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[SPEAKER_00]: Welcome to Different Makes a Difference, where we discuss investment matters that matter to everyday investors.
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[SPEAKER_00]: Join Audembrown's Equity Analysts as we examine pertinent topics in today's markets and look at things a little differently.
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[SPEAKER_00]: Audembrown is an independent Canadian investment firm.
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[SPEAKER_00]: We provide integrated wealth management solutions to help clients achieve their financial goals and we've been doing so for over a hundred years.
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[SPEAKER_00]: Join us for some lessons we've learned along the way that can make a difference for the future.
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[SPEAKER_01]: Hello and welcome to Different Makes a Difference.
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[SPEAKER_01]: I'm Stephen Bowen.
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[SPEAKER_01]: In recent podcasts, we've highlighted new stock recommendations.
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[SPEAKER_01]: Today we have another.
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[SPEAKER_01]: There's no precise timing as to when a new recommendation comes along.
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[SPEAKER_01]: We're always looking for new ideas and the opportunity set EBS and flows with the stock market doing well.
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[SPEAKER_01]: It may not seem like an opportune time for new recommendations, but the stock market is made up of a lot of different companies and there's often opportunity somewhere.
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[SPEAKER_01]: We don't believe that long-term financial success is achieved by trying to jump in and out of the market.
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[SPEAKER_01]: Most people do better.
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[SPEAKER_01]: By owning a portfolio of attractively priced good businesses and holding them through the ups and downs.
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[SPEAKER_01]: At any point in time, you're trying to hold the best hand you can, seeking stocks that look better than the alternatives.
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[SPEAKER_01]: In past episodes, we've highlighted moodies and Airbnb as fitting that bill.
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[SPEAKER_01]: Today, we're going to discuss a company called James Hardy.
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[SPEAKER_01]: To do that, we're joined by Corey O'Cranitz.
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[SPEAKER_01]: Thanks for joining.
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[SPEAKER_02]: Thank you, Steve.
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[SPEAKER_01]: So, Corey, up until a few months ago, I had never heard of James Hardy.
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[SPEAKER_01]: Now, I seem to hear about it everywhere.
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[SPEAKER_01]: When I mentioned it to people, they're like, oh, I know that.
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[SPEAKER_01]: They made Cardi board.
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[SPEAKER_01]: I was watching the baseball game yesterday and it showed up on an advertisement.
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[SPEAKER_01]: For those who aren't familiar with it, who or what is James Hardy?
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[SPEAKER_02]: Thanks, Steve.
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[SPEAKER_02]: Well, first of all, I think you described the stock market environment very well.
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[SPEAKER_02]: And James Hardy is the type of business we want on for the long term.
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[SPEAKER_02]: The short term headwinds that have hurt the stock price lately, but we think it's a good opportunity to buy the stock.
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[SPEAKER_02]: So we'll get more into that later.
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[SPEAKER_02]: Let's talk about who is James Hardy.
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[SPEAKER_02]: They sell fibers meant called party board, North America's the biggest market for them at about 80% at Australia and Europe are each about 10% How is one of those unique businesses where the product has actually become the category?
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[SPEAKER_02]: So think of Airbnb or Uber.
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[SPEAKER_02]: No, we don't say no, we're going to have a short-term rental or a ride share.
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[SPEAKER_02]: We say I'm renting an Airbnb or taking an Uber.
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[SPEAKER_02]: So that is an indication of an incredible brand.
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[SPEAKER_02]: And I think the reason that they've been so successful is it's just a great product.
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[SPEAKER_02]: So deciding is very high quality.
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[SPEAKER_02]: It looks like wood, but it never rocks.
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[SPEAKER_02]: Protect your house from storms, from insects, from fire, doesn't fade, never needs to be painted or very rarely.
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[SPEAKER_02]: And it's actually a product that homebuilders reuse to make their homes look more luxurious and attract new buyers.
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[SPEAKER_02]: So it's a premium product compared to vinyl, stucco, or even other wood products.
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[SPEAKER_02]: Cost a bit more, usually about 20% more.
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[SPEAKER_02]: But because there's virtually no maintenance, it lasts a lot longer, the cost is more.
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[SPEAKER_02]: So you've got to save money over the long term.
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[SPEAKER_02]: Last year, party at you bought a similar business.
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[SPEAKER_02]: So this is a composite decking business called TenderTech.
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[SPEAKER_02]: It doesn't have quite the same brand power as hearty, but it is a do-oply with rival tracks and the economics are axons.
