Yet Another Value Podcast - Bob Robotti on WLK and the revenge of the old economy

Episode Date: April 14, 2022

Bob Robotti, founder of Robotti Advisors, discusses his thesis on Westlake Corporation (WLK) and why he thinks "old economy" stocks are poised for a comeback.My notes on WLK: https://twitter.com/AndrewRangeley/status/1513885052974899200?s=20&t=QiY-1L2H5U3GZ-S5YjGFwwChapters0:00 Intro2:50 WLK Overview6:10 Diving into WLK's segments and products10:45 WLK's favorable supply demand dynamics14:40 WLK's valuation18:55 WLK's control shareholders and family ownership22:15 How can WLK acquire so accretively?28:00 WLK's capital allocation31:45 Do WLK's segments make sense together?39:00 Why buy WLK versus peers?41:40 BLDR and the building products distributors44:45 Why "don't buy cyclicals at the top" might be wrong today51:00 What happens if tech stocks stumble / Revenge of the old economy

Hello and welcome to yet another value podcast. I'm your host, Andrew Walker. And with me today, I'm excited to have Bob Rabadi. Bob is the founder of the athlete named Rabadi Advisors. Bob, how's it going? Very good. We didn't spend a lot of money to come up with that name. Didn't hire IBM $5 million to tell you what's, I like it. You got it. Well, let me start this podcast the way to do every podcast. First, a disclaimer to remind everyone that nothing on this podcast is investing advice. Everyone should consult their own financial advisors. Please do your own diligence and all that type of stuff. And then second, with a pitch for you, my guest, you know, I guess most deepened the weed value investors, which I think is kind of the focal point of this

podcast audience. I think most of them have probably heard of her body. But, you know, I've started getting to know you and especially the team around you ever since the event at Markell from last year, which I participated in. And I've just been impressed at the depth of talent of all the team around you. You know, you've got a bunch of PMs running around there who are all experts on a bunch of different names and playing a bunch of different strategies. So it's been good getting to know the whole team over the last year. And I'm looking forward to we're putting on another event right in front of Markell's Investor Day, May 10th and May 11th. I think that's right. That's correct on May 11th. That's right. May 11th. We'll be doing some panels with some popular investors talking about

valuation ideas, portfolio construction, all that. And then the Markell Investor Day will be in the afternoon if I've got the schedule correct. We'll also have a panel with a number of endowel allocators, too, to get the perspective of the investor, the investor group that's directly investing in allocating capital to other managers, too. That's a we think an interesting extra perspective. Perfect. And this is going to be morning of May 11th. It's right outside of Richmond, Virginia, for anybody who wants to come, the tickets open flying out. I'll see you there. Bob, we'll see you there. I'll be awesome. That's right. And they do, they have a breakfast also with the managers of the various Markell venture companies, which is interesting to get the

perspective of those operating people in different businesses and their viewpoints too. So there's an extra opportunity to hear intelligent people talk about investing, but also to network with the people who attend who, you know, it's like Berkshire in certain ways, except it's manageable and comprehensible as opposed to daunting and you can't do everything when you're out in Omaha. I don't want to put words in there or your mouth, but I'm sure part of the thought process of getting all the events spun up is, you know, everybody talks about 20 years ago. I went to the Berkshire meeting and it was just, you know, 50 or 100 people or something. I'm sure the hope is 20 years from now, people are saying, oh, I went to that

Markell meeting in 2022 and it was just 200 of us. But I'll be there. If anybody's going, feel free, slide on into my DM, slide into Bob's DM, reach out. Let us know you're going and we'll see you there. But anyway, excited to have you on the pod. Excited to see you next month. But let's go ahead and jump into the stock we're going to talk about today. This is perfect timing because the company we're going to talk about it. It's now Westlake Corporation. The ticker is WLK. They just went through a really big name change.

They had a investor day last week that I know you were at in New York City. So perfect timing to talk about Westlake. I'll just flip it over to you. Who are they? Why are they so interested? All that type of stuff. Right. Well, one of the things about Westlake, it's the culmination of a number of different investment

themes we have and a critical investment theme we have. today is, you know, since I started investing originally when I ordered a Tweedy, you could see what they owned back in the 70s and then worked for Gobelli in the early 80s and then our own investing. There are cycles that things go through. And people lose sight of that, especially when you go through a post-financial crisis extended time where like one thing happened and the economic environment was consistent, but an anomaly. And so we think what we're undergoing here is it's the revenge of the old economy. And we think that, you know, that this company perfectly incorporates it. And we also think there's the revenge of the stock picker, you know, understanding businesses and

which ones are going to perform well in a changing different economic environment, you know, and Westlakes a perfect example of those things. Perfect. So the business, yeah, please continue. Yeah. So, so, so one is the, the business is mainly a chemical business based here in the United States. And then the offshoots that come from that. And that's a critical element because, again, an important backdrop is, right, North America has a differentiated energy cost and will for the next decade. And that is a critical element. And what that means is chemical companies, fertilizer companies, businesses based in America that are making industrial products are going to use some kind of hydrocarbon. And that that hydrocarbon is

North American natural gas. That is disconnected from the world's energy complex. And that's a huge advantage. And that advantage has gotten bigger when people have realized the issues with energy and energy security. So that's a critical element. The second thing is, of course, what they do with that. Because what that means is this is a business that has a history of excellent growth, excellent free cash flow generation, all with no issuance of stock. So there's no equity issuance here at all. And so that's their record. They just highlighted. 14% compounded growth in revenues over the last 10 years, 24% growth in EBAA, 29% growth in free cash flow per share. And that's what is. That free cash flow per share is the great engine. And the family itself, who controls this,

is 70% shareholder. So you've got that alignment of interest for someone who's allocating capital, who's got an extended track record of reinvesting that capital, doing great things for the capital. And you continue to see that same thing. So that's, and in the meantime, this company trades, you know, that's the interesting thing is the valuation on it, we think is totally disconnected from the economic reality, well demonstrated in the past and in the future, you know, clearly in place and all of the elements that led to that, we think continuing to strengthen with the ability to reinvest capital and do that well. That's perfect. You covered the overview perfectly and you hit, you hit on most of the questions I'm going to have through this podcast,

but I'll try and earn my bones as podcast. Let's just start about, let's start Westlake Chemical. They used to be Westlake Chemical. I jokingly said big name change, now they're Westlake Corporation. But let's just talk, what are the actual chemicals and products that they're making just to get people an idea of that? And again, this is the revenge of the old economy, right? The key piece of the business is the chloralkalide business, right? And so from that, you make chlorine and you make caustic soda.

