Cove Street Capital's Jeff Bronchick and Andrew Leaf talk $ECVT Ecovyst+ $VSAT Update (Podcast #180)
Cove Street Capital's Jeffrey Bronchick, Principal and Portfolio Manager, and Andrew Leaf, Principal, Research Analyst, joins the podcast today to 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.
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Transcript begins below
Andrew Walker: All right. Hello and welcome to Yet Another Value podcast. I'm your host, Andrew Walker. If you liked 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 Bronchick from Cove Street Capital. Then for the second time, we've got Andrew Leaf. Andrew, Jeff, how's it going?
Jeffrey Bronchick: Great. Andrew, hold on. What stock did we talk about last time? Just so I know if Andrews going to hate us here?
Andrew: I don't know if you want. People can look at the chart. It was ViaSat.
Jeff: Oh, okay. [crosstalk] Hold on. We should probably be shape shifting over, but let's stick to script. Shall we?
Andrew: We can shapeshift over. A couple people were like, "Ooh, this is timely." I said, "No, I did a lot of work on echo this," [crosstalk] but we can shape shift [inaudible].
Jeff: Okay. We'll do the five-minute drill at the end if you'd like.
Andrew: Perfect. 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 advice. Please do your own research, do your own work, consult to financial advisor, all of that. This isn't financial advice. Anyway, guys, the stuff we wanted to talk about today is Ecovyst, the ticker is ECVT. I'm actually really glad Jeff 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 and know that I have been interested in the refining space in general for the past 18 months. They said, "Hey, this might have all of the plays of a refiner," because it's a really interesting product. It's really [inaudible]. It's absolutely mission critical. But I'm rambling. I'll turn it over there. Jeff, Andrew, either of you can start. What is Ecovyst and why are they so interesting?
Jeff: Got it. Yeah, I figured we will divide up into, obviously, I'm just a talking mannequin and Andrew is the Oz or the brain in the enclosed glass thing. I think what was interesting, and thank you in all the disclaimer stuff that you just said, Maryanne, Diane, and our compliance person. Okay, good. Besides a good company, and it's always nice to find good companies that are underpriced because you rarely get good company, cheap stock at same time. There's been some, I guess, external institutional investment industry things that have caused this, that we believe have relieved themselves after frankly smacking us for the 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. This was a failed IPO. Though everyone could look at exactly what PE firms, I'm about to malign, it's this classic. There's a lot done in PE with hundreds of billions of dollars that just makes zero sense except to generate fees in conceptually performance. This was one of them.
CCMP put together privately two groups of chemical companies and took them public back in. Actually, they started the deal in 2014, went IPO'ed in '17, but it was name on paper. It could be constructed as a whole company with a narrative that made sense only to people who were doing nothing but nodding their head and listening. Naturally, they came public with a bunch of different entities of which was the narrative fit to sell an IPO. It didn't fit of how the businesses worked and what one should expect from them, and when. Hence, things did not go according to plan. The stock got crept. This sort of came up in our world of following. We had a failed ipo, is it? We've had a fair amount of experience in this area with specialty chem companies or, excitingly, leverageable and good LBO fodder that when they come out and get on the flywheel of delivery, they get really interesting. We started looking at this.
The second part of this is people in our world hate PE overhang. 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. PE world's smartest men are more making, God knows how much money they went to, God knows what school. As soon as they have a public investment, they freeze. They don't quite seemingly know what to do, and they proceed, and people don't like that. This company had over close to 50% was still PE owned. Naturally, everyone in our world says, "Well, of course, I want to buy the last 5%. Call me when it's done." There can be, and have been, successful opportunities because also PE being PE. They're looking to sell it every day. Sometimes, it comes out through, as I'll talk about the Equus way, which was not good. Sometimes, the company is sold.
Andrew: All of it.
Jeff: In the meantime, again, we're about 400 million plus firm, so we can do these kind of things. If you're running 14 billion, you're like, "I'll just wait till the last one." That was a big setup. They solved their problem or started to solve a problem by hiring a new CEO who is not the lead of company through the IPO. A guy named Belgacem, which, as he explained to me, I said, "How do you pronounce your name?" He goes, "Rhymes with the orgasm." His words, not mine. He was a Senior Baker Hughes guy and just right guy, right time. He's tough as nails. Just went through every single line at the company and said, "This is stupid. Really, we should be two businesses, not four." He did an excellent job of just basically walking, I'm sure PE or the board, and saying, "This is the dumbest idea ever done. I'm going to fix it." Essentially, sold off half the company, paying down debt as well as returning capital shareholders, bid special dividends, which is a nice good little mix there.
