Yet Another Value Podcast - Cove Street Capital's Jeff Bronchick and Andrew Leaf talk $ECVT Ecovyst + $VSAT Update

Episode Date: July 19, 2023

Cove Street Capital's Jeffrey Bronchick, Principal and Portfolio Manager, and Andrew Leaf, Principal, Research Analyst, discuss their thesis on Ecovyst Inc. (NASDAQ: ECVT), a leading integrated and innovative global provider of specialty catalysts and services. Also, be sure to stick around for the last ten minutes as well to hear Jeff and Andrew's update on Viasat $VSAT. For more information about Cove Street Capital, please visit: https://covestreetcapital.com/ Quick blurb on $VSAT: https://covestreetcapital.com/well-that-wasnt-fun/ Chapters: [0:00] Introduction + Episode sponsor: Stream by Alphasense [1:57] What is Ecovyst and why is $ECVT interesting? [9:16] $ECVT core business [16:36] Understanding the $ECVT risks [26:51] $ECVT valuation [34:29] CCMP and INEOS [38:01] $ECVT Capital allocation strategy - M&A [44:31] $ECVT customer contracts - pricing power on renew? [47:09] Final thoughts on $ECVT - catalyst technologies section [49:49] Recent news on ViaSat $VSAT Today's episode is sponsored by: Stream by Alphasense Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts, powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced buy-side analyst conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts 1-on-1 and get your calls transcribed free-of-charge—all for 40% less than you would pay for 20 calls in a traditional expert network model. So, if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. For more information: https://www.streamrg.com/

Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by-side analysts conduct the calls for you.

But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls and a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you.

Head over to their website at streamrg.com to learn more. Thanks for listening and we'll catch you next time. All right, hello and welcome to yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot if you could rate, subscribe, review it, wherever you're following or listening to it. With me today, I'm happy to have on for the second time, the team from Cove Street Capital. Actually, for the first time, we've got Jeff Branchick from Cove Street Capital.

And then for the second time, we've got Andrew Leaf. Andrew, Jeff, how's it going? Great. Andrew, hold it. What stock do we talk about last time just so I know if Andrew was going to, like, hate us here? I don't know if you want. People can look at the chart. It was Viasat.

It was via Vio, so hold on. So are we, we should probably be, you know, shape-shifting. over, but let's stick to script, shall we? Let's, we can shape shift over. A couple people are like, oh, this is timely. And I said, no, we're going to see. I did a lot of work on EchoVis, but we can shape, we'll do the five minute drill at the end, if you'd like.

Perfect. So before we hop into all that, let me just start this podcast out by reminding everyone a quick disclaimer. Nothing on this podcast is investing in advice. Please do your own research, do your own work, consults financial advisor, all that. This is financial advice. Anyway, guys, the stock we wanted to talk about today is EchoVist. The ticker is ECVT.

I'm actually really glad. Jeff kind of brought it up that he wanted to talk about it with me, and I'm really glad he did because two investors who I consider some of the sharpest I know, know that I have been interested in the refining space in general for the past 18 months. And they said, hey, this might have all of the plays of a refiner and then some because it's a really interesting product. It's really moody. It's absolutely mission critical.

But I'm rambling. I'll turn it over there. Jeff, Andrew, either of you can start. What is Echovis? And why are they so interesting? Got it. I think it just will divide up into, you know, obviously, I'm just. just a talking mannequin and Andrew is the Oz or the brain in the enclosed glass thing.

Okay. Yeah. So I think what was interesting for, and thank you and all the disclaimer stuff that you just said, Marianne, our compliance person. Okay, good. It's besides a good company. And it's always nice to find good companies that are underpriced because, you know, you rarely get good company cheap stock at same time.

been some, you know, I guess external institutional investment industry things that have paused this that we believe are, you know, have relieved themselves after frankly smacking us for much of the past two years and I'll go into it. But long story is we track failed IPOs. It's just that simple. And this was a failed IPO. And though everyone could look at exactly what PE firms I'm about to malign. It's this classic of, you know, there's a lot done in PE with hundreds of billions of dollars that just makes zero sense except to generate fees and conceptually performance. And this was one of them.

And CCMP put together privately two groups of chemical companies and took them public back in, actually they started a deal in 2014 when IPOed in 17, but it just had no, it was name on paper it could be constructed as a whole company with a narrative that made sense only the people who were doing nothing but nodding their head and listening and so naturally they came public with and with a bunch of different entities of which was the narrative did not it fit to sell an IPO it didn't fit of how the business is worked and what one should expect for them and when and hence things did not go according to plan and stock got creamed and so there This sort of came up in our world of like following a failed IPOs.

And this is a, we've had a fair amount of experience in this area with, you know, specialty chem companies or, you know, excitingly leverageable and, you know, good LBO fodder, that when they come out and get on the flywheel of delivery, they get really interesting. So we started looking at this. And the second part of this is people in our world hate PE overhang. And there are particularly now, and I think this is one of the more interesting opportunities that we've been pursuing and looking at is people are hung. P.E. world smartest men. We're making, God knows how much money went to God knows what school. Just as soon as they have a public investment, they freeze. They just, they don't quite seemingly know what to do.

And they proceed. And people don't like that. And so this company had, you know, over close to 50 percent was still P.E. own. And so naturally everyone in our world says, well, of course, I want to buy the last 5% call me when it's done. And there can be and have been successful opportunities because also P.E. being P.E., they're looking to sell it every day. And so sometimes it comes out through, as I'll talk about, the Ecovis way, which was not good. And sometimes the company is sold. And in the meantime, again, we're a $400 million plus firm so we can do these kind of things if you're running. you know, 14 billion. You're like, I'll just wait until the last one. Okay, so that was a big setup. Went to, they solved their problem or started to solve a problem by hiring a new CEO who is not

the lead the company through the IPO, a guy named Belgasum, which, as he explained to me, I said, how do you just pronounce your name? Because, you know, rhymes with orgasm. His words, not mine. So he was a senior Baker Hughes guy and just, you know, right guy, right time. He tough as nails, just went through every single line I'm at the company and said, this is stupid. Really, we should be two businesses, not four. And we did an excellent job of just, you know, basically walking into, I'm sure, PE, or the board and saying, this is the dumbest idea ever done. I'm going to fix it. And essentially sold off half the company, paying down debt as well as returning capital shareholders be a special dividends, which is a nice good little mix there.