You know, basic elements, the absolutely nothing sophisticated about it, except there is. And what's really happened is this is an industry like many. old economy businesses in America that have gone through an extended period of time of poor results and poor returns. Poor results, poor returns lead to consolidation, scaling back, all of the things you do that are cathartic and also consolidation. And then, you know, it's kind of like rinse and repeat. And so since it wasn't one or two or three years, but an extended, you know, post the financial crisis more than 10 years with the add on of the pandemic, you had this cathartic process. And that's where they are today. In the chloralcolide

business, the United States is competitively advantaged against other producers around the world because energy is the critical element. Power, you take electricity, you apply it to salt, which is easily available here in the United States, and you get chloralcide at the beginning. So you get caustic soda, you get chlorine. There are three guys in North America, who was the low-cost producer, who pretty much controlled most. of the productive capacity. And so that means that they meet the market demand. They produce to that, but that's, you know, all that I'm going to produce. And so therefore the profitability and the pricing power they have is dramatic. And that's a repeated pattern too. Like a critical thing is the world a

year or two ago came convinced that interest rates, inflation was dead and interest rates were going to stay low forever. They didn't realize you just lived through a hugely anomalous period. And you were at the end of that. And it was the, you know, a new cycle was going to begin. And why? And that's why we think that inflation is going to be persistency to it because you get businesses like this with three guys left who have the ability to control production and have the ability to control prices. They raise prices. And so, you know, that pricing power is defensible because it is barriers to entry in this business and there are relatively few players. And so that's not a transitory fact. That's not a supply chain issue. That's a supply demand fundamental issue that is favorable. That will continue to be favorable. And I would actually think that pricing power and profitability improve over the next couple of years, too. So there's nothing, and there's nothing the Fed can do to make more chloralkalide capacity in North America, which is a hugely expensive, daunting test with barriers to entry and not the kind of business that everybody wants to invest in today because it's clearly concerns about sustainability, impact, all of those things are going to create extra, extra barriers to someone getting into this business. So that's a fundamental piece of what they do.

And then from that, they do a couple of things. They do make some petrochemicals. They also have gotten into PVC over time because that's what the chlorine is mainly used for as PVC. That capacity is grown out. And that's what they've done more recently is they've continued to say, okay, let's go downstream and to build in more products that use the PVC that we make. And so therefore they started and acquired the first important one was probably in 2018, they acquired one of the other large chloralkylide producers axiol that they had tried to acquire

two years earlier georgia gulf got away from them ran off the p p p and g took a piece of their business and mars trust reverse merged and therefore created axiol the problem was the business was undermanaged over leveraged you know wasn't operated well and so eventually uh westlake was able to buy axiol corporation and in the process they also acquired all of the royal roofing product business and siding business. And so, therefore, they acquired the products downstream. And so that was the beginning of it, which they've continued to build out since. So that's kind of a little bit of what they make, kind of at the base, how that fits in

and what they've done to extend kind of the opportunity set that they have in front of them with their core competencies. Perfect. There's a lot there I want to dive into, but let me start with one that jumps out. You know, and this is a common theme I'm seeing across the board. You know, the simplest place is probably an oil and net gas, right? Where they say, hey, since oil and that gas kind of busted in the 2015-2016 time frame, no one's gone out drilling, no one's developed new wells.

And, you know, people, energy bulls have been saying for years, supplies too tight, anything happens and prices are going to go through the roof. And we're kind of seeing that now. On the, on the Westlake side, it's kind of a similar dynamic, right? nobody's built out any new capacity in any of their segments for the past five years. And I think the company's been saying, look, it's been, demand's been growing. We haven't had new capacity. We're kind of at the point where demand's starting to really outstrip demand.

And that's what you're, demand starting to really outstrip supply. And that's what you're kind of starting to see where all these prices are rising and everything. I want to ask, you know, with oil and gas, it takes probably six to nine months to start going and turning on new wells and everything, maybe a little longer to find a lot of fields and stuff. But if somebody wanted to come and build a completely new plant to compete with Westlake, or if Westlake wanted to build a new plant, how long would it take for that new supply to come online from building out a new plant? You know, I don't know the answer to that, to be honest, right? At the investor day, they do point out that if someone built a fully integrated chloralclide

plant, it would take five years and $5 billion. The fact that a matter is nobody would go and build a brand new greenfield plant soup to nuts. Right. So there are different pieces along the way. And, you know, they regularly de-bottleneck. And so the ability to kind of bring on certain pieces and build that out slowly, you know, there's probably some potential to do that. But there's the advantage versus oil and gas. In oil and gas, there's thousands of people and thousands of participants. And therefore, the discipline to that market doesn't exist. The discipline to many old economy businesses in America that are energy intensive, that have, therefore, cost advantage, given North American energy costs, given natural gases, stranded availability in North America means they're competitively advantage. And that's for probably a decade, if not longer. And you've got three people or an oriented strand board that we like. You've got five people that control the market.