Anyway, we spent the whole day there, got a little chemistry lesson 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. He just did an exceptional job of cleaning that out and then rebranded the company as Ecovyst because that has a ring to it out there.
Andrew: Vaguely, ESG.
Jeff: He swore up and down. His wife didn't come up with the name. Anyway, it worked exceptionally well out of the gate. Then the next phase happened and basically, as opposed to, and it is a running mystery of, we think this is, as Andrew will talk about, high margins, great fee cashflow, close loop on. We'll talk about roughly 80% of their business—kind of a really interesting set of dynamics. The question is, why would PE hire Goldman and other large bracket firms and just unmercifully bang the hell out of stock, as opposed to like, "Wow, there seems like a great club trade"? Frankly a mystery. We have just one more left between CCMP and the European company that originally attributed assets INEOS. They did 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, "If they want to give it to you at $9, they're going to sell 10 million shares, buy back three or four, delay the delivering. It's not that important. You got a three-handle." 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. Now, INEOS is the last man standing. They did a deal after the last quarter. They have 7%. There's one more left.
Andrew: You beat me. My later questions were on the PE overhang, but do you know why INEOS did the last deal?
Jeff: Because they're trying to buy Manchester United.
Andrew: Because they're trying to buy Manchester United, another area of focus for me over here. CCMP, you basically mentioned, they were in this for a long time. I think they were fun life out, so that's probably why they were selling it. We don't have to talk about the PE overhang. Andrew, Jeff did a fantastic job of going through the background while you guys got interested in the PE overhang, how they've delayed their delivering. We can talk leverage and everything, but I do want to talk about the core business, right? 80% of the core business relates to a lot of it is alkylate, which they've described as we make liquid gold, right? We make liquid gold when it comes to the refinery. 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 Ecovyst does and why their product is liquid gold.
Andrew Leaf: Sure. The business as it stands today, just to break it down, is they've got EcoServices, which is the sulfur regeneration business, which you're talking about the Alkylation process or the liquid gold process, major part of the business. They also have catalyst technologies, which is a separate segment. Let's start with the EcoServices side. The best way to just think about what the Alkylation process does is that it makes gasoline higher octane. The tailwind 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. That's what's driving the tailwind for their additional volume behind that EcoServices business.
Andrew: Andrew, when I had a car, [inaudible] started car out of college, when I still drove, I would go and fill it up with the regular unleaded. 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 used more alkalization. Is that it?
Leaf: That's exactly right. There's actually a secular tailwind behind that within the number of cars. Cars with turbochargers are usually the cars that need that higher octane. You're totally right. When you're at the gas pump, it's like the middle or the top-level expensive gasoline. The reason why this business is so great and why it's so high margin is that a lot of these, they have a lot of captive pipelines into the refineries that actually do this alkylation process and make gasoline higher octane. Part of the process is they've got to remove the sulfur from the gasoline as it's being refined. They send that through EcoServices pipeline, EcoServices regenerates that, and then they actually take the new virgin or the recycled sulfur and sell it into the market. When you look at the revenue from that business, about half of it is just the actual service of helping recycle the sulfur. Then the other half is actually selling that sulfur into the market.
Andrew: 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? That is for people who aren't familiar. I'll just let you talk. Why is getting it via pipeline so important?
Leaf: Yeah, it's extremely important because there's literally a pipeline from the refinery to EcoServices recycling facility. In terms of 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 your refinery are captive to displace them, you'd have to start trucking maybe to another facility. The cost savings of just having it directly piped in makes it pretty easy for them to not lose a customer.
Jeff: The real model is sort of an old, the classic, the air products model. In other words, we need this done. If 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 it in the Gulf area, which, as we all know, is massive natural gas. Huge competitive advantage there. Customer concentration, you have these pipes, you have routes of collection, and so it's almost like a closed loop. 90% of the contracts are 90% fuel and sulfur-based pass-through. One of the key issues, you're basically providing the service and netting your margin all else being equal. To note when prices of fuel and sulfur go up, it's good for their top line lowers their margin because they're passing through the material. 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 low 30s on an EBITDA basis. It's a closed loop for more demand out there for said product. There's just very few people who want to get into this space.
