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2:34

Welcome Back! That is a straight down

2:36

to say we are covering the industrial

2:38

conglomerate Amethyst. This is one of

2:40

eight companies that Mark Leonard and his team

2:42

a Consolation Software would study as they built

2:45

their own empire. And it's one well

2:47

worthy of a discussion. as you'll here today. To.

2:49

Break down Ametek. I'm joined by now

2:52

Bockarie Coast the I owe the asteroid

2:54

Capital Management Growth in income strategy. Now.

2:56

Has spent a significant amount of time around

2:58

am attacks from the early two thousand and

3:01

since hill today. We. Covered

3:03

the complexity inside his business

3:05

where Am Attack is manufacturing

3:07

mission critical parts for Nasa

3:09

missions, complex fusion energy developments,

3:11

and inside aircraft cockpits. We.

3:14

Cover the simplicity of which

3:16

management approaches growth in their

3:18

own business model. The. Referencing

3:20

targets like doubling earnings per share every

3:22

five years and com pounding revenue at

3:24

ten percent annually. Before.

3:27

We transitions the episode. I do have

3:29

to mention that a second a Mark

3:31

Leonard's eight high performing conglomerates was also

3:33

featured on a Colossus podcast this week.

3:35

Our colleagues at the Art of Investing

3:38

interview Danaher cofounder Mit Rails. This is

3:40

met. His first recorded long form interview.

3:42

Have any cost. And they

3:44

make. Each.

3:46

Of these episodes is great in isolation, but

3:48

even better as a double feature. Now please

3:51

enjoy this breakdown on amazon. All

3:55

right now. thank you for joining

3:57

us to break down am attacks

3:59

I sought. just to kick this one off,

4:01

they're self-described as this manufacturer

4:04

of high-tech industrial solutions,

4:07

but I thought maybe you could help us come

4:10

up with a better way just to

4:12

describe as simple as possible what Amitech

4:14

does, and then we'll jump into the

4:16

meat of the conversation from there. Sure,

4:19

so the way I would describe

4:21

Amitech on a one-line basis is

4:23

that it's a niche

4:26

manufacturer of highly engineered products across

4:28

a very broad range of end

4:30

markets. It's not just

4:32

one product or one set of

4:34

products. In fact, you've probably never heard of

4:36

most of these products, but they

4:38

play a really critical role across a bunch of industries.

4:42

Can you talk maybe just about

4:44

those end markets? Are there specific

4:46

ones that dominate the revenue pool,

4:49

anything that you can share there on the end

4:51

markets to give us a better picture as well?

4:53

The way the company describes it is that

4:55

there are a handful of end markets that

4:57

dominate. The largest is MedTech, that's a little

4:59

more than 20% of

5:02

total revenue, and then

5:04

you have aerospace and defense, military,

5:07

that's a little under 20%, about

5:09

18, 19% of revenue. The

5:11

power market, the serving utilities and others, that's

5:13

another 10%. Automotive is another roughly

5:16

10%. And then

5:18

you have semis, R&D, and then

5:20

just other industrial. There are four or

5:22

five markets that are 50 to 60% of sales, but

5:26

those are both major end markets. It's

5:29

quite a diversification of end markets

5:31

there. Is there something that's unifying

5:33

what they're actually selling? You gave

5:35

us some sense in terms of

5:37

highly engineered products, manufactured products, but

5:39

is there something that's kind of

5:41

unifying all of those products across

5:43

those end markets? Yeah,

5:45

what I would say is, so first

5:47

of all, there are probably tens

5:50

of thousands of components

5:52

and parts and products that they

5:54

sell, because if you look up any

5:56

one business unit within

5:58

Amitek, and there are over 40. you'll

6:01

find that that one business unit might sell

6:03

a couple, three, four, or five thousand parts.

6:06

So it's a really broad array. But I think

6:08

the one unifying factor across

6:11

products is that they

6:13

are mission critical. They're really

6:15

important to the operation of

6:17

some larger system, but

6:19

the costs are actually usually really small

6:21

relative to the overall cost of the

6:23

system. So think about a component

6:25

that goes into a part on a

6:28

commercial jet. That one component

6:31

is very low cost, but it plays a

6:33

really important role. And the jet might cost

6:35

tens or even hundreds of millions of dollars

6:37

or a subsystem in

6:39

a manufacturing line for semiconductors

6:42

or an underwater electrical

6:44

connector for a submarine. Usually

6:47

in the history of doing the show and looking

6:49

at businesses leads to some type of pricing

6:51

power as well, whether the company decides

6:54

to take it, but that representing a

6:56

small percentage of the overall cost, but

6:58

being mission critical is usually a good

7:00

formula that leads to pricing power in

7:02

my experience. Yeah, exactly. And

7:04

that's the case here. Would you say

7:06

there's anything unique about these various

7:08

end markets that they're targeting? Anything

7:10

that they try to do that

7:13

might unify their strategy in terms of how

7:15

they're approaching it? Yeah, I

7:17

would say it's not necessarily the specific end market.

7:19

I mean, they do obviously have a focus on

7:22

certain end markets they find more attractive, but it's

7:24

the structure. But if you talk to the

7:26

company or if you talk to former employees,

7:28

you get a very consistent message that

7:31

Amitek tends to be number one or

7:33

number two. They're always going to be

7:35

the dominant player. They want to be in

7:38

really small markets. So on average, the market size,

7:40

whole market is about $200 to $300 million in

7:42

size. And

7:44

they tend to have, on average, it's a very

7:46

broad, sweet number, but it's about 25 to

7:49

30% share on average in each market.

7:52

They will actually avoid markets that are

7:54

really large in size, say a billion

7:56

dollars or more, because they don't

7:58

want to attract how they're going to be. competition

8:00

from the larger players that are seeking growth. So

8:02

they don't want to be in really huge profit

8:04

pools, which is actually smart

8:06

because while hard to grow in that,

8:08

it just avoids competition. So

8:10

typically you'll see one, two, three global

8:13

players that are dominant. Amitek is one

8:15

of them, typically one or two, number

8:17

one or two, and the rest of

8:19

the market is very highly fragmented among

8:21

a bunch of mom and pops. And

8:24

the other thing about their end markets is they tend to

8:26

be highly regulated. So if you think about what we've talked

8:28

about, Medtech, AMD, Power, these are

8:30

really highly regulated markets. Products

8:32

tend to be spec'd in and

8:35

therefore are pretty sticky. Yeah,

8:37

it's sub segments of bigger end markets,

8:39

but very interesting just in terms of

8:42

running counter to the traditional example of

8:44

going after a big TAM. Can

8:46

you talk a little bit

8:48

about where their products or

8:50

where their manufactured parts

8:52

might be showing up in meaningful projects

8:55

or anything that might resonate with a

8:57

listener? I think that's actually a really

8:59

good way to frame it because their

9:02

products tend to be ones

9:05

you've never heard of and their

9:07

components in larger parts. So

9:09

for example, NASA, they launched a

9:11

rocket in space a few years ago to

9:14

basically study an asteroid belt and they

9:16

used the solar X-ray monitor

9:19

that Amitek, which is an Amitek company,

9:22

uses and they used it to basically measure the

9:24

spectrum of the X-rays reaching the asteroid

9:26

and therefore map the

9:28

asteroid. So it's obviously

9:30

very unique, very differentiated.