And anyway, we went, spent the whole day there, got a little chemistry lesson from, which I don't think I paid attention to since 11th grade, got an understanding of very detailed plan, got a sense of intensity of where he's focused, came back to the office and said we're in and made it one of our largest positions. And he just did an exceptional job of cleaning that out and then rebranded the company as Ecovis, because, you know, that has sort of a ring to it out there. Mnagely, ESG. So he swore up and down, his wife didn't come up with the name.

But anyway, so it worked exceptionally well out of the gate. And then the next phase happened, and basically as opposed to, and it is a running mystery. We think this is an incredible, you know, as Andrew would talk about, fantastic, you know, high margins, great fee cash flow, you know, closed loop on, we'll talk about roughly 80% of their business, kind of a really interesting set of dynamics. So the question is why would P.E. hire Goldman and other large bracket firms and just unmercifully bang the hell out of the stock, as opposed to like, wow, this seems like a great club trade, frankly, a mystery. And we have just, with one more left between CCMP and another, the European company that originally tributed assets, Ineos. They just, I mean, they've done five awful secondaries in our face. We spent a lot of time with management and we got them after the first disaster to say, you know, if they want to give it to you at $9, you should be buying, they're going to sell 10 million shares, buy back three or four, delay the delivering. It's not that important. You've got a three handled. And so net net, we went through this process. The company bought back a crop load of stock through this at very, very cheap prices and we're about to get to everything else. And now Enios is the last man standing. They did a deal. after the last quarter. So they have 7%. There's one more left. And I have it. So you've been me, my later questions were on the PE overhang, but do you know why Ineos did the last deal? Because they're buying, trying to buy Manchester United. Because they're trying to buy Manchester United.

Another area of focus for me over here. But yeah, and CCMP, just you basically mentioned, they were in this for a long time. I think they were fun-liked out. So that's probably why they were selling it. So we don't have to talk about the PE overhang. But so, Andrew, Jeff did a fantastic job of going through the background while you guys got interested, the P.E. overhang, how they've kind of delayed their delivering. We can talk leverage everything, but I do want to talk about the core business, right? 80% of the core business relates to, not a lot of it is alkali, which they've disguised as we make liquid gold, right? We make liquid gold when it comes to the refinery. So I just want to turn it over to you, and Jeff, you feel free to jump in as well, obviously. Let's talk about

what ECOVS does and why their product is liquid gold. Sure. And so the business as it stands today, just to break it down is they've got eco-services, which is the sulfur regeneration business, which you're talking about the alkylation process, or the liquid gold process, major part of the business. And then they also have catalyst technologies, which is a separate segment. So let's start with the eco-services side. So the best way to just think about what the alkylation process does is that it makes gasoline higher octane. So the tail when they're really riding is more turbochargers get put into cars, non-electric cars, but actually gasoline-driven cars, there will be more demand for higher octane gasoline. And that's kind of what's driving the tailwind for their additional

volume behind that eco-services business. So this is a simple, you know, when I had a car, when I started car out of college, when I still drove, I would go and fill it up with the regular unleaded. And now, like my parents' car, when they drive and more cars are going to this, you have to fill it up with the premium stuff and the premium stuff use more alkalization. Is that it? That's exactly right. That's exactly right. And so there's actually a secular tailwind behind that within the number of cars.

And so cars with turbochargers are usually the cars that need that higher octane. And you're totally right. When you're at the gas pump, it's like the middle or the top level expensive gasoline. And so the reason why this business is so great and why it's so high margin is that, that a lot of these, they have a lot of captive pipelines into the refineries that actually, you know, go do this alkalation process and make gasoline higher octane. And so, you know, part of the process is they've got to kind of remove the sulfur from the, you know, gasoline as it's being as it's being refined. And there's the, you know,

they send that through an eco-eco-surfaces pipeline, eco-services kind of regenerates that, And then they actually take the new virgin or the recycled sulfur and sell it into the market. So when you look at the revenue from that business, you know, about half of it is just them, the actual service of helping recycle the sulfur. And then the other half is actually selling that sulfur into the market. And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are. And you can access primary research easily and efficiently through their platform.

With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by-side analysts conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls in a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment

research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening and we'll catch you next time. And then I think this might be a little too far ahead, but one thing you mentioned is, look, they're getting the product that they're recycling and selling. They're getting it via pipeline, right? And that is, for people aren't familiar, I'll just let you talk. Why is getting it by a pipeline so important? Yeah. I mean, it's extremely important because, I mean, there's literally a pipeline from the refinery to eco-services recycling facility. And so in terms of, you know, when they're drawing up contracts, they're usually three to five years, if they're not longer. They've got unbelievable pass-throughs for costs. Because if you're a refinery, you're kind of captive to displace them. You really would have to, you know, you have to start trucking maybe to another facility. You know, the cost-saving. of just having it directly piped in makes it pretty easy for them to not lose a customer. The real model is sort of an, you know, the old, the classic, the Air Products model.

In other words, we need this done. We don't, we can't do it, don't want to do it, not part of our pie. Come in, we'll sign a long-term contract. You put in the assets and you're our guy. You're basically a captive customer. They really dominate of it in the, you know, Gulf area, which as we all know, you know, massive natural gas explode, blah, blah, blah, blah, blah, huge competitive advantage there.