The last part of other interesting things, and then we'll turn it back to Andrew for the other side, is that it's sulfur. Sulfurs mean nasty. 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 pumping the stuff in by, I guess, the gallon, whatever, a lot more than a gallon is. This and that. They need to dispose, not 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 whatever section four waste disposal facility is an awesome business because it just takes seven years and 600. It's crazy. They actually have that sneaky side that's margin enhancive in just getting rid of the worst book, 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. 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 ICE machine is still running. It's almost unchanged under almost any scenario unless really people are going to come to your home and take them.
Andrew: Like they're taking everyone's gas stoves, allegedly. Okay, well, look, we can talk about other pieces of the business. They're involved in polyethylene production and everything, but Jeff just hit on it. Let's talk about it right now. The big risk here is a lot of the business is coming from gas refining in some way, shape, or form. We haven't talked about the catalyst. The catalyst, they're important for renewable diesel as well, but the catalysts are really the turnarounds when you're doing plants and everything. I guess the big risk that everyone said, here's how one smart friend when he said, "Hey, you might want to look at this." It's like, "Look, I'm confident that these guys are going to be selling products until the last refinery in America is shut down.' But the issue is, in five years, right now, I think about 6% or 7% of cars that get sold onto the market are electric vehicles. In five years, if it's 20% and slowly the oldest ICE vehicles start rolling off and miles per gallon, you're going to start having refineries shut down at some point, right?
As you start having refinery shut down, how does that long tail for Ecovyst look like? Are you buying it with the next year or two? Yeah, there's some pricing power. Every refinery's running at a hundred percent right now, but in three years, do you start seeing the first of the refinery shut down? In five years, do you start seeing? In eight years, do you see the middle piece of the refinery? How do you guys think about that tail or the long life of these assets?
Jeff: I would simply say that what people really missing is just, again, there's nothing wrong with the social desire to green out the world. It's just the date's wrong. It's not 2030. Andrew, okay, I've got 23.4 more years left in life, statistically speaking, if you think you've got a couple more, but we're talking 24. I would say, well, well, well beyond any reasonable long-term estimate. I know it's popular for people to be smart, raise their hand in a meeting, and say, "Well, you have zero terminal value." That's this BS. If anything over, we think not within our time horizon of, let's say, 15 years which people will start worrying about it in year eight. You can make, again, captive company making it an absolute necessary product that 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 free cash flow gushing are that's your next seven years.
Andrew: Let me just push back slightly on that. I definitely hear you, and I do not mind. You said, "Oh, there's no terminal value," and 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 Delek, which is a refiner. I've looked at the refiners closely. I certainly hear you. I looked at Exxon sold, it was a small refinery, but they sold a refinery to Par Pacific last summer for about three times mid-cycle EBITDA, right? 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 multiple, 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 the terminal values going away in 2027 to 2030. Some of the worst facilities would go away even before that. You do start to 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 Ecovyst.
Jeff: Again, life is nothing perfect, and arguably, there is absolutely, and we've seen this in other companies in ICE space, like an internal combustion engine, that there's just X percent of our piers and cohorts on both sides of the ocean. That's their mantra. That's the play. You see it in a variety of things. Now, obviously, you can argue coal would be your argument times 12, right? This and that.
Andrew: With a 12th of the multiple.
Jeff: Nonetheless, I had the fortunate thing to be an investor in the last maker of leaded gasoline.
Andrew: I think I saw your 13F. You've got Hallador in there, which is in the coal plant.
Jeff: Again, I would argue people are embedding a 2030 number, which is just the made-up number. I would argue in many asset classes involved in this that the infrastructure here. To your point, whatever it is, EV cars by 2030 are outlawed here. Any math done, McKenzie has person still look out 20 years, how many cars are on the road globally that are still putting in some form of gasoline? The answer is it's unchanged.
Leaf: It is.
Jeff: I would say that. Secondly, US-based company in this world, our natural gas position just buries any refinery in Europe, probably Asia. The Middle East is the only people just because they sit on it. I don't think 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. We're dead on refineries, and I would argue this company should be valued somewhere between air products and forex.
Leaf: I would just add one thing. Another thing about this company that we love and Jeff visited the research facility. They're always on the bleeding edge of their space. One thing that, again, much farther into the future is sustainable airline fuel, which they have the top foothold in. If we're thinking 10, 15 years out, the same catalysts that are used to make airline fuel it's the same one that makes sustainable airline fuel. They're part of that infrastructure. If there's any appetite for that globally, which will add a lot to all your plane ticket fairs, unfortunately. But they're extremely well-positioned to capitalize on that. When we're thinking about this company, if we just think about it as of today, you have to think about it as, "Okay, if some of these refineries start shutting down, they also do have opportunities to replace that revenue in EBITDA."
