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This is Matt Russell and today we are breaking down Vulcan materials. Vulcan is America's largest
producer of construction aggregates. Now that's all of the crushed rock, the sand, the gravel,
which gets used for the foundation of pretty much everything around us, all of the buildings,
the roads, the infrastructure that defines the physical footprint of America. To break down
Vulcan, I was joined by Rob Hanson, senior analyst at Bontobl Asset Management, and Rob shared
what makes this relatively simple business so successful. So begin into the dynamics of operating
quarries, the logistics of moving rocks, and what's cyclical versus what is not. So please enjoy
this breakdown of Vulcan materials, one of my recent favorite episodes to record and to learn about.
All right Rob, I am excited to have you here to break down Vulcan materials. It is a large
business at the time of this recording close to a $30 billion market cap. I don't think it's a
household name, and I don't think it's necessarily a household product and industry that's involved in.
So I thought maybe we could start there with the simple introduction to Vulcan and the
construction aggregates market. If you could just introduce us to what exactly is going on there,
that'd be a great place to start. Yeah, Vulcan materials, it's a pretty basic business.
They make aggregates, and really what that is is they take big rocks and crush them into small
rocks, and then you use those rocks for different things. It's almost like the foundation of the
United States in a way, because you need this underneath highway, you have 21 inches of this,
you use it in asphalt, you use it in concrete. It's a very, very important material, and it's really
used everywhere, and you walk on it every day, but you don't think about it at all. So it's a very
important piece of the United States. I like the way that you simplify that, just taking rocks,
crushing them down. In terms of Vulcan, are they actually owning quarries and then taking those
rocks, breaking them down? Is there some type of contracted involvement there? Just a little bit
about the industry structure and where they fit into it as well. Yeah, so Vulcan is the largest
aggregates producer in the United States. They own quarries. They've got about 400 locations,
and their quarries are located within 60% of the United States population. So the way it works is
that the TAM for this industry for aggregates is about, called around $35 billion. It's used
primarily in asphalt and concrete. Asphalt 90% of it by weight is aggregates, and concrete by
weight 80% of it is aggregates. I mentioned the stat about the 21 inches too. If you think about a
four-lane highway, if you're building a mile of four-lane highway there, you need about 38,000 tons
of aggregates for that, and you're building a home, you need about 400 tons. This stuff, it's not
that expensive. It costs depending on the market, maybe $10 a ton, maybe 25, if it's a very high-cost
market. In terms of the end markets, the companies try to look at it as just public and private.
Public includes the way we look at it as really infrastructure, and so that's all your road
building and whatnot. But there's also some institutional because it depends on the funding. So
the institutional side would be like a school, things like that, anything where it's publicly funded.
Now on the private side, that's the other, called half of the industry, that comes from residential
and then non-residential. That's about around 25% each. Non-residential is just think about data
centers, warehouses, office buildings, retail, although those have become much smaller piece of that
in recent years, just because we're not building many of those things. But the warehouses and
data centers are huge markets. Is there split between that, what I would just
reference, is government-funded versus private market-funded? Is that split evenly? Is there a big
mismatch between the two and just general trending over time has one been significantly better
business than the other? So from the company's perspective, it almost doesn't matter who's paying
for it because they all pay the same price. The government-funded stuff is a lot more steady
because you're constantly fixing roads, you're constantly building roads. An interesting piece of
that is that 75% of the spend on the government side actually comes from state and local government.
Now, the other piece of it is on the non-resident side, the privately funded side, all of that is
coming from businesses and just general construction. So it does tend to be a little bit of a byproduct
of economic activity, but you can have a situation like now where there's a lot of public money coming
from the federal government that can help. So on the public side, it tends to be very steady-eddy
and grows and not as much security that the private side does have a little more security. Let's get
into the history of this business just a little bit. You were telling me a fun story when we were
talking before about their IPO and what that was tied to. So just some background on Vulcan,
how it came to be a market leader. And from my research, it seems like only one of the major
pure players and operators in this space, but what's the beginning and any key milestones that you
would talk about in terms of what led to them being in that leadership role today?
Yeah, so Vulcan is a very, very old business. 1909, this was started as Birmingham's lag company.
There were a few different iterations of itself, but business continued to operate and eventually
seven families formed together to create this business. But the most important date was in
June of 1956, President Eisenhower put funding for the federal highway interstate highway system.