So customer concentration, so you have these pipes, you have routes of collection. So it's almost like a closed loop. 90% of the contracts or 90% of the contracts are 90% fuel and sulfur-based pass-through. So one of the key issues of, you know, you're basically providing the service and netting your margin, all else being equal. and to note when when you know prices of fuel and sulfur go up it's good for their top line lowers their margin because of passing through the material and oddly enough when things slow down and volumes are down and prices come down they actually expand margins all of which net out somewhere in the 30 low 30s on an EBITDA basis so it's a closed loop for more demand out there for said product and this is very few people who you know want to get into this space and the last part of other interesting thing and then we'll turn it back to Andrew for the other side is that you know it's still it's sulfur sulfur is mean nasty and while it has

definitive uses that will never go away and actually is a green thing because you want to mine lithium and copper you're just boom you know pumping the stuff in by the you know I guess the gallon the whatever a lot more than a gallon is um this and that they also have they need to dispose not it all everything can't be recycled it's not a hundred percent transfer. They also have, and one of the interesting things we learned through Clean Harbors are holding is owning, you know, as whatever, section 4 waste disposal facility is an awesome business because it just takes seven years and 600. It's a crazy. So they are actually had that sneaky side that's margin and handsome in just getting rid of the worst cook, both

from their current customers and their internal use as well as outside. They're not going to go out and go spend $600 million, but it's another part of that mix. And so even though people whine about, well, there's not going to be a car sold and whatever numbers you look at, the fact is, no matter how many EV cars are sold in the next 10 years, the actual amount of, you know, ice machines still running is almost unchanged under almost any scenario unless really people are going to come to your home and take them. Like they're taking everyone's gas thos, allegedly.

Absolutely. Well, look, we can talk about there's other pieces of the business. They're involved in polyethane production and everything. But Jeff just hit on it. So let's talk about it right now, right? The big risk here is a lot of the business is coming from gas refining in some way, shape, or form, right? We haven't talked about the catalyst. They're important for renewable diesel as well, but the catalysts are really the turnarounds when you're doing plants and everything. So I guess the big risk that everyone said, here's how one smart friend when he said, hey, you might want to look at it is like, look, I'm confident that these guys are going to be selling products. until the last refinery in America has shut down. But the issue is, hey, you know, in five years, if right now I think about six or seven percent of cars that get sold are onto the market are electric vehicles. And five years, if it's 20 percent and slowly the oldest ice vehicles start kind of rolling off and miles per gallon is improving, you're going to start having refinery shut down at some point, right? So as you start having refinery shutdown, it's kind of like, how does that long tail for

EcoVist look like? So are you buying it with the next year or two? there's some pricing power. Every refinery is earning at 100% right now. But in three years, do you start seeing the first of the refinery shutdown? In five years, you start seeing in eight years, you see like the middle piece of the frontiers. Like, how do you guys think about that kind of tail or the long life of these assets? I would simply say that what people really missing is just, again, it's just the,

there's nothing wrong with the social desires to green out the world. It's just the dates from. There's no 20, it's not 20.30. It's like, and, and I'm, you know, okay, I've got 23.4 more years left in life, statistically speaking. You think you've got a couple more. But we're talking, you know, 20, 40, I would say well, well, well beyond any reasonable long-term estimate. And the, I know it's popular for people to like, you know, be smart, raise their hand in a meeting and say, well, you have zero terminal value. Like, that's just BS.

And if anything over. So we think not within our time horizon of, let's say, 15 years of which people will start worrying about it in year eight. And you can make, again, captive company making an absolute necessary product that we, you know, I just don't think it's a relevant issue. It's a nice little headline, but the current top line, organic growth, maintenance of margins, and key free cash flow gushing are that's your next seven years. Can I just let me just push back slightly on that. So I definitely hear you.

And I do not mind. You said, oh, there's no terminal value. And yeah, that's true for probably every business, actually. But I don't mind investing things with questionable terminal value. You and I were on stage and I pitched Delic, which is a refiner. So I've looked at the refiners closely. I certainly hear you. But, you know, I look at like Exxon sold.

It was a small refinery, but they sold a refinery to Par Pacific last summer for. for about three times mid-cycle EBITDA, right? And when you're selling, and I understand Exxon's got an ESG kick and all this, but when you're selling big refineries for three times EBITDA, or you look at the EBITDA multiples, some of the, like, Marathon's got the best refineries in the world. But if you look at anyone who's got anything a little bit under them, they trade like the terminal values going away in 27 to 2030.

And like some of the worst facilities would go away even before that. So you do start have that, hey, all these refineries are pricing in that there's going to be a lot of retirements in four to six years, that would be a lot of business going away for Ecovist. I would, you know, again, there's life is nothing perfect and that arguably there was absolutely, and we've seen this in other companies in ice space, like internal combustion engine, that, you know, there's just X percent of our peers and cohorts, you know, on both sides of the ocean, that just, you know, that's their mantra, that's the play. you know, you see it in a variety of things. Now, this is, you know, obviously you can argue

coal would be your argument times 12, right? This and that. With a 12 of the multiple, so. Nonetheless, also, I had the fortunate thing to be an investor in like the last maker of, you know, leaded gasoline. I think I saw your 13F. You've got a Hallador, Halador in there, which has the coal and the coal plant. So I would argue, again, it's simply, it's not, I would argue just, you know, people are are embedding a you know a 2030 number which is just the made up number and i would argue in many asset classes involved in this that the the infrastructure here and so to your point even if you know whatever it is evy cars by 2030 or outlawed here by any math done by any you know bekenzi as person still look out 20 years how many cars are on the road globally right

that are still putting in some form of gasoline. And the answer is like it's unchanged. I mean, so I would say that is it. And secondly, US-based company in this world, the, you know, our natural gas position just buries, you know, any refinery in Europe, right? You know, probably Asia and but, you know, the Middle East is the only people just because they sit on it, right?

