Somero Enterprises (SOM) - Donations

The American Society of Concrete Contractors (ASCC) is one of a number of construction industry bodies in the US and therefore would come as no surprise that Somero Enterprises supports the industry body with financial donations.

According to American Society of Concrete Contractors > Foundation > Donors Somero has donated $25k-50k in the past. Exactly when is hard to establish but reviewing Somero’s annual reports (2017-2020) there appears to be no mention of any donations other than charitable ones:

Charitable donations were made in the amount of US$ 45,060 for 2017
Charitable donations were made in the amount of US$ 46,557 for 2018.
Charitable donations were made in the amount of US$ 55,022 for 2019.
Charitable donations were made in the amount of US$ 91,187 for 2020.

Whether ‘Charitable donations’ encompasses trade bodies too, I cannot tell.

In January 2022, T.R. Kunesh, Somero Enterprises’ Global Business Development Manager secured a position on the Board of the American Society of Concrete Contractors (ASCC) as a Director for their Education, Research & Development Foundation. I presume this is a paid position.

On 9th February ASCC received a donation of $250,000 from Somero Enterprises - https://www.concretepumpers.com/industry-news/2022/02/09/ascc-foundation-education-research-development-receives-250000-donation

It would appear this is the largest ever financial donation provided to ASCC from a single entity.

Also, Somero have donated free of charge some of their products for trade body auctions.

Under UK Bribery law (Act of 2010) it fails prima facie given the Board Appointment and subsequent donation of $250k. However, just because Somero is listed in the UK it is not subject to various laws such as the Bribery Act because the company is not operating in the UK and the company is not registered in the UK.

It could be argued that an ‘investment’ of $250k will produce considerable returns for Somero; which is essentially saying the bribery is worth the expense. And why $250k? why not $50k or $100k not produce the same results??

It does make you wonder if Somero actually budgeted $250k in its ‘Global Business Development’ for expenditure to expand in say…anywhere else other than USA the returns would be significantly better. Or just rename ‘Global Business Development’ to ‘Domestic Business Development’ and be done with it.

It is oft quoted that Somero Management is ‘Quality’. Well just about every successful company gets branded with ‘Quality’ management whether it be Enron, to PCF Group…until it all unravels. Profitability is not a synonym for Quality Management. You are just as likely to find a company that is struggling big time to get through COVID issues with ‘Quality Management’ as you are with a company with exceptional growth. As Buffet once said "“I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.”

The question is why did Somero think it appropriate to donate a large amount of money (and equipment) to a US based trade body rather than invest it for other purposes? When a company becomes awash with cash it’s quite easy to make poor decisions.

If I get the opportunity I shall be asking Somero management to advise what ethical oversight and justification for charity and trade donations, whether cash or equipment, is provided by management?

As a follow up, I may also ask them to improve ESG reporting in the Annual Report by providing itemised statement of donations over a certain threshold, say $25k.

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Hi Carcosa,

Interesting topic. From my layman’s view, I would not describe the payment/donation as ‘bribery’. Bribes tend not to be publicly disclosed :slight_smile: The ASCC is a non-profit trade body that promotes the concreting industry. I doubt the payments are persuading anyone at the ASCC to improperly place an order for Somero kit.

For some perspective, Mr Kunesh appears one of 22 directors (excluding council directors, past presidents and others) sitting on the ASCC main board, and one of 8 sitting on the ASCC’s foundation board (excluding staff). Similar to Mr Kunesh, all the other directors appear to work in the industry in some way. The donors page lists numerous companies, so Somero is not alone funding this trade body.

I guess Somero could argue it can afford a $250k donation because its 2021 sales are set to be $133m – and I am guessing that revenue is greater than that earned by most ASCC members. Maybe the $250k is just for the ‘greater good’ of the industry?

On disclosure, political donations must be declared in an annual report but I now believe charitable donations need not be declared. I can’t ever recall a company disclosing a payment to a trade body or for ‘political lobbying’ or similar.