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[SPEAKER_02]: and it has many of the same characteristics so it the last for decades has that premium look but actually a reduction in maintenance is even more important for the fact is it's more exposed to the illness.
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[SPEAKER_01]: Can you tell us about those economics?
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[SPEAKER_01]: It sounds like a superior product what makes James Hardy a good business.
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[SPEAKER_02]: Well, essentially, there's limited competition.
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[SPEAKER_02]: They're the only player.
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[SPEAKER_02]: So insideing, they have a 90% share in cement siding and 90% share.
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[SPEAKER_02]: They share in 85% doopily retracts and composite decking.
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[SPEAKER_02]: So essentially, like I said, they own the category.
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[SPEAKER_02]: What you're doing is computing against fine over what?
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[SPEAKER_02]: In charge more and generate higher margins and just take share from a weaker competitor.
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[SPEAKER_02]: And that would say beyond the brand, Hardy at she has a world-class distribution network.
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[SPEAKER_02]: This is a key competitive advantage.
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[SPEAKER_02]: In the building sector, you know, distribution really does matter.
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[SPEAKER_02]: You have to have those relationships with those customers, with the builders, and they have that in spades.
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[SPEAKER_02]: Regardless whether you're going with a contractor, you're going with home you don't try and get yourself, Hardy will be there and be ready for you.
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[SPEAKER_02]: They're expanding that.
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[SPEAKER_02]: So they're growing that network, but it's already one of the best.
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[SPEAKER_02]: Then they're doing other things to improve their products as well.
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[SPEAKER_02]: They're trying to lower the install costs, make the product lighter, and easier to use.
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[SPEAKER_02]: So it really isn't exciting time for the company.
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[SPEAKER_01]: Well, let's talk about that excitement and that growth a little bit more.
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[SPEAKER_01]: What's going to drive the growth of this business?
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[SPEAKER_02]: The most important part,
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[SPEAKER_02]: for hardy is that they can continue to take market share.
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[SPEAKER_02]: We don't need a booming housing market, they can keep working with industry, just really do more of the same, keep growing, because they have a great value proposition, and have a great product.
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[SPEAKER_02]: That is better than vinyl or water or other materials.
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[SPEAKER_02]: They also sell directly to home builders.
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[SPEAKER_02]: So a booming housing market wouldn't be such a bad thing.
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[SPEAKER_02]: They could participate in that.
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[SPEAKER_02]: They have a 25% share in new builds.
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[SPEAKER_02]: That's up from 10% 15 years ago.
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[SPEAKER_02]: So they've steadily improved.
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[SPEAKER_02]: We think that can continue.
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[SPEAKER_02]: Again, because they have a great product.
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[SPEAKER_01]: Okay, so you mentioned that there's opportunities beyond just the housing market, but the housing market will make a big difference for this company, you said earlier, it's 80% American, so we need to think about the US housing market in particular, a lot of stocks related to US housing are kind of down in the dumps right now activity has been pretty subdued, tell us more about what's going on in US housing.
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[SPEAKER_02]: Yeah.
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[SPEAKER_02]: Look, the new home market has been really soft.
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[SPEAKER_02]: As I mentioned, in the fall, it's a tough time for that sector due to higher rates.
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[SPEAKER_02]: We think really the big driver of this is that we have 30 year mortgage rates out there, which people are locked into.
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[SPEAKER_02]: So those people don't necessarily want to sell and give up those mortgages.
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[SPEAKER_02]: People that are looking to buy after take on higher interest rates and higher mortgage rates.
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[SPEAKER_02]: and they don't have the benefit of those 30 or more just so there's a bit of a stalemate between the two sides and I think that's the main reason why activity has been it's been low it's interesting usually when we have high housing prices which we do right now the activity is booming people are taking advantage of that but activity has been much lower than normal so.
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[SPEAKER_02]: We think this can improve over time.
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[SPEAKER_02]: There's life events, people's mindsets will change and people will just get used to higher interest rates and will eventually end up with more activity on the new build side.
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[SPEAKER_02]: Either way, Hardy should be able to take market share and grow the business.
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[SPEAKER_02]: On the renovation market, it's actually much larger.
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[SPEAKER_02]: So this is actually a bigger opportunity for Hardy, and they only have about a 15% share.
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[SPEAKER_02]: So there's a lot more that they can do there.
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[SPEAKER_02]: And as I said, it's a bigger market
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[SPEAKER_02]: And I think one of the real important parts of this is that if you look at the age of homes, 50% of the homes out there are 50 years old.