Andrew: Yep. That's great. Just two things to say. One, Jeff, you mentioned investing in the leaded gasoline pieces, and whenever I think about refiners of these, the quote is, "Sure, it's a sunset in industry, but what a beautiful sunset it could comes to mind and the profits from some of the refiners or the last pop to mind." Then the other thing, you guys started to mention it, and Jeff started hitting it with the natural gas. Most of their assets are either Gulf Coast situated or smaller, but California situated, which means they're right on the coast. As you said, "Even if the US is going to be a hundred percent EVs, we're going to be making it elsewhere. Because you're on a coast, our US 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 useful life.
Jeff: Sulfuric acid is just one of these things that whatever you don't like in a society, it doesn't matter. It's a necessary chemical required to make everything that you look around your room or live with, and it's going to take decades and decades and decades to replace an infrastructure that was built for X supply chain. There's that. Again, I really do think it's beyond the scope of a prop. Our bet is 2050 or 2060, not 2030 or the next election. It's really that simple if you can clinging to that world's coming to an end. I can tell you also, literally, we're in El Segundo, which for those, besides being the airport city as a big honking refinery, 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. I don't think it's the issue. Look, if this company just math put up seven years of mid-single dig of growth with 30% push margins, and 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."
There's a new board that is post-PE. The CEO was an excellent COO and really was the builder, runner, and architect of the EcoServices of their biggest business. He doesn't have the proven chops. There's a guy who became in classic. Je sold of Creighton and so now he's the genius CEO who anything in the basic materials he touches will naturally be sold. There's a whole group about what to do with these free cash flow. They're down their leverages. Even after the last share of purchases, it's still in the threes and dropping rapidly. If we can get seven years through nothing material, which again, I don't think we're going to make money. [crosstalk] Andrew, you can add on that.
Andrew: Andrew, did you want to add anything? Go ahead. We can go in a lot of different directions from that.
Leaf: No, nothing. I just would say to your point on their refineries being concentrated in the Gulf in California. You're exactly right on the coast for exporting if it does come to that. They've got the slide in their investor presentation, which just shows their concentrations around that.
Andrew: Perfect. 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 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. I've got that at maybe based on their projections for 2023, that's about eight times EBITDA. Specialty chemicals is tough because these things do tend to trade for multiple. It's certainly higher than 8x EBITDA, but obviously, there's also a wide range of specialty chemicals players. How do you think about what a fair multiple for this type of business would be?
Leaf: Yeah, I'll give you the short answer of today, and then I'll also give you maybe a little history. This is a 30% plus EBITDA 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 being at the top of that. From the beginning, we've bought shares in this company every time. It's at 7x. It's head-scratching to us that this business, especially with these high-quality assets that are growing and have mid-EBITDA. 30% EBITDA margins are trading at these valuations. On top of that, you have to remember that 75% of their EBITDA converts to free cash flow and that's not adjusted. That's real free cash flow. It's trading almost at eight and a half percent free cash flow yield. It's one of the cheapest stocks we own and yet one of the higher-quality businesses we own, too. It's a real big. It's a mix of those two.
Jeff mentioned this earlier, but I just want people who are new to the company. Their revenue's very choppy. It doesn't screen well because last year, especially, they had a massive revenue increase from sulfur product pass-through. We're talking significant amounts, and it looked like their revenue was going up 40%, and their margins were actually going down because it was just a pure passthrough. If you're looking at just the stable business, you have to clean that out. What you will get is mid-5 % to 6% EBITDA growth on pretty similar revenue growth. It's still, to this day, extremely cheap even though it's sort of hitting $12, which is new high for it lately.
Andrew: 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." Then you read the footnotes, and you're like, "Oh, it's all passed through." It's like Jeff's going to yell at me for not doing work, for not being a real researcher here.
Jeff: No, it's legit. We like to invert, like, "Okay, we bought this stock, I guess," whatever. We bought it a while ago. We got paid dividends and worked really well on this. We kind of flatten. Really, what could go wrong here, and what do we see is something like a PE firm thought to just bang it out on the market at the low multiple as opposed to selling the whole thing. Like, what don't we know? Then there's a second area of, again, there's the ICE contingent. I shall not invest in anything remotely involving anything like this, taking off the thing. But I also think, again, one of the key things is also, again, no one likes or very few people like it. We don't like it, right? 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." 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.
