Conor Maguire's "Deep Breath, Deep Value" thesis on SOL Group (podcast #115)

Conor Maguire, founder of value sits, returns to the podcast to discuss his "Deep Breath, Deep Value" thesis on SOL Group.

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All right, hello and welcome to Yet Another Value podcast. I'm your host, Andrew Walker. For those of you listening on YouTube, my dog, Pen, is back here making her first appearance. If you like this podcast it'd mean a lot if you could rate, subscribe or view it wherever you're listening, but today I'm happy to have on for the second time my friend, Conor Maguire. Conor is the founder of Valuesit Substack. Conor, how's it going?

Conor Maguire: Good, Andrew. Yeah, good to be back on. Thanks for having me.

Andrew: Great. Thanks for coming on for the second time. Let me start this podcast the way I do every podcast. First, a disclaimer reminds everyone nothing on this podcast is investing advice. Please do your own work. Do your own research. We're actually gonna talk about-- it's a pretty good size company, but it's a little on the liquid[?] side. The family controls about 60% of it. Tweety Brown's[?] got another 8%. So that floats on the smaller end. So everybody should just keep all those in mind. Maybe a little extra risk here, but please keep that in mind. Second, a pitch for you, my guess, if people can go listen to the first podcast for the original pitch, if they want a full one, but I don't know any better pitch than say you turned your podcast to a paid substack about a month ago and who was subscriber number one, two minutes after you switched over to paid substack?

Conor Yeah. You were straight in there, Andrew. Yeah, you were number one. Alright, so thanks for your support on that.

Andrew: No. Look, I woke up and opened my email, and the first email in my inbox was you announcing it like three seconds after I opened my email and I was just boom, instant. But look, I love your work and that's why I was subscriber number one, and that's why I'm happy to have you back on the podcast. So, all that out the way, let's turn to the company we're gonna talk about today. You had a very clever name for them. The company is SOL Group. The name of your post was deep breath, deep value, which I thought was really good, but I'll turn it over to you. What is SOL Group? Why is the title deep breath, deep value?

Conor Yeah. So thanks, Andrew. So SOL Group is an Italian-listed industrial medical gas business. So it's listed on the Italian stock exchange. And as you said, it's 60% controlled by two controlling families. So, the current management team is the third generation of the two families to lead the company. So, SOL Group basically provides, or it produces industrial medical gases. So principally oxygen, nitrogen, hydrogen, carbon dioxide, helium, and then some other niche, specialty gases, and it provides them across the various industrial sectors and into the medical sector. So, if you think about any kind of modern industrial manufacturing process, usually requires some part of the production process, oxygen, nitrogen, hydrogen, and so on.

So these are really essential. Gases are commodity inputs into industrial processes. And so that's one side of the business that's approximately about 50%. And then the other 50% is really on the healthcare side. So, again, they provide gases like oxygen, hydrogen, carbon dioxide to hospitals, home care facilities, and also kind of home respiratory services, for example, ventilators for people who are at home, not in a hospital setting, but that require regular specialty kind of medical care.

Andrew: Perfect. Perfect. There's a lot of stuff to dive in there-- lot of concepts of other things we can talk about, but I guess I wanna start with the question I start with and everything. There are a lot of investment opportunities out there like this is a reasonably large company people have known for years-- we'll probably talk about private equities interest. So people have known for years that medical gases and these types of things, industrial gases are a pretty good business. So, my first question is just, what are you seeing that the market's missing that makes, I mean, in your writeup, you know, you say, "Hey, in a base case without a takeout, this can basically-- it's done 20% annualized for the past, I think it was 20 years." And you think you can do it 20% annualized for the next 20 years. So, what are you seeing that kind of the market is missing in this company?

Conor Yeah. So, I mean, what makes this stock interesting to me is that it has kind of three different attributes all in one. So firstly, I'd say this is kind of like a kinda a Buffett type stock, and that it's a very, very stable, very well run. Reasonably good return on capital business with very predictable earnings. So this is, you know, this is what I'd call a kind of a structural winner in that. For reasons that we could get into, in terms of the particular business model and the industry set up, I mean, if you look at a chart, this business has consistently grown earnings and EBITDA over the last 20 years. And its EBITDA margin is kind of a rock-solid 23% throughout that time. So it's a very stable, very predictable business. Number two-- that's the first reason.

So the second reason why it's interesting, is that it is clearly undervalued. So this business trades at about seven times EBITDA and its larger appears such as [inaudible] and Linde group traded about, you know, 12 to 14 times. Similarly, private market, similar private market assets have traded at 12, 13 times EBITDA as well. So relative to the comps[?], this is very, very, very cheap at seven times EBITDA and there are particular reasons why that might be, but I think again, it's mispriced, even considering those reasons. And then I suppose, probably, this is kind of a special situation as I see it in that it has no sell-side coverage. It's completely overlooked by the market. So that's probably one of the main reasons why it's cheap. No one really knows about it. And number two, and this is kind of what I think makes it really interesting is that this is a family-run and operated business for generations. The current senior management team, from my understanding and from my own research are likely to retire within the next five years. There's no one else in the family to take on the management role and CEO role. And the likelihood is that they will probably cash out to private equity within the next five years. There isn't really anyone within the family, as I understand it, that would take over management.

And so they've received numerous approaches from European private equity houses over the last number of years. And, you know, haven't sold as yet, but I think, just given the multiple arbitrages, the age of the senior management team and with no successors, you know, it's obvious to take private candidates. And the current market cap of one and a half billion, you know, this is easily worth double-- you know, in a cash-out scenario.