9:33

NASA is not going to just choose any supplier. Another

9:36

interesting one actually close to home here in

9:38

the Bay Area is Lawrence Livermore Laboratory. They've

9:41

been doing fusion energy research for decades

9:43

actually. Basically what they do is they

9:45

bombard a pellet of hydrogen plasma with

9:47

the world's largest laser and create

9:50

a nuclear fusion reaction. And

9:53

to do that, they actually have to use really

9:55

highly specialized optics and they actually use ZIGO, the

9:57

optics produced by ZIGO, for research. on

10:00

Fusion Energy and Zygote is an Amitech company. So

10:02

it gives you a sense of this is

10:05

really highly engineered, highly specialized type

10:07

of stuff that Amitech is producing. Those

10:09

are really on the EIG

10:11

side of the business. If you shift

10:13

to EMG, something that I

10:16

think is equally important, but probably a lot

10:18

less sexy and a little less interesting, but

10:20

I think equally important is powdered

10:23

metals. They do the shape

10:25

wire. So SMP Wallingford, which is an

10:27

Amitech company, does the shape wire for

10:30

the push-pull mechanisms in flight control on

10:32

commercial jets. So these are wires

10:34

basically that are four one-hundredths of an inch

10:37

in diameter. So really small,

10:39

really important. They fit

10:41

into this much larger jet to

10:43

actually help control it. So again, there's a

10:45

really broad range of products serving all kinds

10:47

of customers, but that's the bread and butter

10:49

of what they do. Thinking about

10:52

how this all came together, so

10:54

much of what we look at

10:56

now is either a single product

10:58

business or something that's focused in

11:00

a specific sector. So just

11:02

bring us back in time a little bit

11:04

in terms of how Amitech came to be,

11:07

whether those individual divisions grew up organically together,

11:09

whether they're acquired, whatever you think are some

11:11

of the key moments in the history, bringing

11:13

us to where we got to today. It's

11:16

kind of interesting because I got to know the

11:18

company almost 20 years ago. I worked at

11:21

American Securities, which is a private

11:23

equity firm. The first deal that

11:25

they ever did was a company called

11:27

Katima, the LBO Katima, which was a

11:29

spinoff of Amitech. It's the only

11:32

spinoff they've ever done. That

11:34

deal basically enabled

11:36

American Securities to become the private firm

11:38

that it is. Latest fund was $9

11:40

billion, become a pretty sizable player. One

11:42

of the co-founders of American Securities was

11:44

on the board for 35 years at

11:46

Amitech. So I kind of studied

11:48

Amitech for years because it was considered the

11:50

model company to acquire. They sell these kind

11:52

of niche products where they really

11:54

dominate this small market that they're in, and

11:57

each of these products generate lots of

11:59

cash and then can... go and use that as

12:01

a platform to acquire other adjacent products and

12:03

businesses. In terms of the history of the

12:05

company itself, the predecessor was a

12:07

company called Manhattan Electric Supply Company and actually

12:09

went bankrupt in 1929. And

12:12

then the company emerged from bankruptcy in 1930.

12:16

It was called American Machine and Metals of Time. And it was actually

12:18

just a producer of commodity industrial parts

12:20

for laundry machines and a bunch of other

12:22

things. But over time, gradually

12:24

became more profitable. And by 1944, it was

12:27

actually able to acquire a company called USGage

12:29

for about $3 million. And

12:32

that is a pressure and temperature gauge business. Amitek

12:34

actually, 80 years later, still dominates that

12:36

market. So this gives you a

12:39

sense of the origin of the business. And then

12:41

1955 is when William Rosenwald, he

12:43

invested a significant stake in American Machine

12:45

and Metals. His dad was

12:48

Julius Rosenwald. And Julius Rosenwald

12:50

had bought a controlling stake in Sears Roebuck, built

12:53

the Sears catalog that we've

12:55

heard of and turned

12:57

Sears into the Amazon slash Walmart

12:59

of its generation. So William

13:01

Rosenwald, his son, was really just trying

13:03

to diversify, bought this company and pushed

13:06

it into continuing to do even

13:08

more niche products. And that year,

13:10

55 is a similar year because they acquired Lamb

13:12

Electric for about $34 million and

13:14

really focused on these kind of precision

13:16

components, niche electric motors for

13:19

small appliances. And today,

13:21

Lamb Electric, if you look it up, it's a

13:23

really dominant brand. It's probably the biggest brand

13:25

within vacuums, other applications. Basically

13:27

the company eventually made itself Amitek and continues

13:29

acquiring through the 60s and 70s. By

13:32

1980, it was doing about $400 million of sales

13:35

of these very highly engineered parts.

13:39

And by 1988, they realized, okay, we have some

13:41

businesses that we've acquired that are a little slower

13:43

growth. They're not as niche. And

13:46

so that was Katima, which is actually Amitek

13:48

spelled backwards. And it was 14 different business

13:50

units that they spun off. And again, like

13:52

I said earlier, it was ultimately

13:55

LBOed by American Securities after they was spun

13:57

off because the Rosenwald family, they

13:59

owned 20... percent of Amitech at the time.

14:01

And so they received a commensurate stake and really

14:03

obviously were familiar with this spun off business. And

14:07

then in 1990, Walter Blankley, he

14:09

became CEO. And he was

14:11

actually an engineer at Amitech for 30 years and

14:14

laid the foundation for what would become the

14:17

Amitech growth model, new product

14:19

development, operational excellence, global

14:21

and market expansion, then M&A. And his

14:24

goal was double digit annual earnings

14:26

growth and achieving what he called

14:28

superior ROIC. So he was trying

14:30

to systematize the continued growth of

14:32

the business. And he

14:34

was really independent. I mean, he at one point

14:36

cut the dividend by two thirds and

14:39

bought back a third of the company over three years because

14:41

he thought it was undervalued. He really

14:43

focused on we have to own and

14:46

build and buy differentiated businesses.

14:48

So he actually separated the

14:50

water filtration business in the late 90s

14:52

because he thought it was overly commoditized.