And even when we say things like that, there are geographic submarkets, right? North America is a big place. So the fact of matter is if you have a plant in the East Coast and, you know, you're selling product in Arizona, that plant's not part of that competitive landscape. So the competitive landscape is winnowed down. And you see it repeatedly, right? Because it was a week or two ago, right? The government was after Tyson chicken. And so because there's only four producers of chicken.

And so they say beef is the same and pork's the same. So you can go through that litany of old economy businesses that have winnowed down. And there are three or four guys left in the business. they haven't generated returns in more than a decade. And that's what they did. They right size the supply to meet the end market demand. Demand has been growing some over time. And therefore now suddenly demands exceed supply. And when you demand exceeds supply and there are barriers to entry because they get into any of those businesses is time consuming, difficult and, you know, has even risks to it. It's kind of what you want. theoretically, everybody wanted to own better businesses

because they have things like barriers to entry, and then for pricing power and high returns on capital and all of those things. Well, what's happened is that was the same attributes that many businesses in North America have today that are old economy businesses after decades of poor performance. Economics 101, things change. And therefore, the landscape is substantially structurally different

than it has been. And these are different businesses, even though you think it's the same thing. And that's why the market is saying, it's only going to trade a five or six times earnings because we know that does peak earnings. We've seen that in the past. You've saw something different in the past. That leads perfectly into my next question.

I guess my two next questions would be, why don't we just throw the about, let's just start by throwing the valuation out there and then we can go through that. So, you know, Westlake, as we're speaking, what is it trading for? What type of multiple does that imply? I don't know. Is it eight times earnings? I think it's tough because they did so, I'm sure we'll talk acquisitions in a second. It's tough because they did so many acquisitions recently.

I think it's like six times EBDA, maybe seven or eight times free cash flow. I think if I've got my numbers correct. Yeah. Free cash flow should be a little bit better than EBITDA because there's plenty, once they buy something, right, that includes even intangibles and they're amortizing and they're depreciating. And therefore, really once you own these plants, keep them, if you keep them well-maintained, you're not building a new plant, but yet it has an extremely long life because effectively you rebuilt the whole plant over time. Every fitting and every pipe on it is different than it was,

so therefore you've effectively rebuilt the plant. So therefore they have a longer life than their accounting economic depreciation is. So there's more free cash flow than would appear to be the case. So somewhere around six times EBITDA, six time free cash flow, I mean, those are very cheap numbers for what we've described, right? It's competing at this point. somewhat in oligopoly. There's obviously great demand tailwind, supply is limited. So I think the first question would be a bearer pushback and say what the market is pricing this at 6x for some reason, right? And I think the reason would probably be it's looking at the company and saying earnings are peaking right now. I understand what Bob's saying, but you know, I've got 15 years of

example of these being kind of low return businesses that maybe Wesley can slightly out earn its cost of capital, but most of them on the whole earn their cost of capital or less. Like I get Bob saying that, but we've got six months of these businesses out earning and, you know, 15 years of the world telling us these businesses are return on capital businesses. And we're buying peak at peak earnings right now. The one rule as a value investor, everyone knows is you don't buy cyclicals at peak earnings, right? You wait until they're at trial earnings and the multiples look crazy. So how would you respond to that bare pushback? So first off, let me talk about that structural thing. So maybe four years ago, David Castler, when we were making a presentation,

he came up with a checklist. Everybody got big into checklists, right? And he said, even for value investors, the checklists are, I don't want to invest in anything that's cyclical. I don't want to invest in anything that's a commodity. I don't want to invest in anything that's potentially trading at a high price. You know, so there's a whole litany of reasons that you wouldn't. And that was based on experience.

And that was based on past experience. And there are some reasons to think that, you know, that past experience was of relevance and that there would be cases. And that's what I'm saying. There are structural changes to these businesses. that means these are not peak earnings. These are sustainable earnings that actually grow from here. For Westlake, there's a second answer to that question.

If you look over the last decade, I think they've had a 15% return on equity. So that's not true. This company does earn a return on equity. And the fact of the matter is, if they grow their free cash flow, it half the rate they did in the past. So they grow at only 15%. You tell me something that has a 15% return on capital that will grow earnings at 15%. that's trading at seven times earnings is not a stock that's going to generate a really good

return for you, then you know, you're just kind of, I don't know what you're thinking. I think so. The facts are this company has demonstrated that it is not a business that can't continue to generate increased returns and generates a clear return on capital. And they are clearly focused on return on capital's key component. And I've got this in my tweets. I'm sure somebody can read it or anybody can go look at the investor day. They talk about, hey, all of our top managers, they are paid on economic value ad,

which is your returns on capital above cost, capital, and everything. Right. And they've done that since the inception of the business. This is not some Johnny come lately. Let's hire a consultant, have them come in, and we'll do an EVA study, and then we'll try to change our business based on that. The business is built, founded, fundamentally operated for its eternity based on that. And it's a family.

this is a family that has a record of understanding the businesses they're in and generating really great returns. And they own, as you said, they still own 75% of the company, which at that point, you do kind of wonder, why is this a publicly traded company when they've got 75% of it? But obviously that's enough to keep them from taking that. No, no, no, no, no. That's a very good question. Because structurally, one of the risks that exists in Westlake Chemical, having been an investor in out of favor, discounted companies over my entire. life with a control shareholder is that there's a risk that the control shareholder sees the opportunity better than I do. I do. And has the ability to avail themselves with that opportunity.