Andrew: I wanted to dive into a few things in what you just said, and then we'll probably go a little deeper into the business in a sort of half of the podcast. But the first thing you said, this is a Buffett-like business. It's funny you said that, because when you said, I started remembering, I was like, "Hey," you know, so there used to be Airgas and I believe Praxair, were two big US-- not competitors, because this turns to be a local business, but you know, they were the two big-- Airgas. And I was like, wasn't Airgas a Buffett play? And it wasn't a Buffett play but if you go and you look Bill Ackman in 2013, he made his biggest bet ever on air products. He said, "it's the biggest investment I've ever made." 2.2 billion dollars and he called it a Warren Buffett business. And obviously, Ackman follows like a Warren Buffett-like style. So these are businesses I don't think Buffett's invested in before, but these are Buffett-like businesses, exactly what you said-- stable products, good returns on capital, advantage, all that type of stuff.

Let's dive into the second thing. So, I do think a big part of the thesis here, and again, we'll go into the business itself in a second, but a big part of your thesis is, "Hey, this is a hundred, almost a hundred-year-old business, the founding family, they control it." They own it. They own 60% of it. They've got the management team in here. They're getting up there in age. They're gonna turn 70 in the next few years. And when they do, you say, "Hey, a private equity style take out is likely." So I wanna dive into that a second. I know private equity firms have tried to take these guys out before. Why don't you discuss that history? And then I might push back a little bit on the private equity side.

Conor Yeah. So, I mean, as you said, I mean, there's, Billman Ackman was well-known in his previous interest in the sector and you know, there's been a lot of consolidation. So two major deals that have happened in the space in the last kind of five to ten years have been firstly, Air Liquide's acquisition of Airgas in 2015, which created the global number one player. And then following that, a couple of years later, Linde group, the German business, acquired Praxair-- and that created then the number one market leader. So those two acquisitions really consolidated the top end of the market. And so there's only really-- with air products now in the US, the only remaining kind of of the big three-- outside of that, there are one or two players in Japan, and then you've got some smaller regional players of which, SOL is one of the bigger ones. And then there's another privately held German business as well, very similar, slightly larger revenues, but pretty similar.

So, you know, the industry has consolidated significantly in the last number of years. And you know, when you look at the consistency of earnings, the business model in terms of very stable cash flows, contracted long-term customer contracts, this lends itself really well to kind of, you know, leveraged buyer transactions and the cash generation is very strong as well. Another point I think, is particularly relevant at the current time, is that all these contracts are inflation-linked. So, you know, they pass on, you know, electricity and energy are the biggest input costs in these businesses because of the essential nature of these gases that are sold to industrial medical customers, they're able to pass through those cost increases. There's just like one or two-quarter lag, but generally, they pass the cost increases. So, I mean, when you look at that type of setup, in the current market, I think this is the type of business that private equity would be very attracted to, especially when you look at the discount evaluation.

Andrew: And your article mentions that private equity has approached SOL before? Can you go into the background of private equity history with SOL?

Conor Yeah, so these weren't publicly reported. But, you know, from [inaudible] to management, management and analyst to cover the industry, it's kind of-- it's known anecdotally that private equity has approached the business in the past. So, you know, in terms of actual deal terms, they were never publicly disclosed, but I know there's been an ongoing conversation and this has been on the radar of a number of private equity houses in Europe for a number of years.

Andrew: And when you talk to management and they say, "Hey, we've been approached before, but we've rebutted them," why did they say they rebutted private equity firms in the past?

Conor Certainly, I mean, five years ago or in the last five years, they haven't really been ready to sell. They're content to hold onto it for now, but as they have tried to kind of figure out succession plans-- but you know, that window of time to kind of, you know, for the succession plan to be implemented is kind of narrowing now. And you know, the likelihood is that there won't be a family member. And rather than kind of appoint someone from outside the families to take on leadership roles, they, they would rather just cash out.

Andrew: So, and that's based on your talks with them is kind of what you're thinking?

Conor Yeah. I mean, I've spoken to management. I've also spoken to people in the industry as well and who have kind of corroborated kind of-- that's their sense as well and from separate conversations they've had.

Andrew: No, it makes total sense, because I guess the pushback I would have on the private equity ideas, this is a hundred-year-old company and yes, the family owns 60% and there's gonna be discussion issues. But if I was the family, I'd be like, "Cool. I own 60%." Like why am I gonna go sell this to a private equity firm when I've got this business? I control it, that gives me some influence. Like I've seen it a hundred times, you know, just keep your 60% into trust for the whole family and just be your own private equity firm, right? Like just go hire an outside manager, keep 60% control and keep this kind of public, but keep it kind of a controlled family public thing. You get the-- I don't know, there's plenty of US companies, none are like jumping right off the top of my head, but there are plenty of US companies that have pulled this, right? Mars family, I don't think Mars family actively operates the business anymore, but if you look at the richest people in the world, like 20 of them are from the Mars family because they own M&M, they own the Mars, you know, it's just a professional-like kind of private business at this point.

Conor Yeah. Well, I think one other factor in this, is that the public markets clearly are never gonna value this business at what it's really worth. You know, and as I said, the multiple arbitrages between this and some of its larger periods and some of the private market deals that have been done in the space is just so wide that I think that's a sufficient incentive for them to kind of maybe think, "okay, there's no one else in the family to take this on." There's a big potential, you know, liquidity event for the family. And it's actually two families involved. So, you know, I think, the kind of the agreement there is, or the understanding is there, that if they can't keep it within the family, you know, a liquidity event and a cash-out is the next best thing.

