Yet Another Value Podcast - Clayton Partners' Jason Stankowski and Brian Lancaster on why Mattr $MATR.TO is misunderstood

Episode Date: August 23, 2024

Jason Stankowski (Partner and Co-Portfolio Manager) and Brian Lancaster (Partner and Co-Portfolio Manager) from Clayton Partners join the podcast to discuss their thesis on Mattr Corp. (TSX: MATR), a growth-oriented, global materials technology company broadly serving critical infrastructure markets, including transportation, communication, water management, energy and electrification. For more information about Clayton Partners, please visit: https://www.claytonpartners.com/ Chapters: [0:00] Introduction + Episode sponsor: Tegus [2:10] What is Mattr Corp. and why are they so interesting to Brian and Jason [5:23] When Jason and Brian look at Mattr Corp, what they think they're seeing that the market is missing that's going to lead to alpha generation here? [10:57] Switching to US listing and what Jason likes about IFRS better than GAAP [15:07] $MATR.TO comparison to TerraVest [19:34] What's the secret sauce that doesn't make $MATR.TO just another commodity business [26:45] Auto manufacturer vertical [29:56] Growth runway [34:05] How much is Mattr a bet on the business vs. management team for Clayton Partners / stealth AI potential here [43:13] Q2 Earnings and conference call [51:30] $MATR.TO final thoughts and capital allocation strategy Today's sponsor: Tegus If you’ve been reading my newsletters, you know how often I rely on Tegus for my research. It’s truly revolutionized how I get up to speed on new industries and companies. Tegus has the largest transcript library in the world, with over 75% of private market transcripts. Whether you’re curious about AI, biotech, or any niche market, Tegus has the insights you need. What sets Tegus apart is its all-in-one platform. It’s packed with expert call transcripts, management checks, panel calls, and in-depth financial data. No more jumping between different services or piecing together fragmented data. With Tegus, everything is right at your fingertips. The best part? The insights you get are from the very people shaping the industries you’re interested in. You’ll find perspectives from insiders and executives that you simply can’t get anywhere else. To see Tegus in action and understand why it’s my go-to resource, visit Tegus.com/value – that’s T-E-G-U-S dot com slash value. Trust me, once you try Tegus, you’ll never look back.

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I'm your host, Andrew Walker. If you like this podcast, it would mean a lot if you could rate, subscribe, review wherever you're watching or listening to it. With me today, I'm happy to have on from Clayton Partners, Jason and Brian. Jason Brian, how's it going, guys? Good. How are you? Doing good. Really appreciate you guys coming on the podcast, really looking forward to it.

Before we get into it, I just want to remind everyone start the podcast the way I do every podcast. Nothing on this podcast is investing in advice. That's always true, but particularly true today. We're going to be talking about a Canadian domicile company, Mattercor, just to throw it out before we get there. But, you know, people should remember Canadian domiciled. It carries a little bit of extra risk, extra tax abuse.

devices, extra tax consequences. Nothing on this podcast is investing advice, not tax advice, anything like that. So please consult a financial advisor, do your own work. All that out the way, Jason Bryant, really excited for the podcast today. I guess I'll just start. What is MatterCorp and why they're so interesting? Yeah, let you kick it off, Brian. Yeah, sure. MatterCorp is a kind of recently restructured company. The remaining businesses, their sort of material technology.

They've got a composite technology's business, which makes spoolable composite pipe, as well as composite underground storage tanks. And then one of the real interesting growth aspects of that business is, is stormwater management system, so composite systems to handle a lot of the, you know, the sort of incremental demand for dealing with stormwater, wastewater, et cetera. And then the other side of their business is called connection technologies,

and that's really electrification focused, specialty wire cable and some heat shrink solutions, goes into automotive. There's a really good trends there with regard to EVs and hybrids as well as nuclear applications, aerospace, and then just kind of general industrial. So pretty highly engineered wiring cable assemblies and related products.

So yeah, those are the remaining businesses. I think what's made it a really interesting company to us is that they've gone through a pretty significant restructuring. They sold a highly, highly cyclical pipe coating business that was basically servicing deep water construction projects. So obviously you can imagine a hyper-cyclical business. They recently sold that. They've got a pretty compelling, robust balance sheet.

can probably put three or four hundred million to work. And so we feel like they're just on really good footing going forward as they redeploy those proceeds and grow the remaining businesses. And you get all that with a really, really solid management team and a good runway for growth. I think when it was still Shaw Corps, because this is the old Shaw Corps, there was a write-up on Value Vestious Club

that referred to it as a Fort Knox balance sheet, which I always like, which always tickles me. Jason, did you want to add anything to Brian's overview? No, I think it's a pretty simple story. It's, you know, trying to get out of the oil and gas services kind of sector. Obviously, they still have some in the composite pipe, but the balance of the business is growing and has some secular trends we can get into that we think are pretty attractive and shouldn't make it trade like a deep

cyclical business that it used to be. And it's sort of stuck in the SIC codes of its past. It's one of my favorite things where people, one of my favorite investors was Bob Evans, which used to be, for a while, it used to be a restaurant company. And they sold the restaurant and they became just a, it was processed potatoes, branded potatoes basically, that they were selling to grocery stores, which is about as nonsense. cyclical and non-restrocent needs you could get, but it was still in the SIC code with restaurants, only restaurant analysts covered. It was like, hey, this isn't a restaurant anymore, but people thought it was.