So clearly, this company for the last five years has always been something that would be easy enough for the family to leverage it a little bit, take it private and own 100% of it. They could have done that. And that is for another company, that might be a risk. But that's what I think family has demonstrated. They have no interest in doing it. And so, therefore, that one risk that, you know, could, like, stop you out on a great investment, they have a track record of that's not their intent and that's not their interest. And they are willing to let you stay along as their partners. And that's a great thing. I don't know if you followed Cornerstone Building, which it's tangential. So they just had this

happen, right? Like, it seemed like the earnings were about to inflect and CDR owned 65% of them took the shareholders out at what was a nice premium to the prior price. But, you know, here we are just yesterday, Cornerstone came out and said, hey, we sold a division for $500 million, which, by the way, is about all the cash that CNR is going to need to raise to pay out minority shareholders. So CNR is pretty much free-rolling a buyout of the whole business, just crazy. Yeah. That's right. And that's the reward they get for having owned it all these years. And clearly, there's been mismanagement at the ownership level. There's been mismanagement at the ownership level. The idea that they put this company together with NCI building products made

no sense at all, you know, and for why. And then now suddenly after mismanaging and not paying attention, now they're buying the business because it's worth more than what the public market price is putting on it. In the meantime, Cornerstone's a great example, though, because Cornerstone in many of the building products is, if you look through the acquisition they made of Boral to really substantially, this is Westlake, when they bought Borrell, they did the presentation, they talked about who the competitors were, and they go product by product, they go insiding and in roofing and who that is. there's a laundry list of cornerstone businesses, whether that's ply gem or whether it's atrium, a whole bunch of cornerstone businesses are competitors to Westlake, which we also

think is kind of an interesting dynamic in that. They bought Borrell, who we think was undermanaged, definitely. They've done things like really expensive things like they put on a new shift and they raise wages a little bit. And therefore, they produce a lot more capacity ahead of the same plants they have to sell more product into a market to a strong demand for. And therefore, increasing profitability. And they've integrated them, so they've saved some cost in the process, but they're also competing against Cornerstone's products. And the turnover of senior people, the continued change in management, the misdirection of that business means, they have a competitor who's not optimally being managed for a number of years. And that's provided an opportunity

and still will continue to provide opportunity as they consolidated in that business today. They'll have some impacts of that that will be beneficial to Westlake also. I want to dive into a point you just made. This is something that jumped out of me. You know, Westlake has been built over time through acquisitions. That's been their main source of growth. And one of the things you said is one of the things that jumped out of me, you know, they were talking about that recent acquisition and they said, hey, one of the things we did to increase capacity, we run the, I think it's 24-7, right? We basically just add a line. We run the thing 24-7. And they talked about a lot of other in their acquisitions,

It's a lot of other basic blocking and tackling is what I'd call it things that they do in these acquisitions. And you see the proof is in the pudding, right? Their returns on capital are great over time. They've substantially outperformed. But I guess my question to you is these are $100 million plus businesses. Like how are these opportunities, how are they dis mismanaged that a buyer can come in, buy it at one number and say, hey, basically I'm doubling earnings because I'm just going to add a second line in or something. Like how is it this bad? I don't know. That's a commentary on things could be really run poorly. Well, the axial acquisition, you say, is the same thing, right? That was mismanaged. But some of that's capital, right? Because they always talk about, you know, de-bottlenecking, whatever else, and changing an axial business was undercapitalized and therefore, you know, so, and that's a combination then if you don't spend enough money to do the right things with the capital to plant and to keep it up to date and have it run efficiently, then that means the people aren't happy. And that means you've got discord and therefore you don't have

go to business. You know, the assets can, you know, can produce. And so thinking about an intelligent, and then when you get acquired by somebody who's thoughtful, who raised the rates, they said in one of the plants, the guy, you know, McDonald's was making more money than the guy was working in their plants were at Borrell. And so they raised the rates. So therefore, suddenly you have employees who like you. And it's the same thing. And, you know, a different company into four bought Georgia Pacific's plans and Georgia had closed down the plant and they started back up again and the employees suddenly loved them because it's budget Pacific didn't run it well didn't like it shut down the plan and people lost their jobs this other guy comes along and hires people and runs

it well and therefore you have a happy employee and employees are critical elements and making the hard assets productive and generate the maximum opportunity you know we probably it's hard to measure that that's it but that fact that fact is critical and really does make a difference it's one of those things. You know, when you're starting out as investor, everybody says, oh, you want to, you want to invest in the great management teams or the great companies. And it sounds so trite, but then over time, you've probably been doing this a little longer than I have. But, you know, you just see these companies like one company, you're, oh, they're two turns cheaper. I'll buy them. And then three months later, you know, it turns out that their acquisition, they overpaid or

the operations are off or something. I just like, I always think of my head, charter versus Altis. I'm not sure if you follow cable super closely. But, you know, Altis was always so much cheaper than Charter. But guess what? Altees is falling off a cliff because their operations are awful and the executive team lost the handle. And Charter just chugs along. Everything's going perfectly. And yeah, it's just the difference between great management teams and okay and poor ones. But I will warn you, Andrew, that's absolutely true. But I will warn you, though, how do you think about that and how do you characterize it and what's the proof and what is cause and what's effect. There are plenty of businesses that have great records, therefore, people then

assume there's great management, and that may not be the case. And so therefore, and then they get halo valuations, and there are fundamental problems with some of those businesses. So it's more difficult to really know what's a really well-managed company, because we do. You know, with the tendency is, if the record is poor, there must be poor management. But as Buffett says, you know, when you know, you know, manage it with a great. reputation meets a business with a poor reputation, you know, who wins. And that's, that's fundamental to what is, was that a great business or was that a great manager? And it's something changing in the business that the manager, therefore, is oblivious to because he's busy making

money and it looks great. And he's getting patted on the back. The one I was thinking about, as you were saying, like, when you say great acquisitions, they come in, they find synergies and operations that no one thought of. Like, everybody thinks of Dan or her, which has been great. But the other one people used to think of was GE, right? They'd buy a company. They'd cut working capital on half within 48 hours. They'd figure out all these cost energies. And guess what? That blew up spectacular. It turned out a lot of that was based on some funky and accounting and stuff. So it's so hard. Or everybody wants to invest in businesses with great culture. Three years ago, you know what business everyone thought had a great culture? Activision Blizzard.