Andrew: Would there be any politics involved with that? Because I've seen family-controlled Italian companies before that have tried to sell. I say Italian, but probably European, and heck at this point, probably all across the world, but family-controlled companies that have tried to sell to private equity-- but I think it's particularly in Europe where the European regulators say, "oh, we don't like this." Right? Like private equity, scary, gonna put leverage on the balance sheet, might try to close down some underperforming plants, might try to fire some employees. And like I have seen European companies block family-controlled-- not fully blocked, but they can make life really hard for making that type of control. So do you think there'd be any issues? Because an industrial gas business employs a lot of people. It buys a lot of power, not just directly. It employs a lot of people indirectly too, right? It's almost critical infrastructure because fire[?] and hospitals. So, do you think there could be some political pushback on that?

Conor In this case, I don't think so because of the relative size, I mean, if you were looking at a much larger player, like, you know, Air Liquide or someone like that, or someone approaching that type of scale. Yes, I think the implications of a private equity buyout would be more significant, but in this case, I mean, this is a 1 billion revenue business. It's an important business in the markets that it operates in, but in the overall scheme of things, I don't think a private equity acquisition of it would be material enough to prompt regulatory or political concerns.

Andrew: Okay. You mentioned multiple arbitrages a few times, right? This trades for about seven times EBITDA on the capital markets currently which-- look, seven times EBITDA, even after a pretty decent markets off recently, I would say that's the price of a below-average business probably gets. I'd say a normal business probably is eight to nine these days. A good business is 10 to 12 plus, and that's just very general, right? But that would just be rule of thumb and adjust for all sorts of other stuff. But you've mentioned multiple arbitrages a few times, this trades for seven times EBITDA. What does a normal air product company trade for? What do they tend to trade for in a takeout? Doesn't matter if the takeout's private equity versus strategic, all that type of stuff.

Conor Historically, kind of 12 to 14 times for comparable businesses. So the most direct comp is when the-- I think it was when the Prax air acquisition happened back in 2018. I think they had to sell their European assets to a Japanese company Nippon Sanso and that was the European assets with about 400 million EBITDA. SOL has about a 260 million EBITDA. So ballpark[?] kind of scale and that traded for 12 and a half times or 13 times to Nippon Sanso. So that's really the benchmark and that's actually a benchmark valuation. When I asked management, what did they think the business would be worth or should be worth at a fair consideration? That's the type of multiple that this type of business would [inaudible].

Andrew: Yep. So almost, I mean, again, trades for seven, you just listed to combat[?] 13-- will round up and say the multiple would almost be double what it currently trades for. And there is a little bit of leverage here. We'll probably talk about leverage in a second, but so you're talking more than a double on the shares if we woke up tomorrow and they were sold for the multiple that you thought they should go for?

Conor Correct. Yeah, exactly.

Andrew: Yeah, exactly. Perfect. Okay. So, let me go to my second favorite question. This is a family that owns 60%. They know the business really well. They've communicated to you and I think they've communicated across the board-- "Hey, this is a good business that deserves to trade for a multiple, much higher than we're currently trading for." We can talk more about leverage in a second, but this is an under-levered company, I would say, it's a little bit over one times leverage if I'm doing that math in my head correctly. Businesses like this can generally support a lot more leverage to that, right? Very consistent, economically resilient business. You can support a lot more leverage. So my first question would be, they know the values there, why aren't they going out and buying back shares? I know they do acquisitions, but they've got plenty of liquidity. They could do both if they want. Why aren't they taking advantage of the multiple?

Conor Yeah. I mean, I think this is, you know, as with a lot of family companies, this is a very conservative finance business. I mean, it's just slightly over one times geared. Historically, it's gonna maintain that type of gearing. I suppose, you know, why aren't they buying back shares? I mean, this is effectively that kind-- it's almost like a privately held business that happens to have a kind of a legacy public listing. So, you know, they don't have any analyst coverage. They don't hold investor days. So, you know, they're not really minded to kind of drive value through buybacks or other kinds of financial engineering. You know, they're kind of content just to let operate the business and continue to grow it. And you know, one of the things I suppose, in terms of capital allocation is that they have invested on a relative basis. They've invested more. In growth CapEx than their peers. And a lot of that is through both on acquisitions, particularly on the home care, and residential care side of the business, where they've bolted on smaller operators.

And then there's a kind of multiple arbitrages there where they're buying these smaller units or businesses, you know, maybe four or five times EBITDA, bolting it in and, you know, in a fair market, I suppose, you know, they're easily worth double that. So, I think that's really been the focus in terms of capital allocation. They pay a small dividend that has grown over time as well. But again, you know, as I said, they've been content to kind of focus on operating the business without getting too focused or distracted on, on kind of returning capital and levering up the business.

Andrew: All right. So that covers the special situation side of the business. So, but there's another part of the business, right? Like it would be great if we woke up three months from now, three years from now, five years from now, and the management said, "Hey, a succession planning part of the business, we're selling this to private equity for 12 times EBITDA, 14 times EBITDA and the shares with more than double. And we'll do great." But I think there's another thing where, "Hey, this is just a good business." We mentioned, it's a Buffett-like business. It's done, you know, 15 to 20% IRR on the open market for well over a decade, at least. So there's another side of this business where it doesn't sell and you and I just wake up three years from now and we say, "Hey, EBITDA's grown, the business has done great. We've done really well here."

So let's dive into the core business. The core business is the technical gas business, and then they've got the home care and some other stuff we'll talk about, but the technical gas business. I think if you've never looked at this and you and I said, "oh, this is a Buffett-like business." You would say, "gas? Like they're literally just taking oxygen from the air. Like, why can't everybody go and do this?" So can you just dive into what is the core technical business and why is this such a good business that we said it's a Buffett-like business?