14:55

And then you get into

14:57

the 2000s periods, this guy, Frank Rammatz

14:59

became CEO. He'd been at Amitech

15:01

for about 10 years and he basically took the

15:03

blankly model and just applied it going forward. So

15:05

a lot of M&A and

15:08

really big focus on margins at

15:10

operational excellence and the earnings compound about

15:12

15% until he left in 2016. And

15:16

you get to the present, David Zapico is the

15:18

current CEO. He's an engineer by training. He's been

15:21

at Amitech for 27 years. So you see this

15:23

recurring theme of people who

15:25

are engineers who have really died in

15:28

the wall, Amitech employees and

15:30

understand the Amitech growth model. The

15:33

two things that he's done that have been

15:35

a little bit unique have been one he sold

15:37

Redding Alloys, which was a little bit of

15:39

a commoditized specialty metals business that was tied

15:41

to oil and gas. And he's

15:43

really focused M&A on these niche growth

15:46

businesses that try to increase

15:48

the future organic revenue growth. So obviously

15:51

there's always been this focus on these differentiated

15:53

businesses, but he wants to

15:55

own businesses that have a little more growth. And

15:57

that's really worked well because you've seen the organic

15:59

revenue of the business pick up since

16:01

he took over about seven years ago. So I think the

16:04

last thing is if you go back to

16:06

1955, and it's a long history, but it's

16:08

actually kind of amazing, revenues have compounded at anywhere

16:11

from seven to nine percent annually. To

16:13

get that kind of high single-digit revenue growth through

16:15

the cycle, obviously, not year in and year out,

16:18

but through the cycle is

16:20

pretty, I think, amazing and speaks

16:22

to the durability of the business

16:24

over time, across different

16:26

leaderships. Yeah, it's quite

16:28

a unique history. I mean, just

16:30

the various things that you mentioned there, it

16:32

stands out to me that the engineering

16:35

focus and the

16:37

advanced very, very mission critical parts

16:39

has always been core to the

16:41

DNA. But certainly over the last

16:43

30 plus years, that capital

16:46

allocation as well, I think

16:48

when you see these businesses sometimes will

16:50

often cover them, the conglomerates

16:52

or the mixed end

16:55

markets tend to end up

16:57

spitting out and almost

16:59

becoming just more focused on a single

17:01

product line. As a shareholder or

17:03

as an investor who's looked at this name

17:06

for a while, when you

17:08

balance that niche market along with the

17:10

capital allocation, where do

17:12

you put management in terms of capital

17:14

allocators and ranking them? How do you

17:16

think about them in that regard? Because

17:19

that's something that's certainly standing out to

17:21

me in that description of the history.

17:24

I think that management has been

17:26

really effective over time

17:28

and really introspective and thoughtful about

17:31

allocating capital. They've never actually had a write off

17:33

of goodwill in the history of the company. So

17:36

this is a company that dates back almost 100

17:38

years now. And they've obviously done

17:41

hundreds of acquisitions over the history of the

17:43

company. And even writing alloys, that was a company

17:45

that was purchased in 2008 for $110 million.

17:49

viewed as not the most successful, unique business. They

17:51

sold it for $250 million in

17:54

2020, 12 years later. So

17:56

I would say management is

17:58

really competent and thoughtful. And

18:00

I think a lot of that ties into their

18:02

compensation. I mean, it's not the most unique

18:04

compensation incentive scheme, but they

18:07

do focus on the short term,

18:09

organic revenue growth, earnings growth,

18:12

margins and free cash flow. That's part

18:14

of their annual comp, but then longer

18:16

term, there's a return on tangible capital

18:18

and relative shareholder return metric that

18:20

they're also compensated on. And

18:22

I think that balance of those factors is

18:25

really important because if you're incentivized

18:27

to grow revenue, you're going to grow revenue.

18:29

If you're incentivized to expand margins, you'll do

18:31

it at all costs. The balance of organic

18:34

growth, margin expansion, free cash flow generation and

18:36

returns on capital, I think that's

18:38

worked out really well. And I don't think it's coincidence that

18:41

the business has done what it's done over time. Yeah,

18:43

I think your point there and look

18:46

at that incentive schedule and what

18:48

they're prioritizing, and that's usually where

18:50

you'll find the company prioritizing their

18:52

focus. I do want

18:54

to get into the segments, at

18:56

least in terms of the way

18:58

that the company presents them, it

19:01

breaks out the electronic instruments group,

19:03

the electronical mechanical group. Do

19:05

you view those as separate? I mean,

19:07

the size is certainly different. But when

19:09

you look at the margins, 25% versus

19:12

28%, there's a lot of similarities. Just

19:15

when you approach looking at this

19:17

business, do you separate those significantly?

19:20

Yeah, I mean, only because they separate them,

19:23

it's just easier. That's

19:25

how the management team looks at it. You're right, they're

19:27

kind of hard to really

19:29

penetrate when there's generic names, electronic

19:31

instruments group and electromechanical group. But

19:34

the one way to divide it is

19:36

that the EIG, electronic instruments group, it

19:38

serves the process, the power industrial and

19:41

aerospace markets. And the EMG,

19:43

the electromechanical group, which is 30% of sales,

19:45

serves AMD, medical automation and

19:48

other industrial markets. I

19:50

think using that set of parameters helps separate

19:53

the two. Yeah, and markets,

19:56

and they certainly both sound niche just from

19:58

the cheap seats over here. It's always

20:01

interesting to see how management will split those things

20:03

out. We talked a

20:05

little bit about the Amitech growth model,

20:07

which incorporates many different things, but maybe

20:09

we could just start with the top

20:11

line. How do you think

20:14

about what goes into top line growth, which

20:16

has been based on the statistics that you

20:18

just provided, quite impressive over the years. But

20:20

when you think about organic

20:23

growth versus what they're acquiring and

20:25

how those two things go and trend over

20:27

time, how do you think about that for

20:29

Amitech? I think that's the right way to

20:32

think about it because you can't really look at this because

20:34

of the question you just asked. You can't really look at

20:36

this at a unit level because you have so many different

20:38

products across different divisions. So you kind of have to look

20:40

at it on an aggregate basis. And

20:43

the other thing you have to keep in mind is it is

20:45

a cyclical business. It's an industrial cyclical. So you

20:47

have to look at it kind of through the cycle. So

20:50

through the cycle, organic revenue growth

20:52

is roughly 4%. Part

20:54

of that is because of the acquisitions that have

20:57

made over the last several years, which just structurally

20:59

are growing faster, I think, under David Zepico. The

21:01

organic growth used to be closer to 2% to

21:03

3%. But

21:05

I think 4% through cycle is

21:08

a reasonable algorithm to

21:10

think about the top line growth. And it's

21:12

primarily price led. There's some volume

21:14

growth that comes in year in, year out, but pricing is

21:16

important. So for example, this year, the company thinks they can

21:18

do about 3% pricing. Probably

21:22

it'll be a little bit better, it's

21:24

my guess. I think that's a good

21:26

benchmark. And then acquisitions represent another roughly

21:28

4% through the cycle. That'll

21:31

vary, obviously, year to year. At

21:33

the end of last year, they just completed their largest

21:35

acquisition in the history of the company. But

21:37

I think the 4% organic plus the 4% acquisition

21:40

gets you to 8%, which is right in the middle of

21:42

that 7% to 9% historical

21:44

growth rate that they've generated. And

21:47

on the organic growth, makes

21:49

sense that they would have the ability to

21:51

increase price on

21:53

the volume side. Is this all

21:55

the original equipment that

21:57

they're manufacturing the parts for? anything

22:00

regarding replacement, just thinking about

22:02

that trend line over time.