So these families came together, merged themselves, and then went public on January 2nd of 1957
in order to take advantage of this government money that was going to be funding this interstate
highway program. Fast forward to 1970. They had about 70 aggregate operations and called eight states.
And then you have today 400 aggregate operations in 22 states. They have about 16 billion tons of
aggregate reserves, which is about a 60 year supply. But what's interesting about these quarries is
I was looking through one other 10Ks at one point and there's a Norcross quarry, for example,
in Georgia. And this quarry has actually been in operation since 1970. So these quarries have 50 to
70 year lives. But this one has been in operation since 1970. And then if you look at today,
what they have left, it's a 49 year supply based on today's volume. So these things really can last
for a long, long, long, long time. Yeah. And I think I'm familiar with quarries thinking about
some of the finished material you might see in a kitchen, like a granite or a quartz marble.
And I'm not as familiar with the quarry market in the US. They started in Alabama. Am I right to
think that there were a lot of quarry locations there? Is there anything geographically unique?
Oil you think of Texas in certain other areas? When you think of quarries, are there certain
geographical spots that these are most dominated in? They're pretty much everywhere. The bigger
governor is really the cities and towns because no one likes these things. But there is an important
fault line. I think it's called the Brevard fault line that runs from DC down the Mid-Atlantic
through Texas where you can't get as much rock. And then you have Florida where there really isn't
any rock at all. So all of that has to be shipped in by boat. Whenever where else in the US,
there are plenty of them. I think in the US in total, there's around 10,000 quarries. Another
interesting set was back in 1976. The number of quarries in the United States peaked at 12,600 or
something like that. So we don't tend to make a lot more of them. So that's why I mentioned the
bigger governor is just cities and towns really not liking these big giant pits because
Vulcan and there's a couple of other competitors like Martin Materials and Summit Materials and
CRH. These companies are really mining companies. People don't really think about them that way,
but they're above ground mining. They just dig a giant hole in the earth. And then you have your
quarry and you just keep mining it and mining it and mining it as far as long as you can.
It's an interesting not in my backyard, Nimbi, barrier to entry. It seems like in terms of having
the quarries today and restricting new folks from coming into the market. Is there a difference in
quality between the different locations? You mentioned a little bit before in terms of the cost
and the price you might pay and what that looks like. Is that coming down to the specific quality
of what's actually being mined? Is there much difference there? There are some differences.
That's why it's crushed stone sand and gravel. So there are different types of rock that are used
for different things and some of them are more specific. There's the certain sands that are used
in oil and gas. But for the most part, a lot of it can be very similar. It just depends on where
you are. It's not a ton of differentiation, which is why when I look at this business, you're like,
this is a commodity product in a pretty fragmented industry and that's capital intensive. How could it
be any good? It's actually kind of the opposite. You can have a great business based on some of
these characteristics that you'd otherwise think wouldn't be the case. Yeah, no, it's quite interesting.
I think you referenced one of the reasons why it could be a good business with the regulatory
barriers to entry. The other I wanted to ask about is just the actual mining operations.
That's typically capital intensive. There's usually a lot of different costs that go into it
upfront, but then logistically. How does the business think about the cost profile of what
they're doing? And what are they actually required to do in terms of, okay, they're mining that,
are they required for the transportation as well? How much of that is integrated into the business
versus outsourced? Anything that you can talk about just in terms of the cost profile of what
they're doing in operational excellence, if that is a thing in this space.
Opening a new quarry is very time intensive and it's very in capital intensive. You need to have
maybe $50 million if you want one that's close in and it's going to take you 10 to 20 years to get
this permitted through the environmental piece. It's very, very complex and one of the major
barriers to entry. It's a scarce resource too. I know I call it the commodity, but it is scarce.
It's got to be close to a population center because this is 10 to call it 20 bucks a ton,
so it doesn't travel very far. Every 40 miles you travel by truck, it costs doubles because it's
about 25 cents per ton mile. So you've got to have the logistics and the trucking there and then you
have to have relationships with some of these downstream contractors too because you need to have
people to use your product. So it's a very hard industry to get into and greenfielding,
Vulcan, they do greenfields every maybe one, maybe two a year, but some of those are just really
distribution sites where they mine it and then they put some rail tracks down.
What's interesting though is the logistics piece is just so important and part of that is because
if you're going to transport this stuff, I mentioned by truck, it's 25 cents per ton mile.
If you do it by barge, if you can have a quarry located close to an ocean, it's only one cent per ton mile.