All that said, you are right to wonder what the $250k will return and why the payment is not $50k or even $0.

Maynard

Quote here from FT article on Rudgely (coal=>Amazon) (copy of article here) about the need for floors to be absolutely(!) flat for robots to work in Amazon warehouses…

“ Our tour around the cavernous space shows the work itself hasn’t changed much since our last visit: handheld computers direct “pickers” from shelf to shelf while monitoring their productivity in real time. “You’re sort of like a robot but in human form,” was how an Amazon manager described the system to me 10 years ago. In its newer warehouses, Amazon now has real robots. They bring the shelves to the pickers, who remain stationary instead of walking all day. The average worker picks roughly 100 items per hour if walking around, but more than 300 items an hour in the automated system, according to news reports.

Gary Norton, at the time of our visit the site’s general manager, says there are no plans to introduce the robots at Rugeley. “You wouldn’t believe how flat the floor has to be [for the robots to work],” he says. While new Amazon warehouses are set up for robotic systems, “our legacy buildings still play a huge part in the network”. It’s strange to hear this place described as a “legacy building”, I say. Just 10 years ago it was state of the art. “Amazon years are like dog years,” Norton laughs. “We call people ‘experienced’ if they’ve been here for a couple of years.”

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There seems to be an investors belief that Somero are the only company in this space. Fact is they remain a very small player and do not offer an overwhelming advantage over other laser/non-laser screed providers in USA, Europe or Asia.

A concrete floor is only part of flooring process. Concrete by its very nature provides an inadequate surface no matter how flat it is laid which is why it requires sealing with an epoxy/varnish type of covering. It is that layer that requires flatness and appropriate grip levels for use.

It is simply cheaper to use standard concrete flooring techniques and follow up with a cheap laser grinder for initial flatness requirements.

The company has bemoaned the fact that Europe had lesser standards for flatness than USA. My research finds that hard to justify. There are EU and UK standards but nevertheless for the requirements which Somero provide a solution for it is the architects that specify the standards over and above that of any industry ‘standards’.

It is hard for me to see how Somero are going to sell meaningful products into the European markets without having a physical presence there. Service, Support and Sales offices should be established. Having a Derbyshire industrial estate office for Somero staffed with few people hardly seems satisfactory.

Recruiting numerous new staff in the USA for worldwide sales seems… inappropriate.

Somero, have already shown their naivety when they tried to sell product in China. They did what I have seen first hand over 20 years…Think China is a huge easy market and walk away with their tail between there legs after they failed to understand their market.

Australia was someone taking a chance to prove management wrong and the change of approach has proved highly successful clearly giving SOM management encouragement.

Old time investors have been bemoaning SOM management for years and years about their ineffectiveness of overseas expansion as the company preferred to look at their navel and expand their in house training etc (something which would put many construction companies off because anything that requires training is expensive, once trained the personnel can leave taking their skill with them and if the product requires training then its too complicated).

Having said all of the above, the positives are that concrete flooring construction industry is in boom times worldwide, SOM are a very small company and only have to sell a few products overseas to make a significant difference to revenue (although exchange rates, shipping costs, lead times etc are against Somero this year).

Investors tend to think profitable companies inherently have great management. This is not always true. In the case of Somero I don’t think they are particualrly special; they may have a great product but have failed miserably over the last 5-10 years in expanding sales especially overseas. Failed to understand overseas markets, failed in creating Licensees, Joint Ventures, Capable agents etc., Now I see major employee costs going up substantially which would be good if they were located outside USA…

Anyway, at least I got my $250k query fully answered during the presentation.

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I was always a bit worried when I did rudimenatry research into China. Like all these things, go check if you can buy the same from Alibaba. Aliexpress > High Quality Drive Type Concrete Leveling Screed Laser|Lifting Tools & Accessories| - AliExpress to buy a laser screed machine from many configurations.