And guess what? It turned out there was a heck of a lot of sexual harassment and all sorts of other crazy stuff going on. So it's just so hard from the outside to see what's luck, what's real skill and all that sort of stuff. Well, someday I'll go on and I'll give you my tirade about GE. I thought Jack Walsh was probably the worst manager that probably have lived. And this reputation was so, so misleading and so untrue. And he's the guy who ruined that company. And he retired and got a $400 plus million bonus, the largest bonus ever,

for setting up a house of cards. And that's what it was when he left that business. It was a house of cards. And that was all manipulated. earnings. And so that's, and that was a horrible environment. And I love people talk about Sig Sigma and they talk about GE and it's, oh, yeah, you know, good managers. We move them around from different divisions to different division. In the meantime, on the energy business, you know, where I'm a really heavy investor for a long time, whenever I met anybody who's in the

energy business and they competed against a GE subsidiary or an acquisition of a company, a company that was acquired by GE, they said, field day for us. This is just going to be great. Anybody there whose company is going to leave and whatever advantage they have, they're going to lose because GE isn't going to be able to know how to run that business. They paid too much for it probably and they're going to mismanage the business. So great. I love having GE as a competitor. So that was my experience, people in the business who would compete head on head with a division.

And, you know, that's the opinion of GE. So anyway. Let me turn. So Westlake is a business that's been built through acquisitions. Obviously, people think of them as good capital allocators, good acquires. And as something like I always come to when they're in acquisitions, and someone kind of asked this at the investor day, right? like, hey, you're in the business acquisition, so I trust you with capital allocation is what

it comes down to, right? And right now, somebody said at the investor, somebody asks, hey, you're going out and buying businesses for a higher multiple than your stock trades for kind of on the stock exchange, right? And whenever I see that, I have the question, like, is there kind of signal in that noise, right? Where instead of going out and aggressively repurchasing and retiring chairs or something, the business seems still kind of committed to going in and acquiring businesses, and maybe that's great. They've created value through it over time, but I looked in and say, they don't think the best use of their capital is their stock. So should I think the best use of my capital is the stock? I don't think you can actually do that. You

don't get too hung up in the numbers, right? I do think a business that generates free cash flow that sees opportunities to expand its business, to fill out the business, to generate good returns that potentially are incremental to the business they already have, those opportunities don't come along that often and those opportunities you need to seize. You can kind of buy back your stock almost at any time, although you can't because you only want to buy it at the right times, right? If it's trading it too much money, you don't want to buy it back or if it's trading in fair value, you know, not much value add. But acquisitions that make sense I really do think I've come to believe are the best use of capital because those opportunities don't

come along all that often. And I'm sure the numbers, they're not, they're doing the calculations in terms of what that business is, what they think that business will generate, what returns they think they'll get on that. And they have the experience having done this and the conviction and the understanding of those businesses that they're requiring because they are related to what they do, that I think there are calculations in penciling of those numbers and what they're paying for it is a good economic return. And the other thing with the business that's 75% owned by insiders. I'm sure they'd love to buy back stock, but there's kind of only so much stock they can buy back because it's thinly traded. It might make more sense for them to just spend their all their

times on acquisitions where they actually can move the needle versus, you know, thinking a lot about repurchases and maybe buying back 3% of their shares over the next year. You know, that was interesting because that question got asked once or twice, at least in the breakout session after. And I thought they were unequivocal in terms of, no, we have an author of to buy back stock. We will buy back stock. And so that's a regular thing that we understand the value creation of buying stock for less than when the business is worth. It's incremental to the earnings. And those earnings means that we get more of the same earnings. So they're more aggressive than buying back stock, I believe, than I would kind of think. Because I'm saying,

that's right. There's a limited amount you can buy. The floats only so much. So therefore, that does limit the ability to kind of take advantage of that opportunity, especially in an environment where these stocks are trading at really low multiples, when the company has sustainability of those earnings being a high probability. That's a really great investment account. But it seemed to me that they buy back more stock than I would have thought, because I would have had the same kind of thing, you know, you can't do much there. It's just a limited opportunity. Music to my ears. Anybody who listens to this podcast knows that I love to share repurchase. That's, close to the top for me for investing in a company.

Let's talk about, so the company used to be Westlake Chemical. They renamed themselves Wesleyate Corporation in large part because they've been moving a lot into HIP is the, I believe it's HIP is the segment, but housing and an infrastructure where they're competing with CNR and everything. So, you know, a frequent, the company addressed it at their investor day. They said, hey, here's why hip and performance and essential materials, which is their legacy kind of chemical stuff. Here's why these two products will, these two segments belong together.

But I think the reason they put in their rest today is because a lot of analysts look at this and say, do these really need to be together? So I just want to turn it over to you. What do you think about the move into housing and do these two segments need to be together? You know, it's interesting in a world in which everybody wants to separate everything. Everybody wants to spin off businesses. They have different valuations. So let's do something that helps the public markets. You know, I do think that too many corporations run their businesses, make strategic acquisitions or divestitures or structures based on the market flavor today.

And to run your business based on what the market likes today is a poor way to run your business. And so, you know, I think that's one of the advantages you get. You have a family that owns 70% of the business. And the idea of spinning it off just because you get the sum of the parts that have a higher valuation, they're not going to do that. I would suggest that over the last couple of years, the fact that they are integrated in, That's probably been advantageous for them. And it's interesting because there's a difference, right? Because in the chloralcoholic business, you know, they're making PVC.