22:04

Again, it's so many different end markets, but

22:06

I think it's primarily aftermarket parts. They do do

22:08

OEM as well. They'll supply to OEM,

22:11

but aftermarket is the primary source

22:14

of demand for their products. And they

22:16

don't disclose this, but periodically, if you talk

22:18

to the company or if you talk to

22:20

actually former employees and competitors, it's

22:22

something like 30% of their revenue

22:25

is really recurring. It's just

22:28

a replacement part and you need to replenish it

22:30

every few months or every year or something like that. And that

22:32

used to be 50% and 20% years back. So

22:35

they've tried to increase it and I think they

22:37

have, but broad sweep across

22:39

the whole business, about 30%. And

22:42

one interesting data point that I saw was

22:44

that 25% of sales in, can't remember if

22:49

it was 2022

22:51

or one of the most recent years, 25% of

22:53

revenue came from products that were released

22:56

in the last three years. That

22:58

would indicate to me that innovation

23:00

is key here. Is there anything

23:03

else that you would point to

23:05

in terms of what's driving that

23:07

new product representing that high percentage

23:09

of revenue? Yes, 25%

23:11

of sales, I think in last year were produced

23:14

from products that were released in the last three

23:16

years. That's part of their

23:18

Amitek growth model. Your listeners are probably

23:20

familiar with Danaher. They have the Danaher

23:22

business system and Amitek has the

23:24

Amitek growth model and new product development is actually

23:26

one of the four pillars of

23:28

the Amitek growth model. And

23:31

that innovation, a couple of things I would say,

23:33

the CEOs are David Savico is an engineer. He's

23:35

been with the company for years. They have 2,900

23:37

engineers on staff here in

23:39

the US and outside the US. And

23:41

they invest about 6% of sales and

23:44

research development and engineering. And

23:46

that's actually increasing over time. And that

23:48

6% is pretty significant. It's actually in

23:50

line with Danaher I just mentioned, significantly

23:53

higher than Honeywell or Illinois

23:55

Toolworks. And so that

23:57

is a core part of their Amitek growth

23:59

model. because they've acquired some of

24:01

these businesses literally going back to the 30s and 40s. So

24:05

you have to invest in the products

24:07

and innovate and work with your customers

24:09

so that you can remain kind of

24:11

leading edge and maintain your dominant position

24:13

because they're in these niche markets, but

24:15

there is competition. So that's a really

24:18

core part of what they do. I

24:20

think it's important to driving the

24:22

organic revenue growth and driving those volumes because

24:24

you can obviously get lazy and juice your

24:26

margins by not investing, but I think they

24:28

realize that that's not a sustainable approach. Yeah,

24:31

it acts as a unique marketing tool

24:33

in some ways, I think as well,

24:35

because it points to how much they

24:37

are releasing new products. And I'm sure

24:40

when there's competition in end markets, that's

24:42

consistently important. I would say just

24:44

in terms of price, if you're telling your

24:46

investors, hey, we're raising price in

24:48

excess of cost by 50 base points, 100 base

24:50

points, you have to build a turn to your

24:52

customers and say, well, we're also investing for this

24:54

product innovation that we were telling you about. I

24:56

think there's reality to it. I don't think it's

24:58

just marketing, but you're right. It is marketing as

25:00

well. I think it's important. Yeah,

25:02

absolutely works hand in hand. And

25:05

before we get to the margins, one other thing

25:07

that stood out in terms of the revenue

25:09

is that 50% is coming from

25:11

outside of the US

25:13

was the international growth

25:17

story and actual thing, or was this

25:19

always kind of a globally diversified business

25:21

where a large chunk of sales were

25:23

coming from outside the US? I

25:26

think that was an intentional development as the

25:28

business grew. And again, that's part

25:30

of the Amitec growth model is product

25:32

and market expansion. That's one

25:35

of the four pillars. That's a separate

25:37

pillar because as the business grew, and

25:39

especially Asia grew economically and grew in

25:41

importance as a customer base, you

25:43

had all these new end markets where there was all

25:45

this manufacturing. And if you're a supplier of these niche

25:47

components, you have to be in these markets. And

25:50

so as demand, they're crude,

25:52

they intentionally expanded there. They've

25:54

done acquisitions to serve customers

25:56

that are outside of the United

25:58

States. And They were also in

26:00

Europe and I mean, they're all over the world. But

26:02

that was, I think, an intentional part

26:04

of their approach. And if you look at what

26:07

they do today, if you talk to the former

26:09

employee there, one of the consistent themes that will

26:11

come up is that that

26:13

product and geographic expansion, market

26:15

expansion, is key because you

26:17

may acquire a business that has no

26:19

sales in some geography or to some

26:22

customer base. But this other

26:24

business at Amitek has really strong

26:26

sales there and they can use

26:28

their relationship and their scale and

26:30

leverage to expand into that

26:32

market. And that's beneficial for everyone. It's beneficial

26:35

for the acquired company and it's beneficial, obviously,

26:37

to the customer who has an additional supplier.

26:40

And on that point, it was something that

26:42

I wanted to get to a bit, just

26:44

in terms of the synergy potential with any

26:46

of these acquisitions. Is there

26:48

a lot of cross-selling going on? Is there

26:50

anything that they point to just in terms

26:52

of when we have a sales force in

26:55

this existing region or in this end market,

26:57

we find that a large percentage of what

26:59

we acquire can get a revenue opportunity that

27:01

they didn't already have? Is there anything unique

27:03

about that in terms of the synergy potential

27:06

and what you just mentioned before? I

27:08

don't have a statistic in terms

27:10

of their success in cross-selling. But

27:13

again, if you talk to the company, you talk to

27:15

former employees, you talk to competitors, you definitely hear that

27:18

it's a key part of what they do because

27:20

they view it as basically a platform of

27:23

company they might have in a market. And to the

27:25

extent that they can add a product

27:27

line and sell it and lock themselves

27:29

in more with that customer, it's

27:32

beneficial, obviously, to them. And

27:34

the last point on the international

27:36

markets, I think it's always interesting.

27:38

You see a lot of US

27:40

players try to implement their business

27:42

model abroad, Walmart, UPS, FedEx. Oftentimes,

27:45

there's a big learning curve where it's

27:47

not just an Apple to Apple thing.

27:50

It sounds like there's a little bit

27:52

more natural growth or extension abroad here

27:54

with what they're making. Is that fair

27:57

to say? Yeah, I think it's completely

27:59

natural. for what they do because like I

28:01

said, so much of the manufacturing is done abroad

28:04

that if you're selling a critical

28:07

component to a customer that's

28:09

already abroad, they're likely to use

28:12

you for a new product. The other thing

28:14

is that a huge portion of their engineering staff is in

28:16

India. And so a lot

28:18

of the research and development that they're

28:20

doing is coming from outside of the

28:22

United States. So the knowledge and expertise

28:24

and they're working with other companies is

28:27

happening abroad. I think this

28:29

expansion abroad has been a very natural kind

28:31

of expansion of the business. Haven't

28:33

heard of any sort of big blowups that they had

28:35

over the last 20, 30 years by expanding abroad

28:39

the way you have heard from many companies

28:41

over time who try to do kind of

28:43

a single big push. This has

28:45

been more organic. That makes sense. Transitioning

28:48

a bit to the margin profile of the

28:50

business, we touched on it a bit before

28:55

25% operating margins in that electro-mechanical group,

28:57

28% on the EIG group. Impressive

29:01

margins for manufacturing business

29:03

and industrial business. Can

29:05

you talk just a little bit about how that's

29:07

trended over time? I love in industrial as you

29:09

get to talk about the incrementals and the decrementals

29:11

through cycles. So any color you can give there

29:13

would be useful. The way management

29:16

thinks about margins, they look at the

29:18

op margin of the business. So if you just

29:20

go from that, they've generated about six and a

29:22

half billion of revenues on an annual basis, 26%

29:25

EBIT margins on a consolidated basis for

29:28

the company. That was last year. If

29:30

you go back to 2005, they were doing 16% margins.