So I don't think, you know, it's a nice headline talking point. but I really do think the math is going to march on its own drummer without that really being a factor. And we're dead on refineries. And I would argue it's air, you know, this company should be valued somewhere between air products and Forex. Okay. I would just add one thing. So another thing about this company that we love and just visited the research facility.

They're always sort of on the bleeding edge of their space. And one thing that, again, much farther into the future, you know, is sustainable airline fuel, which they are kind of have the top foothold in. And so if, you know, we're thinking 10, 15 years out, you know, the same catalyst that are used to, you know, make airline fuel, it's the same one that, you know, make sustainable airline fuel. So they're part of that infrastructure. So if there's any appetite for that globally, you know, which will add a lot to all your plane ticket fares, unfortunately, but they're extremely well positioned to capitalize on that. And so when we're thinking about this company, we can't, if we just think about it as of today, you have to think about it as, okay, you know, if some of these refineries start shutting down, they also do have opportunities to replace that revenue and EBITDA.

Yep, that's great. Just two things that say, one, Jeff, you mentioned investing. in the leaded gas lamp pieces. And whenever I think about refiners of these, the quote is, sure, it's a sunset industry, but what a beautiful sunset it could be comes to mind. And like the profits from some of the refiners are the last pop of mind. And then the other thing you guys started to mention it and Jeff started hitting it with the natural gas. Most of their, most of their assets are either Gulf Coast situated or smaller, but California situated, which means they're right on the coast. And as you said, hey, even if the U.S. is going to be 100% EVs, we're going to be making it elsewhere.

And because you're on a coast, our U.S. refineries can just start pumping and you're close to the refineries that can actually ship it worldwide where the demand will be. I don't know if you guys want to add anything there, but that really does strike me as an advantage for the long term, it's kind of useful life. I mean, it's a, you know, sulfuric acid is just a, it's just one of these things that whatever you don't like a society, it doesn't matter. It's just, it's a necessary chemical, you know, required to make. everything that you look around your room or live with and in.

And, you know, it's going to take decades and decades and decades to, you know, replace an infrastructure that was built for X supply chain. So there's that. I don't, you know, again, I really do think it's beyond the scope of a prop. I just, you know, our bet is 2050 or 60, not 2030 by or the next election. So it's really that simple if you, you know, you can cling to, you know, that world's coming to an end and blah, blah, and I can tell you also, I mean, literally we're in El Segundo, which for those, besides being the airport city, as like a big honking refinery that also that we can take a tour anytime we want if you want to go look at some actualization going on. It's about two miles away from us, hopefully not blowing up. So I just, I don't think it's the issue. And look, if this company, just map, you know, put up, seven years of, you know, mid-single digger growth with 30% push margins. And, you know, the issue I think is much more of, wow, if you can do that,

you'll get a much higher multiple than seven and eight on an EBITDA basis, number one. And number two, then it gets to the other issue, obviously, was capital allocation. One of the, there's a new board that's, you know, this is post-P-E. The CEO is, was an excellent COO and really was the builder, runner, an architect of the eco services of, you know, their biggest business. He doesn't have, you know, the proven chops. There's a guy who became in, you know, classic, you know, he sold of Creighton. And so now he's the genius CEO who anything in the basic materials he touches will naturally be blah, blah, blah, and sold. But, you know, there's a whole group about what to do with this free cash flow.

You know, they're down their leverage, even after the last share of purchases, you know, is still and the threes and dropping rapidly. So I think those are the, you know, if we can get seven years through nothing material, which, again, I don't think is, we're going to make money. Andrew, did you want to add anything? Go ahead. We can go a lot of different directions from that. Yeah.

No, nothing that I just would say, to your point on their refineries being, you know, concentrated in the Gulf and California, you're exactly right on the coast for, you know, exporting if it does come to that. And they've got the slide in their investor presentation, which just shows their concentrations around that. Perfect. So let's, I guess quickly, let's just touch on valuation because Jeff mentioned and then we can use it as a jumping off point for a capital allocation going forward. But, you know, this is trading as you and I talk about $12 per share. That gives it about a $1.5 billion market cap, about a $2.3 billion enterprise value. You know, I've got that at maybe based on their projections for 2023. That's about eight times EBTA. So, you know, specialty chemicals is, it's tough because these things do tend to trade for.

Multiple is certainly higher than 8x evada, but obviously there's also a wide range of specialty chemicals player. So how do you think about like what a fair multiple for this type of business would be? Yeah. So I'm going to give you the, I'll give you the short answer of today. And then I'll also give you maybe a little history. But I mean, if you look at, I mean, so this is, you know, 30, percent plus EBITA margin, specialty chemical business. There's really not that many comps that are this small. But if you look at any other specialty chem business that's publicly traded,

you're getting 12 to 18x with air products, you know, being at the top of that. And so from the beginning, I mean, we've bought shares in this company every time it's at 7X. And it's just head scratching to us that this business, especially with these, you know, high quality assets that are growing and have mid-ebita, you know, 30% EBITDA margins are trading at these valuations. You know, on top of that, you have to remember that 75% of the EBITA converts to free cash flow, and that's, you know, not adjusted, that's real free cash flow. So it's trading almost at 8, 8.5% free cash flow yield. And so one of the, it's one of the cheapest stocks we own, and yet one of the higher quality businesses we own too. And so it's a real big, it's a mix of

those two. Jeff mentioned this earlier, but I just want, you know, for people who are new to the company it looks their revenue is very choppy it looks just you know and it doesn't screen well because um last year especially they had a massive revenue increase from sulfur product pass-through um i mean we're talking like significant amounts and so it looked like their revenue was going up 40 percent where and their margins were actually going down because it was just a pure pass-through so if you're looking at just sort of the stable business you have to clean that out um and what you will get is you know mid five to to 6% EBTA margin, you know, growth, or sorry, not growth, 5 to 6% even a growth on a pretty