Conor Yeah. Okay. Yeah. So, I mean the key attraction this business really is that it, it takes, you know, what it produces-- gases, such as nitrogen, oxygen, argon, helium, and so on. These are essential commodities for most manufacturing industrial processes. So, this business has a pretty high barrier to entry in terms of its capital intensive to get up and running. You know, it uses a lot of heavy plant equipment, such as air separation units and so on. So it takes atmospheric gases. It breaks them down into the component gases such as oxygen and so on. And then it distributes these or supplies these gases to industrial and manufacturing customers in a number of different ways. And these are all subject to long-term contracts.

What makes this a great business is that they're so tied into their customer's operations. So, for example, some customers, they'll have a pipeline directly into that customer's production facilities. And so, you know, the switching costs of that type of delivery is so high that the revenue stream is nailed in or nailed on.

Andrew: It's literally the best switching cost, right? The only way you could switch-- because as you said, it's a pipeline from the plant directly to your customer. Like the only way, you could switch is I guess you could start hiring trucks to bring in like canned gases, but that's so expensive and that's why any pipeline business, many of them-- I don't believe any pipelines here are regulated, right? But many people do-- like oil and gas pipelines get regulated because once you build it's a legitimate monopoly, right? There's no other way. And you can just start taking all these excess profits. So that's why it's so great. Let me ask two questions on the gas business. So the first question, right? I did some writeups and some work on Party city, and I actually have been meaning to finish those writeups, but like Party city basically gets helium from people and they distribute helium in stores and Russia invading Ukraine-- it turned out a lot of helium came from Russia slash Ukraine, and now there's this helium shortage that's going around.

And I know a lot of gas is like, you say oxygen-- and we're not gonna be short of oxygen, but a lot of gas we have had shortage issues with. So, are they having any issues with kind of the supply of the base gas and everything coming into them? Have they run into any of that?

Conor No. I mean, in the case of helium, that's quite a niche gas and while SOL do provide it, it's not one of their main gas. I mean, there are four main gases, which are about 60% of their production, are oxygen, nitrogen, carbon dioxide, and argon. So, you know, in terms of kind of being able to continue to supply, they don't really have any issues there. So they're kind of insulated from some of that risk.

Andrew: And then second question I had, so you mentioned when we were first starting, you said, "Hey, these contracts are CPI inflation linked," which is great. It's not gonna be a surprise to anyone who's listening to podcast that inflation is running high, but I was concerned like, a big piece of this is you take the base gas, you put it through whatever they do, and it takes energy costs. And anybody who's familiar with-- these are Europe, most of their businesses in Europe, and energy's mainly coming from natural gas and net gas, I'm just looking at my screen, you know, I think it's, TTF Dutch gas. It's gone from 55 last year, and as you and I are speaking, it's about 132, right? It's almost tripled. And inflation is not tripled. One of my concerns, it was either your write-up at the annual report where they said, "Hey, the cost for us to process gas, it used to be the energy costs were like used to be 50% of our revenue. And right now they're running it about 90%." I think it was the report. It could have been annual [crosstalk].

Conor Yeah.

Andrew: I was concerned like, yes, they're CPI linked, but their cost piece is running so much higher than CPI. Like, are they gonna run into issues? Does that make sense?

Conor Yeah. So, I mean, that was one of the questions I'd put to management when I spoke with them and I think, yeah, so historically, kind of the current energy crisis, the energy and electricity costs are about 60% of their total cost base. That's about 90% now because of what's happened with inflation. And, and so, yeah, that's the obvious risk to this in terms of earning power. But again, coming back to the fact that these are essential gases, there's no substitute, and the customers are tied into contracts. So they have the ability to pass on these costs. And so that's what they've been doing and that's what I'd expect to see kind of in the second half of this year. A lot of these companies like this in Europe, don't report quarterly, it's kind of a interim, half year, and full year. So, you know, I would expect kind of true towards the end of the summer when the half year report comes out, that you will see-- I mean, I'm not saying they're gonna be immune from it. There will be a lag of course, but you know, they have CPI linkage in their contracts, so they are able to pass that cost on and customers generally will have to eat that cost increase. I mean, if you're operating a steel blast furnace, you need oxygen and other gases to operate that. If you don't have oxygen, you can't operate and you're idled. So you know, that's essential, I suppose, point coming into play there.

Andrew: Come dive into conspiracy corner with me for a second here. So right now, let's just use round numbers. Nat gas in Europe is a hundred, right? And this is up from 50 last year. And you know, if you go back pre-COVID 2019, it was like 10 or 15, right? And I do wonder if they strike a lot of contracts right now and they base them on, "Hey, nat gas is a hundred, a hundred fifty, seventy-five, whatever it is." You know, let's say we fast forward three years and nat gas has gotten under control, right? In the US, nat gas is still six and it's 130 in Europe, and that's gonna take a long time to normalize because similar to pipelines, we've gotta build all these LNG facilities and get them over there. But at some point, I would guess, nat gas comes down from 130, just because it's so high on an energy basis. Like if nat gas is 20 in four years, I wonder if they're gonna have a bunch of contracts that were struck when nat gas was a hundred where their energy costs have come so far down that they're actually super profitable because they're CPI linked on the upside. I don't think they're gonna be like, kind of on the downside with those energy costs. Does that make sense?

Conor Yeah, no, I mean, that is a valid point, I think. Yes. You know, the whole purpose of the CPI linking is to protect them when costs rise, you know, and they're able to push through those cost increases. When costs turn the other way, there's, I suppose, they're able to [inaudible] while they may over time if cost, you know, really dropped dramatically, customers are obviously gonna look to kind of, you know look for some relief on that. But, you know, they are gonna be able to capture some excess profit in that type of scenario because I suppose, just with inflation now being a more possibly structurally higher for longer type dynamic, you know, I think they will be able to kind of keep some of that cost increase.