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[SPEAKER_02]: So there's a big opportunity for them to put new sighting on these old homes and people can really only put that off for so long.
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[SPEAKER_02]: If you look back at more spending spend, we've had four down years.
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[SPEAKER_02]: So renovation spending in the US has gone down for four years in a row.
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[SPEAKER_02]: A typical cycle would be about four or five years.
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[SPEAKER_02]: One of the main reasons for having a down period is we had a COVID boom.
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[SPEAKER_02]: So during COVID people were stuck in their houses and they were renovating and improving their houses.
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[SPEAKER_02]: And so we're coming out of that.
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[SPEAKER_02]: So we kind of have the post-COVID hangover right now that we've gone through.
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[SPEAKER_02]: And again, we think we're nearing the end of that.
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[SPEAKER_02]: And as these homes age, we'll see kind of the scratch-over covering.
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[SPEAKER_01]: Okay, so it sounds like a good backdrop when we look kind of longer-term basis for this company.
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[SPEAKER_01]: I want to pick up on you referenced earlier their composite decking and they bought a company called Azac a little while back and let's just say it wasn't a very popular deal.
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[SPEAKER_01]: The stock got hit really hard on that deal.
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[SPEAKER_01]: Mm-hmm.
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[SPEAKER_01]: Why did people hate this deal?
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[SPEAKER_02]: Yeah, people definitely hated the deal and it's, it's that's your reason why we became more interested in the stock.
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[SPEAKER_02]: The main reason why people didn't like the deal is price.
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[SPEAKER_02]: They paid too much for Azac, one of the higher multiples that we've seen in the sector.
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[SPEAKER_02]: And Hardy management argued that,
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[SPEAKER_02]: There would be synergies so they would have cost savings and there was overlap that they could take advantage of and there was costs on so they could they could sell more of the product as well.
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[SPEAKER_02]: There's a risk certainly that they don't achieve the benefits that they're talking about to make the deal makes sense from a purchase price standpoint, but we're not paying that.
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[SPEAKER_02]: We're buying the stock today and so we're getting both companies now at a discount.
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[SPEAKER_02]: You know, it's really water under the bridge.
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[SPEAKER_02]: It's not much we can do about that.
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[SPEAKER_02]: We don't see them doing another big deal.
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[SPEAKER_02]: You know, they've made this deal.
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[SPEAKER_02]: In our mind, it's a deal that makes a lot of sense.
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[SPEAKER_01]: Okay, let's expand on that.
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[SPEAKER_01]: Why does it make sense in your mind?
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[SPEAKER_02]: Well, you're bringing together two very high quality companies, two of the best quality companies in the space.
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[SPEAKER_02]: They're also highly complementary.
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[SPEAKER_02]: They're similar type products, similar economics, and you're selling to the same people.
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[SPEAKER_02]: So, as I mentioned before, Hardy is one of the best distribution networks in the industry.
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[SPEAKER_02]: They can now take both of those products and push them through the distribution network and utilize the relationships that they have with those builders and with those contractors.
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[SPEAKER_02]: It's a great opportunity to kind of combine these two complementary businesses.
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[SPEAKER_02]: You know, I think as those cost signals come through, you're going to see a real benefit in the next couple of quarters.
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[SPEAKER_02]: And the balance you don't prove to, you know, one of the issues that people had with the deals that they took on too much leverage.
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[SPEAKER_02]: And so when they made the deal, because the price was high, they had that on some debt.
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[SPEAKER_02]: And so the leverage went up.
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[SPEAKER_02]: But they're going to pay that down because both businesses generated ton of cash and those cost savings can also be used to pay down debt.
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[SPEAKER_02]: So we're not so worried about the balance sheet, but that was something that was also weighing on it.
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[SPEAKER_02]: You know, when we look forward, we just, we see a business that is going to have better results.
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[SPEAKER_02]: Expectations are very low.
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[SPEAKER_02]: We see a balance sheet that's improving and ultimately we see a housing market that won't prove for them as well.
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[SPEAKER_02]: I guess the final thing is just, you like to use that culture.
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[SPEAKER_02]: They're buying a business, I think, is very conservative, and it's historic that you've been taking share.
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[SPEAKER_02]: They have a product that I think is actually better than the tracked product, but they haven't been able to get it to market.
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[SPEAKER_02]: Most people would say it looks better, certainly cooler under foot, and that's a big benefit for them.