similar revenue growth. And so, yeah, no, it's still to this day extremely cheap, even though it's, you know, sort of hitting, you know, $12, which is sort of new highs for it lately. When I started prepping one of my first questions was because Q1 revenue was down, it was going to be, hey, why was Q1 so soft? I thought this was a stable business. And then you read the footnotes, you're like, oh, it's all passed through. And I was like, Jeff's going to yell at me for not doing work for not being a real researcher here. It's a legit. So let me like we like to invert like

okay we bought this stock at you know I guess net whatever we bought it a while ago we got paid dividends and worked really well on it kind of platinum you know the really the what could go wrong here and what do we see? Something like wow they couldn't a PE firm

thought to just bang it out in the market at the low multiple as opposed to selling the whole thing like what don't we know right then there's a second area of again there's the ice contingent right i shall not invest in anything remotely involving anything like this you know taking off the thing um but i also think again the one of the key things is also your dad again you're no one likes or very few people like and we don't like it right you know it's like we see the opportunity wow someone owns 70% of

this it's going to go some way people float small ergo we can get in others won't and we have been very successful in the past, because often it results not just in a series of painfully, shockingly poorly executed secondaries, like we've seen here, like the whole thing gets sold. So I think people are kind of sort of waking up like there's one more and it's going to come after the next earnings. Also, they make the claim and they, you know, how show it's art of the 19 years of blah, blah, blah, that show how not cyclical they are, right? Because this is a mandatory element. It's a closed loop system. We've got all these pass-throughs could be wronger. And so when you see something like the first quarter, you know, it's like,

you know, obviously we're being fed material to support a thing and you have to say maybe we should, are we discounting that concept enough that for whatever reason the risk is less miles driven, et cetera, et cetera. And the last little weird thing is this company's hard to screen because in the catalyst business, which is the other 20% is part of it, it's a big joint venture with Shell in Europe. And so, you know, a big chunk of numbers is not, quote, above the line. It's below the line. So, and when they say adjusted EBITDA, we yell at them and say, no, BS, BS on stockcom, blah, blah, blah, you know, real I'll bet, but it is fair to say you've got to, when you're, you know, people screen for the company, that a good chunk

of math doesn't show up because it's not above the line. So you have to adjust for that. And I think that's one of the reasons. People don't, if you just got on Bloomberg and spent your two-minute drill and say, oh, it doesn't look that cheap. You kind of miss it. And that's kind of a fun little thing about, you know, the old doing the work thing. And Andrew? Yeah. And so I gave you the shorter sort of version of, you know, what's happening now, but just a quick also on sort of the longer term. So Jeff's alluded to this, but I want to put some numbers around it. So we invested in late 2020. The stock was about $11 back then. Since then, we've collected about $5 in special dividends.

And they used some of the, you know, and some, and they paid down debt as well. But what they did really was, and why we really like Belgasum, is they had two mid-20% EBITA margin businesses, which they said, we need to get out of. We want to hold onto the crown jewels. And so when we bought in late 2020, again, seven-x EBITDA, we were buying it at. And they sold those mid-20 businesses for like one with an eight handle, I think one with a nine-handle. I think one with a nine handle multiple. And that's how we got those dividends and that. And there's a lot of debt pay down.

And so we're just sitting there like, wow, I mean, the lower quality businesses are trading for, you know, eight and nine X. And now we're sitting here with what are arguably the best segments. And it's still trading at, you know, eight, eight and a half, you know, eight times. And so, and then another sort of comp we want to put out there. And this is on a segment, maybe we should go over real quick. But, you know, on their catalyst technology side, the number one competitor is Grace. And Grace in 2021 was sold for 12X.

Oh, I pulled up their proxy and pulled all the peers yesterday. Absolutely. But please continue. And so when it's just there's just this divide between public market evaluation and private market valuation. There's, I mean, there's direct comps of businesses that have been sold. And everything leads us to believe that this is not an 8X EBITDAB business. And they have the cash flow to back it up, too. So that really gives us comfort.

Just a quick question. Their adjusted EBIT on number, they report, that does include the earnings of the JV. Am I misremembering that? No, that does. As they report it, that's correct. So in Bloomberg, just making sure I didn't have that. Take out $20 million for the stock comp. Let's just get that on the record.

This is, we hereby count stock comp as a compensation expense. I can appreciate that and fully support it. Just quickly, so we mentioned CCMP and INOS. We already talked about why they sold INOS because they want to go buy MANU, even though I think they're going to lose the Qataris, CCMP because they were just timing out. But as you mentioned, hey, these businesses, they can handle a lot of leverage, right? The CEO will come out and say, hey, we're at 3x leverage now.

We've been at 6x leverage. We've got great visibility. We can lever these things up. They tend to go really well in private equity platforms. Why do you think CCMP didn't explore a sale or couldn't pull a sale off or anything instead of kind of just blowing, blowing through this through really tough to do secondaries? I asked and not answered. We've talked to people in the banking community.

We've talked to all the relevant players that may and may not have been mentioned. And, you know, obviously, I would say that maybe at the top, that the anti-ice world was they just i don't it remains i will admit it remains a mystery because particularly how they executed it they did there's nothing worse than having Deutsche bank or goldman doing a secondary for a small cap company i mean it's just they have no no they just don't even care they don't have the bodies of where the stock goes and and and where they kept selling it so i don't really have a good answer to it because you know the world is semi-efficient, right? If what we believe was as believable as we're saying. Exactly.

It's a known, unknown risk factor that we look at and go, you know, is there something really we're missing here that negates this narrative? Even if you guys, like, you mentioned a few times double-digit multiple, right? Let's just say that implies a $20 per share price. I'm sure, I've heard people when a stock's at 10, they're like, if somebody tried to buy it for me for 20, I'd be furious. I'd be like, you know what? I'd probably take 20 and I'd go and try and find something else. But, you know, last year, CCMP and Ianos combined, they went about 50% of the company.