I guess backing up from SIC code mismanagement, you know, one way I'm trying to just, like, lead every pod and frame every podcast discussion going forward is the market is a competitive place, right? There's a lot of smart people out there doing research, everything. When you guys look at Mattercorp, what do you think you're seeing that the market is kind of missing that's going to lead to alpha-generating? here yeah i think i think what we've been you know not knocking on wood what we've been pretty good at over the years um is judging management teams and sort of their decision-making and i'm not

sure um you know on on the face of it if you just start you know reading the mdna and and and the documents um if you can really appreciate the sort of the private equity approach that that that might and Tom are taking to the business and some of the underlying growth that's happened in the connections business notwithstanding some inventory changes up in Canada so there's I think really the judgment of management and their ability to to grow this and the decision making around capital allocation I think is probably a differentiator I don't know Brian yeah I think that's I think that's probably the biggest one that we see that we think is compelling. And I think just the general quality of the remaining businesses,

and there's just been so much noise and confusion through this transition and selling off. They still have a small remaining non-core business in that space that they'll be also selling. But just the numbers have been really noisy. So I think that's part of it also kind of to your point, the fact that it's that it's a Canadian listed stock, yet the vast majority of their businesses are U.S. focused. And, you know, it's really a high quality small cap that I just don't think anybody is really focused on. And also to your other point with the coming from this sort of oil services space, you know, that's sort of who their analysts are. I think they definitely are looking forward to more sort of multi-industrial coverage. And I just think over time, it becomes a little bit more mainstream as far as who they are and what they're doing. They're also looking pretty intently right now for an acquisition in their connection business in the wiring cable space. They think they have a lot of opportunity to penetrate, you know, U.S.-based accounts.

that business and an acquisition would help them along that path so yeah i just think a lot of a lot of reasons why it would be either one not focused on or two just sort of misunderstood and the balance sheet is is pretty robust for for a little you know industrial business they've got a lot of capital to deploy and they've already been doing that the the minute they close the deal. They started pretty aggressively buying back stock, which we thought was them putting their money where their mouth is. We think they'll continue to do that even while being able to do a reasonably sized acquisition. And we trust their, you know, their underwriting and their capital allocation. Like, they're not going to do a deal unless it makes really good sense for

the strategic fit, but also them getting really, really good returns on that capital. Yeah. And Andrew, one of the other things, like we, I had a conversation with, with another investor who said, you know, it's really illiquid. So if you look at the U.S. listed, you know, over the counter name, it looks like it trades about, you know, a thousand shares a day. Yep. Whereas that, but that Q-Sip is interchangeable with the Canadian. So you can actually put up, you know, 100,000, 200,000 shares. And, you know, broker will already. that for you. So you can own it in US currency if you want. You can obviously buy it on the TSX, but it's very liquid on the TSX. It's just, you know, sometimes it's just going the extra picking up the phone and finding out, oh, no, we can actually buy hundreds of thousands of shares if we want in the US QSIP. We just have, you know, just have to actually pick up the phone and talk to somebody about it. So yeah, there's a ton of smart people out there, but, you know, not everybody goes the extra, you know, call to figure out what, you know, what they can do,

actually. No, look, it's one of the most interesting things out there. Like, this is Canadian domicab. I think there are London domicab companies, too, where a lot of their business in the U.S. And, you know, I'm always a little skeptical when someone comes to me and says, hey, you know, this trades at a four turns discount because it's in Canada or because it's London. But, you know, all with a lot of the business in the U.S., and you kind of do see that. I can, I'll just ask that, do you guys think they switch to a U.S. listing at some point?

Because a lot of their business is in the U.S. And it does seem like that would kind of help, that would kind of help juice liquidity, juice visibility, juice the multiple at some point. I think at some point, we've discussed it with them. I actually like IFRS better. And, you know, you kind of started the, uh, started the pod with the caveat of it's Canadian and there are tax, you know, issues and questions. But in some context, the MD&A and the information that actually comes out of IFRS in Canada, I think, is better and more descriptive of what's going on than some of the U.S. disclosure gap personally.

But, yeah, I think over time, they feel like they need to grow and get a little bit bigger to sort of absorb the cost. And obviously, Sarbanes-Oxley, you can have your own opinion about it. but it's a joke and it costs a lot of money and they would have to do a lot of stuff. And these are old businesses that, you know, the Shaw businesses were, you know, 80, 100 years. I mean, these are old businesses. So I think there would be a lot of work and cost that, you know, maybe if they're double their size in three to five years, they might want to take on for a U.S. listing, but otherwise they're focused on growing and compounding capital currently. I'm sure this is the question that everyone dreams of when they're listening to a podcast

hearing and hearing answered. But you mentioned you like some of the disclosures better in IFRS than Gap. And I can go both ways. Like I'm no accounting expert, but obviously I look at companies in both. What are some of the things you like better in IFRS than Gap? Well, they, like, they show their lease obligations as debt, basically. And I find, I just find the MD&A, the discussion of, of the actual businesses to be more, more descriptive.

I find the, you know, IFRS has much, Gap can tend to be very rule-based, such that people game the actual rule, sort of, you know, form over substance. And IFRS comes back in a lot of places, IFRS says, hey, the substance is what matters and you actually have to disclose what's going on, even if you hit this particular bright line test, if you're really, you're really doing something different, but you hit the bright line test, you need to actually capitalize it or not.

