destruction of Shareholder Value Schmitt has lagged the market on a trailing 3, 5, and 10 year timeframe SENTENTIA Cumulative Returns As of June 10, 2018 3 year 5 year 10 year RBC Micro Cap Value I (RMVIX) 31% 78% 133% Vanguard Industrial ETF (VIS) 42% 90% 147% *Russell 3000 31% 69% 108% *GICS 45
Slide 14: Destruction of Shareholder Value (cont'd)
SENTENTIA $0 $10 $20 $30 $40 $50 Jan-01-96 Jan-01-98 Jan-01-00 Jan-01-02 Jan-01-04 Jan-01-06 Jan-01-08 Jan-01-10 Jan-01-12 Jan-01-14 Jan-01-16 Jan-01-18 SMIT Stock Price (Jan 1, 1996 - Sep 17, 2018) $0 $1 $2 $3 $4 $5 $6 $7 $8 Sep-17-08 Sep-17-09 Sep-17-10 Sep-17-11 Sep-17-12 Sep-17-13 Sep-17-14 Sep-
Slide 15: Lack of Accountability and Misalignment
3) Lack of Accountability and Misalignment • No accountability or independence • David Case, son of Schmitt’s founder, has been VP of Operations since 1996 • 4/5 Board members have been with Schmitt for 12+ years; 3/5 for 20+ years • 3/5 Board members have supervised both Wayne Case and David Case a
Slide 16: Disconnect in Pay vs. Performance
4) Disconnect in Pay vs. Performance 16 SENTENTIA Notes : • David Hudson was not considered independent beginning in 2016 due to his position as President and Chief Executive Officer from January 2016 to January 2018 • Director compensation is as disclosed in Schmitt’s filings with the U . S . Secur
Slide 17: Poor Corporate Governance
5) Poor Corporate Governance x Staggered board with directors subject to re - election once every 3 years x Board is stale and lacks independence x Plurality vote standard for uncontested director elections x 25% of shareholders required to call special meeting x Shareholders cannot act by written c
Slide 18: Board Needs Refreshment
Board Needs Refreshment The main commonality of the Board members is their long tenure with Schmitt during prolonged under - performance. 18 SENTENTIA David Hudson Maynard Brown Michael Ellsworth Charlie Davidson David Case Name With Schmitt Since 1996* 1992 2006 2016 1996** Bio Dave has served on t
Slide 19: Table of Contents
I. Overview II. Our Involvement with SMIT III. Why Change is Needed IV. Our Plan Table of Contents 19 SENTENTIA
Slide 20: Our Plan
Our Plan 1. Conduct Comprehensive Strategic Review 2. Instill Operational Discipline 3. Improve Corporate Governance 4. Link Pay to Performance SENTENTIA
Slide 21: Conduct Comprehensive Strategic Review
SENTENTIA 1) Conduct Comprehensive Strategic Review Strategic Advisory Committee should conduct a full strategic review , which should include consideration of the following: • Sale of non - operating real estate • The Company should publicly commit to a timeline for the sale; Schmitt should not be
Slide 22: Instill Operational Discipline
2) Instill Operational Discipline Compared to competitors, in our view, the Company is mismanaged with large working capital, high SG&A and undisciplined inventory management. We seek to: • Instill fiscal discipline across the Company through targeted cost - cutting • Improve working capital managem
Slide 23: Improve Corporate Governance
3) Improve Corporate Governance Shareholders should have a voice in the board room. We urge the Board to take steps to increase accountability to shareholders by: • Improving governance and compensation disclosures • Removing staggered board • Creating a lead independent director • Removing supermaj
Slide 24: Link Pay to Performance
4) Link Pay to Performance The Board and Management should be aligned with performance. • Align director compensation • Cut director pay from current average of $45,000 (excluding David Hudson) to bring in line with peers, with appropriate mix of cash and equity • Align executive compensation • CEO
Slide 25: With Your Vote
With your Vote… You can help maximize shareholder value by appointing two highly - qualified and independent nominees to the Board. 25 SENTENTIA Item 1. Election of Andrew P. Hines FOR Item 1. Election of Michael R. Zapata FOR
Slide 26: Appendix
Appendix Letter from Mr. Michael R. Zapata to Schmitt’s Board of Directors (August 21, 2018) Letter to Fellow Schmitt Shareholders (September 17, 2018) 26 SENTENTIA
Slide 27: Bios of Sententia Board Nominees
Bios of Sententia Board Nominees 27 Andrew P. Hines , age 78, has been the Principal of Hines & Associates, LLC, a consulting firm, since 2000. Previously he served as Executive Vice President and Chief Financial Officer of Natural Markets Foods Group, a chain of organic food markets, from October 2
Slide 28: Bios of Sententia Board Nominees (cont'd)
Bios of Sententia Board Nominees (cont’d) 28 Michael R. Zapata , age 40 , has been the Founder and Managing Member of Sententia Capital Management, LLC (“Sententia Capital”), a value investing focused investment management firm, since 2012. His experience prior to Sententia Capital featur ed extensi
Slide 29: Appendix: SOTP Assumptions
Appendix: SOTP Assumptions 29 SENTENTIA • Cash – Unrestricted cash is as of May 31, 2018 as disclosed in SMIT’s Annual Report on Form 10 - K filed with the U.S. Securities and Exchange Commission on August 21, 2018 (the “2018 10 - K”). • Excess working capital – Sententia calculated “working capital
Slide 30: Appendix: SOTP Assumptions (cont'd)
Appendix: SOTP Assumptions (cont’d) 30 SENTENTIA • Excess working capital (cont’d) : Sententia calculated “excess working capital” as the difference between working capital of $ 6 . 2 million and “target working capital” . Sententia set target working capital at 20 % of fiscal 2018 sales, which calc
Slide 31: Appendix: SOTP Assumptions (cont'd)
Appendix: SOTP Assumptions (cont’d) 31 SENTENTIA • Balancer Business (SBS) and Measurement Business (Acuity and XAct ) : Below is a summary of the valuation of SMIT’s SBS, Acuity and XAct businesses, which Sententia calculated based on what Sententia determined to be appropriate multiples of their f
Slide 32: Appendix: Cumulative Returns Disclosures
Appendix: Cumulative Returns Disclosures 32 SENTENTIA • June 10 was the day before Sententia filed its initial Schedule 13 D with the U . S . Securities and Exchange Commission • Small - cap Industrials and Electronics consists of the median annual return for a peer group of 44 U . S . - headquarter