29:35

You went from 16 to 26 over that 18 years. That's

29:40

a really significant amount of

29:42

margin expansion. And so the question

29:44

is how did you do that? And your point actually

29:46

is right. So they're incrementals. If you look at their

29:48

incremental margins, typically they're about 35%. It's

29:52

a cyclical company. So some years during

29:54

a soft patch, they're not going to put up

29:56

those types of incrementals, obviously, and they'll have decremental

29:58

margins. time they've

30:00

consistently generated about 35%. Last year,

30:02

they had over 40% incremental margins.

30:05

As I think about it, that is

30:07

a reasonable benchmark to think about it

30:09

because you're consistently generating those

30:11

types of incremental margins, the business

30:13

should be headed in that direction. So we can

30:15

talk about some of the drivers of that. You've

30:18

jumped me on my next question, which was going

30:20

to be where they're getting that leverage and that

30:22

margin expansion, whether it's the labor line or anything

30:24

else. If you just look at the

30:26

P&L, you can see we

30:28

talk about roughly 8% revenue growth historically

30:31

annually, but the gross margins have grown

30:33

at about 10% annually and EBIT

30:36

operating profit has grown about 12%. So

30:38

clearly, you're getting some

30:40

improvement at the cost

30:42

of goods level and then some fixed cost

30:45

improvement as well. And I

30:47

think there are a handful of things going on.

30:49

So first of all, the Amitek

30:51

growth model, which again, I keep coming

30:53

back to but it's something that's been ingrained

30:55

in the company for decades now. And

30:58

it's one of these things where, again, you talk to former employees,

31:00

they'll tell you that's kind of what you live by. The

31:02

first leg of it is operational excellence. It's kind of

31:04

the cornerstone of the business. And what does that mean?

31:06

It means they are constantly trying

31:09

to figure out how to pull costs out

31:11

of the business and do things more efficiently.

31:13

This is not about constant headcount reduction

31:15

or anything like that. It's more about we

31:17

are trying to improve our manufacturing process. What

31:19

are the best practices if we get a

31:22

new company that we've acquired, what have we

31:24

been doing in this division or this business

31:26

unit to produce things more efficiently? They're doing

31:28

all kinds of lean and Six Sigma and

31:30

other things. But they're also

31:32

using their scale to procure

31:35

inputs at a better cost and

31:37

the greater scale they have, the greater leverage

31:39

they have to improve their costs. And

31:41

then they're operating in these niche

31:43

markets, especially as they acquire new businesses and

31:45

as they cross cells, we talked about earlier

31:47

and expand, they have more and more leverage

31:50

and they can price. And so they typically, if you go

31:53

back to say 2017, when they started disclosing

31:55

this, they price ahead of cost

31:57

inflation by anywhere from 50 to 100 basis points.

32:00

So, if you're constantly trying to

32:02

improve your operational efficiency and your

32:05

manufacturing and use your

32:07

scale and procurement, and you

32:09

can actually get priced ahead of cost

32:11

by 5,200 base points, that's a

32:13

really good recipe for margin expansion. And

32:16

even the pricing alone, I mean, I've

32:18

seen it across other companies, when you can get

32:20

pricing ahead of cost by that level, it doesn't

32:22

seem that impressive. But you do that year

32:24

in, year out, it's going to add up. And I

32:26

think that combination of factors is

32:29

what's really driven the gross margin expansion.

32:31

And then if you think about SG&A,

32:33

this is a business where you

32:35

acquire a new business and you put it

32:38

on a platform, they have a very decentralized

32:40

approach. They're not adding a ton of headcount,

32:42

headquarters, they're just adding another business. And so

32:44

you get this SG&A leverage to, as you

32:46

sell through distributors and even through your

32:48

existing sales force. Yeah, I

32:51

think the Amitek growth model, depending on which

32:53

business it is, oftentimes you hear

32:56

in this particular case, I think you can point

32:58

to the performance of the business and

33:00

get an understanding of the

33:02

credibility that goes into that growth model there,

33:04

where for others, it might be just more

33:06

show. Here I think there's a case

33:08

to be made that it's a very big part in

33:10

terms of how they work and how they operate. I

33:13

did want to get into that

33:15

operational approach. And when

33:17

you're managing all these different businesses with all

33:20

these different product lines, you tap into it

33:22

a little bit there in terms of that

33:24

decentralized approach. Is there anything unique there? I

33:26

think talked about Danner, there's some other great

33:28

examples of businesses that trans dime,

33:30

try to make sure that they're incentivizing

33:33

individual business units. What does

33:35

Amitek do? Yeah, both those

33:37

companies actually come to mind as good

33:39

analogs to what Amitek does. This is

33:41

one of the two things that really

33:44

differentiate the business in terms of having

33:46

a decentralized approach and wrapping

33:48

the Amitek growth model into it. So in terms

33:50

of decentralized approach, they have about

33:52

21,000 employees at the company, but

33:55

only 150 are actually at corporate

33:57

headquarters in Irwin, Pennsylvania, just outside

33:59

of Philadelphia. So you think about

34:01

there's a small corporate headquarters, but all the

34:03

decision making is pushed down to the business

34:05

unit level. So you have 42 different business

34:07

units that roll up into 11 divisions that

34:09

roll up to four group presidents who report to the

34:11

CEO. But those business units, those

34:14

42, that's where everything

34:16

is really going on in terms of the

34:18

operations of the business. So each of those

34:20

business unit managers has P&L

34:22

responsibility. That's what they're doing day in

34:24

and day out is they're trying to

34:27

improve that P&L for that business

34:29

unit. This is from, again,

34:31

talking to former employees about 75% of the

34:33

comp is at the

34:35

business unit level. The manager

34:37

of that business unit really cares about

34:40

what he or she is able to

34:42

do to maximize profitability and grow that

34:44

business over time. Very

34:46

interesting to see how these businesses that

34:49

come together through acquisitions are worked through.