And it just seems to be, you know, I've done a lot of deals around Gap in my prior career. and I just, I trust it less, I guess. You said the MD&A is more descriptive in IFRS than in GAAP. And I just, you know, is that a function of, let's just take to me, is that a function of matters MD&A is more description than your average US company? Or do you think, like, just you get better descriptions in IFRS than GAAP overall? Because, you know, I read a lot of 10Ks. And sometimes I read one, I'm like, I'm not, especially the first three pages,

which is like the business description, sometimes I'll read it. I'd be like, I don't know what the hell this company does. Like, did I just read something? Like, I'm completely confused. And sometimes I'd be like, oh, that was a really interesting overview of strategy and everything. And I've always thought to me it was more the company and at the company's description than some type of gap rule. But I'm curious, do you think IFRS just like encourages and allows more for more flea flow or do you think it's just this company specific? Or maybe I have a, maybe I have a subset of the actual companies that I've invested.

Maybe it's a, you know, a selection bias. the companies we've invested in in Canada have had more, you know, descriptive. I haven't gone and done an exhaustive search of all, you know, Canadian MD&A's and some sort of analysis to know the difference, yeah. You just said it and I can be a accounting finance there, so I thought it'd go there. Again, I'm sure it's what everyone loves. Let me back up a little bit. So Mattercor, you guys mentioned, you know, kind of more industrial industries, they're looking to do acquisitions,

Canadian domiciled. I think the first thing, and actually, Jason, I think you emailed me. I had someone on pitching Terabest earlier this year. And when I started looking at this company, I just kept having like little rhymes back to the Terabest story. And, you know, that Terabest has been outstanding. It's a 3x over the past couple years, over the past year. It's executed great. Ignore the execution of the share price. But I just guess if I said, hey, this rhymes with TerraVest, like how would you guys respond to the positives, the negatives, that that comparison? Well, it's a lot cheaper. And you're at the starting line of TerraVest. So, you know, go back 10 years. I mean, I'm not an expert on TerraVest. We've known some of the former directors and investors

there and have a lot of respect for what they're doing. But it's not a sexy business. This is, you know, the stuff that matter is not some sort of, you know, crazy, sexy business. And I think TeraVest is won by executing, basically, and earning a reputation of compounding capital, you know, buying back stock when it's appropriate, and doing it aggressively. So, you know, not being an expert on TeraVest, just seeing things that rhyme, like you're saying. It's like basically you're at the beginning. They finally sold this last big asset at the end of last year. And like Brian said,

things have been a little bit noisy with some slippage and permitting in their tank business. And they thought they had a big order recently. I think you asked about the quarter a little bit. But they thought they had a big international order on the pipe business, which was going to make Q3 kind of grow nicely. And we thought we were sort of off to the races here. they got that order pulled. So you're, you know, you're basically at the beginning, the starting point of something that

we think hopefully looks like TeraVest and ends up getting, you know, a multiple similar and returns, you know, looking out the front of the front of the window. This episode is brought to you by Tegas, the future of investment research. Look, if you've been reading my newsletters, you know how often I rely on Tegas for my research. I probably read one or two expert calls a day, you know, probably average seven a week off of Tegis. They've got the largest transcript library in the world with over 75% of the private market transcripts. Whether you're curious about AI, biotech, or any niche market, TIGAS has the insights you need. What sets TIGAS apart is its all-in-one-pack platform.

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That's Tegas.com slash value. Trust me, once you try Tegas, you'll never look back. No, that's great. Brent, let me turn this question to you. So one of the things, and I, sorry to keep bringing Terevast up as the comp, but when I looked at TeraVest, one of the things I kept saying is, you know, they're making big tanks for outside gas station stuff. And I kept saying, hey, how can this be a good business, right?

It just seems to me that should be a cost of capital business, right? A mom and pop can do it. You're basically taking a lot of metal and turning it. And obviously, they've found a lot of different, a lot of different areas that have given them really nice returns on invested capital. They've been able to, they've been able to acquire really accretively. When I look at matter, one of the reasons TerraVas popped up is the same thing kind of pops to my mind, right? I'm looking at their investor deck right now. Is it Xerces?

There's two Xs in there, which is tough to pronounce. But, you know, underground storage tanks and treatment solutions, flex pipe, prerunium spoolable composite pipe, shawflex, engaged wire, cable, and assemblies. Like, I look at all those and I say, oh, my first thought is cost of capital business. But what you guys are saying is, A, low multiple, right, which is always helpful. But B, you're talking about growth. You're talking about a creative value enhancing growth. So, Brian, I want to ask you, like, what's the secret sauce here that makes my initial take?

Oh, pipes are a commodity business. What's the secret sauce that makes that wrong? Yeah, I mean, I think it's obviously a little bit different answer in each one of the businesses, but, you know, it's highly engineered composite products. It's not, you know, it's not steel tanks or welded steel pipe that it's composite solutions that obviously have to be engineered for whatever the application is. So, you know, in the pipe business, it's highly engineered composites that can handle really high pressures, really high temperatures, things like that. And so in that business, they're taking a lot of share from welded steel pipe. There's a lot of opportunities that they can use their application for that never used to think about composite as a solution. And then more importantly, they've been spending the R&D dollars to engineer the larger and larger diameters of pipe that can meet all those tests and be, you know, a solution for the larger diameter pipe application.