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[SPEAKER_01]: You're describing a lot of positives here, but I want to poke back at some more potential risks.
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[SPEAKER_01]: Another risk is as best as this is a company that has an as best as liability.
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[SPEAKER_01]: Tell us about that.
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[SPEAKER_02]: Yeah, so the as best as liability is put a billion dollars.
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[SPEAKER_02]: So it's a big number, but this dates back to their days in Australia.
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[SPEAKER_02]: I'm kind of the mid-80s.
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[SPEAKER_02]: So it's where we're up over 40 years now in terms of when those exposures happened.
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[SPEAKER_02]: They do have ongoing live bills.
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[SPEAKER_02]: I think they're probably at you peaking right now.
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[SPEAKER_02]: and then they will gradually trend lower.
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[SPEAKER_02]: But this is something we keep an eye on, but it is also something that's well appreciated by the market.
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[SPEAKER_02]: It's been out there for a very long time.
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[SPEAKER_02]: They have a trust that manages those payouts and they pay into that every year, but there's been a lot of work done to ensure that there's a strong understanding the liability that's out there.
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[SPEAKER_02]: And so I think it's very manageable.
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[SPEAKER_01]: It's not the only company with an asbestos liability, asbestos was a very popular product back in the day.
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[SPEAKER_01]: It wasn't just James Hardy was doing anything wrong.
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[SPEAKER_01]: It was pretty common.
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[SPEAKER_01]: Can you tell us a little bit more about that?
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[SPEAKER_02]: Yeah, it was used in almost all building products.
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[SPEAKER_02]: One of the main attributes was that it prevented fire.
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[SPEAKER_02]: So it was an additive to a lot of products.
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[SPEAKER_02]: Obviously didn't know the dangers.
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[SPEAKER_02]: They stopped using it at the appropriate time, but again, most liabilities are outstanding.
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[SPEAKER_02]: they're well positioned to pay those.
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[SPEAKER_02]: And again, it's, I think it's well appreciated by the market.
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[SPEAKER_01]: So I think we've covered a lot here, the good, the bad, and everything in between.
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[SPEAKER_01]: Maybe can you put it all together for us?
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[SPEAKER_01]: What do you want people to walk away with when they think about James Hardy?
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[SPEAKER_02]: Yeah, I mean, the housing market is going to have been flow.
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[SPEAKER_02]: We're going to have up some downs.
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[SPEAKER_02]: But we think over the long term,
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[SPEAKER_02]: The demand for their products is going to grow very nicely, they own two of the best businesses.
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[SPEAKER_02]: If you look at decking and siding or two of the best businesses in sector, some of the highest margin, some of the highest returns.
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[SPEAKER_02]: And we think they're still room to grow both by taking market share.
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[SPEAKER_02]: And by having a better housing market at some point on the road, then that includes new builds and renovation.
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[SPEAKER_02]: They have a dominant market share already.
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[SPEAKER_02]: They have superior products and we think they can just continue doing more of the same and as you put those two companies together There'll be a lot of benefits a lot of cost savings a lot of cost selling that they can do to grow faster.
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[SPEAKER_02]: I think people realize so the best part is we can buy it now at a discount
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[SPEAKER_02]: Because of all the things we talked about with some of the housing headwinds, the leverage, and just some people aren't loving the deal.
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[SPEAKER_02]: We can buy the stock in the discount.
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[SPEAKER_02]: We can get a great business, add a great price, and I think an under-appreciated growth story there.
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[SPEAKER_01]: All right, that's why we call this podcast different makes a difference.
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[SPEAKER_01]: If we see a different view than the market, we can view that as an opportunity.
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[SPEAKER_01]: And it sounds like we have that here with James Hardy.
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[SPEAKER_01]: Thank you, everybody, for listening.
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[SPEAKER_01]: Thanks, Corey, for joining.
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[SPEAKER_01]: As always, if you like this podcast, please hit the subscribe button, and you'll be reminded of future episodes.
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[SPEAKER_01]: Take care, and we look forward to talking again soon.
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[SPEAKER_02]: Thank you.
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[SPEAKER_00]: Thank you for listening to another episode of Different Makes a Difference.
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[SPEAKER_00]: Just as every individual is unique, so are your financial circumstances.
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[SPEAKER_00]: Be sure to talk to your professional advisors for advice related specifically to you.
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[SPEAKER_00]: Our podcast is for general information purposes for Canadians only.
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[SPEAKER_00]: The views expressed are those of the presenters and may not reflect the opinions of Autumn Brown.