34:51

Is there anything else regarding the integration

34:54

of new businesses into the business model

34:56

that we haven't talked about that you

34:58

think is interesting? Yeah, I would

35:00

say what's really important here, actually, this

35:03

kind of touches on the last part of the

35:05

Amitek growth model, which we didn't talk about, which

35:07

is acquisitions. That's the fourth leg of stool. So

35:09

it's operational excellence, the new product

35:11

development, the global market expansion, the acquisitions. And

35:14

the end goal of all of it is that double

35:17

digit earnings and revenue growth, significant free

35:19

cash flow, and then strong and improving

35:21

returns on capital. Exceptions

35:23

are this really key component because they

35:26

acquire a business, about half the

35:28

time that acquisition is coming from

35:30

the business unit level. So

35:32

a manager will say, hey, if we were

35:34

to acquire this adjacent product line

35:36

or business, it would really improve

35:39

our position with our customer. And

35:41

by the way, to the extent that business

35:43

that's acquired is helpful, it's

35:45

going to help the business unit manager. And if

35:48

it's not helpful, the business unit manager doesn't want

35:50

to own that business. So

35:52

they're constantly looking at these acquisitions

35:55

to improve their

35:57

offering. And then they can use

35:59

their operational excellence and develop new

36:01

products and expand into new markets

36:04

with that acquired company and therefore drive margins

36:06

which drives higher free cash flow, which enables

36:08

you to kind of do this all over

36:10

again. So it's this virtuous cycle and I

36:12

think the acquisitions really tie it all together.

36:15

I don't know if you have any color on

36:17

this, but it's interesting to me whether

36:19

it's former employees who may have mentioned something,

36:21

but when you have these

36:23

models, the upside is all great. As

36:26

though the reality is having businesses that

36:29

maybe could cannibalize one another or maybe

36:32

it would be better for the overall business

36:34

if there's things bundled together and that might

36:36

impact pricing a bit and look

36:38

negative at the unit level or the business

36:40

unit level. Have you come across

36:42

any downsides to the operating model like that

36:45

or challenges that they've had to work through?

36:47

I think periodically what's happened,

36:50

this is more historical, is that you

36:52

see that they can acquire businesses that generate

36:54

lots of cash but don't have

36:57

a ton of growth. The cash flow generation is

36:59

a really important part of what they do and

37:02

if you overemphasize that, you get

37:04

into end markets that potentially aren't

37:06

that great and therefore you have

37:08

slower growth, it's a fine balance

37:11

because you obviously want a company that generates cash

37:13

but you also want some growth because ultimately

37:16

that's what generates future cash. So

37:18

I think that's where they've had

37:20

issues in the past and you've seen the

37:22

actions they've taken is that's what Katima was.

37:25

When they had those really slow growth business units,

37:27

they spun them off because they said it's not

37:29

core of the business or redding alloys in 2020.

37:32

It was tied to oil and gas, it was just

37:34

cyclical, generate lots of cash but it

37:37

just wasn't something that made sense

37:39

from a growth standpoint. So I think to

37:41

me, that's where they've kind of run into

37:43

issues in the past is sometimes overemphasizing cash

37:46

flow and frankly, if that's a mistake you're

37:48

going to make, I'd much rather make that

37:50

mistake because a business that generates lots of

37:53

cash theoretically has more downside protection as long

37:55

as you're not widely overpaying. Yeah,

37:57

I would imagine it makes for an interesting

37:59

acquisition. target to it, to vest

38:01

it from the portfolio. And it

38:03

all points back to them being

38:05

very interesting capital allocators where you

38:08

often hear of great purchases, it's

38:10

equally important to make great sales.

38:13

And I think that it's harder and

38:15

harder to find management teams that want to

38:17

focus on that side of running the business

38:20

or at least focus on a conglomerate and

38:22

thinking about it through a portfolio approach rather

38:24

than focusing on one specific product. One

38:27

of the data points that was really interesting was that

38:29

75% of free cash flow

38:31

over the past decade has gone

38:33

to acquisitions, which is an incredible

38:35

number. And I think

38:37

the remaining 25% split between dividends

38:40

and buybacks. One of the

38:42

challenges that many of these businesses run

38:45

into as they grow is that it gets

38:47

harder and harder to find acquisitions that move

38:49

the needle. You mentioned they just made their

38:51

biggest acquisition ever. So it falls in line

38:54

with the need to acquire bigger

38:56

businesses or bigger assets. But how do you

38:58

think about that, whether it represents a risk

39:00

or the runway opportunity in

39:02

terms of the businesses that are out

39:05

there that they could acquire, knowing how

39:07

important that acquisition growth is to the

39:09

overall bottle? I think you hit

39:11

the nail on the head. To me, that is actually the single

39:13

biggest risk because I think about the future of

39:15

the business. So Paragon Medical was

39:18

a business they acquired for a billion nine at

39:20

the end of last year. They actually acquired it

39:22

from American Security, it's funny enough. So it all

39:24

comes full circle. It seems like it fits right

39:26

in. This is a med tech type business. So

39:29

they're selling these kind of highly engineered

39:31

components and instruments for medical

39:33

devices that are used in surgeries and all

39:36

kinds of things, orthopedics in particular. And

39:39

they paid a billion nine for a

39:41

business that is generating about

39:43

150 million in Ibadah. It's

39:47

to about a 12 to 13 times

39:50

Ibadah multiple. Now historically, they paid

39:52

eight to 10 times. They've

39:54

been creeping higher over time. That eight to 10 times

39:56

is years back. It is a higher

39:58

margin business. It's a higher growth business. and it should grow

40:00

10 to 11% over time. But when

40:03

you're acquiring a business of this scale, if you have

40:05

a mistake, if there's a blow up, it'll

40:08

just have a bigger impact potentially to Amitek,

40:11

creates a distraction for management to fix this

40:13

thing. And it just raises the stakes in

40:15

general. If you look, you point out the statistic of 75%

40:17

of the capital. So the average

40:19

deal historically was roughly $200

40:22

million in revenue. So this $500 million

40:24

is more than double what their historical

40:26

rate has been of acquired revenue. So

40:29

I think that to me is the biggest risk.

40:31

Now, if you have a business that has

40:34

been growing for decades, it's just natural that

40:36

they're going to be new, larger

40:38

deals over time. But you do have to

40:40

trust management more in terms of their diligence.

40:43

And is there anything based on their

40:45

track record of when they've made bigger

40:47

acquisitions of those working out

40:50

or not working out? Is there anything historically?

40:52

I mean, ultimately, it just comes down to

40:54

the next deal. Just curious. Over

40:56

time, you've seen these larger deals do

40:58

just fine. And there just haven't been

41:00

blowups. Like we talked about earlier, they've

41:03

unwound some deals. But there have not

41:05

been any really big blowups. And this

41:07

question comes up every few years as

41:09

they gain more scale and then have

41:11

to look at bigger deals. But

41:13

I think the discipline of

41:15

incentives, that's where this is really

41:18

important. Because if you're focused

41:20

on improving organic revenue, these

41:22

deals make a difference because they start

41:24

filtering into organic revenue. If you're incentivized

41:26

to improve earnings per share, but also

41:28

margins and free cash flow, that's a

41:31

good check. And if returns on tangible

41:33

capital are a key to your long-term

41:35

incentive comp, in addition to

41:37

shareholder returns, all of that ties in

41:39

as a check on

41:41

how these deals go. So I think they

41:43

understand that the stakes are raised, they completely

41:45

get that. But it's just natural that

41:47

they're going to look at bigger deals as they

41:50

gain scale. And you've seen this in other businesses

41:52

as well, where there have been deals that have

41:54

gone wrong with other businesses as they get larger.

41:56

But there have also been deals that have gone

41:58

really well and this is a big deal. is

42:00

just kind of a natural organic evolution.

