Interviewing a CEO can seem like a daunting task. What questions do I ask? How do I frame such questions to receive specific answers? Are those answers genuine? How do I take an aggressive approach on the important issues? The list of questions goes on. The following is a framework for initiating such successful dialogue.
- Develop a plan of attack.
- Identify what you hope to learn about the company. This requires understanding the entire story and opportunity for growth that lies ahead.
- Determine pertinent issues that may impact the share price.
- Read previous conference call transcripts and familiarize yourself with the current news.
- Prepare a detailed set of questions. The questions allow you to drive the interview and create a structure for the conversation.
In an attempt to discuss my typical plan of attack, I want to reflect on a recent conference call I had with CEO Paul Mobley of Noble Roman’s (NROM). The company has transformed itself from an operator of pizza franchises to a new business model focusing on the sale of Take-N-Bake pizzas in grocery stores, as well as convenience stores and other non-traditional locations. While every conversation will deal with different issues and company characteristics, I think it is wise to always begin by having the CEO tell you the story of the company. Hearing the story and opportunity set from the person who is executing a vision is of the utmost importance. What may seem like a great opportunity to you on paper may not sound as compelling or alternatively, maybe it sounds that much better when told directly. With NROM, Paul did a wonderful job of communicating how the company started, the vision for pizza restaurants as a destination for families in the 1970’s and 1980’s. He explained the evolution of their concept as the need for pizza as a destination became less important. When that occurred, the model shifted and they began bringing pizza to the people through non-traditional locations (for example, bowling alleys). In the years that have past, NROM has continued to evolve but the economic downturn during the 2000’s hurt their franchises leading to a large percentage of them closing. The past 12-18 months, however, have breathed new life into this company that has always leveraged its expertise in food and pizza for success.
Understanding the story of a company is essential when framing out the opportunity. In this case, a majority of my questions were focused on the new business, why the company may be approaching an inflection point, and what might investors expect as far as timing is concerned with new organic revenue growth. However, it is also important to recognize that the legacy business could be a drag on future growth and thus that needs to be addressed as well. Two questions I always ask myself as I prepare for an interview are: Why do I want to own this stock and what might make this stock move? Share prices can move for any number of reasons, including anticipation of news, earnings results, acquisitions, a large holder purchasing or selling shares, etc. You want to identify potential catalysts prior to the interview so you can inquire, find out how relevant they may be, and when the timing may occur. There are a number of points to highlight with NROM in this respect.
First, as the company has transformed its’ model towards the Take-N-Bake product, it now relies heavily on distribution and its presence in retail stores. As a result, the growth in supermarkets is directly correlated to their ability to sign on additional distributors. Understanding the relationship of revenue to store (and distributor) is a very important part of their business model for a potential investor. The distributor sells ingredients to the store who then makes the pizza (but does not cook it) and sells it fresh. Questions that immediately come to mind when understanding this new concept are: How many pizzas do the supermarkets sell per week? What types of pizzas are most popular? Where are the pizzas sold and what type of refrigerator space does the company usually get? Who bears the risk with unsold product? How does pricing differ per store? What does NROM make per pizza? Upon asking those questions, you find out that the supermarkets sell on average 60 pizzas per week. NROM does not know which pizzas are most popular but they claim 70% of pizza consumers want pepperoni on their pizza. The refrigerator space is typically in the deli area but the amount of space differs per store as they determine where the product is offered. Pricing is suggested but is not determined by the company, thus the individual stores have final say. NROM, however, makes approximately $1.16/pizza. Processing these answers and asking follow up questions on the fly is a very important piece of the interview process. If the stores are given discretion on price, space, and type of pizza, than what does NROM control? What oversight does NROM have on a store level? The answer is little, but in the opinion of this author, that is a very important takeaway that would not otherwise have been found out. A food company should understand it’s consumer on the consumer level, not on any other level. If they can’t identify which specific products are being sold and whether the quality control across stores remains on a similar level, how can they respond to changes in consumer behavior with their products? The answer is they cannot.
The above example highlights one negative takeaway from the interview. However, the opportunity remains compelling because as you dig deeper, you find out that distributors are set to grow 50% this year, grocery store exposure is set to grow 100% (at a future rate of 500/year), and its entry into convenience stores, which bears an opportunity 7x as fruitful per store, has already gained traction with two large partnerships. The company, quite simply, is in the first inning of a new chapter in its long history.
The number of questions not mentioned in this piece are infinite. Every question can be applied differently to every company. That being said, driving the conversation is essential. If you allow the CEO to dictate where the conversation goes, you will not likely walk away with the information you hoped to find. The primary method to achieving this success is preparation. While some view interviews as an introduction to a company and a story, I suggest a different approach. Introduce yourself to the company on your own time. Utilize your accessibility to senior level management to ask pointed questions which will deliver relevant answers to the opportunity set and thus in the end will leave you with a more focused view on how attractive the shares may be. If performed successfully, your level of conviction will reach new heights and will reflect itself in your investment performance. Good luck.
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