Whereas then rail, I believe, is about 8-10 cents per ton mile. So transportation of this material
is hugely important. I think it's an overlooked piece of the business that is just hugely important.
In terms of who pays for that transportation, generally the way they price it, they price it on
a per ton basis when the transportation is included in the price, but quite often the customers
paying for that and quite often they'll pick it up as well. But in general, the stats around
are that 80% is shipped by truck and then the other 25% is shipped via barge or rail first and then
use it trucks. You always have to use that truck and it's highly expensive, which is why in certain
markets you want to have multiple quarries and that's why you have this platform approach.
There's a lot of different ways of looking at value in terms of the operational piece to really
get the price down as much as they can for their customer. It really is interesting to hear about
how important it is from a logistical standpoint. When the price is so impacted by the transportation
cost, I can think about coal in the US. That was such a massive driver. I think it was 35% of the
overall cost of coal at one point and rails refused to move on pricing and that killed a lot of
the coal mines. Here it just would seem like the geographical focus is really important. Has that
essentially led to local geographic monopolies where certain players are just dominant in the areas
that they have the quarries? These local old athletes are hugely important and you want to be numbered
one or number two in a market. I mentioned they have 10% share overall and the number two player
martin materials probably has a nine 10% share as well. But really that doesn't matter on the whole
for the whole entire United States because it's really what you can do in that local market. I was
reading a Harvard Business School case because they looked at the IPO of some materials and one of
the factoids in there was interesting markets where you have one to four players. The margins tend
to be 25 to 40% for aggregates. Markets where you have five or greater players the margins are 10 to
25%. So these local gopales are really hugely important and that's a big contributor to the value
of the business. And in Vulcan's case in 90 plus percentage of the markets there in their number
one or number two. It's a natural point to ask what is their margin profile today? Where do they
come out on that scale? The gross margins in the aggregates business are around 38 to 40%.
They've also got concrete and asphalt and those businesses are more like 10 to 15%
gross margin businesses. But part of that just happens to be when we can talk more about vertical
integration later in the conversation but it really depends on where the market is and certain factors.
And from a sales perspective what percentage of the business is the aggregates and what percentage is
that asphalt and concrete and other? Aggregates are 60% of sales but 90% of gross profits. So it's
really an aggregate's dominated business and you're going to lead with your aggregates and fill in
on asphalt and concrete in the markets where you need to be. And one important question too is
where are you going to be vertically integrated? First of all you want to ask yourself, am I aggregate
lead? Okay, yes. And the second piece is for asphalt are my contractor customers? Do they do
asphalt? And if the answer is yes then you don't want to be in the asphalt business because you
don't want to compete with your customers. So there are going to be markets where it's value
creative to be in aggregates and it's return on capital creative because those businesses are very
capitalite. Lower barriers to entry but if you can supply your own self with your aggregates
they can work very well. In a similar vein on the concrete side what's more important there is
are the cement guys? Do they have their own ready mix? Ready mix is just those big concrete
trucks that you see on the roads. They're constantly just mixing these things up. It's an easier
business to get into but it's hard to run because you can only have these trucks going for a certain
amount of time before the concrete just fills up the truck and you're ruined and it's done. You really
don't want to be in the ready mix business when you're competing against cement player because
they control the cement and they can whip you around on price and you're just the only aggregate
sky. But there are certain markets where they do that and they have some good markets in
northern California where they can compete quite well there. Really interesting when it comes to
thinking about that in terms of the vertical integration where it makes sense especially when you
have that big of a disparity in the margin profile. If we just focus on the top line a little bit
and we can dissect it both on the volume side and on the price side start with volume. You reference
before the government side of things is a bit more steady the private side of things you can see a
bit more cyclicality. How has that trended over time? Is it generally in line with GDP? Is it
outpacing GDP? Is there anything from a volume perspective that is unique when I would think of
this I would just think of very tied to construction but is that over simplifying is there anything else
you would mention there? No I mean that makes sense. There's actually data in this industry from the USGS
the US Geological Survey that goes back to 1900. The long term volume trend is about 3% going all
the way back and then if you look at the last 10 years it's a little more like 2% and then they
actually have price data as well and the long term for that is around 2% to 3% but if you look in
the last 10 years it's actually accelerated more to around 4%. So the industry in general you should
think about growing up 5% 6% just in general for the entire United States. Now if you're in a good
market where there's population growth employment growth household formation then you should be getting
a higher growth profile than that because if you're building a new residential community then
you're going to have to build in some strip malls. I don't think you're building regular malls
anymore or maybe you need an Amazon warehouse. So it tends to follow and they're very generally long
cycles. It is cyclical during the last the GFC volumes were down 55% for these guys but I think
that's not really a normal downturn. If you look back in the early 90s was the last time volumes
for this industry really came down and it took about 2 to 3 years and it was maybe 15 to 20%.