You guys probably wouldn't have been furious if they tried to sell the whole thing for 13 versus 20 or wherever you think the fair prices. But for CCMP and I knows, they control the company. It would have been a huge premium to the $9 they were selling. It's like, hey, yeah, it would have been below fair value, but why didn't they just go inside? I hear you. But business can be unknowable that way. but it's just a curious question.

Yeah, I can add a couple things there. One, so for CCMP, it was in a 2014 fund. So they were really at the end of life. This was, they need to get it out. And then I think the other piece is, I don't think these businesses would be sold together. You know, Jeff mentioned this was an IPO of basically two disparate businesses

smushed together and then brought public. And so I think to be sold would probably have to be separated and then sold in pieces similar to what they've done with the two, other business segments that they've sold. And then on top of that, you know, what do you do with the JV? You know, how do you sell that? You know, what are the complications with shell owning the other 50% of it?

And so I just, I think there are, it's not, it's not as easy as, okay, we're going to, you know, I mean, you know, sell this one sec, you know, sell this and spin it or spin it off or and then sell the other piece. But it still is a big question mark. So, but it's not. Anyone has any. Please contact us at Coast Street Capital. dot com if you have a really good answer for that because it's a stumper.

Let's talk about the go forward. So as we speak, there's one more I know sales to come. As you said, it might be after the Q2 earnings, but the company's in good shape. It's three times levered. They're going to generate a ton of cash flow. They've been buying back shares. But the CEO has also been clear, hey, I want to do acquisitions. Since they did the last deal, I think they bought what was like ECAM 42 or whatever.

They did a small deal alongside it. And he's been saying since then, I want to go buy things. I want to bolt things on. And that's what specialty chems do, right? They go and buy stuff for 6x and they get a little bit of synergies and the whole thing's worth 12x when you roll it up. But they could do that. They could just keep returning cash flow as shareholders.

Eventually, maybe so can it. How do you guys kind of see the story playing out over the next three years? Well, I would say most people, like correct you, most people sell for 6x and buy a 12x. I would say. I laugh, but I can't tell you how many companies I've done that. And I've done it once or twice in my portfolio as well. It's a very expensive lesson to learn to be. you know we have a joke thing like everything eventually becomes a toaster right so you know what

what is specialty camp so but that is we pointed at the beginning a known unknown here and you know we've spent a fair amount of time with board and company and and you know i think they they don't they're not wild-eyed um i would say the CEO is really good to run the business and maybe identify like a chem 32, it's been a monster home run. You know, I don't smell this massive, you know, we're going to lever up to five times to do something. Could there be bolt-ons? And again, the capital allocation in a free cash flow company that's got this wondrous thing that's steady, you know, a lot of your incremental, you know, PV of future value is what did they do with the money?

My estimate is like three is enough. It's fine. You don't have to go, you know, you don't have to be one-time. I think that's inefficient. We'd be screaming about that. But, you know, they're on a next inflection point of what else can we do. And that's, you know, as we say in life and here, sometimes like, we'll let you know in three years the answer to that question. Yeah. I'll just add to that. So in April of 2022, when all these secondaries were coming out, they also press release that they authorized a $450 million share repurchase, you know, and considering the market gap of

company and that's almost a third of their market gap now that's over four years but i i think they've they've made it pretty clear and signal to the market that they're buyers of their shares at reasonable prices and that's what they've done so far and a lot of that's been through the secondaries um but we'll see if that translates to open market purchases but i think there's the people there's there's an organ you know i know oddly enough and every company you know touts is greenness and you mean you change your name to ecovis you better you know have something to say um but in all seriousness the things like anything biofuel requires interesting chemical technology to these catalysts to help in nature of that and there so there's and whatever area no california we lead the you know

the world in grossly overpaying for things so to make ourselves feel better LCFS and oh yeah we're just we love this stuff and but it also there's not a single area of somehow fuel that is involved here. There is, you know, again, you can green all you want, but, you know, you need lithium and copper to enable that this world. And you cannot mine lithium or copper without just this boat,

vat loads of sulfuric acid, which needs to be recycled. So it's not sitting in a pool and blah, blah. So there's lots of interesting, you know, deep bottlenecking, on existing platform type mid-single growth that looks pretty doable. I mean, there's always ebbs and flows in, you know,

whoever's running the government and what the regulatory environment will be. But, you know, in general, you know, we're not going to go away from looking at bio and trying to commercialize this, which is a huge benefit then. So I don't, you know, yes, bolt-ons would be neat and lovely and well done, if well done. But, you know, I think our thing is mid-single digit, maintenance of low 30 margins, 75% free cash flow, Jen, that's more than sufficient at current valuations to make good money. It's also, it jumps out to me just, look, we talked about the refining side, again, the aquiline, the liquid gold.

If we're going to be producing any type of gasoline, that stuff is going to, it's required, right? Like, and miles driven really doesn't fall short of if we lock everyone down for a pandemic or something, right? So you've got this great business that should be very stable because you're in the pipeline. you should have decent pricing power because it is a very small component of the overall cost and it's absolutely critical. This just strikes me as a business that's just absolutely prime for financial engineering where let's keep our 3x leverage steady. Let's grow 5%ish on the EBITA line. That means we can keep the 3x leverage steady. So we take the cash flow plus an extra 5%

buyback shares every year. It's a really, really nice growth algorithm for shareholder value. Whether or not they're going to do that is remains a question. right because that will be again the known unknown right you have he's a new CEO he there's a new board like a whole changeover from the whole PE brain and so I would say you know I don't see them as you know if you look at it they're not you know they don't have like $12 a share of cash and won't do a damn thing and they're not you know crazy let's just like roll up into seven X guys it's not So there's somewhere in the middle. So I'm not sure that, you know, obviously from our standpoint as financial geniuses on this call, right, we would argue for exactly what you said

and helped do it. And they've been doing that to some degree. I think the share were purchased brain was really, we beat them into it to say, if they're going to sell stock down 17%, you should buy it for us. But that's one of the nice things about being a loud page one shareholder. And I mean, page one shareholder for both of you and loud mainly for Jeff. But that's one of the nice. things, right? You can call them up and say, hey, let's do something that's really going to create a lot of money for everyone except for these guys who are selling to you. It ignored plenty of time. Page 1 doesn't always help. Just real quickly, so I've mentioned a few times, I've mentioned a few times.