So that's one of the reasons that business has such compelling growth is that they're going into bigger and bigger chunks of that addressable market with their composite. On the tank side, it's a similar story. There's just not enough highly engineered composite tanks for the level of demand out there. So a lot, you know, we've heard a lot of stories of customers basically going with steel because they can't get composite. You know, there's obviously applications where maybe that makes sense because you don't really need to focus or worry about how long the tank lasts and sort of the main. maintenance of it, but most new applications would much rather have composite, and that's been benefiting Xerces. They're also shifting to much larger tank, just the pure size of the tank, and that is incremental engineering. Not everybody can do that. That's an area where Zerces has

been adding capacity as well. So I think, frankly, I think the tank business is one of the pieces that is a bit misunderstood. There's a significant wave of demand in fuel tanks with all these new travel centers and new sort of bulked-up convenience stores that are being built to effectively replace a lot of the, you know, 50, 60, 100-year-old fuel stations. So while everybody's focused on electrification, at the same time, we all know there's going to be, you know, there's going to be fuel in vehicles for a very long time and that footprint of stations especially large format travel centers is growing rapidly so that's you know and then obviously there's other drivers to that business on the stormwater management side and just pure sort of liquid

storage underground all of that stuff you know drives that business um right can i just pause you for could i just pause you there for one second on both of those businesses you mentioned um highly engineered composite is taking share from steel if I have to kind of like sum it down to one word which is awesome for them right but I just want to like for my own identification I think for listeners too are trying to understand this is the advantage here like they are playing the highly composite right they are benefiting from that share shift but is the advantage that they can produce the composite so there's some really unique process and technology and everything around producing the composite or is the advantage in the highly engineered where they've got the engineer so

you know, maybe the composite is more commodity. Like you can find composite somewhere, but they've got the engineers, they've got the know-how, they've got the skill. And, you know, as you get more and more technical, like I think about something like in the sphere in Las Vegas, completely different business. But I think they said there were two firms in the world that could design something like that. So, you know, those two firms are probably earning pretty good returns on capital if they've got all the know-how. So again, I rambled a little bit, but I'm really just trying to understand because, look, TerraVess was a 3-X. And I'm not saying this is the next TerraVS. I'm not saying it isn't the next tariff. us, but I'm trying to understand so, because if it is, you know, I know you guys think it is or could like generate those returns. I kind of want to be able to swing at that if it is. Does that make sense? Yeah. I mean, I think it's, I think it's all of the above. I think it's much more the fact that you have the right solutions, the right engineering, the right customer support. You're in those markets and you have, you, you were in sort of the poll position with the really meaningful customers. I'm not about to sit here and tell you that somebody else couldn't come up with,

you know, with a composite tank if they set their sights on it. I think they absolutely can. But it's more just a function of what's the capacity out there, who are the players that have the approvals, you know, that basically have the products that can meet the spec for these development projects. Right.

I mean, tear of us is a board. It's really more. care of us. And the pipe business is no different. I mean, you know, it takes a long time to get a product out there that's approved and can handle the situation that you're installing it into. So, you know, I'm not, I'm not about to say that you can't get more competition because we all know you can always get more competition. So I just think, you know, they've, they've sort of proven over these last number of years, that these businesses are north of 20% sort of EBITDA margin

businesses. And with the investments they're making in their manufacturing footprint, they think that that margin can continue to move higher as we come out of these investments. That's another reason why I think the stock is a bit misunderstood is they're in the middle of investing a ton of capital for you to enable a significant growth path, but also drive efficiency and margin improvement. But they have competitors, yeah, but they have competitors in all their businesses. So, I mean, just like, just like TerraVest, if you look at what they, what they do,

there's, it looks like a cost of capital business, as you said. But I think Brian summed it up really well. It's the permits, they have a brand, you know, people respect it. They execute and deliver for their customers, pretty much in all the segments. some of the wiring stuff I had the same impression as you before we visited

one of the facilities and you know they have where they put connections together they literally have their ovens you know at the facilities for the auto manufacturer so could somebody else do it

of course do they have engineers that you know are irreplaceable probably not but they have good brands they have good products and they have good service. And so, you know, I think that's the answer. There's nothing that's irreplaceable, like the sphere type of example.

Can I just dig in, I did not realize that on the ovens at the auto manufacturers. Could you just talk a little bit more? Because I'll just tell you the analogy I'm thinking my head, something like air products, right? Where they've literally got their things that are piping gas directly to the hospital and they've got the pipes. It's like, could someone replace that? theoretically yes somebody could build a new facility get all that you know air products a lot of what they make is actually regulated compressed gases and everything theoretically someone could build the facility take a pipe put it into the hospital absolutely but that's going to be a lot

effort now that might be a little bit extreme comparing to ovens at an auto manufacturing plant but I'd love to hear like in that example what are they ovening at the auto manufacturing plant like how long is that relationship going on how does that look yeah it's I mean I can let Brian can chime in, but it's basically connecting, you know, a way to connect to two different wires and then do it in a way that, that, you know, deals with heat and water and, you know, basically you can't, you can't get it wrong, right? So it's a cheap product. It's, you know, one of these things you like to see, which is it's, it's not a very, you basically put a, put a wrapper around the two things and then you use heat and to seal them basically and connect