42:03

Another evolution might be the pricing

42:06

of these deals. You mentioned kind of in

42:08

the low teens or 12 to 13 times

42:10

even for deals, even eight to 10 times.

42:12

I think that's probably realistic in terms of

42:14

what most businesses are paying for deals, but

42:17

they'll often reference six to eight times. But

42:20

I would say it screams as certainly

42:22

not cheap for a lot of

42:24

those assets. And that's pre synergies, I'm sure. But

42:27

can you talk a little bit about the

42:29

valuation point? I think you dove into it

42:31

a lot there, but it does seem to

42:34

stand out just as maybe their willingness to

42:36

pay higher prices for some of these acquisitions.

42:38

Yeah, I think as they've gained deeper expertise

42:40

at integrating businesses and cross selling and pulling

42:43

out costs and all the other things that

42:45

they do that are part of the Amtech

42:47

growth model, they feel

42:49

more and more comfortable that they can pay

42:51

these multiples. And I would raise two other

42:53

points. We've been able

42:56

to extract or generate higher organic revenue

42:58

growth under David Spico as he's done

43:00

deals that are a little more expensive,

43:02

but the payoff has been there. And

43:04

meanwhile, they've still expanded margins significantly and

43:06

generated much higher free cash flow and

43:09

improved the returns on capital. And

43:11

so I think if you just look at

43:13

their history over the last seven years, they've shifted a

43:15

little more to these types of businesses, it's

43:17

worked. The other thing is that a core part of

43:19

their M&A strategy, and this has been true for years,

43:22

is that deals have to be immediately accretive and they

43:24

have to achieve a 15% minimum IRR using

43:27

reasonable assumptions. Now, you're relying on their

43:30

judgment, obviously, and their analysis, but

43:33

that's really all you can do and you have to base it

43:35

on what they've done historically. I guess

43:37

certainly tracking the movement in the underlying financials

43:39

over time, you're going to get a lagged

43:41

indicator of whether it's working, but seems

43:44

to be working on the funding

43:46

of M&A. Free cash is

43:48

a big percentage of this from the business,

43:50

the free cash flow. Are they

43:53

using equity or leverage debt

43:55

financing where they're making these acquisitions? Yeah,

43:57

so they don't use equity. If you look at share.

44:00

account, it's been flat for about 20 years now. And

44:02

like you said, they spend about 10% to 15% of

44:05

their capital on share repurchase. They're pretty

44:07

opportunistic about share repurchase, actually. If you

44:09

look at when they've done it, they've

44:11

really increased it during periods of turmoil

44:13

for the broader market. They

44:15

really do view it as an alternative use

44:17

of capital, right side by side with M&A.

44:20

And if you think about how

44:23

they've financed their deals

44:25

historically, they use free cash flow primarily. Their

44:27

leverage is only under one and a half

44:29

times on a net basis, even

44:32

after the Paragon deal, which is the largest deal ever.

44:34

And so they do use a little bit of debt,

44:36

but I would argue they're significantly under lever. Now, they

44:39

don't want to use a ton of leverage, probably can

44:41

tell based on the history of the company. They're not

44:43

a really aggressive company when

44:45

it comes to M&A and using

44:48

leverage and financial engineering. That's not what

44:50

they do. They're trying to buy businesses

44:52

that can grow over time and where they

44:54

can improve them. So to

44:56

me, it's a really important, especially in a roll up,

44:59

because this is arguably a roll up.

45:01

For decades, they've been acquiring other businesses. They generate

45:03

tons of cash, the free cash flow conversion net

45:05

income is about 115%, if you look at it

45:07

over a long period of time. And

45:09

then the leverage is, I think, very

45:11

conservative under one and a half times,

45:13

especially if you're relative to peers. And

45:16

so they're very thoughtful about

45:18

how they fund these deals. And

45:21

they don't want to be going out and just

45:23

issuing shares to do deals. Not their MO at

45:25

all. Yeah. On the debt

45:27

point, I think certainly screens is under

45:30

levered. One of the points you

45:32

were making earlier was that this is

45:34

a cyclical business. So you do see

45:36

some swings. Do you have a sense

45:39

of historically, whether it's a 15,

45:41

16 industrial recession or 2020, maybe

45:44

what the EBITDA line did in terms of

45:46

declines, I think your point on it being

45:48

a roll up and you have to be

45:50

very, very thoughtful about how you're using leverage

45:52

in a roll up is an important

45:55

one. It's definitely a cyclical business.

45:57

And the best, I think, precedent

45:59

to understand the cyclicality in a

46:01

typical slowdown would be in 2001

46:03

and then the industrial recession, like

46:05

you mentioned, 2015-16. In both those cases,

46:08

revenue was down. In 01, revenue

46:11

was down 1%. In 15 and 16, revenue

46:13

was down 1%. In 3%, those are total

46:15

revenue numbers. So not much. But

46:17

if you look at 15 and 16, I

46:19

think is a good one, just because it

46:21

was across two years, the mix of businesses

46:24

was pretty similar to what we're seeing today.

46:26

EBITDA was actually slightly up in 2015, despite

46:28

the revenue decline. And then in 16, it

46:31

was down about 8%. So you

46:33

had a decline, but it wasn't a dramatic

46:36

decline in profitability. In 2009, revenues declined 17%.

46:38

EBITDA was down 13%,

46:41

so a little less. And then obviously, in

46:43

COVID, revenues were down about 12% that year. And

46:45

EBITDA was actually up most single digits in 2020.

46:47

And so I would say there are a

46:50

couple of takeaways. One, the

46:52

business is cyclical. So you see the top

46:54

line compress. But EBITDA doesn't compress

46:57

probably as much as you might think.

47:00

And the second point, which I think

47:02

is really important, is that the snapback

47:04

in profitability within a year or two

47:06

is really significant. They quickly are

47:08

able to meet and exceed prior

47:11

levels profitability and then get

47:13

larger. And this is something we talk about,

47:15

I like to touch on is that the companies

47:17

like Amitex, that are, I think,

47:20

really high quality cyclicals tend

47:22

to do better in these periods of

47:24

slowdown. And they actually will

47:26

take share from these small mom and

47:28

pops, and they'll just grow and improve

47:31

their cost structure. And not only that, they'll actually

47:33

be able to take advantage of M&A. So

47:37

evaluations get compressed, they can actually buy

47:39

companies at a time that

47:41

everyone else is stepping back. And Amitex

47:43

is the permanent, in many ways,

47:46

ideal home for other

47:49

companies that want to sell, because it's not a

47:51

highly transactional business in terms of buying and then

47:53

selling. They want to hold these companies forever. And

47:55

actually, in some cases, like we talked about in

47:57

history, literally, these companies go back decades. Yeah,

48:01

opportunistic acquirers of their own shares certainly

48:03

have a case to be made there,

48:05

I think, for being potential winners over

48:07

the long run during those periods. Before

48:10

we close out on the capital

48:12

allocation section, just the dividend, it

48:14

seems like something they are paying.

48:17

There was that cut, which was notable, but

48:19

anything you would point to there in terms

48:21

of relevance with the dividend? I

48:23

think that cut back then was justified. That was,

48:26

you know, in the 90s, in the early 90s.