Again that was the ROTC crisis so it was another crisis but what's more normal in terms of that is
what's happening today where you have non-residential declining residential's improving and then you have
the government piece slowly steadily rising. So for example this year I think the aggregates players
have been talking about flat to down volumes for the industry and I'm sure 2024 is going to be
something similar because it's very similar dynamics. When you think about something like the 15,
16 time frame industrial recession but it didn't really feel like a massive recession in the economy
did that put pressure on the business just thinking about that more recent example.
During 15, 16 they actually did okay. Volumes continued to rise slowly they get price every single year
without fail and what's great about too about this industry is when they're raising prices 40%
of the business is project-based business so they know what's going to happen with price for at
least 40% of the market next year so that's why we're looking at another year of high single digit
low double digit prices this year but at that part of the business it's nice there's some visibility
into it in terms of the big project business. The pricing charts are absolutely incredible
so in going back over time what is the driver there I think you laid it out just in terms of
an industry that has fewer players and you have your geographical locations but is there anything
else that's allowing them to really capture those price increases and seemingly pass on inflation
while they're doing it from year to year. If you think about it it's a very fragmented
customer base and then the other thing is that supply is lasting you can turn off the aggregate
facility in 15 minutes if you need to so it's not a factory where you just have to keep pumping out
things that's one key difference between cement and this business cement you've got to keep that
kiln fired up you've got to keep it operating and whether it's recession or not you're just going
to keep pumping out cement and if need be you're going to ship it by barge to wherever you can to
unload it anywhere in the world and it's much higher because it's a much higher price I mean that
goes for a hundred bucks a ton at least so it's really just the fragmented customer base the fact
that you can turn on and off the factory so to speak and then like I mentioned too another
factor is just the being number one or number two in the market whether it's maybe three to four
players it's just a little more rational in general and is there anything else that they can offer
to a customer that maybe a smaller player wouldn't be able to offer is there anything just being a
large player having this business that spans wide geographical is there anything they can offer
just at a local level that differentiates them yes for sure these guys have done a really good
job at incorporating technology into their business I mean this business is super old the way it
was done before is you have your paper ticket you get the weight you tell them what you want
where to deliver it whatever it was very slow and then you end up delivering it maybe at the
wrong address and it cost you money you these truckers get upset these guys have been able to
incorporate this technology right down to the customer level and into their plant and one
interesting example of their ability to monitor their inventory position at their customers is
they actually have technology where they go and they dump the rock at the customer site and the
customer will take it and do what they want with it when they need it but they can monitor that for
example and see when they need to deliver more so it's kind of like what you have your printer
and it automatically orders more ink when your ink gets low that's exactly what this is except a
giant truck of rock shows up in your facility when you need it so they can keep replenishing
their rock for their customers but even beyond that simple things like giving an accurate
coordinate of where you're going to deliver the rock because if you think about it sometimes
there is no road there yet you're building the road so there was no ability to say go on
core and main and it's right there it just didn't exist so being able to have a coordinate and
deliver it exactly where it needs to be when it needs to be on the exact time they have this
app that they use on an iPad or an iPhone and it shows all the stats with that and helping the
truckers with utilization too because costs them fuel those guys paid differently in that respect
that's probably on the selling side where they've really helped their customers but they've also
used technology and their operations as well that's fascinating too because basically they've
created almost like a digital twin of all of their rock crushing machines and they can analyze it
if you open your fax and you look in like green and red and it's blinking and flashing that's
what they have for their plants and they can see okay there's an issue at this specific spoke of
the crusher we need to fix this or also our plants going to have less throughput so they've been
able to basically run the plants less hours generate more tons and so you have better throughput
and it's this enterprise wide you know performance tracking where you can pull this up or if there's