them and so the connection technologies division does that and they provide basically the oven that connects the wires and the sleeve so the composite that does it and it's very simple thing it reminds me of like you remember Simpson strong ties right like the the building products where it's not a very expensive piece but if you get it wrong the car stalls out and shorts out Um, and so these were, they're pretty much in, Brian, I think, I think they're pretty much in every auto manufacturer or like 80% of them. Um, and their relationships have been, you know, are very, very long and deep. And so those are pretty much sole source you're saying. Like there's no one else who can make those for those 80%. I don't. You mean sole source. They're, they're in, they're in the majority of the of the auto manufacturers. Certainly they have. competition but in the where their where their ovens are at i don't think you go by somebody else's sleeve that was for sure yeah that was exactly the question brian did you want to add anything to that no i was just going to clarify that that's that's a heat shrink product so it's not the

actual wire it's the it's the it's insulating the connection of the two wires and sealing it and so again you're getting into sort of the the engineering part of it but that's a highly engineered solution. It's sort of the interplay of the composites in that in that heat shrink tubing and then how you bond it to the wires. So you can't you can't say oh yeah, I'll just use this other guy's solution. It's it's all engineered together the you know the way you apply it and the product itself. So pretty thicky obviously once you're designed in. I think it was on the Q2 earnings call. It might have been somewhere else I was reading, but they're pretty explicit. Their goal is to double revenues by 2030 and grow EBITDA margins to greater than 20%. I mean, you know, right now you're buying them at five or six times EBITA multiple, something around there. You run the numbers on double. You run the numbers on doubling their revenue while taking EBITDA margins from kind of the mid-teens currently to over 20% and you start looking at a, that's a lot of earnings, right? So I wanted to ask you guys, there's two pieces of that. A, we're going to double our revenue and B, we're going to,

almost double-ariebidon margins. Let's be generous to call that. How do they do that, right? What does it take to get there? How much is organic? How much is inorganic? How do they kind of drive that? I think the first thing to say there is that that's their organic targets. That has nothing to do with M&A, which would be obviously pretty significantly incremental. Okay, I wasn't clear. I kind of thought that they were building a little bit of inorganic when they mentioned that. Yeah, I mean, they say it pretty explicitly that those are their organic targets. But yeah, I mean, that's the runway they see in their existing businesses. That's why they're investing, you know, to modernize their manufacturing footprint. And obviously, that's over seven or eight years.

It's not like they're going to double in the next, you know, year or two. But I think they see a very solid, you know, line of sight to sort of 10 plus percent. annual growth that's kind of what gets you to a seven year double um and you know on the margin side i mean they have made good headway the last number of years it's just when you take it all the way down to the bottom line when you're totally out of these businesses that they got rid of and then carrying kind of the the proper overhead for the remaining businesses i think that lands you sort of in the you know 1517ish now and i think i think they they believe that they can drive that higher mainly through efficiency and just you know higher volumes through a more modernized

manufacturing footprint yeah they have four they have four new manufacturing facilities coming out of the ground i mean two just came out and are producing um and getting more efficient by the by the quarter and and uh another one will open by year end and then one in q one so they've invested of what, Brian, almost three, roughly three bucks a share Canadian in, you know, in new property, plant and equipment. So that, that organic growth, you know, has to pay off. The returns that they're expecting from that, obviously, that's a big part of the thesis. Yeah. And I think that's, you know, that that's part of, again, the opportunity, the current sort of, you know, sort of wobbling around in the stock. I mean, they're absorbing some pretty significant expense.

This is not all cap X. They've got a pretty significant chunk that's rolling through the P&L as well. So it makes the reported numbers look pretty ugly right now. Now, of course, if you follow the story closely, you understand the pieces that are sort of pertaining specifically to these investments. They're going to roll through that really kind of Q1 of next year. You'll sort of be past all that. but the underlying profitability of the two segments,

you know, backing out those costs is very similar to the last year or so. It moves around, you know, quarterly based on volumes. But I think that's one of the other confusing things about the story. If you're looking at it as a new investor, you know, the profitability is, you know, pressured this year from all the investments they're making. Yeah, he runs it through OPEC. you know, sort of the payments they're making that are operating expenses, they don't get to capitalize.

One of my favorite stories is always, it's a little overplayed, but I do love whenever somebody says, hey, they're investing through the income statement. Like, I do think that is, especially if you think the investments are going to be very high return in capital. Let me love another higher level question that you asked. How much of this is for you is a bet on the businesses, right? We've talked about the composite, taking share from stuff. We've talked about some of the things where they might be pretty great into process.

How much is this a bet on the business? Great balance sheet, all that, versus a bet on a jockey, the management team. It seems like you guys like the management team, think they can drive growth here. Wouldn't be, wouldn't mind some inorganic, wouldn't mind if they did some inorganic activity. We can talk about your bikes a second. But if somebody's coming and saying, hey, I really like matter. I want to do more diligence on them. How much should they think in business versus I need to get comfortable with this management team?