48:29

That made sense at that time because

48:31

of the broader reality of the shares

48:33

being undervalued. But they've been paying,

48:35

they pay a small but growing dividend. So it's

48:38

about 10 to 15% of their free cash flow

48:40

generation that they spend on dividend and

48:42

they consistently grow it roughly in line with

48:44

their free cash flow for share and earnings

48:47

growth. To me, I think that's a really good position

48:49

to be in because it tells me that they have

48:51

higher and better uses of capital, primarily

48:53

M&A, and then periodically they'll do

48:55

share repurchase and the dividend is

48:57

kind of the output with the excess capital. But

48:59

it also at the same time, it creates some

49:02

discipline. I think this is true across a lot

49:04

of different companies. When you have these small growing

49:06

dividends, it does create some discipline. We have to

49:08

meet this obligation over time and it's more a

49:10

signal to investors than anything. And

49:12

meanwhile, they can retain internal

49:14

capital to actually go out and buy

49:17

companies rather than going out and issuing

49:19

excessive amounts of leverage or, like you

49:21

were asking earlier, doing equity, which would

49:24

be kind of the last thing I'd want them to do. One

49:27

point that you mentioned earlier, just in terms of

49:29

the valuation of the deals that they're acquiring and

49:32

those ranges, I'm just curious how

49:34

Amitek has trended over time, what

49:36

valuation methodology you would use as

49:39

an investor to look at this

49:41

business, assuming it's some type of

49:43

Yuba-Daw multiple, but just where it's

49:45

ranged over time and just general

49:48

framework for that would be useful.

49:51

I look at it both on an Yuba-Daw

49:53

basis and on an earnings and free cash

49:55

flow basis. Everyone kind of

49:57

talks about earnings for this company. The reality is free cash

49:59

flow. cash flow conversion is significantly higher. But

50:02

if you look at it over time, on an

50:04

earnings basis, it's traded in that

50:06

20 to 25 times range,

50:09

which given the returns on capital,

50:11

returns on capital were back

50:13

in 2005 or something in the 35, 36% range

50:15

on returns on tangible capital,

50:19

because they do a lot of acquisitions. They're

50:21

now 80% as of last

50:23

year. Not only are they

50:25

really high, but they're improving. And I think improving

50:28

returns on capital, one of

50:30

the single most important indicators of

50:32

value creation for shareholders.

50:35

And so, it's not a cheap

50:37

multiple, just in absolute terms, but

50:39

relative to the quality of the business,

50:42

and proving returns on capital, I don't think that

50:44

that's crazy at any one time. But obviously, you

50:46

want to buy it when it's cheaper. And

50:49

then from an even top perspective, it trades in

50:51

the mid to high teens. Obviously, if

50:53

it's taken into account a bunch of different things, rates

50:55

are where they are now, the market is trading at

50:57

a bit of an elevated multiple at the moment, relative

50:59

to history. Historically, you can think

51:02

about those earnings multiples over time.

51:04

Yep. If you said the market traded and used to be in

51:07

that 15 to 16 times, so let's

51:09

say 15 to 20 times for a business that converts

51:11

earnings at the cash flow above 100%, and

51:13

has those returns on capital, I think

51:15

getting some premium to that is certainly

51:17

not unreasonable, and

51:19

why the market would trade it there, a completely

51:21

fair case. We talked about the

51:24

risks associated with bigger acquisitions, to some

51:26

extent cyclicality. Do you think there's anything

51:28

else that you would point to as

51:30

a key risk, or maybe that other

51:33

investors suggest is a major risk for

51:35

the business? I think one

51:38

conversation that you'll hear, and I

51:40

think it's a legitimate question, is

51:42

around the organic growth of the business.

51:44

They've achieved high organic growth over the last

51:46

several years. How sustainable is

51:48

that? And is the volume

51:51

growth large enough? Are they capturing

51:53

these large growing, structurally

51:55

growing areas of the economy? They'll

51:58

talk about automation. They'll talk about

52:00

renewables, they'll talk about medical

52:02

device and semis is

52:04

a big theme that they play into, but are

52:06

they really capturing all of that? And

52:09

my answer to that is one, it's

52:11

a very good question. It's a fair question. If you

52:13

look at the organic revenue growth pre-2016, it was

52:15

in that 2% to 3% range through the

52:20

cycle, which isn't that inspiring

52:22

relative to nominal GDP growth of say

52:24

4% in the US over

52:27

time. My answer to that is

52:29

I think you've now had seven years roughly of

52:33

evidence that the organic revenue growth is picking

52:35

up because of the nature of the focus

52:37

of the business, the separation of some assets

52:39

that were just lower growth.

52:41

But I would point to that as the

52:43

key question that I look at routinely and

52:45

like you pointed out the acquisitions. That's

52:48

something that definitely you have to focus on and

52:50

think about and talk to them about because

52:52

if anything changes there, it's not something

52:54

you can ignore. Absolutely. This

52:57

has been a fascinating conversation. We covered the

52:59

business and the segments and just how they

53:01

operate the business just as much and I

53:04

think some of those are the most fascinating

53:06

companies to cover. We close

53:08

out with the lessons that you

53:10

can take away, in this

53:12

case Amitek. What would you

53:14

point to? You've had quite a bit of

53:17

experience looking at this name over two decades.

53:19

What would you say stands out as a lesson from

53:21

looking at Amitek? I'd say there are two big

53:24

lessons for me. One is that when

53:26

you have a company that has very long duration

53:28

growth and a little bit of margin

53:31

expansion, that combination is extremely

53:33

powerful. It's hard to overstate how powerful that

53:35

is. They've grown revenue at a 7% to

53:37

9% Kager for almost 70 years now. That

53:42

doesn't sound really exciting. You're not

53:44

necessarily talking about all the latest

53:46

technology trends, but over time

53:49

that can be really powerful. I think

53:51

that's what's helped lead the company to

53:53

perform so well from a shareholder standpoint.

53:56

That long duration growth to me with a little bit of

53:58

margin expansion, that's a really important and less than something

54:00

to anchor on. And then the second big takeaway

54:03

for me is just to keep it simple. When

54:05

I first looked at the business almost 20

54:07

years ago, it was, what I understood was

54:10

that it's this really simple, repeatable model and

54:12

it worked. And if I think

54:14

about over that timeframe, there've been so many distractions

54:16

and they've stuck to these niche businesses. They

54:19

improve them, they buy them and

54:21

they do this year in, year

54:23

out. And they've made improvements. They've made

54:26

course corrections. But when a

54:28

business has a really intelligent strategy that's

54:30

working, adhering to that strategy can be

54:32

as powerful over time as the

54:34

long duration growth and you combine those two, they're

54:36

tight at the hip. But I think those two lessons

54:39

for me are really important from studying Amitek. Absolutely.

54:41

No, I think it was very well said.

54:43

And I think you offer some unique perspective

54:45

on this name, given the relationship that you've

54:48

had with it over the year. So thank

54:50

you now for joining us. It was a

54:52

pleasure. Thanks, Matt. Appreciate the time. To

54:55

find more episodes of Breakdowns ranging

54:57

from Costco to Visa to Moderna,

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