an issue instead of having to call somebody an expert and have them come on a plane and a
week later and fix it and so there's all this downtime they can actually just do it over the phone
and tell the person to go into this location find that fix this whatever and they like to talk
about how the number of Sundays they worked has gone down from 20 to two or something like that
working on a Sunday's expensive because it's all over time so if you can reduce that and incorporate
technology into there super important very interesting to see dashboards and other industries outside
of finance finance it's usually just the green and red like you mentioned you have refineries seeing
where their oil is coming from Nigeria North Dakota here and crack spreads the example you just
described which is excellent it seems like it actually has a meaningful impact on cost I love
that where technology is really coming into play and impacting the operations when they talk about
actual profitability of the business it's profit on a per ton basis we explained a little bit just
in terms of which driving the revenue when you split out cost per ton you talked a lot about the
transportation side of things what other big buckets are there and how have you thought about that
trend line over time just in terms of the cost of what they're producing and whether that's
inching upwards or downwards and how they control that so I'm going to attack this from a little
bit different of a perspective in the aggregates industry these guys were very much at least a
pioneer in talking about it more publicly which is cash gross profit per ton so you're excluding
the depreciation amrization and the depletion which comes with your or so this is just the pure
cash basis and Barclays has done some good work that companies whose cash gross profit per ton has
risen the most over the years the stock has done better so it's been a good predictor of performance
but these guys were first at least talking about that more publicly and the goal there is really
to keep costs down and raise price price obviously helps a lot but there's some input costs
like diesel is about 10% got labor at 30% you've got supplies and fixing the machines but it's
another 20% those are the big cost buckets but as I mentioned the biggest piece that is that
they call it the Vulcan way of operating that was what I talked about before with the technology
piece is really honing in on all those costs becoming way more efficient and running those
crushers with much better throughput and operating with less man hours and really trying to hone in on
that that's where they've been focused on for very very long time and it's been hugely important
and hugely helpful one of the things that they've mentioned is they were originally talking about
nine dollars per ton of cash gross profit when they were think around 220,000 or 225,000 tons or
something like that they revised that up to 11 to 12 dollars per ton around 250 or 260,000 tons
so they've actually outperformed their expectations and my guess is the inflation has helped them a
little bit because they've been able to raise prices by 19% this year it's been good for these guys
it's funny there was a customer and one of the things he talked about was he was like
their world class at raising prices so part of that is price but they really do have this tremendous
focus on cost and it's been a really big driver as that historically ever come back to bite them where
pricing has lost them business or there's been any snapback in terms of how far they can go
on the pricing side to my knowledge not really because everybody's doing it at the same time
one of their competitors martin talks about a value over volume strategy and they've raised prices
over 20% this past year so a little bit higher the other aspect is aggregates are five to maybe
10% of the cost of the job so if it's up 10% it's not going to have a humongous impact on your overall
cost in this day and age the inflation last year everything was rising pretty significant amount so
it was really the one thing on the long list of everything that's rising when you think about that
cash gross profit for ton that number trending upwards how much of that actually trickles down
through the earnings through the income statement all the way down to the earnings line and
potentially bringing it all the way into free cash flow is there anything unique about the
business and how it's able to convert revenue and gross earnings into actual cash flow they convert
about 75 to 100% of net income into free cash flow it's a very good business in that respect
in terms of the cash flowing down through the income statement to incremental EBITDA margins
when things are normal like you know absin a big M&A transaction etc they're really around 60%
on each incremental ton of volume so it falls down very fast the problem is sometimes you end up
doing M&A transactions are little deals and so all of a sudden you'll see in their income statement
their years you're like why don't gross margins just go down by 4% but it's really because maybe
they did big transaction a bunch of costs they have to maneuver and we can talk more about M&A
later but it's just one of those things where there's a lot of different factors involved and that
60% EBITDA increments absolutely wow what's the baseline EBITDA margin for the business?