Andrew: What kills this business? Again, industrial gas is used in hospitals, used in industrial processes. Like there's not a lot of-- obviously, the first thing that comes to mind is oxygen when a patient is going under like there's not really a replacement for oxygen. Is there any long-term obsolescence risk here? I've just been thinking a lot about like what kills a business because for years if I can go on a tangent-- for years, everybody said, what kills Google? What kills Facebook? All this type of stuff. And it's hard to imagine, but like, I saw something where-- TikTok a growing share of searches are on TikTok. Like TikTok could actually kill Facebook. I don't think he kills Google, but it could actually kill Facebook. And TikTok actually could kill legacy media because the competition for time is going up so much between video games, TikTok, and all this sort of stuff. Like there's just less time in the day to turn on HBO or watch Netflix. And this isn't all that's driving Netflix to stock price, but you can see some of that, and the media company's stock price.

So with these guys, I have just kind of been thinking like over time, what kills them? Is there any obsolescence risk to-- obviously, not oxygen, but just the products in general? Or what do you really worry about at night with this investment?

Conor Well, in terms of an obsolescence risk, I mean, I don't really see much of a risk on that in terms of the-- I mean, if you're talking about kind of their facilities and their production, you know, capability, I mean, they invest a pretty healthy amount in R and D, and in growth and also in terms of their maintenance CapEx. It's a very well invested business. And so from that point of view, in terms of equipment and so on, I think they're pretty well-positioned. In terms of obsolescence, in terms of the end products, I mean, it's hard to see, I mean, as you said, there are things like oxygen for medical end uses that there literally is no replacement for that for, you know, oxygen treatment and respiratory therapy and so on. And also, I think in a lot of the production processes, they're a pretty core part of those processes. I mean, I think if I was to really think about what could change in terms of maybe something like ESG in terms of how steel is produced? I mean, steel production is one of the heaviest pollutant industries out there. And there is a push in terms of how blast furnaces are operated and how to make them more carbon, you know, to decarbonize that process. But then again, the flip side of that is that carbon capture is a growth opportunity for a business like this. I mean, Air Liquide and Linde are very focused on that. And so, I mean, that's an area that SOL can grow into as well in terms of capturing carbon, regasifying, and then, using it for other end uses.

Andrew: How do you, again, I do work for this podcast, but I didn't dive into the comps full and everything. How do air products or how does an industrial gas player play into carbon capture?

Conor So in terms of SOL, so they would typically-- say a customer of which emits a lot of carbon dioxide in its industrial, it's manufacturing process. So you know, SOL or Air Liquide or someone can come in capture that carbon dioxide that's emitted and effectively recycle, and then use it for, you know, carbon dioxide is used in carbonating drinks, food, and beverage. You know, it has so many end uses.

Andrew: I drink a whole soda water during the podcast, anyone on YouTube can see I'm holding up an empty soda drink thing. So I'm very familiar with how carbonated water.

Conor Yeah, I mean, that's just one very simple everyday use. I mean, carbon oxide is used in a huge, you know, in a vast amount of industrial and manufacturing processes. So I mean, that's one way in which they can maybe use that carbon capture as an opportunity to grow.

Andrew: I understand why they would be the person to process the carbon, right? Like you're gonna bring the carbon dioxide to their facility. They're gonna bottle it, process it, get compacted, whatever it is. Why would they be the person to capture it? I honestly don't know a lot about the carbon, but it does seem like going to the actual customer site and doing the carbon capture. Why should they own that? Versus I don't know who the competitor would be, to be honest, but it seems like that's a completely different skillset.

Conor Well, no, because talking about competitors, I mean, you know, the likes of Air Liquide and Linde are obviously gonna focus big time on carbon capture. And so, you know, any of the really large industrial plants and facilities, they're obviously best place given their scale and given the relationships with a lot of the larger customers to do that. But I mean, SOL is a, you know, a pretty decent size regional player with a very diverse customer base, you know, would equally be well-positioned to service that segment to the market.

Andrew: Yep. And you mentioned they do a lot of growth CapEx. They do a lot of bolt-on acquisitions. And you know, when you talk risk, there is the risk that if they're doing lots of bolt-on acquisitions, that some of them [inaudible], but they're doing-- again, it's a bolt-on, not transformative. So even if some of them fail, like, "okay, we lost three months of profit, six months of profit. It's not we levered up to five x and like bankrupt to the firm on them." But you also mentioned they do a lot of R and D and there was this-- I'm trying to find in their slides, there was a line how much they spend on R and D. But I was just curious, what do you spend on research and development for industrial gases? Is it new uses for industrial gas? Is just generally improving your kind of method of production or what are they spending? Because it seems like that's a business that's been around for a hundred years. There's like not a lot to research if that makes sense.

Conor Yeah, well, I suppose there's a constant kind of need for, you know, in terms of science and laboratories, universities, where there's new processes, new applications. And so you know, a lot of the R and D spent is around trying to serve those new evolving kind of requirements, and also kind of diversifying into kind of other areas or other customers. I mean, biotechnology is one field now that they're looking to, you know, leveraging off their experience in the medical space to date and, kind of expanding into that field. So, you know, implementing that type of expansion, there's a certain amount of R and D involved in that as well. So that's just kinda one example maybe of how they're spending R and D.

Andrew: Perfect. So look, we've now covered the industrial gas side, and anything else we should be talking about gases or I do kind of wanna turn over to the home care business if that works for you?