Now they're doing the home building products. That's very different than Olin's approach. Olin is a merchant producer of chlorine and of caustic soda. And, you know, they sell it to somebody else. Five years ago, I met with the CEO of Plygem. And he said this is maybe it was four years. Anyway, it was right around the time that Westlake acquired Axiol. And in that process, they got royal business products, siding and roofing. And his comment to

me was, well, you know, they can't be in that business because that makes no sense. There's channel conflict. They're the PVC producer and supplier. And now they're going to compete with me who's making the siding product. So they can't stay in that business. So they're going to divest somehow with that royal business. And instead, they didn't. And instead, they built it out. And I would imagine maybe in the last year, there were times when Pligem was in need of raw materials because there were issues with that. And, you know, that's part of that structural change too. The fact that, you know, you potentially want to be integrated because then that gives guaranteed sources of supply of the critical elements to therefore make your products to sell them into the marketplace. So I'm thinking that their belief is a little bit, being vertically integrated is advantageous.

and enables me to have an advantage over my competitors in building products because I know I'm going to get my source of supply. Yeah, it's one thing I think the pandemic and the post-pandemic times really illustrated, right? Like, as you said, it used to be so much cut up your supply chain as much as possible. Like you just want to focus on one piece. But I think we're seeing people that own their entire supply chain, like they've just got so much more flexibility. And I get, yes, you should be able to do everything with a contract and stuff. But, you know, in tight supply change, when things get crazy, there's an advantage to being vertically integrated, and we're seeing that now, and, you know, just with the way the world's kind of de-globalizing a little bit right now,

it seems like it's worth paying up for companies that are vertically integrated versus maybe who can be kind of at the whims of the market or their suppliers or anything. So, so this chlorophyllide business is interesting, I do think, you know, in terms of the how American industry has changed in what it's done, right? Because, but, you know, you really have, you know, they have a very consolidated, consolidated, competitively advantaged North American chloralkalide industry. And what drove that to the culminating event, really, was not Axiol being bork by Westlake. That was a nice incremental one that took two other competitors that were four in five and made them three or two. And so therefore that was

nice, but the key one was really in 2015, 2016, Dow and DuPont merged. And so when Down DuPont merged, they said, okay, now we want to only be in specialty chemicals, because everybody knows specialty chemicals, barriers to entry, stability of earnings, higher returns on capital. So what are these other things? So chloralkylide, this is a base product. We don't want to be in this business. So they took their chloralcolide business. It spun it off into Olin. So Olin was one of the top competitors. They were one of the top competitors. But the combination of those two, right, the shareholders of Dow DuPont ended up only 51%.

But that ended up probably being close to 40% market share in chloralcolate business and took them out of the business down. But Dow needs those base products. And so therefore contracted to buy them back for a 10-year period at a fixed price. So therefore, they have secure sources of supply on a key integral inputs into making their high-end products with their high-end margins. So I'm interested to see what happens in 2025 when that contract expires. And Dow DuPont suddenly need products in the chloralkalite chain and don't have that capacity.

And what's happened is with Olin in the last two years, right, Olin's pricing has dramatically changed. And the profitability has gone from, was it, 600 million of EBITDA, went to over 2 billion of EBITDA within an 18-month time period. because the industry was able to adjust to the fact that we're going to produce what we need to produce, and therefore we have pricing power. So the margins expanded dramatically in that business. And so the culmination happened of the consolidation that hadn't occurred for like, structurally you would have think that would have happened a long time ago. But it also will be see, again, how people run their businesses based on what Wall Street

tells us to do and how they potentially have divested of something that is an integral part of their supply chain to make a lot of the products they make. And what happens at that point where they have to now contract in an open market from someone who probably has strong pricing power? So it'll be interesting. But again, vertically integrated, not vertically integrated, making those decisions, what's the longer term outlook for those are critical questions that kind of come into play? And if you make those decisions based on what Wall Street tells you, then that's a mistake.

If you make those decisions based on your understanding of the business and what you see the outlook to be and where you see there's opportunities and not, that's a, that seems to me a much superior approach. That may take some time because right for Olin, it didn't immediately culminate into something. But, you know, that company, Olin's cheaper than Westlake. So that actually, so Westlake is the first one of these companies that I've looked at, but I'm liking the story. I like the valuation. I mean, you pitch a great story. Six times EBITA with, you know, demand growing, supply, frozen, these great dynamics. that's awesome. That was the next question I was going to ask. Opportunity cost.

Olin, I'm just kind of looking at Bloomberg. Olin looks a little cheaper than Westlake. Seems maybe a little simpler. You probably get a repricing story in 2025. So why was Westlake the kind of the choice the horse you wrote here over Olin or some other chemical company I'm not thinking of? I guess I followed it since it IPO. And maybe we bought it like five years later. You know, we followed it. We didn't buy it. Stock had a run up. And then it is a cyclical business has cycles.

And so therefore there was a cycle. The earnings got depressed. The stock came in and then we bought the stock. So we've owned it for a long time. I visited with the people. I have conviction that because that's what it is. A company that generates a lot of free cash, then the question becomes, okay, what do you do with that free cash?

And in my mind, Olin's cheaper than Westlake. But I'm not sure what Olin does with its free cash. Yep. And I know, I don't know that I have no idea what particular thing Westlake's going to do with their cash, but I know from their track record that they're going to get high returns in reinvesting that capital. So therefore, it's not only the valuation today, but it's what the growth opportunity really is. Because that's what it is, right? I'm not a value investor. I'm not looking to buy a cigar butt for 50 cents that's worth a dollar.

And then when it gets to a dollar, sell it. I'm looking to buy businesses that are trading for vastly less than what they're worth. I think times frequently less than 50 cents in a dollar. But more importantly, I'm looking for a business that's going through a difficult time. That's why I buy it cheaply. But that cyclicality leads to changes in that company and that industry that really make for an opportunity for a return to the cycle and much higher returns. And substance looks like I had some video issues there. No, that makes total sense.