yeah so baseline is about 30% as I mentioned earlier it's about a 30% gross margin and then you have
10% sales so you have a 20% EBIT margin and then you have an depreciation depletion and
amortization which is another call it 10% so that's how you get your 30% EBITDA margin
which is why they use that cash gross profit per ton metric because it's very similar to your gross
profit yeah absolutely I think with some of these businesses especially anything that there's
a production of whether we call it a commodity or not something like that it's tricky but something
along those lines helps you understand at the base level what it's costing and what they're
profiting for production of each incremental thing well I want to get into capital allocation a
little bit before we jump to M&A just on that earnings conversion into cash flow I assume that's
the cat X line that's swinging it are there large capital outlays related to new quarries when you
think about capital expenses what do those typically look like and how much is their volatility just
in terms of spending and big spending programs anything along those lines cat X in general let's call
it high single digits maybe 10% of sales so it is a little bit capital intensive now when you break
that down even further the most important piece of that is actually investing back into your
business updating your crushers investing in the technology that they have there's a very big
piece of that just the operational cat X and that's probably about 60% of that so if it's 10%
that's 6% now the other 4% is actually for growth and that's that very long term investing in
future quarries and that's just so hugely important because it's very expensive it's very long term
it's a little bit risky because you have to think about a market and say where's our next leg of
growth going to be in 20 years because where is it land I'm going to grow which quarter that other
4% is really spent on that and that's land acquisition environmental costs remediation it can
be pretty expensive to take that through the whole entire process and just last a long time and
they obviously have many of these projects going on they don't tell you how many exactly but it's
got to be a lot because if you look at their slide deck and when I was going back through it
from 2016 to I think it was 2022 it looked like there was maybe about almost 20 new locations
and some of those are just drop areas but it's a super important part of the business
and in terms of what determines a good outcome from that capital spend opening up a new quarry
is it the demand that's ultimately attached to that obviously expenses can get out of control
based on what you mentioned but are there risks that when they start mining the rock it's not
high quality rock just thinking about the variability and outcomes when it comes to new quarries
that's definitely a small risk but they do spend a lot of money looking into this doing these
geological surveys and studies to really make sure there's x feet that we can go and get out of
this thing and maybe we can try to extend it in the future over this other area but we have to buy
that land making sure you have access to all the mineral rights and all that stuff so the risks though
I mean you could spend a lot of that money and then the town just says no sorry that's it we don't
want that we don't want your big trucks running around and kicking up dust everywhere and ruining
our air quality and also your big pit is really ugly so we don't want it there is a variety of risks
and that's why you have to have a bunch of different irons and the fire all throughout it and look
the other big risk too is maybe you choose an area for your leg of growth that's going to happen
in 20 years and what if the population doesn't actually fill in there that could be a material risk
you spend all this money and now you're at this quarry and there's no construction to fill the
scent so that is definitely a risk is just such long lived assets that it's just funny I mean you
could be wrong and then eventually be proven right maybe in year 40 instead and they're like oh wait
I did have this quarry so I will say going into this I completely failed to appreciate the importance
of geographical proximity to the end construction and how much of a roll that plays when it comes to
the transportation costs so very interesting to see how important that is shifting to M&A you
mentioned sometimes that can throw off the numbers is that a key part of the DNA with this business
acquiring other businesses and consolidating the industry yes definitely M&A is hugely important
for all of the companies it's an interesting industry where sometimes you might have a decent asset
but you're not the right owner and sometimes you sell to somebody else and it's better for them and
you can use that cash for something else and buy something that will help your portfolio in
that way or there are times when you can swap assets with another company too which is a unique
thing it's like the MBA or something it's not like a normal business in that respect but what's
also important for M&A the key piece is really being able to optimize your logistics so maybe you
have a query on the south side of town and you have one on the east side of town but if you can buy
a company and get one on the north side too then you have much more variability on where you can
shift the demand to and from based on where your customers are and you have this ability to maybe
ship more optimally in terms of being on time and saving money that way and if you can save money
then maybe you can price a little bit better and then you have a nice little flywheel so really I
think people look at M&A and they're like okay oh you paid ex price or whatever but there's a lot
more strategy involved to that and it's just super important in terms of being able to reduce
your costs and reinforce that flywheel there's obviously overhead cuts you can make to there's
procurement scale right buying these big yellow iron and these big crushers and tires and things
like that they have a national relationship with I think it's caterpillar so I'm sure that they
get a cost advantage there maybe 5 10% something along those lines but one other thing that's important
about M&A too is the valuation people try to look at this thing on a multiple basis but it's hard
to do when you're looking at an asset that's 70 years life in it it's going to be there for a long