Conor Yeah, no, that sounds good. Yeah. And I think we've kind of covered all the key points on the industrial side.

Andrew: Perfect. So, they've been growing into the home care business, and I think this was a little surprise for me, better returns on capital in the home care business. I think it's almost 50% of the business at this point. So I just wanted to-- what is the home care business? Why are there better? Why did they get into it? Why are there better returns on capital there?

Conor So home care is kind more like a service business rather than a production business. So I think around 1986, in the mid-eighties, they made the decision to diversify into kind of the medical and healthcare sector leveraging off kind of their ability to produce oxygen and other kinds of gases that are key in the medical field. And so, one way they did that was to set up this service business, which is what they call the home care segment. So that really involves calling to people and their patients in their home setting or in residential care facilities, typically outside the hospital setting and administering oxygen or other respiratory or other kinds of services and that includes the provision of equipment ventilators, replacing gas canisters, and so on. And so, it's really a service business. And so in that sense, that's how it's kind of it's capitalized in that, they're not kind of spending huge amounts of CapEx on equipment and so on. And it's also a higher margin then as well. I think, you know, the margins are kind of close to 30% EBITDA margins in that side of the business.

So it's asset-light, and it's service focused. And so, you know, particularly it's kind of really boomed over the last two years with COVID and obviously, that was a huge tailwind for the business and off the back of that's continued to grow, I mean, in terms of pathogens and respiratory illnesses are becoming more and more frequent. And so that again, you know, a continued growth area for the business that are particularly well-positioned.

Andrew: Perfect. Now, so most of their businesses in Europe and they do have an expanding South American, I think Brazil, they've got some in China, so emerging markets for on the home care side, but you know, I'm US domestic base, and I think for any US domestic listener when you hear home care business, they've got oxygen therapy, ventilation, telemedicine. When you hear all that, you've got really bad dreams of the home care businesses in the US, which tend to be they grow quickly. They've got great margins. And then in the US, Medicare pays for most of them. Medicare does a huge cost cut because they say, "oh, look, there's a cute little home care business that's getting 25% EBITDA margins in this sector. 25% EBITDA margin is too high in healthcare, we're gonna cut their reimbursement rates by 30%." And the business goes from growing and profitable to really flat.

This business has grown-- I'm looking at their slide for people falling along. It's slide 34 in their full-year 2021 presentation. It's grown really nice. 9% annual growth for over 10 years, almost 30% EBITDA margins. Like this is a good business, but just for my domestic listeners who hear home care, good growth. Great margins. Why is this not a business that's like, kind of on the chopping block for competition, margin depression, all that type of stuff?

Conor I suppose there's only a handful of operators. There is a limited condition in competition in the space. There's only a handful of operators and I suppose, the need with just with aging demographics in Europe and particularly now post COVID were kind of increased focus on respiratory illnesses and treatment. There is only a handful of kind of companies that can really deliver at scale. And these guys are tied into either the insurance companies, health insurers, or national health services, depending on the jurisdiction, whether it's Italy or Germany, or wherever they're providing the service. So you know, it's the reliability of the service and the ability to kind of serve the market that they've-- I mean, in theory, yes, it's a risk. In reality, it's not that gonna happen where the economics are just gonna be cut down on them. I think it's unlikely, given the relationships they have in the market, customers, and kind of, you know, the level of service, the quality of the service they're able to provide.

Andrew: Perfect. So home care is actually starting to become a-- not starting, it is a really meaningful part of the business, right? I'm trying to do the EBITDA comparison as we speak, but is there a multiple difference? Like when we started, we were just saying, "Hey, this business trades seven times EBITDA," is there kind of a multiple difference if we just sold this business SOTP or whatever between the air gas side and the home care side?

Conor Yeah. I mean, when you look at the competitors and look at the other players in the market, I mean, Air Liquide, Linde do provide kind of similar healthcare services or home care services as well, a much smaller part of their businesses in relative terms. So, I mean, there, isn't a pure-play, you know, to break out the multiple, there isn't a pure-play kind of see where the market benchmarks, you know, home care versus industrial gas. So all the comps are a kind of a, you know, it's a composite multiple. Although, probably more skewed to the industrial side in terms of the overall revenue mix. But then again, I mean, if those comps are trading at 12 to 14 times and they have, say 20% of the business or less is home care and 50% of SOL's is home care. And that's a higher margin, less capital intensive business. I mean, that's even more supportive of a higher multiple for SOL.

Andrew: Yep. Yep. And actually, I was just looking at the slides, when I do it-- and I'm sure the company thinks this way because the first thing they always present is the technical gas side. That's what they're known for, that's what they talk about. At this point, I think the home care business actually does significantly more in EBITDA than the technical gas side. It's One 160 in EBITDA from the home care side versus I think it was 90 in 2021 from the technical gas side. So we talked about gas the whole time and you actually might say, "oh, this is more home care business though." Home care does get some stuff from technical gases. So yeah. Anything on the home care business or I wanna talk about the two emerging lines as well.

Conor No, I suppose one other point just on the multiple actually is just, you know, if you look at other kinds of similar healthcare-focused businesses, you know, you see a lot of-- it's been kind of a typical private equity play in Europe over the last number of years, whether it's healthcare or doctor services, veterinary clinics, and so on that roll up a model where they kind of buy and build platforms and in the private markets. Again, those businesses can trade, you know, 15 times 16, 17 times EBITDA. So again, just looking at that as a kind of broader comparable-- again, that's kind of supportive of a higher multiple for the SOL's home care business.