I think, I mean, Jason can chime in, but I think it's always both. I think our investment style focuses intently on management and capital allocation and, you know, them proving to us and over time that they think like owners and that they make smart investments when they've fully vetted the opportunity and they understand that they can earn a compelling return on capital. But look, you've got to believe the businesses are compelling too. We do. We think they're in a very interesting position with kind of these niche materials,

technology businesses. But I think we also love the fact that we're confident that, you know, if they, if they could get a really full price for one of their businesses, that they think is, you know, can be sort of position. or they can take that capital and do something even more compelling, we think they'll do it. So that's, you know, those are really just the way we look at it. Those are sort of free call options that you have somebody that is opportunistic and thinking like an owner.

You know, I mean, if you really look at it, that's what they just did. You know, they just sold their pipe coding business, which is in a massive upswing. It's generating enormous amounts of cash flow right now. And they sold the business because they know that it's hypercyclical and full cycle. It's not a great business to be in. They want to be in more consistent, more organic growth-oriented, lower capital-intensity businesses, and that's what they've done. So I think it's both. Yeah, it's always both.

We like and trust the management. I think our second level of work was really on the businesses. And after digging more into, you know, what's going on at these service stations, I just didn't realize the organic growth that's really going on at Buckees and Quick Trip and Racetrack. And there's big family owned, you know, businesses and private equity owned businesses that are rolling these things out. And I was, you know, I was on a road trip and, you know, leaving Nashville and a friend of ours said, oh, man, you got to stop at Buckees on the way out of town. I'd never been to Buckees. Well, it's clean, awesome, and I had a colleague that knew the founders, and we started digging in, and we're like, wow, this is actually, these people are opening up these very, very profitable businesses, and they're basically rebuilding a lot of these service centers. And then obviously Berkshire owns pilot.

He's going to say the Berkshire. Yeah, and I think they're investing a lot of capital to grow that thing. I remember when I heard Berkshire was buying fine jail, I was like, gas stations. Like, isn't that a low margin? But, hey, low margin, go look at Murphy's USA. And that's like the worst of the gas stations, what you think? Go look at that stock. I mean, that's, what, a hundred baggers since it's fun.

But, yeah, you do this, you do gas stations, right? You do them at scale. And they've proven to be a very good business. And it might be where the puck is going. So that makes total sense. I'm sorry. I was going to say Berkshire, too, and I was excited you said it. I cut you off.

now that's that's it just i think the team you know we we we we found out they were not net exercising their their stock options um which is basically buying stock you don't see it very often in the marketplace everybody usually just net exercises and sales right i did not realize that that's crazy yeah yeah yeah so that's that that that tells you that you have a thinking management team so the management came but as brian said then then the question is will does the whole thing just deserved to be a five times because it's a cost of capital or whatever terminology you use type of business. And really is their growth opportunity. And as we dug into all the different businesses, we found that there are growth opportunities, these larger

diameter pipe is actually really, really meaningful to their sales process. And you're seeing it now where, you know, the industry is sort of in decline and they're able to kind of tread water because they're rolling out new diameters, et cetera. So, yeah, probably enough on that. But yeah, we definitely need both the management team and some belief that the business isn't going to, for another Berkshire quote, you know, overcome good management, the bad business is going to win. This is a, I feel a little bit silly saying this, but is this, is there any stealth AI potential here? Just say AI in the

conference call? They're getting some data center love from their water tanks. They're saying that the data centers use a ton of water. And so they're getting a lot of RFPs and quotes for water storage stuff

related to these data centers that's kind of growing. So maybe you could get a little love there. Yeah, basically to the extent that data center development happens in more dense areas. Like, you know, that's when you really need underground tank solutions. So they have, they've said that that's kind of an emerging piece of demand for the hydro chain, you know, sort of water solution stuff. But, but no, I mean, I think beyond that, I mean, I don't know, maybe somewhere in their manufacturing, you know, processes or something.

but I don't think so if I'm building out in the middle of nowhere Texas storage is not a concern so I can just take a giant metal bucket and store my water for liquid cooling so I'm not going to need matter there but if data goes closer to urban and suburban areas where space will be at a premium because lands at a premium you can't build it you're going to have to store that water underground and these guys might be a play there am I kind of hearing that correctly yeah yeah I wouldn't, I mean, it's not going to drive the whole business, obviously. So it's a small piece of what they're doing. But yes, that's right.

Yeah, they spoke about it. They sort of laid it out and talked more about the opportunity and detail on their first quarter call for the first time, really. And they just said they've seen, you know, in the last sort of year and a half, they've seen, they've gone from zero to basically a pretty significant. significant RFQ volume in that space. It's not really impacting their revenue yet. But, you know, the reason it's interesting is it's massive volumes of fluids. So they need the largest tanks they make. Right. Which, again, is where there's not much capacity. They're at capacity with their new investments. And those are very high margin solutions within the tank world. No. And I ask not because I'm trying to go out and Yolo and AI play, but I've seen it happen several times recently where the AI, it is so much money going to these AI systems. And if there's a component that they deem critical, there's so much money and so much build happening. Like you can all of a sudden have really huge demand. The profits can be huge. It can be fast. It can overwhelm the capacity. I mean, you know, you've seen it with some HVAC firms, some engineering firms in Texas and stuff. And they put up huge margin. So while I,

do feel silly for asking something that at the start is like, hey, why isn't this just dumb metal pipes or something as an AI play? Like I did want to ask because it's not crazy to think you and I could wake up and say, hey, you know, they had 50% growth three years in a row in this thing and it drove huge margins. No. Let me go ahead. No, I think you're right. You could get you could get some love.