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[SPEAKER_00]: AudlandBrown is a member of the Canadian Investor Protection Fund.
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[SPEAKER_00]: Welcome to Different Makes a Difference, where we discuss investment matters that matter to everyday investors.
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[SPEAKER_00]: Join Audembrown's Equity Analysts as we examine pertinent topics in today's markets and look at things a little differently.
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[SPEAKER_00]: Audembrown is an independent Canadian investment firm.
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[SPEAKER_00]: We provide integrated wealth management solutions to help clients achieve their financial goals and we've been doing so for over a hundred years.
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[SPEAKER_00]: Join us for some lessons we've learned along the way that can make a difference for the future.
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[SPEAKER_01]: Hello and welcome to Different Makes a Difference.
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[SPEAKER_01]: I'm Stephen Bowen.
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[SPEAKER_01]: In recent podcasts, we've highlighted new stock recommendations.
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[SPEAKER_01]: Today we have another.
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[SPEAKER_01]: There's no precise timing as to when a new recommendation comes along.
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[SPEAKER_01]: We're always looking for new ideas and the opportunity set EBS and flows with the stock market doing well.
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[SPEAKER_01]: It may not seem like an opportune time for new recommendations, but the stock market is made up of a lot of different companies and there's often opportunity somewhere.
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[SPEAKER_01]: We don't believe that long-term financial success is achieved by trying to jump in and out of the market.
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[SPEAKER_01]: Most people do better.
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[SPEAKER_01]: By owning a portfolio of attractively priced good businesses and holding them through the ups and downs.
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[SPEAKER_01]: At any point in time, you're trying to hold the best hand you can, seeking stocks that look better than the alternatives.
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[SPEAKER_01]: In past episodes, we've highlighted moodies and Airbnb as fitting that bill.
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[SPEAKER_01]: Today, we're going to discuss a company called James Hardy.
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[SPEAKER_01]: To do that, we're joined by Corey O'Cranitz.
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[SPEAKER_01]: Thanks for joining.
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[SPEAKER_02]: Thank you, Steve.
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[SPEAKER_01]: So, Corey, up until a few months ago, I had never heard of James Hardy.
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[SPEAKER_01]: Now, I seem to hear about it everywhere.
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[SPEAKER_01]: When I mentioned it to people, they're like, oh, I know that.
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[SPEAKER_01]: They made Cardi board.
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[SPEAKER_01]: I was watching the baseball game yesterday and it showed up on an advertisement.
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[SPEAKER_01]: For those who aren't familiar with it, who or what is James Hardy?
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[SPEAKER_02]: Thanks, Steve.
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[SPEAKER_02]: Well, first of all, I think you described the stock market environment very well.
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[SPEAKER_02]: And James Hardy is the type of business we want on for the long term.
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[SPEAKER_02]: The short term headwinds that have hurt the stock price lately, but we think it's a good opportunity to buy the stock.
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[SPEAKER_02]: So we'll get more into that later.
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[SPEAKER_02]: Let's talk about who is James Hardy.
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[SPEAKER_02]: They sell fibers meant called party board, North America's the biggest market for them at about 80% at Australia and Europe are each about 10% How is one of those unique businesses where the product has actually become the category?
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[SPEAKER_02]: So think of Airbnb or Uber.
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[SPEAKER_02]: No, we don't say no, we're going to have a short-term rental or a ride share.
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[SPEAKER_02]: We say I'm renting an Airbnb or taking an Uber.
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[SPEAKER_02]: So that is an indication of an incredible brand.
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[SPEAKER_02]: And I think the reason that they've been so successful is it's just a great product.
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[SPEAKER_02]: So deciding is very high quality.
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[SPEAKER_02]: It looks like wood, but it never rocks.
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[SPEAKER_02]: Protect your house from storms, from insects, from fire, doesn't fade, never needs to be painted or very rarely.
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[SPEAKER_02]: And it's actually a product that homebuilders reuse to make their homes look more luxurious and attract new buyers.
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[SPEAKER_02]: So it's a premium product compared to vinyl, stucco, or even other wood products.
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[SPEAKER_02]: Cost a bit more, usually about 20% more.
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[SPEAKER_02]: But because there's virtually no maintenance, it lasts a lot longer, the cost is more.
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[SPEAKER_02]: So you've got to save money over the long term.
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[SPEAKER_02]: Last year, party at you bought a similar business.
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[SPEAKER_02]: So this is a composite decking business called TenderTech.
