Throughout the quarter Italian political developments, their implications for Italian government budgets and, in turn, their implications for Italy’s relationship with the Eurozone, took center stage. Those developments have not been a positive experience for Italian equities but have resulted in an apparent opportunity for the Fund. Among those impacted by price declines is the equity of Buzzi Unicem (MIL:BZU). Buzzi’s predecessor companies have been in the Italian cement business for more than one hundred years. The company is family controlled and appears to us to be well-run and conservatively financed. Fortunately for Buzzi, the company expanded over the years, building a very large and very profitable U.S. cement business. The U.S. cement market is structurally undersupplied and has seen minimal additions to capacity in recent decades leaving the U.S. dependent upon imports in order to meet a meaningful portion of normal cement demand. Generally speaking, this puts U.S. cement producers in a position of realizing good prices and enjoying high capacity utilization, both of which contribute to attractive profitability. That is certainly the case today though our expectation is that Buzzi’s U.S. operations are likely to enjoy even better days ahead. Buzzi also has operations in Central and Eastern Europe, which in our eyes represent a mix of quality ranging from quite good to somewhat marginal. Turning to Buzzi’s home market in Italy, the company has almost 11mm tonnes of annual production capacity, comprising nearly one quarter of Italian cement production capacity, though today Buzzi’s Italian operations produce a small operating loss as do the vast majority of Italian cement plants. Italy has seen quite a steep fall in demand over the most recent decade with consumption falling roughly 50% since 2006. The industry, which was built to provide much larger volumes, has been left reeling from low utilization rates and lack of profitability. On the bright side, the Italian industry’s largest competitors, Buzzi included, have been participating in consolidating the industry and reducing excess capacity in recent years. There are signs it is helping. If a nascent demand recovery were to gain a bit of momentum, Buzzi’s formidable operation could eventually make a huge contribution to profit. In the meantime, the company appears to be valued inexpensively in public markets based on consolidated profit, which means that we are paying a modest price for the U.S. and other non-Italian assets while getting 11mm tonnes of Italian capacity for free. The Buzzi family, who control and manage the company, seem to agree with our conclusions as the company has recently become quite active in buying back shares.
From Third Avenue Management (Trades, Portfolio)'s third-quarter 2018 shareholder letter.