The whole thing gets sold. I think people are waking up like there's one more, and it's going to come after the next earnings. Also, they make the claim and they show a chart of the 19 years that show how not cyclical they are because this is a mandatory element. It's a closed-loop system. We've got all these pass-throughs. It could be wronger, so when you see something like the first quarter, obviously we're being fed material to support a thing, and you have to say, "Are we discounting that concept enough that for whatever reason the [inaudible] section is less miles driven, et cetera."
The last little weird thing is this company's hard to screen because the catalyst business, which is the other 20%, is a part of it is a big joint venture with Shell in Europe. A big chunk of numbers is not "Above the line." It's below the line. When they say adjusted EBITDA, we yell at them and say, "No BS. BS on stock com. Real EBITDA." But it is fair to say when people screen for the company, a good chunk of math doesn't show up because it's not above the line. You have to adjust for that. 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, "It doesn't look that cheap," you miss it. That's a fun little thing about the old doing-the-work thing. Andrew, go on.
Leaf: Yeah. I gave you the shorter version of what's happening now, but just a quick also on the longer term. Jeff's alluded to this, but I want to put some numbers around it. We invested in late 2020. The stock was about $11 back then. Since then, we collected about $5 in special dividends. They paid down debt as well. But what they did really was, ad why we really liked Belgacem is they had two mid-20 percent EBITDA margin businesses, which they said we need to get out of. We want to hold onto the crown jewels. When we bought in late 2020, again, 7x EBITDA, we were buying it at, and they sold those mid-20 businesses with one with an eight handle, and I think one with a nine handle multiple. That's how we got those dividends in that, and there's a lot of debt pay down. We're just sitting there like, "Wow. The lower quality businesses are trading for 8x and 9x," Now, we're sitting here with what are arguably the best segments, and it's still trading at eight and a half, eight times. Another comp we want to put out there, and this is on a segment maybe we should go over real quick, but on their catalyst technology side, the number one competitor is Grace. Grace, in 2021, was sold for 12x.
Andrew: Oh, I pulled up their proxy and pulled all the peers yesterday. Absolutely. But please continue.
Leaf: There's just this divide between public market valuation and private market valuation. There's direct comps of businesses that have been sold, and everything leads us to believe that this is not an 8x EBITDA business. They have the cash flow to back it up, too. That really gives us comfort.
Andrew: Just a quick question. The adjusted EBITDA number they report that does include the earnings of the JV. Am I misremembering that?
Leaf: No, it does.
Jeff: That's correct. As they report it, that's correct.
Andrew: But it's on Bloomberg, right? Just making sure I didn't have that.
Leaf: Take out 20 million for the stock comp. Let's just get that on the record. We hereby account stock comp as a compensation expense. Boom.
Andrew: I can appreciate that and fully support it. Quickly, we mentioned CCMP and INEOS. We already talked about why they sold INEOS, because they want to go buy Man U, even though I think they're going to lose the Qatari[?] CCMP because they were just signing out. But as you mentioned, "Hey, these businesses, they can handle a lot of leverage." 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 leverage 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 just blowing this through really tough to do secondaries.
Jeff: I asked and not answered. We talked to people in the banking community. We've talked to all the relevant players that may and may not have been mentioned. Obviously, I would say that maybe at the time that the anti-ICE world, I will admit it remains a mystery because particularly how they executed it. There's nothing worse than having Deutsche Bank or Goldman doing a secondary for a small-cap company. They just don't even care. They don't have the bodies of where the stock goes and where they keep selling it. I don't really have a good answer to it because the world is semi-efficient. If what we believe was as believable as we're saying, it's a known-unknown risk factor that we look at and go is this something really we're missing here that negates this narrative?
Andrew: You mentioned a few times double-digit multiple. Let's just say that implies a $20 per share price. 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." It'd be like, "You know what? I'd probably take 20, and I'd go and try and find something else." Last year, CCMP and INEOS combined, they own about 50% of the company. You guys probably wouldn't in furious if they tried to sell the whole thing for 13 versus 20 or wherever you think the fair price is. But for CCMP and INEOS, they controlled the company. It would've been a huge premium to the $9 they were selling. It's like, "Hey, yeah, it would've been below for 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.
Leaf: I can add a couple things there. One, for CCMP, it was in a 2014 fund. They were really at the end of life. They need to get it out. Then I think the other piece is I don't think these businesses would be sold together. Jeff mentioned this. It was an IPO of basically two disparate businesses smooshed together and then brought public. To be sold, there probably have to be separated and then sold in pieces similar to what they've done with the two other business segments they've sold. Top of that, what do you do with the JV? How do you sell that? What are the complications with Shell owning the other 50% of it? It's not as easy as, "Okay, we're going to sell this one second, sell this, or spin it off, and then sell the other piece." But it still is a big question mark.