Andrew: And they've got two startup businesses. They don't devote a ton of slides to them, but one of them is the biotech business. And one of them is the hydro energy business. I've got a few questions on the hydro energy side, but just anything you wanna say on the biotech side of the business?

Conor Yeah. So they're both more recent kind of segments that they're developing. They don't break out performance for those smaller segments because they're very, very small. I mean, biotech is really an offshoot of the existing medical and home care business, and really that's a very new business. So, I mean, that would take time for that to become a meaningful part of the business. And then the other piece, the hydro business is that's very small. I think it's really, you know, they own some hydro energy plants. But I mean that they partly serve, or power their own operations rather than being kind of, you know, a whole new service segment.

Andrew: No, just on the hydro side. I thought it was really interesting. I mean, again, I don't know how much-- these are hydro plants. I believe it's six hydro plants owned and operated in Eastern Europe. But, you know, as we talked about earlier with nat gas, like this is a business that is structurally short electricity, because this is a very energy-intensive business on the gas side. And I was just thinking, oh, how [inaudible] have hydro electrics? And I was also wondering, could there be like a little bit of hidden value there because as we've talked about nat gas prices are through the roof, electricity, there's an electricity slash energy shortage crisis, whatever you wanna call it in Europe currently. And it doesn't look like it's getting any better, owning six hydroelectric businesses like hydro base load, the marginal cost is basically zero to produce. Like that's probably not too bad to have right now.

Conor No, it certainly makes sense. And as I said, they do use it to power their own operations in some of their locations. But it's such a small part of the business that it's not really material to the overall thesis, but I mean, yeah, in time, maybe it becomes something more valuable and certainly it's, it's a positive for the business in that they have that, you know, maybe as a new platform that they can build on.

Andrew: You never know, right? Because I just look at the slides and it says, "Hey, this is 120 million kilowatts hour per year of hydroelectric capacity. And I don't know how much 120 million kilowatts hour per year is. Like you could tell me, "oh, their businesses take 10. And the other 110 was like making nothing, but it turns out that these electricity prices it's gonna be like just mini money out the roof, or you could just say, oh no, it's just not it." I had no idea. So I was just wondering if there was something hidden there. Look, I think we've done a pretty good job covering everything here. Anything else you wanna talk about on so, or kind of finished up here?

Conor Yeah, you touched on it earlier in terms of the downside, you know, I mean, I'm looking at this as a kind of a special situation, and that the takeout is real, that the driver or the kind of catalyst, number one, if you wanna call it and, you know, data side, a market rerating-- just given the quality of the business, it has no sales side coverage. You know, if they decide to kind of maybe start engaging more with analysts, and investor community, that could drive a market rerating, and I would expect a business like this to rerate pretty quickly just given the obvious quality of it. But that aside, I mean, that's one of the really appealing things about this as stock is it just continues as is and just grows in line with this historic trend, you know, the kind of forward, prospective rate of return that you can expect to earn on this is kind of, you know, 15 to 20% without any multiple expansion. That's just through continued earnings growth in line with the trend, not doing anything, you know, different to what they've done for decades.

But that being said, there are growth drivers in terms of decarbonization, and carbon capture and there are other growth opportunities there, but let's assume that they just keep doing what they're doing. No multiple expansion and you get the one and a half percent dividend, a modest enough dividend. I mean, that breaks back to over the next five years, kind of a 15, 20% return. So, I mean, if that's your downside, I mean, I say downside [crosstalk].

Andrew: Yeah, your downside is one of the best investing records of all time, like 15 to 20%.

Conor Yeah, no, I say downside the context of the kind of special sit thesis not playing. You know, so I think, it's kind of hard to see any real downside to owning this machine. You can expect a decent, very acceptable rate of return at a bare minimum and you get the free option of market rerating plus potentially the liquidity event where it's a two to three X in five years' time.

Andrew: Yeah, look, I think the downside would be, that everyone's looked at family-controlled companies before that trade for obviously less than they would go for to sellers to motivated buyers who would like kind of financially maximize it. But you know, here, the nice thing is, a, you're paying a cheap price and it's management-- again, 15 years, really good returns. They grow the business, these things. I mean, this is literally just both of their core business are literally just steady up into the right revenue, earnings, all that sort of stuff. And, but part of that's driven by inorganic growth, but, you know, there's not a huge difference between inorganic growth if you're taking your cash flows and going buying like small bolt-on businesses for four or five times EBITDA and just going and doing it yourself like it's not a huge difference if you can do it consistently.

To me, a lot of people would say the downside is family doesn't care. They're just not gonna do anything. It's like, okay, cool. Then they'll do what they did for the past 15 years and shareholders past 15 years, past a hundred years, and shareholders will still be pretty happy there. Let me switch it up a little bit. We've been going almost an hour, but not quite an hour. So I'll hold you to the hour timeline. Look, you do this great weekly bulletin every week where you dive into, "Hey here's some interesting event ideas. You've got the AOB, any other business where you just talk about something interesting." So we're talking on, what is today's date? It's June 28th. We're talking June 28th. So you'll have another one coming out like Friday or something, but just wondering what's on your mind these days in the markets?

Conor Yeah. I mean, I think, there's a lot of concern around a lot of increasing talk around recession risk and you know, are we looking at a recession now? Is it a stagflationary recession? One of the areas of the market that I think is interesting and I kind of just in that kind of more-- and I'm not a macro investor, but I like to kind of look at some of the kind of more macro indicators at times, just to try and frame, I suppose, where the markets at and how I should be thinking of it. And I think, you know, the high yield space at the moment is there. There are signs of potentially high yield cracking, you know, leveraged loans and high yield debt. I mean, that's collectively about three and a half-trillion dollars worth of debt outstanding. You know, 90% of leverage loans now at the moment are covenant light. You know, there are no warning triggers now and we're looking at, you know, we're just talking there about cost inflation and energy input cost increases.