Alclined Liquid Gold, it gets in through the pipeline. It's on long-term contracts with captive customers and everything. Obviously, the revenue line comes and flows because they're passing through a lot of this stuff. But in terms of pricing power, when people are just thinking of that, like, this is something that attracts me. providing a small cost and it's an absolutely critical component. You've got a captive customer. If they want to replace you, they literally need to start trucking in from 500 miles away, just that cost. What sort of pricing power do they have with their customers as kind of these contracts come up for renewable? That's been a big piece of the air product story too, as Jeff was

mentioning it earlier. Andrew? No, no. Especially on the ecosystem side, they usually just have contractual price increases, not nothing major, but a lot of the times it's just sort of, you know, they tick up, you know. And they don't get big bumps when the 10-year or three-year or five-year contracts come up for renewal. They don't get big bumps at that point. I think it's sort of like a steady, you know, they have good relations with their customers.

They're not looking to, you know, bump it up. But they're looking for that definitely, that price increase, nice and steady every. It's a mutually assured destruction. You know, it's a, they, you've got the pipeline. If nothing's going through it, you're losing out just as much as they are. You know, the refinery, like, you know, and the way. if you go walk around a refiner of these, all these like little, you know, what's the word, boxes of stuff that looks complicated and interconnected.

And even though that might not be yours, you know, I lease that space to someone like Equipus to do that. You know, you don't want to rub it in people. I mean, this is a small company and your customers are, you know, every big refinery in the world. Like you don't want to, you know, they could flex. They really don't want to, right? And so it's sort of a, you know, we're here, we've had a 10-year contract, you're going to really pick up this. So it's the pricing, it's not as much, the pricing is much more maintenance of margin or maintenance of profitability. So that's the key thing.

I don't think it's per se about the refinery. Look, if there's a huge uptick in demand for alkaline or, you know, for whatever either a sulfur, the refinery, frankly, is going. going to see most of that. Like, it's just the pricing of the thing, and they'll benefit tangentially from that. But it's not about, you know, we're on space and we're going to shove it to, you know, and even air products doesn't wake up. You know, they're in there because they have a record of not, like, hey, we put in $100 million to do this for you. And I know we have you captive, but I'm not going to treat you like that. And that makes total sense. There would be a lot more we could talk about if we wanted to really dive deep in here.

I did want to ask on a few questions than a completely different company. But before I go there, just anything, again, there's a lot of other stuff we could cover, but I think we did a good job hitting all the high points. But is there anything you guys kind of think I miss or wish we could have hit a little harder that you think listeners should be thinking about?

Yeah. So I would, I mean, we didn't hit really the catalyst technologies section. I'll just give like a one minute. I mean, so they basically, there's a silica catalyst side. That's the almost direct comment. to the Grace business. These are, they're actually, you know, specialized and produced catalyst for each individual customer.

So that's why you get such high margin. These go into like HDPE plastics and MMA plastics. So it's relatively stable and not really as bumpy. You know, it's more of market share gains and losses versus industry gains and loss, or sort of like industries going up and down because it's tied to plastic end markets. And then the JV we mentioned with Shell, it's for hydrocracking catalysts, and that is lumpy. And that's just something to really note. The reason is, is the way hydrocracking catalyst work, it's almost like a cartridge.

The way to think about is you, like, insert a cartridge, you deplete the cartridge, and then you buy a new cartridge. And so it's not, and so that, so they'll have some quarters where you're looking at it and you're like, oh, my God, this is, you know, it's growing massively. No, it's just, it happened to a line that all those refineries need a new. cartridges at turnarounds at the same time. Yeah. Yeah. And so that's just another layer of complexity, which doesn't make it a smooth, you know, grower all the way up. But if you look over the long-term trends, it is. And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are. And you can access primary research easily and efficiently through their platform.

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So, if you're looking to optimize your research process and increase ROI on investment research spend. Stream has the solution for you. Head over to their website at streamrrg.com to learn more. Thanks for listening and we'll catch you next time. Perfect. Look, I obviously we announced this podcast yesterday. We've been planning it for a while, but this morning there was some news on Biasat and I got like four inbounds. They're like, hey, you have literally the top holder, the axe on Biasat coming on your podcast. You have to ask them. So for people who don't know, it's July 13th, Biasat last night announced they were having issues with the satellite they had just launched, and I'll just turn it over to you guys.

I don't know if you guys have any thoughts or if you want to share anything. I know it's kind of a developing situation. First a moment. Yes, an off spreadsheet event, let's say. So we're right back. I mean, in a nutshell, not to go through everything else, you know, the, there is a, you know, a distinct probability of an insured zero for the first of three satellites. this just take everything biasats ever put out or anything we've ever said or any spreadsheet and just change the date and bizarrely so that's what it is now the stock's going to sit here for you know in and around the 27 to 33 for you know another nine months until viassette two which will be now sort of repurposed a bit to cover both to provide capacity and that's really the company was out of capacity in biaset now the weird thing was so that that's where it's staying

You know, the counter-narrative, just sort of like ISIS, the counter-native-viasat, the counter-narrative to Viasat is, everything will go, Leo, et is a better model. Geo is a dying dinosaur and blah, blah, blah, blah. Sadly, we can't prove or disprove that until Viasat 3 is in the air, and either that is going to earn, you know, a return of in the 30s, which it won't now because on a time value of money, it's going to go up to stay down. And you can argue, you know, wow, are they going to, are they going to, are their customers who were going to get pissed who got so, you know, all the airlines will signed up and

they're just desperate for capacity. I, you know, non-zero, but no. And the bizarre thing, though, is, you know, we bitched when they did the M or set deal. And because we thought, like, this is, we have this, totally aligned with the defense business. We're more on the price of the stock. The amount of return and math that is going to come out of a warehouse and go into the sky and get projected on this share base was just nuts.