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[SPEAKER_02]: It doesn't have quite the same brand power as hearty, but it is a do-oply with rival tracks and the economics are axons.
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[SPEAKER_02]: and it has many of the same characteristics so it the last for decades has that premium look but actually a reduction in maintenance is even more important for the fact is it's more exposed to the illness.
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[SPEAKER_01]: Can you tell us about those economics?
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[SPEAKER_01]: It sounds like a superior product what makes James Hardy a good business.
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[SPEAKER_02]: Well, essentially, there's limited competition.
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[SPEAKER_02]: They're the only player.
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[SPEAKER_02]: So insideing, they have a 90% share in cement siding and 90% share.
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[SPEAKER_02]: They share in 85% doopily retracts and composite decking.
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[SPEAKER_02]: So essentially, like I said, they own the category.
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[SPEAKER_02]: What you're doing is computing against fine over what?
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[SPEAKER_02]: In charge more and generate higher margins and just take share from a weaker competitor.
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[SPEAKER_02]: And that would say beyond the brand, Hardy at she has a world-class distribution network.
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[SPEAKER_02]: This is a key competitive advantage.
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[SPEAKER_02]: In the building sector, you know, distribution really does matter.
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[SPEAKER_02]: You have to have those relationships with those customers, with the builders, and they have that in spades.
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[SPEAKER_02]: Regardless whether you're going with a contractor, you're going with home you don't try and get yourself, Hardy will be there and be ready for you.
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[SPEAKER_02]: They're expanding that.
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[SPEAKER_02]: So they're growing that network, but it's already one of the best.
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[SPEAKER_02]: Then they're doing other things to improve their products as well.
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[SPEAKER_02]: They're trying to lower the install costs, make the product lighter, and easier to use.
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[SPEAKER_02]: So it really isn't exciting time for the company.
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[SPEAKER_01]: Well, let's talk about that excitement and that growth a little bit more.
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[SPEAKER_01]: What's going to drive the growth of this business?
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[SPEAKER_02]: The most important part,
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[SPEAKER_02]: for hardy is that they can continue to take market share.
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[SPEAKER_02]: We don't need a booming housing market, they can keep working with industry, just really do more of the same, keep growing, because they have a great value proposition, and have a great product.
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[SPEAKER_02]: That is better than vinyl or water or other materials.
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[SPEAKER_02]: They also sell directly to home builders.
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[SPEAKER_02]: So a booming housing market wouldn't be such a bad thing.
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[SPEAKER_02]: They could participate in that.
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[SPEAKER_02]: They have a 25% share in new builds.
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[SPEAKER_02]: That's up from 10% 15 years ago.
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[SPEAKER_02]: So they've steadily improved.
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[SPEAKER_02]: We think that can continue.
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[SPEAKER_02]: Again, because they have a great product.
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[SPEAKER_01]: Okay, so you mentioned that there's opportunities beyond just the housing market, but the housing market will make a big difference for this company, you said earlier, it's 80% American, so we need to think about the US housing market in particular, a lot of stocks related to US housing are kind of down in the dumps right now activity has been pretty subdued, tell us more about what's going on in US housing.
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[SPEAKER_02]: Yeah.
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[SPEAKER_02]: Look, the new home market has been really soft.
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[SPEAKER_02]: As I mentioned, in the fall, it's a tough time for that sector due to higher rates.
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[SPEAKER_02]: We think really the big driver of this is that we have 30 year mortgage rates out there, which people are locked into.
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[SPEAKER_02]: So those people don't necessarily want to sell and give up those mortgages.
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[SPEAKER_02]: People that are looking to buy after take on higher interest rates and higher mortgage rates.
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[SPEAKER_02]: and they don't have the benefit of those 30 or more just so there's a bit of a stalemate between the two sides and I think that's the main reason why activity has been it's been low it's interesting usually when we have high housing prices which we do right now the activity is booming people are taking advantage of that but activity has been much lower than normal so.
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[SPEAKER_02]: We think this can improve over time.
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[SPEAKER_02]: There's life events, people's mindsets will change and people will just get used to higher interest rates and will eventually end up with more activity on the new build side.
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[SPEAKER_02]: Either way, Hardy should be able to take market share and grow the business.
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[SPEAKER_02]: On the renovation market, it's actually much larger.
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[SPEAKER_02]: So this is actually a bigger opportunity for Hardy, and they only have about a 15% share.
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[SPEAKER_02]: So there's a lot more that they can do there.