You know, you're looking at wage inflation is going up, costs are going up. You know, interest rates are going up. So debt service obligations are gonna go up and you've got a lot of highly levered companies out there that are approaching that potential pinch point. And, you know, I know anecdotally already that there's liquidity is driving up in leverage loans, and in the high yield space, you've got a whole three and a half-trillion dollars worth of triple B, that healthy chunk of that you've gotta think it could be lined up for downgrade which would lead to forced or mandated selling by a lot of the holders, which is going to impact spreads and, credit risk perception again as well. So I think that's just interesting. I mean, how does that inform my view of equities because I'm an equity investor equity analyst. So I'm kind of interested in parts of the market that are maybe insulated from some of that wider credit risk and kind of some of the macro risk and I think some of that you can find some of that insulation is in special situations and in certain kind of commodity-related names.

Andrew: It's funny you say you can find that insulation in a special situation, but I will tell you my special situation book that was put on in March would tell you that you do not find that insulation in the special situations book, because it's just interesting like special situation, should be market neutral, but if it is a, you know, like soul would be different, but if it is a company that has been rumored to be up for sale and you look at it and you say, "oh, this company is trading for eight comps, go for 12. I'm gonna buy it because it's rumored to be put up for sale. I think it's good. I think they'll get a huge premium." Like when the market falls apart, spreads blow out like-- the stock sells off really hard because people quickly start looking at it saying, "there's no way they can finance this deal." Now their flip side to that would be, if you're looking at something that's doing that right now, it could be really, really interesting. But I'm mainly laughing at myself because I don't wanna cry on a podcast if that makes sense.

Conor Yeah. No, but I mean, you're right. I mean, in times of stress, correlation is one and, you know, if there's a liquidation event, there's a liquidation event, you know, everything sells off and you just gotta be ready for that to take advantage of it. I mean, March 20 was a brilliant time March, April 20 was a brilliant time to kind of pick up some bargains. So, you know, I think the way I'm thinking about things now is, you know, maybe preparing for a potential sell-off. And I mean, I think, you know, there are other situations there at the moment that I think you can, you know, where they can offer good risk-adjusted returns, independent of maybe what the market is doing. I mean, you look at what Buffett is doing recently. I mean, the two biggest, the two most interesting, two of the biggest bets coming out of the recent Berkshire, you know, AGM was the Activision [inaudible], and his bets on energy.

So I mean, he got their commodity in special sits[?], that's what Buffett is doing in the absence of everything, you know, the absence of any other opportunity. So, I mean, to me, I think that's a very interesting tale.

Andrew: Commodities are interesting because I think I've written about this, talks about it tangentially on the podcast and stuff, but you know, I just keep looking at all these commodity companies, and Buffett's buying Oxy and I think Chevron-- he's buying that too. If you just look at those, you can apply this to a host of commodity companies, literally almost any energy and gas company, you know, the spot price for the domestic US is a hundred dollars oil, $6 nat gas, let's call it. Next year it's $90 oil, 550 or 5 nat gas, whatever. If you actually DCF all these companies out, they're basically implying the curve is 15 to $20 oil and a dollar to $2 nat gas below where the curve is implying. So I think what Buffett is seeing, I think what a lot of people are seeing is like, "Hey, the market is saying that the curve is flat out wrong in these prices. And if I buy them, like I get a lot of cash flow up front, because they're getting super normal profits right now." So I'm basically betting on two things. The curve is close to right, and management's not gonna light all this money on fire. It seems like a good bet to me. Like a lot of these guys, Chesapeake, Chesapeake is one I was looking at yesterday. I've done 30 minutes of work, so don't hold me to it. But like CHK, they literally went to a conference and they said at current curves, we're gonna do 13 and a half-billion dollars in cash flow to equity over the next four to five years. And their market cap is $12 billion. So it's like, "Hey, forget about terminal value. All the terminal value is free. We're gonna get all this and they say we're gonna return the vast, vast majority of its shareholders." Anyway, I'm rambling, I wanna give you last thoughts. Anything else on SOL? Anything on the energy I just went on? Anything else you wanna talk about?

Conor No, I think you're right. I mean, I think I also think kind of niche, certain niche, commodities. I know you had a podcast recently on Brian and that's a name I've written.

Andrew: I know you have, yep.

Conor Written about as well. And I think, you know, that's a really good example, I mean that's a company in play, it's strategic [inaudible]. It's very niche. You know, and I think that's another type of situation that I think is interesting in the current market and that you've got a secular tailwind behind us. But it's also a special situation in the near term that kind of mitigates some of the other risks that might be there in the near term.

Andrew: Yeah, it does. Until of course, I record the podcast and five days after I record the podcast [inaudible] down, 25% to the lowest, it's been in like 18 months or something. But I still think that's interesting because as Brian mentioned on that podcast, even with 10-- it's at 27,000 right now, like the share price probably implies something lower and these guys are structurally advantaged in [inaudible]. But anyway, Conor, we've gone for an hour. It's been great having you at time number two. Looking forward to time number three, I'll just pitch you again. Look, I was a literal moment one, number one subscriber to Conor's thing. If you are looking for value special situations with especially European flare I'd say-- there's some American stuff, but especially European flare, I think you do fantastic work. I think it's fantastic stuff and it's well worth checking out. So I'll include a link and share notes for everyone who wants to check it out, but Conor Maguire, thanks so much for coming on, and looking forward to podcast number three.

Conor That's great. Thanks, Andrew.

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