And we thought at the time that the MRC deal, well, you know, non-zero of being a masterstroke of industry consolidation, lots of good things to happen. But it's also like, oh, my God, you're deluding the effect of your everything, the Viassat 3 constellation. You're deluding us on that. Well, good thing we have it. I was doing the math because they bought Emersat for, what is it, 850 in cash, plus 3.1 in stock.

So we're rounded up to $4 billion, right? And I was, is that right? Oh, and then the assumption of debt. I'll have to go re-look at everything. But I was in math, I was like, oh, Viasat is at about $3.5 billion right now. Like, you get the government business. It's just two words, effing, annoying. I mean, right, underheading of all spreadsheet event.

So we got the launch. We got the thing. Everything's working fine, you know, a third party of which it could be one of three companies, probably Northrop. You know, they're literally. It was confirmed it was Northrop. it? I think it's been confirmed. The company has neither confirmed or denied, but there's a lot of, you can go dork out on Twitter and there's lots of like astronomer, you know, there's lots of

real niche guys who just follow this space. So I would say they just, they had to put something out. The antenna is, you know, in some way, walked like a bad shoulder and they're, you know, effectively doing jiggling. But, you know, this could be a zero. They're doing the old hit the TV a few times to get it to work on the side. kid you not. That's literally what it is. So Net Net, just basically the company, you know, again, you build capacity that is needed or not, and it has a return on investment of mid-30s or not. And if you don't do that, then you're sort of stuck. So while they can repurpose a little MRSAT and all this and that to help with the huge demand needs, it's just blowing out the numbers 18 months. The other weird thing that you think, so this was insured, which, you know, beats a sharp stick in the eye, but, you know, that's still not fun. And oddly enough, one of the other things, the second satellite is already pre-insured, because guess what?

Insurance and insuring that third one, I would guess. Just went up, so to say. So, you know, for us, you know, whatever, this is a sharp stick in the eye and we're, you know, arguably, you know. So this was insured against, because this would, I think they said in their PR, closely with the reflexors manufacturer. It's a manufacturing error. So one of the worries I had and a few people had was, hey, you're probably insured against the rockets going up. The rocket explodes. It explodes on the launch pad. But it's also insured against manufacturer failure in the air. Exactly. So,

yeah, they're good for that. I mean, obviously, there's going to be lawyers and things and, you know, insurance companies don't like to pay and people that. This is, appears to be a fully insurable van. And the second satellite is insured under the same math. So, you know, but it's, how is it not frustrating. I mean, really? I mean, as I told you, though, look, obviously today's share price isn't fun, but if all of my companies could have the equivalent of a satellite going up in, and let's just say exploding, a satellite going up and exploding, their stock could be flat on the year, I would take that for all of my companies very happily.

You know, the story of life is if the market finds your exposure and punishes it, that is what I have learned. So whatever. It's, you know, it's frustrating, you know, it's going to cost us, you know, 250 basis points today, which, you know, we're having a really good year even with this. So, but, you know, look, there's 12 other, more than 12 other satellites with this exact antenna. El Harris did the prior, the last slide to be set two, and that was a screwed up antenna. So there's no like the world, you know, it is a ridiculous concept to have a. satellite with an intent and send it up to space. That's not the case. And, you know, the story alive. So they're, you know, working. I feel worse for me and our clients today. But I feel, you know, imagine like being ahead of a satellite company. You're supplying, and it's four people in the world who could do this. And I'd love to be in that room and hear that rant.

I had notes and I hadn't started to dive into it, but I did remember that Vsat too happened. And that whole constellation turned out to be a success. If I wrote it wasn't a consulate. That was a single thing. Yeah, that was a, you know, one of the panels. So it probably was operating, you know, net life of satellite at 85% what it was. And again, they got a material, you know, payment from that for that damage. Look, if this satellite, the issue they're going to have is like, you know, do I want, it looks. I mean, they said, it basically looks, you know, there's a not pretty, you know, it's a pretty decent high probability of a zero here.

Just like we sent it up and now an audience, and obiasat, so we've been fighting against space. X and Starlink for, you know, space debris issues and blah, blah, blah. Well, we just put the largest piece of state debris. So net net, you know, we, we, you know, whatever we, the company is going to be in three and a half weeks, you know, they had to put out a press release because something's happened. They're, you know, they're literally like, you know, 24-7, 365 right now on evaluating this issue. So people could, you know, but the worst case scenario is for, you know, they get paid.

$420 and we just ate 18 months of, you know, aggressively big free cash flow growth as they took, you know, really, you just look at it. It's like building a building. You build a building. The day before you start leasing, you look like crap because it's sitting and not earning. Yes, shoot us. Yes, very annoying. Oh, it's annoying, but look. And it's only 9. It's only 8.30. We can't start drinking either. It's not appropriate. It's 11.30 Eastern time if that helps you with it. Now, there's what we're going on the podcast, Andrew.

Is that kind of wise wisdom by Andrew? Look, guys, I really appreciate you guys coming on. It's been great to connect. I appreciate you talking about egos, which again, it's really interesting. And bias had appreciate you giving some real-time exposure. Look, it's been great, and we will chat soon. Thank you very much for your time. We appreciate it.

Just for the record, I met Andrew for the first time at our Merkel meeting. I frankly didn't know, look at a smart young man. you are and a really- Yeah, you came out. We're like, oh, I just thought you were a podcaster, which I wasn't sure if I should take that as an insult or another jerk off doing a podcaster. It sounds like, wow, this guy's got game. So when I heard that, I just wanted to say that for them to allow, but when I met you, I'm like, okay, we'll do his podcast. Anyway, I really appreciate it. It's been great, guys. Thank you. It's been great. 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.