SOM have always said their differnetiatoin is not in the prduct but the expertise that goes with it. I guess some truth in that but once someone is trained they can presumably go and buy a native £10k chinese-manufactured equivalent…

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Hi Carcosa

I agree there may be a general investor belief that Somero is the only company in this space, possibly because i think they may well be the only listed player. Somero is unusual in that it literally invented the laser screed (see Q&A with the Inventor of the Somero Laser Screed | For Construction Pros ). Not sure what is market share is in the US: do you know?

Somero kit helps to produce really flat floors and once architects are aware of this and know that flat floors improve the value of the building as an end product, they start specifying the design specs and requiring super flat floors.

What’s interesting is that this is necessary of warehouses (to stop racks and fork lifts toppling over) but also necessary for the robots as well (according to the FT article i posted) and there are likely to be lots of factories using robots in the future. So the demand for flat floors isnt just about riding the demand for warehouses to satisfy e-commerce but also factory automation:two huge secular trends. Investors like SOM mgt because they are very open and reliable, and whatever quibbles there are over success in other parts of the world the business has gone from strength to strength in its home market of the USA. They’ve also done a good job in expanding sales with new products and acquisitions so not sure what the “failed miserably” here refers to apart from overseas.

SOM certainly isn’t rated like a great company by investors which is what matters most and it is undeniably hugely profitable from a ROIC perspective. Its cyclicality means it will never demand a high multiple but i think the current one is miserly if margins can be sustained. Talking my own book here btw.

Poor overseas success is actually a good thing from a forward looking/M&A perspective since it gives private equity buy-out funds something to apply their value add tool kit to and justify a decent premium.

Cheers
Steve

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Hi Steve,

As you rightly say, it was Dave Somero that invented the laser screed machine in the 1980’s. Yet sales over the years hardly shows it to be a ‘must have’. There are numerous other manufacturers of laser screed machines all of differing capabilities and presumably price points. This partly explains why I think Somero will not be overwhelmingly successful in Europe; American products are not so desirable and their costs tend to be high at manufacturing level, import duties, shipping and exchange rates.

The need for flat (and level) floors is not in question but at the end of the day it is still concrete which is not typically ideal for smoothness or wear which is why an epoxy resin covering is usually required which then has to be be ground flat.

Whilst concrete laying labour hours can be reduced with a Somero product it does nothing in terms of saving labour hours for preparation, rebar etc., So for an entire floor laying job the savings Somero offer do not make a huge impact. Furthermore using Somero to its best ability requires large volumes of in-spec concrete to be continually supplied which is only usually available at mega-project levels.

Where Somero does tend to have an advantage, from what I see is being able to lay vary large slabs which reduces the number of joints; but something that is not really a problem in robotic warehouses.

Having said all of this, I am a long term shareholder, I do believe revenue will grow but am wary that international expansion can be problematical. I do not have great confidence in management handling European expansion well; but even if they make a mess of it they will likely sell many units.

During the last investor call Somero were asked what their market share was. They said they don’t know; which given their apparent long term interests in concrete trade bodies etc., seems somewhat laughable.

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hi Carcosa

You make some very interesting points and clearly you have an in depth knowledge of the workings of the industry.

Given your quite strong negative views of Management’s ability to deliver I am surprised you continue to hold (and that you have been a long term holder). On balance your views must therefore be more positive than negative but that doesnt come through in your overall commentary.

Like you I watched the results presentation and also was surprised that Management couldn’t put a figure on their market share.

Whilst the North American market remains strong I’m happy to hold. Cyclicality rather than Management has been my main potential downside risk consideration to date but I can see why you have other valid concerns and I respect that.

Snazzy

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Hi Snazzy

I think expressing negative views about the shares you own is quite healthy :slight_smile:

I have frequently suffered from not paying enough attention to the downsides of holdings, and have dismissed warning signs through complacency or some emotional bias. I now try to ask awkward (rhetorical) questions in my blog write ups, in the hope one day I can think of an answer (or somebody answers for me). And once you understand a company’s drawbacks, you can then assess whether the upside potential really is sufficient!

Maynard