That makes total sense. So that's what it is. We're looking to buy a dollar for 35 cents. but we're looking for elements in place that give us conviction, that dollar can turn it to $2 to $4 to $10. And then, of course, that is a huge win. And we've had success a couple of times in being fortunate to do that. And that's one of the things like I love about chair repurchases and businesses that are kind of going to grow because if you buy that 50 cents for a dollar, as you said, if it's just a traditional value trap, it takes five years to get your dollar back, like that's a nice IRA, but it's not great. but if you buy a business for 50 or you said 35 cents for a dollar and that dollar grows to a

$1.50 in the meantime because the business is growing and they're repurchasing shares at a discount. It just really puts time on your side to do that. Anything else we should be talking about with Westlake here? I don't know, but that makes, that does make me digress for a moment, right? Go ahead. So, but right, we have some sense that we know something about building products. And that really, a large part comes from our investments in the distributors to the homebuilder. So that's Builders' first source in BMC. And so starting at 09 and then in 10, you know, and we increased our positions over time. Those industries, cyclical situations, in most cases, never bought back stock.

Frequently in the early years, you know, the finances were still kind of tough on the business. They're in no position of a divine backstock. And actually, builders had to even dilute shareholders by doing a capital recapitalization. And therefore, there was some dilution in the process. But what really happened was there were opportunities for consultants. consolidation. And that's what they did. So they made acquisitions. They consolidated the business. And then suddenly today, that industry landscape is a different industry than it's ever been. And that's what people don't recognize. The market share of BMC, Builders BMC, is not only in structural

business products they distribute, but also in, especially the component part of the business, it's vastly different and it's driven so much more value. Today, Builders for resources making a lot of money, it's extra free cash flow. Last year, they bought back $2 billion for the stock, so therefore they have the financial flexibility, but they're still looking for acquisitions. If there's an acquisition to make, it really still continues to make sense for them to do that. So acquisitions probably clearly grew the value there much more. If they hadn't been able to buy back some stock, it would have been a little bit better, but that wouldn't have been as incremental. Builders always makes me laugh because, hey, I need to get back up to speed on it. I always feel

like I've missed it just because of the run up. But I remember last year when they announced a share repurchase and all my friends who followed it were like, that's, that's a quarter's worth of EBITDA. Like, they're going to be done with that in two months if they, if they don't do it. And sure enough, the next earnings came along and like, hey, we had a billion dollar share repurchase program. We generated that in free cash flow. We bought that back in stock. We're re-upping it. Like, it's just incredible how good the cycle is for them right now. Well, you know, and the stock's falling off because home building is going to go the hell in a hand basket, you know, because interest rates fully, interest rates are wrong.

Interest rates have been wrong for a lot of years. But with inflation today, that's the new thing on the block. And suddenly people realize it. So interest rates are going to move and it's just probably going to go up. The problem is there's not enough homes. The, you know, the demographics are we need more homes. And so that's not changing. And so that means that rents go up. That means, therefore, you know, there's a cheaper to rent or own, all those things. You know, that's a headwind for sure, a quarter or two. In the meantime, the stock's falling down, Builders first source. And, you know, they look through their numbers in terms of what their free cash flow, with very modest expectations. And, you know, and that is a stock buyback store. And that's

what it is. Well, they say, we will make acquisitions if they make sense. If they don't, we will buy back stock. And this is $6.8 billion over the next four years is how we have to deploy in that way. And we will do. And the market's given them the opportunity because now the stock pulls in further. So they don't have to use. nearly as well, or they buy a lot more with the same dollar. It's funny because it just all rhymes, right? Like, people say, this has been the thing forever. Anything touching homes, interest rates start rising, you need to sell.

Any interest rates start rising, you need to sell the cyclicals. But with Westlakes, it's, hey, we underbuilt supply for 10 years, and now we're in a place where demands rising and supply can't keep up. And with builders forces, anything touching homes, it seems like it's similar. Hey, since the financial crisis, we underbuilt home for 12 years. So, yeah, interest rates are rising, but guess what? people still want to start homes. People still want to move into homes, start families. And we underbilt for 12 years. It does seem like the cycle is different this time.

Well, that's what people have ignored is in 2008, 9, 10, 11, that industry went through the worst depression ever. The right sizing and the downsizing of those businesses has been dramatic. The consolidation that's valid in that has been dramatic. Today, you know, there are a limited number are people who make Orient and Saran Board. Every plant in America is running. We're building not a huge amount of homes, you know, and the capacity is fully employed. Lumber is the same thing. And what is the industry doing in the strong times? They're not building a new plan. They're acquiring the competitor and they're buying back their own stock. So the supply side of the equation is not changing. And the demand side is sustainable and probably is going to grow over time. And so

therefore. And when you only have three suppliers and you're the distributor, that's a fundamentally different place than being 10 suppliers and 15 distributors. That's a mess. Nobody has pricing discipline and you have cyclicality. You've got a different industry structure, both of the people who are making products that go into homes and the people who are distributing that. That's a fundamental difference. And the whole industry on all sides have been downsized to fit to 800,900,000 homes a year, maybe a million homes a year. That's it. And so therefore, that's less than what we need. So therefore, the demand for their products exceeds the market's ability to supply that. And they're not changing that supply number because it took a decade

plus to get there. Yep. That's the change. That's what's different. That's what people are ignoring. I'm with you. And it's just, you know, you mentioned lumber. I think last week when we talked, we talked a little bit oil and gas stocks like across the board chemicals Westlake it's like I just see all these companies that are earning they're trading for six times EBDA just minting money and free cash flow at this point all of them are saying hey demand is outshipping supply and there's no supply coming on and the market just kind of yawns you know and I get I mean it seems to me the market's just pricing an imminent recession but it just it seems like the the cycle is much different and you know I think back earlier this year US steel was trading for X is the ticker trading for about 20 tangible