time maybe even a hundred years so you just don't quite know so even using a multiple for M&A it's
difficult to gauge whether it's too expensive or not so in terms of how do they value it
they use a DCF and they look at Bertrand Capital and hurdle rates and things like that and
multiples too they have to check all the different boxes just to make sure they're not being too
crazy but even if you quote unquote overpay at 20 times EBITDA it still could be a very good deal
because maybe based on where your existing cores are it allows you to have a better cost cut
than just quote unquote synergies there's just a lot more strategy that goes into it than you
know otherwise expect from just a rock crushing operation I was waiting for you to use the word
synergy I think it can have this negative overuse connotation but it sounds like based on what
you're describing there's some strategic things in terms of this asset might be worth a lot more
in this portfolio because it can connect to these other assets that already exist in that portfolio
which is very interesting on the multiple side are they financing these acquisitions using
some mix of cash and equity and debt what are they doing there yeah so they typically haven't
used stock for M&A it's all in cash and debt and they keep their leverage within two to two and a
half times the most recent transaction they did was actually US concrete which is a little bit of a
name they're not all concrete and sometimes what you do is like I mentioned how there's better
owners for assets they bought US concrete for 1.2 billion in cash they used a little bit of debt
and cash as well and then they turn around and they sold some of the operations in different
pieces so they really were coveting the aggregates piece of that business they sold a lot of the
ready mix the other big transactions that they've done US aggregates which was a Alabama company
gave them a very good mid-Atlantic presence that was 900 million and then the other big acquisition
was Florida Rock in 2006 and that was a tough acquisition it also included cement facilities
in Florida as soon as they got dried on that everything fell apart in the economy and they had
always planned to sell this cement operation but they had to wait five years to sell it and I think
they sold it for maybe 800 million bucks they would have been sitting so pretty in the downturn
had they not done that deal but that being said it did give them these amazing assets in the
mid-Atlantic region too where they really built that out that are still there today they still
on them they're making a lot of money for them was a terrible deal I don't know maybe it worked out
in the end Florida in 2006 whether that's luck or just challenging times that is a tough one
over a long enough time horizon things certainly can change there's a few dirils that you reference
there I'm curious when you think about this going forward are you expecting more M&A is that
something that the management team hints at or is it just a strategic type thing like how core is
it to the thesis of the business and the opportunity ideally they'll keep buying small operations
just this last year they spent around 500 million bucks on I think four or five different
companies they don't make a huge deal out of it but it's absolutely core to their business
it's quarter their growth it's quarter them making more money and servicing their customers better
so they will definitely continue in an ideal world they would love to just keep picking off
small queries here and there because this is a highly fragmented industry and there are tons and
tons and tons of cores I think something like 10,000 so a lot of these are family-owned businesses
they try to just stay in contact with them you never know when the family's going to want to sell
supposedly it's always the third generation that doesn't know how to run it and they're like I
want to just get rid of this and monetize it and that's what every company's looking for in
this space and they all talk about it but the M&A piece is hugely important that's where a lot
of the capital goes because they don't buy back a ton of stock they do pay a dividend the last
time they bought back stock I think was in that industrial recession that you mentioned they bought
a few hundred million dollars and that was when it was trading maybe on a PE basis it was trading
around 20-ish times around something like that which typically this company trades in 25 to even
as high as 30 times sometimes people get very excited about a coming election and infrastructure
bills and things like that as we've broken it down impressive earning stream impressive industry
and I think you mentioned before they have 10% of the market next biggest has 9% so it still feels like
the consolidation play has a long way to go there when you think about the earnings growth
profile when you mentioned the potential for pricing growth on top of volume is trending with
the macro seems like they're getting more and more operationally efficient how is the earnings
growth trended and just generally what is the expectation there for how that can trend over time
so over the last five years earnings have compounded about 10% so then you add an
dividend yield of 1% or whatever and so you get a total return of around 10 maybe 12% but going
forward because of the iij and the IRA and then you have the chip sacked with all these mega projects
there's a lot more infrastructure and public money coming and then you add on top of it this I
would call a super cycle in pricing this has been an almost 20% year and next year is going to be
probably high single digits maybe you could even get to low double digits in terms of the
outlook in the future I think consensus is looking for around mid teens earnings growth for the
next couple years so and that's with a situation where commercial construction is really not doing
very well there's some notable lags maybe we overbuilt some warehouses from what I understand
during covid so there's a decline in there but what's being helped is offset by data centers and
then a lot of the on showing that's happening here in the United States as well this should be a
total return of somewhere around mid teens for the foreseeable future yeah very interesting to find
these in the various places in the economy and when you have an asset with that long shelf life