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[SPEAKER_02]: And as I said, it's a bigger market
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[SPEAKER_02]: And I think one of the real important parts of this is that if you look at the age of homes, 50% of the homes out there are 50 years old.
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[SPEAKER_02]: So there's a big opportunity for them to put new sighting on these old homes and people can really only put that off for so long.
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[SPEAKER_02]: If you look back at more spending spend, we've had four down years.
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[SPEAKER_02]: So renovation spending in the US has gone down for four years in a row.
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[SPEAKER_02]: A typical cycle would be about four or five years.
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[SPEAKER_02]: One of the main reasons for having a down period is we had a COVID boom.
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[SPEAKER_02]: So during COVID people were stuck in their houses and they were renovating and improving their houses.
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[SPEAKER_02]: And so we're coming out of that.
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[SPEAKER_02]: So we kind of have the post-COVID hangover right now that we've gone through.
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[SPEAKER_02]: And again, we think we're nearing the end of that.
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[SPEAKER_02]: And as these homes age, we'll see kind of the scratch-over covering.
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[SPEAKER_01]: Okay, so it sounds like a good backdrop when we look kind of longer-term basis for this company.
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[SPEAKER_01]: I want to pick up on you referenced earlier their composite decking and they bought a company called Azac a little while back and let's just say it wasn't a very popular deal.
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[SPEAKER_01]: The stock got hit really hard on that deal.
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[SPEAKER_01]: Mm-hmm.
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[SPEAKER_01]: Why did people hate this deal?
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[SPEAKER_02]: Yeah, people definitely hated the deal and it's, it's that's your reason why we became more interested in the stock.
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[SPEAKER_02]: The main reason why people didn't like the deal is price.
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[SPEAKER_02]: They paid too much for Azac, one of the higher multiples that we've seen in the sector.
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[SPEAKER_02]: And Hardy management argued that,
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[SPEAKER_02]: There would be synergies so they would have cost savings and there was overlap that they could take advantage of and there was costs on so they could they could sell more of the product as well.
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[SPEAKER_02]: There's a risk certainly that they don't achieve the benefits that they're talking about to make the deal makes sense from a purchase price standpoint, but we're not paying that.
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[SPEAKER_02]: We're buying the stock today and so we're getting both companies now at a discount.
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[SPEAKER_02]: You know, it's really water under the bridge.
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[SPEAKER_02]: It's not much we can do about that.
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[SPEAKER_02]: We don't see them doing another big deal.
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[SPEAKER_02]: You know, they've made this deal.
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[SPEAKER_02]: In our mind, it's a deal that makes a lot of sense.
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[SPEAKER_01]: Okay, let's expand on that.
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[SPEAKER_01]: Why does it make sense in your mind?
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[SPEAKER_02]: Well, you're bringing together two very high quality companies, two of the best quality companies in the space.
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[SPEAKER_02]: They're also highly complementary.
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[SPEAKER_02]: They're similar type products, similar economics, and you're selling to the same people.
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[SPEAKER_02]: So, as I mentioned before, Hardy is one of the best distribution networks in the industry.
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[SPEAKER_02]: They can now take both of those products and push them through the distribution network and utilize the relationships that they have with those builders and with those contractors.
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[SPEAKER_02]: It's a great opportunity to kind of combine these two complementary businesses.
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[SPEAKER_02]: You know, I think as those cost signals come through, you're going to see a real benefit in the next couple of quarters.
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[SPEAKER_02]: And the balance you don't prove to, you know, one of the issues that people had with the deals that they took on too much leverage.
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[SPEAKER_02]: And so when they made the deal, because the price was high, they had that on some debt.
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[SPEAKER_02]: And so the leverage went up.
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[SPEAKER_02]: But they're going to pay that down because both businesses generated ton of cash and those cost savings can also be used to pay down debt.
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[SPEAKER_02]: So we're not so worried about the balance sheet, but that was something that was also weighing on it.
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[SPEAKER_02]: You know, when we look forward, we just, we see a business that is going to have better results.
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[SPEAKER_02]: Expectations are very low.
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[SPEAKER_02]: We see a balance sheet that's improving and ultimately we see a housing market that won't prove for them as well.
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[SPEAKER_02]: I guess the final thing is just, you like to use that culture.
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[SPEAKER_02]: They're buying a business, I think, is very conservative, and it's historic that you've been taking share.
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[SPEAKER_02]: They have a product that I think is actually better than the tracked product, but they haven't been able to get it to market.