Jeff: Anyone that has any, please contact us at coachfreecapital.com if you have a really good answer for that because it's a stumper.
Andrew: Let's talk about the go-forward. There's one more INEOS 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's also been clear, "Hey, I want to do acquisitions." Since they did the last deal, I think they bought what it was Chem42 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." 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 to shareholders eventually. How do you guys see this story playing out over the next three years?
Jeff: Well, I would say most people, I correct you, most people sell for 6x and buy a 12x.
Andrew: I laughed, but I can't tell you how many companies I've done that. I've done it once or twice in my portfolio as well.
Jeff: It's a very expensive lesson to learn to be. We have a joke thing like everything eventually becomes a toaster. What is specialty chem? That is what we pointed at the beginning, known and unknown here. We've spent a fair amount of time with board and company, and I think they're not wild-eyed. I would say the CEO is really good to run the business and maybe identify like Chem32, which has been a monster home run. I don't smell this massive. We're going to lever up to five times to do something. Could there be bolt-ons? Again, the capital allocation and a free cash flow company that's got this wondrous thing that's steady a lot of your incremental PV of future value is, what did they do with the money? My guesstimate is three is enough. It's fine. You don't have to be one-time levered. I think that's inefficient. We'd be screaming about that, but they're on the next inflection point of what else can we do? That's as we say in life here. Sometimes, we'll let you know in three years the answer to that question. Andrew, do you have any?
Leaf: Yeah, I'll just add to that. In April of 2022, when all these secondaries were coming out, they also press release that they're authorized a 450 million share repurchase and considering the market cap of this company, that's almost a third of their market cap. Now, that's over four years. But I they've made it pretty clear in signal to the market that they're buyers of their shares at reasonable prices. That's what they've done so far. A lot of that's been through the secondaries, but we'll see if that translates to open market purchases as well.
Jeff: But I think there's an organic. I know oddly enough and every company [inaudible] and you change your name to Ecovyst. You better have something to say. But in all seriousness, things like anything biofuel requires interesting chemical technology to these catalysts to help in nature of that. Whatever area in California, we lead the world in grossly overpaying for things to make ourselves feel better.
Andrew: LCFS.
Jeff: We love this stuff. But in all seriousness, there's not a single area of somehow fuel that is involved here. Again, you can green all you want, but you need lithium and copper to enable this world. You cannot mine lithium or copper without this load of sulfuric acid, which needs to be recycled so it's not sitting in a pool. There's lots of interesting deep bottlenecking on existing platform type, mid-single growth that looks pretty doable. There's always ebbs and flows in whoever's running the government and what the regulatory environment will be. But in general, we're not going to go away from looking at bio and trying to commercialize this, which is a huge benefit then. Yes, bolt-ons would be neat and lovely, and well done if well done. But I think our thing is mid-single-digit maintenance of low 30 margin, 75% free cash flow. That's more than sufficient at current valuations to make good money.
Andrew: It jumps out to me. Look, we talked about the refining side, again, the alkaline, the liquid gold. If we're going to be producing any type of gasoline, it's required, right? Miles-driven really doesn't fall short of if we lock everyone down for a pandemic or something. 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. 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 EBITDA line. That means we can keep the 3x leverage steady. We take the cash flow plus an extra 5% buyback shares every year. It's a really, really nice growth algorithm for shareholder value.
Jeff: Whether or not they're going to do that remains a question because that will be, again, the known unknown, right? You have, "He's a new CEO." There's a new board, like a whole changeover from the whole PE brain. I would say if you look at it, they don't have $12 a share of cash and won't do a damn thing. They're not crazy, "Let's just roll up and do 7x, guys." It's not clear. There's somewhere in the middle. I'm not sure. Obviously, from our standpoint as financial geniuses on this call, we would argue for exactly what you said and help do it. They've been doing that to some degree. I think the sharer purchase 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."
Andrew: Hey, that's one of the nice things about being a loud page one shareholder, and page one shareholder for both of you and loud, mainly for Jeff. But that's one of the nice things. 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."
Jeff: It ignored plenty of time. Page one doesn't always help.
Andrew: Real quick, I've mentioned a few times alkaline and 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, this is something that attracts me. Look, you're 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 these contracts come up for renewable? That's been a big piece of the air product story, too, as Jeff was mentioning it earlier.