Obviously, we're not trying to underwrite that as you as you mentioned. I mean, it's, it would be. be nice. And as Brian mentioned, they just added capacity in their larger, their larger tank. So that's obviously beneficial. I think anybody who's watching and listening to this is going to say, all right, Jason Brown are making interesting points. You know, I'm paying five times EBITO with a great balance sheet. So I've probably got some downside protection unless the world goes to hell in a handbasket. Let's go do some research. And the first thing they're going to say is, oh, well, they're kind of painting this bullish story, you know, 10% annualized growth to 2030,

expanding margins, some demand, they mentioned AI demand. And then they're going to look at the stock price for Q2. And this, they announced Q2 and earnings go, this stock goes from 17 to 15. And I think Jason mentioned a little bit. They said they had one big pipe project that was laid. But I do just want to ask, like, what happened with the Q2 earnings? Like, why did the stock pull back? How did you guys interpret them? And again, I'm not trying to trade earnings calls, but I think it's something people are naturally going to ask. Yeah, I think, I think my take on it is, you know, When they reported Q1, they talked about a pretty significant uptick in the second quarter, and it didn't happen. And it was basically a significant international order in their pipe business.

International is a very rapidly growing piece of their business. So it's been part of the reason why they're growing their composite pipe in the face of pretty significant downturn. in drilling and completion activity domestically. And so, you know, obviously the analysts got excited about the fact that you were seen an inflection in the top line. And frankly, it's even more than that because they had a couple, they had a couple really depressed quarters coming out of last year due to a little bit of an inventory correction on the tank side.

And that probably is worth a little discussion as well. because obviously we're sitting here talking about demand for tanks being strong and the good runway for growth. Last year, their major customers had some serious permitting just and regulatory challenges. So they're sort of ready with the footprint. They're ready for the tank, but they're waiting on approvals. And so it sort of put a bit of a stop sign up in that business. The company did not want to build incremental inventory. They wanted to basically hit the brakes on manufacturing to let those permits roll through.

That has now happened. That business has swung back up significantly the last quarter or so here, and there's guiding for that to continue through the rest of the year. But that gave you a couple quarterly hiccups. Now you sort of get another quarterly hiccup on the other side of the composite business. So that's basically what's driving the volatility. The stock's just kind of been gyrating around. around, you know, between 15 and 18.

And I think that's, you know, to your point, I mean, they've got to come out of that with cleaner sort of numbers and cleaner execution as you move into next year. And if you're buying the stock, you're obviously betting that you think that'll happen. Jason, did you want to add anything there? Yeah, no, it was basically this quarter, it was, it was Q3, right, Brian, that they, that they had guided to kind of the big bump from this international, um, this international order. Yeah, sorry.

Yeah, yeah. So just to clarify, it was Q3. And so the analysts, yeah, the analysts had a big step up because they thought they had that. And really, they didn't have the purchase order yet. They had, they had the customer come over and look at the facilities and manufacturing plant. And they thought they had the order. But they didn't have the PO and they probably shouldn't have mentioned it in advance. There's a fine line between wanting to be, you know, as transparent as possible about what's going on in the business, which is great.

But then when you get people sort of salivating about it and having, you know, the numbers move around based on what you think is going to happen, you got to really think about when you want to tell people that. And so I think if there's a private company, private equity company, they would have come to the board and say, hey, we think we have this order. This is what it'll look like. but they're a public company. They didn't have the PO yet, and so they got a little bit ahead of themselves. There's just one more thing from the Q2 call that I was a little confused by. There are some sales on the oil and gas side, I believe, and they mentioned how their product is consumed when wells are completed,

not when they drill them. And I was kind of confused just, you know, as an outsider who does a day of work on this in prep, I was kind of confused by what the issues and what they were driving it there. So do you want to talk to me about kind of where analysts and then we're getting in a misstep on that? Well, they just, they, they connect the well to a midstream pipeline, right? So their, their pipes are not down the hole. So if you, you know, if you, you can drill a well and leave it capped and not have,

not have it producing. Okay. Right. So, so, so you don't need, you don't need to connect it to anything, um, until you want to sell the commodity coming out of it. So, so they are pro-cyclical in terms of, look, More wells are getting drilled is ultimately going to be good for them when they get connected, but maybe not at the time.

But if oil and gas price are growing up, more drills are good drilled. Eventually, they have to connect to the midstream to get to market. And that's when they're going to be getting their right. Okay, that makes total sense. Yeah. The other little nuance there is that, you know, there's sort of an issue in the U.S. where the wells are so significant and there's so much consolidation in the space that you're getting fewer more massive wells.

And then obviously when you get into a period where people are him and haunt about oil price, you get a little bit of a slowdown in that completion. They're the takeaway sort of gathering system hype. And so that's what they're trying to explain is sort of those dynamics. But they're mainly explaining it because they've been growing pretty nicely. through all this, partly because of what I was mentioning earlier, that how much they've grown their international business, these international projects are enormous. They're, you know, in the Middle East, that's why they had this, they felt like they needed to talk about this

piece that was going to be significant in Q3. That's been pushed out, if not pushed out indefinitely. But there's other opportunities, obviously. It's just hard to predict when those are going to show up. But in the U.S., they've been growing in a pretty, pretty down, you know, ugly environment as far as completions. And they're just trying to point out, like, if that continues, that's, it's going to be hard to significantly grow. But if you get any stabilization or uptick in that, then you have a pretty significant opportunity for them to continue to take share. and you know, and you sort of see the more pure benefits of their larger diameter pipe offerings starting to come to Mark. This episode is brought to you by Teegis, the future of investment research.