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[SPEAKER_02]: Most people would say it looks better, certainly cooler under foot, and that's a big benefit for them.
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[SPEAKER_01]: You're describing a lot of positives here, but I want to poke back at some more potential risks.
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[SPEAKER_01]: Another risk is as best as this is a company that has an as best as liability.
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[SPEAKER_01]: Tell us about that.
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[SPEAKER_02]: Yeah, so the as best as liability is put a billion dollars.
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[SPEAKER_02]: So it's a big number, but this dates back to their days in Australia.
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[SPEAKER_02]: I'm kind of the mid-80s.
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[SPEAKER_02]: So it's where we're up over 40 years now in terms of when those exposures happened.
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[SPEAKER_02]: They do have ongoing live bills.
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[SPEAKER_02]: I think they're probably at you peaking right now.
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[SPEAKER_02]: and then they will gradually trend lower.
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[SPEAKER_02]: But this is something we keep an eye on, but it is also something that's well appreciated by the market.
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[SPEAKER_02]: It's been out there for a very long time.
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[SPEAKER_02]: They have a trust that manages those payouts and they pay into that every year, but there's been a lot of work done to ensure that there's a strong understanding the liability that's out there.
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[SPEAKER_02]: And so I think it's very manageable.
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[SPEAKER_01]: It's not the only company with an asbestos liability, asbestos was a very popular product back in the day.
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[SPEAKER_01]: It wasn't just James Hardy was doing anything wrong.
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[SPEAKER_01]: It was pretty common.
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[SPEAKER_01]: Can you tell us a little bit more about that?
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[SPEAKER_02]: Yeah, it was used in almost all building products.
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[SPEAKER_02]: One of the main attributes was that it prevented fire.
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[SPEAKER_02]: So it was an additive to a lot of products.
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[SPEAKER_02]: Obviously didn't know the dangers.
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[SPEAKER_02]: They stopped using it at the appropriate time, but again, most liabilities are outstanding.
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[SPEAKER_02]: they're well positioned to pay those.
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[SPEAKER_02]: And again, it's, I think it's well appreciated by the market.
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[SPEAKER_01]: So I think we've covered a lot here, the good, the bad, and everything in between.
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[SPEAKER_01]: Maybe can you put it all together for us?
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[SPEAKER_01]: What do you want people to walk away with when they think about James Hardy?
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[SPEAKER_02]: Yeah, I mean, the housing market is going to have been flow.
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[SPEAKER_02]: We're going to have up some downs.
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[SPEAKER_02]: But we think over the long term,
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[SPEAKER_02]: The demand for their products is going to grow very nicely, they own two of the best businesses.
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[SPEAKER_02]: If you look at decking and siding or two of the best businesses in sector, some of the highest margin, some of the highest returns.
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[SPEAKER_02]: And we think they're still room to grow both by taking market share.
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[SPEAKER_02]: And by having a better housing market at some point on the road, then that includes new builds and renovation.
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[SPEAKER_02]: They have a dominant market share already.
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[SPEAKER_02]: They have superior products and we think they can just continue doing more of the same and as you put those two companies together There'll be a lot of benefits a lot of cost savings a lot of cost selling that they can do to grow faster.
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[SPEAKER_02]: I think people realize so the best part is we can buy it now at a discount
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[SPEAKER_02]: Because of all the things we talked about with some of the housing headwinds, the leverage, and just some people aren't loving the deal.
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[SPEAKER_02]: We can buy the stock in the discount.
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[SPEAKER_02]: We can get a great business, add a great price, and I think an under-appreciated growth story there.
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[SPEAKER_01]: All right, that's why we call this podcast different makes a difference.
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[SPEAKER_01]: If we see a different view than the market, we can view that as an opportunity.
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[SPEAKER_01]: And it sounds like we have that here with James Hardy.
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[SPEAKER_01]: Thank you, everybody, for listening.
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[SPEAKER_01]: Thanks, Corey, for joining.
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[SPEAKER_01]: As always, if you like this podcast, please hit the subscribe button, and you'll be reminded of future episodes.
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[SPEAKER_01]: Take care, and we look forward to talking again soon.
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[SPEAKER_02]: Thank you.
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[SPEAKER_00]: Thank you for listening to another episode of Different Makes a Difference.
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[SPEAKER_00]: Just as every individual is unique, so are your financial circumstances.
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[SPEAKER_00]: Be sure to talk to your professional advisors for advice related specifically to you.
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