Jeff: Andrew, you want to?
Leaf: Yeah, no. Especially on the EcoServices side, they usually just have contractual price increases. Nothing major, but a lot of the times, it's just sort of they tick up.
Andrew: 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.
Leaf: I think it's sort of steady. They have good relations with their customers. They're not looking to bump it up, but they're looking for, definitely, that price increases nice and steady.
Jeff: It's a mutually assured destruction.
Andrew: You've got the pipeline. If nothing's going through it, you're losing out just as much as they are.
Jeff: The refinery and the way if you go walk around a refinery, there's all these little boxes of stuff that look complicated and interconnected. Even though that might not be yours, it might lease that space to someone like Ecovyst to do that. You don't want to rub it on people. This is a small company and your customers are every big refinery in the world. They could flex. They really don't want to. It's sort of we're here, we've had a 10-year contract, you're going to really pick up this. It's the pricing. The pricing is much more maintenance of margin or maintenance of profitability. 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 for whatever reason, sulfur, the refinery, frankly, is going to see most of that. There's just the pricing of the thing and they'll benefit tangentially from that. But it's not about we're on space and we're going to shove it. Even air products doesn't wake up. They're in there because they have a record of not like, "Hey, we put in a hundred million to do this for you, and I know we have you captive, but I'm not going to treat you like that."
Andrew: 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 a few questions on 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 think I missed or wish we could have hit a little harder than you think listeners should be thinking about?
Leaf: Yeah. We didn't hit really the catalyst technologies section at all.
Andrew: No.
Leaf: I'll just give a one minute. Basically, there's a silica catalyst side. That's the almost direct comp to the Grace business. They're actually specialized and produced catalysts for each individual customer. That's why you get such high margin. These go into HDPE plastics and MMA plastics, so it's relatively stable and not really as bumpy. It's more of market share gains and losses versus industry gains and loss or sort of industries going up and down because it's tied to plastic end markets. Then the JV we mentioned with Shell, it's for hydrocracking catalysts, and that is lumpy. That's just something to really note. The reason is the way hydrocracking catalyst work, it's almost a cartridge. The way to think about is like, insert a cartridge, you deplete the cartridge, and then you buy a new cartridge. They'll have some quarters where you're looking at it and you're like, "Oh, my God. This is it's growing massively." No, it happened to align that all those refineries need a new cartridge had [inaudible] [crosstalk].
Andrew: Turnarounds at the same time.
Leaf: Yeah. That's just another layer of complexity, which doesn't make it a smooth grower all the way up. But if you look of the long-term trends, it is.
Andrew: Perfect. Obviously, we announced this podcast yesterday. We've been planning it for a while, but this morning, there was some news on ViaSat and I got four inbounds are like, "Hey, you have literally the top holder, the ax on ViaSat coming on your podcast. You have to ask them." For people who don't know, it's July 13th. ViaSat last night announced they were having issues with the satellite they had just launched. 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 a developing situation.
Jeff: First, a moment. Yes, an off-spreadsheet event, let's say. We're right back, in a nutshell, not to go through everything else. There is a distinct probability of an insured zero for the first of three satellites. This does take everything ViaSat's ever put out or anything we've ever said, or any spreadsheet and just change the date and bizarrely. That's what it is. Now, the stock's going to sit here in and around the 27 to 33 for another nine months until ViaSat-2, which will be now sort of repurposed a bit to cover both to provide capacity. That's really the company was out of capacity in ViaSat. Now, the weird thing. That's where it stands. The counter-narrative, just sort of like [inaudible], neither ViaSat. The counter-narrative to ViaSat is everything will go, "LEO is a better model. GEO is a dying dinosaur. Sadly, we can't prove or disprove that until ViaSat-3 is in the air. Either that is going to earn a return of in the thirties, which it won't now because, on a time value of money, it's going to get to slow down.
You can argue, "Wow, are there customers who are going to get pissed?" All the airlines are all signed up and they're just desperate for capacity. Non-zero, but no. The bizarre thing though is we bitched when they did the Inmarsat deal and because we thought we have this totally aligned with the defense business. We're more at the price for 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 shared base was just nuts. We thought at the time that the MRCD wall non-zero of being a master stroke of industry consolidation, lots of good things to happen, but also like, "Oh, my God, you're diluting the effect of your everything. The ViaSat-3 constellation, you're diluting us on that." Well, good thing we have it.