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I want to give you guys an opportunity to wrap things up with anything I miss or anything, because it's not the easy, it's an easy story to understand, but as we talked about, you kind of need to get comfortable with, is this cost of capital business or is this, like, you know, good returns on capital business? But I want to wrap it up with one of my favorite subjects, and that's, they've got an active stock buyback program. I think, you know, under billion dollar market cap, they mentioned on the Q2 call. They said, hey, our share buyback program, NCIB up in Canada, is off to.

They called it an active start. They're talking about $10 million a quarter. So obviously, I'm lobbying you guys a softball question. But how do you look at kind of share repurchases and capital allocation on that side going forward? Yeah, we like what they've done. It's been, as they say, in all of the above approach. So they've put, you know, a lot of capital into organic growth, which we generally see, obviously they have to deliver on it. But that's, but that usually has the highest returns if you have management you trust and the lowest risk because it's businesses you know.

As Brian said, they put, you know, they put the hammer down late last year when they closed the sale and the stock was a little bit lower than here. and they've consistently been buying back stock and, you know, we think it's a good capital allocation. They believe in the growth and they believe in the margin targets. So, yeah, we're excited that they're doing that and have the balance sheet to look at acquisitions. What else would you add, Brian? No, I think that's it. I mean, I think it's not very often that you see a company, you know, put the hammer down

aggressively on their buyback when the stock comes in. That's exactly what they did right on the heels of closing the pipe sale. The stock was a little bit heavy and, you know, I think they exhausted their entire remaining buyback in like six weeks or something, which we love to see because they're just putting their money where their mouth is, you know? And then they say like when the stock is 18, 20, it's, you know, they don't necessarily feel the need to be so unbelievably aggressive, but they're still buying back at kind of a measured pace. So yeah, we like their quote, all, what is it? All the above. Yeah, all the

above approach. They've got, they've got the ability to invest, you know, in the growth of the business while also giving capital back to shareholders at really compelling multiples. And they just refinanced their debt as well at a, you know, at a, you know, at a month. much better rate. Sorry, Andrew, go ahead. No, I just say, I love to see that because Brian mentioned, hey, you know, the stock goes weaker and they start buying back more. I'm sure you guys have seen it all the time. I normally

see the reverse, right? The stock's higher and their buying back shares. I'm like, this is pretty interesting and then the stock's 50% longer. Like, we've got to preserve cash. We've got debt coming due. You know, the economy could be worse. God damn it. They've done it to me again. Look, I think

everything here was interesting. I will say the coolest thing, the coolest thing I heard was that they were exercising stock options without, uh, without an exercise. So they were coming out of their own pockets of pay for the stock options and cover tax costs and everything. Not that that's the craziest thing in the world, but I very rarely see it done. It's very, you know, nobody really tracks that specific thing. But I will say in the past when I've seen that it has been, uh, it has generally been

a really good sign because who's got a better view of value than insiders, probably no one. And the fact, in this case, it's almost like they're doing everything they can to maximize their outside exposure in line themselves. Guys, we have covered so much. I think we've done a really nice job of covering a story. Jason's the one who's been pinging me for three months. You've got to look at it. And when I finally started drilling down, I was like, okay, I can kind of see the TerraVS rhymes. And, you know, TerraVest is a three X over the past year. So I wouldn't be about to have one of those. But I want to make sure anything else you think we should have covered. Listeners should be thinking about if they're interested in starting to do a

and story to kind of get ranked up on this? No, I think we covered it pretty well. I mean, it's all about the organic growth and, you know, the magnitude of the investments they're making. If they're thinking as clearly as we think they are about their opportunities, these are going to be pretty powerful payoffs. And right now you're in the middle of the no free cash flow. Oh, they're spending it all.

you know, people get sort of negative in those periods. And we've had some of our best investments where that's when you accumulate your position because next comes the payoff, you know, to all of that capital. So, yeah, they got to execute. The bottom line is, you know, they've had a couple little hiccups here. They need to execute better. But we think they're really, really quality people. We think they're thinking about the business the right way. And we love that they're buying back stock in the meantime while everyone's confused. No, I like that you put it there, especially, I think small cap international, you know, I do think there's less coverage and less people looking at it.

And it's been, again, maybe this is more London, but it's just been beating over my head, like, hey, especially international with the dearth, you don't invest a year ahead of time when they're making the investment. What you really want is they've made the investment and the trailing numbers look terrible. But then hopefully they start to realize the fruits of that investment and all of a sudden the market can really wake up when EBDA goes from 50 to 150 because all of those investments start paying off and the stock, you know, just looks, it looks really good. And it's nice. The cash flow starts rolling in. These guys will buy back shares and everything. So cool. Jason Bryant,

this has been great. Clayton Partners, you can actually, their website's really nicely designed. You can find it really fast if you just Google Clayton Partners and you'll see some nice little photos of them under the team and everything. But look, guys, I appreciate you guys coming on. And I know there's one or two others that you guys are excited for us. So looking forward to have you on for a second time. Right. Thanks, Andrew. Thanks, Andrew. A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.