book value, there's 27. They were absolutely many money. And I kept looking at it and saying, what the heck's going on? And now they got a boost from a war and a couple of other stuff. But, you know, I think the stock's almost a double since then. And it's because if things trade this cheaply while they're making this much cash, it doesn't take much for the stocks to start having to go higher. So revenge of the old economy. That's it. But what I also will say that in addition to really cheap valuations is given the financial conditions of these businesses, many of them with like no net debt. So if there's a hiccup and a slowdown,

these are historically levered businesses too. So the risk associated with a downturn, a slowdown, their ability to manage that is vastly different because I don't have debt payments that I have to make and if I've got to sell product to get cash. Instead, I'm like, I'll lay off a couple of people. I'll get rid of a shift. I'll make less product.

I'll just make the product the market is looking for it. I'll keep pricing. Pricing is my profit. it's not a volume game. It's all about pricing and profitability. That's what I was saying with USCL. Everybody would treat me and say, hey, like, you don't buy cyclicals at low multiples. That's the top of the cycle. I say, I get that, but guess what? They've had a low multiple for nine months now, and we've never seen a cycle where they do super normal profits like this for nine months. And in that time, they went from 2x levered to negative 1x levered with lots of net cash. So if the cycle falls off

tomorrow, like they're not going to be on the verge of bankruptcy like they did every other cycle, which I thought was hugely different. We've been running for almost an hour. I've really been enjoying this. Any last thoughts on Westlake or any last thoughts on cyclicals, revenge of the old economy or anything you want to get out before we wrap this up? Well, no, but it's also revenge of the stock picker because it's not every base business and it's not every company.

You know, it is, I think it is company specific. You know, you got the right company and the right business with the right management, the right capital allocation. Those are critical differentiators. And so being able to identify those in the, invest in those is an extra reason. And an index can't do that. Right. And as you move from, you know, large cap and what's happened over the last decade is, right, the large cap's done really well. Of course, the subcomponent of a large cap is a few who've done extremely well. And so therefore,

if you own the index, you kind of own it all plus and it's efficient and it works. And everybody becomes, oh, yeah, passive investing is a way to go. Why would you pay money? Why? That's ridiculous. if suddenly the whole hockey puck is, you know, is in a different spot and everybody's at the ice fighting over there where it used to be. And you got to get to where it is and move down. And the market caps on all of those companies have compressed. So it's a much tinier universe. And so therefore, as all that capital. And it's not just equity capital, right? Because fixed income markets are bigger than equity markets. And in 2000 and people say, oh, you know, there's certain similarities last number of years to the internet bubble. It was different. At the time, I think it was

the 10-year treasury was 6.5%. The fixed income market was not mispriced and misvalued. So now you have all public markets. And it's not public. It's private because the private markets have grown, but it's all based on the interest rate. And the interest rates are wrong. And if you've got a 1.5% 10-year treasury as your base, you know, when you start to then mark, you know, price up based on risk, you're in the wrong place. And so, So so much of that has to move. There's going to be so much capital movement that would seem to me in the next decade. The next decade, you know, the idea that 2020 is going to be like tens were, it's just laughable.

That wasn't a huge one-time anomaly. And that's not the way the world is on a sustainable basis. And we're moving to a different place. Over the past seven years, just felt like the easiest thing in the world was to own anything tech. And if you did it, you got massively rewarded. But one of the things I've always thought about it, I hope it comes. one day, but, you know, if at any point you see Facebook, Amazon, Microsoft, Netflix, all these guys, if you ever saw them stumble for any reason, right? Like, the indices would be down

huge. And there are so many, as you're saying, like, energy is 5% of the SMP 500 these days. Like, these home building companies are barely even in the SMP 500 these days. There are so many companies that if you kind of had a regime change like that, I'm with you. I think there would be, I think there are and will be opportunities just out the wazoo. And I don't know about you, but like, I spent a lot of time in invent driven. I just feel like the opportunity you said, it's incredible right now. You know, markets are probably down 15 or 20% from their highs, but just there's so many of these smaller guys that are just completely disregarded, you know, things like Westlake

trading at 6x and great fundamentals. And I just feel like not a lot of people really care about them. Right. Yep. Cool. It's the land that the investment dollars have forgotten, but they will find it because it's a, right? It's a weighing machine and they weigh cash. And if they don't find it,

accumulating. Exactly. If they don't find it, the cash is accumulating so quick. Either they're going to buy their stocks back or the private equity companies are going to come in, buy the whole company and pull the Brookfield and re-IPO them for 10 times what they paid two years later or something. Well, one of the guys we have on one of the panels, the stock big panels, is a guy, Andrew, Adam Katz, that I met a couple different times. And he left Elliott and has some private funding that he's doing.

And what he thinks the opportunity is in small cap, right? because large firms, whether it's Elliott or whether it's LBO firms, have really just got so much capital. You have to move up to, you know, where do you fish? You have to fish where the fish are. And so therefore, they've avoided and eliminated. And the small companies and the small companies' valuations have come down. So you've got this perfect confluence of events.

I think he's going to have a great success in raising capital to identify, you know, small public things that really have the opportunity and have a valuation entry point that makes it kind of a no-brainer. Well, I'm 100% with him. And that's a great way throughout the show because I'm now looking forward to seeing it was Andrew Katz. Adam, Adam Katz. Adam Katz. I'm looking forward to seeing him at the Markell event.

So I'll just remind everyone, Bob and I will be at the Markelle event on May 11th. Bober Boddy, thank you so much for coming on and looking forward to seeing you in person in about a month. Okay, great. Thanks. Take care. Bye.