Andrew: I was doing the math because they bought Inmarsat for 850 in cash plus 3.1 in stock. We're rounded up to 4 billion, right? Is that right? Oh, and then the assumption of debt. I'll have to go re-look at everything, but in math, I was like, "Oh, ViaSat is at about 3.5 billion right now. You get the government business, you get this."
Jeff: No, it's just two words: effing, annoying. Right under heading of all spreadsheet event, we got the launch. We got the thing. Everything's working fine. A third party of which it could be one of three companies, probably Northrop.
Andrew: It was confirmed it was Northrop, wasn't it? I think it's been confirmed.
Jeff: The company has neither confirmed nor denied, but you can go dork out on Twitter and there's lots of astronomer. There's lots of real niche guys who just follow this space. I would say they had to put something out, the antenna is in some way locked a bad shoulder and they're effectively doing jiggling. But this could be a zero.
Andrew: They're doing the old, "Hit the TV a few times to get it to work on [inaudible]."
Jeff: I hit you not, that's literally what it is. Basically, the company, again, you build capacity that is needed or not, and it has a return on investment of mid-thirties or not. If you don't do that, then you're sort of stuck. While they can repurpose the little Inmarsat 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 this was insured, which beats a sharp stick in the eye, but that's still not fun. Oddly enough, one of the other things, the second satellite is already pre-insured because guess what?
Andrew: Ensuring that third one, I guess.
Jeff: It just went up, so to say. For us, whatever, this is a sharp stick in the eye and we're arguably.
Andrew: This was insured against because I think they said in their PR, closely with the reflectors manufacturer. It's a manufacturing error. 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."
Jeff: Exactly. Yeah, they're good for that. Obviously, there's going to be lawyers and things and insurance companies don't like to pay and people. This appears to be a fully insurable event and the second satellite is insured under the same math. How is it not frustrating?
Andrew: Well, 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, the satellite going up and exploding, their stock could be flat on the year, I would take that for all of my companies very happily.
Jeff: The story of life is if the market finds your exposure and punishes, that is what I have learned. It's frustrating. It's going to cost us 250 basis points today, which we're having a really good year even with this. But look, there's more than 12 other satellites with this exact antenna. E. L. Harris did the prior, the last side, the ViaSat-2, and that was a screwed-up antenna. The whirl, it is a ridiculous concept to have a satellite within antenna and set it up to space. That's not the case and the story life. We're working. I feel worse for me and our clients today, but imagine being ahead of a satellite company. You're supplying and there is four people in the world who could do this. I'd love to be in that room and hear that rant.
Andrew: I had notes and I hadn't started to dive into it, but I did remember that ViaSat-2 happened, and that whole constellation turned out to be a success, if I remember.
Jeff: Yeah, there wasn't a [inaudible]. That was a single thing. Yeah, that was one of the panels. It probably was operating net life of satellite at 85% of what it was. Again, they got a material payment from that for that damage. Look, if this satellite, the issue, they're going to have is, "Do I want it looks?" They said it basically looks like there's a pretty decent high probability of zero here. Just like we set it up and now, [inaudible] and ViaSat has always been fighting against SpaceX and Starlink for space debris issues. Well, we just put the largest piece of state debris. The company in three and a half weeks, they've had to put out a press release because something's happened. They're literally 24/7 365 right now on evaluating this issue. But the worst case scenario is they get paid 420 and we just ate eight 18 months of aggressively big free cash flow growth as they took. Really, 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, it's very annoying.
Andrew: Oh, it's annoying.
Jeff: It's only 8:30. We can't start drinking either. It's not appropriate.
Andrew: It's 11:30 eastern time if that helps you with it.
Jeff: That's why we get on the podcast, Andrew, is that kind of wise wisdom by Andrew.
Andrew: Look, guys, I really appreciate you guys coming on. It's been great to connect. I appreciate you talking about Ecovyst, which you again, it's really interesting and ViaSat. I appreciate you giving some real-time exposure. Look, it's been great, and we will chat soon.
Jeff: 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 what kind of a smart young man you are.
Andrew: Yeah. You came out and we're like, "Oh, I just thought you were a podcaster," which I wasn't sure if I should take that as an insult.
Jeff: [inaudible] Another jerk doing a podcast. It sounds like, "Wow, this guy's got game."
Andrew: I appreciate it.
Jeff: When I heard that, I just wanted to say that for the [inaudible]. But when I met you, I'm like, "Okay, we'll do his podcast." Anyway, [crosstalk] thank you very much.
Andrew: I really appreciate it. It's been great, guys.
Jeff: Take care.
Leaf: Thank you. It's been great.
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