just thinking about that a little bit in the duration of the asset and how much inventory they have
does that stand out relative to peers that would just one last point I wanted to ask on that side of
the business I think you mentioned 60 years of inventory is that abnormal versus the peer group
anything unique there yeah I think that is pretty normal in terms of the peer group it's just a very
long cycle business and these assets that can be used for just obviously many many years so
yeah it's pretty normal I mean some of the smaller companies maybe it's a little bit less because
you've got summit materials that they have a little more of the paving and the contracting and then
there is a big one of the biggest in the world actually CRH formerly listed in the UK and now they
actually just relisted here they have a different they're a very big company they're a lot more
vertically integrated they do a lot more asphalt a lot more paving a lot more ready mix but
Vulcan is a aggregates lead I would call it a pure play aggregates company then there's also Martin
which is they have cement they recently sold a couple of their cement plants in Texas so I think
they have maybe one left in California but it seems like they're trending in that direction
probably because they see the high multiple that they've always treated about two points higher than
the Vulcan straight two points higher than Martin so maybe Martin sees that and wants to try to
change that and I know 60 years we have plenty of time probably beyond my time to worry about it but
is this the type of resource that we could ever run out of is that anything that's a reasonable risk
over time I think if we're going to run out it's only because the environmental issues or maybe
you just don't have it on the right market but that's the importance of the logistics and I keep
thinking about that when you're shipping by barge they actually have a quarry in British Columbia
which they can ship by barge down to the coast of California all the way down they had a really
amazing quarry in Mexico which the Mexican government stole from them they're in litigation with
that but it was super important because they could ship this all into Florida because you can't
get rock and Florida I think we're not going to run out and if we do it would be more as a result of
some environmental regulations or things like that that makes sense thinking about risks to this
business is there ever risk that an alternative solution is provided something that could replace
composites no I don't think so and I should have highlighted this earlier I'm one of the key
pieces there are no substitutes you have to use this in asphalt you have to use it in concrete
and you have to use it as that base layer on your roads there's nothing that can really
displace it even if you think about concrete the ingredients are cement fly ash aggregates in water
that's really it fly ash can displace cement a little bit but other than that there's really no
substitute the other risks would just naturally be the top line the macro environment the economy
which we've alluded to a lot any other competitive forces maybe not so much in the form of
substitutes but the competitors doing creative things to take more business has that ever came up
in a creative way or has there ever been any threats historically when I think about the risk the
competitive actions I haven't seen a situation where there's ever been a blame like oh we had
some dumping by a competitor or something like that it's really not the case from a competitive
standpoint I think what's more important risk is the capital allocation maybe you choose the wrong
market and I talked about how maybe you're expecting that market to be one to four competitors where
you're going to have those higher margins but it ends up being a six plus market or maybe you
underestimate or don't think about who the players are and the cement ownership or something like
that I think that's where the real important risk is in that capital allocation and yes obviously
the macro is hugely important too if you think about before the Trump administration came in they had
talked a lot about infrastructure the stock ran up everybody was excited they're going to do
infrastructure and then it kind of never happened they focused on other things it didn't happen
and so the stock didn't perform as well there because people are excited so there are government
policy can impact this as well and then the other thing I think is interesting too is the weather
if it's super cold out you have a freeze in Texas you're just not going to be doing much
construction or maybe it's just crazy rain for a couple weeks on end so there are those kind of
risks where maybe that they miss a quarter because of whether there's all these random
exogenous factors where that can impact it on a quarterly basis but when you look at this on
a multi-year basis it ends up performing pretty well because you're going to still do that work
it's just going to either be delayed or maybe you can do extra work in that quarter to do all that
construction but those are probably the main risks when I think about the business
yeah it's very interesting I was just trying to come up with things beyond the short-term
the cyclicality of the economy things that are a little bit higher level and think about
strategic risks but it's quite an interesting business with the dynamics and barriers to entry
and where they are and what they have and there aren't many of those other risks that you can
come up with so it's an interesting one that stands out for sure the closing question that we
always have is about lessons that you can take away from this business and apply elsewhere so
what do you think the lessons would be with Vulcan that maybe you can use as framing when looking at
other businesses or take away and apply elsewhere as an investor I think one thing that's super
important is that mundane is good often everybody's after the next fad, bevy, this or crypto currency
that and get it really excited but you could just own this and not have to worry too much it's
crush rock it's not sexy but it can really work over a long period of time and I think this is
also a company that is ideally suited to just set it and forget it if you're confident you have
the right management team we're going to make the right capital allocation decisions there's not a
whole lot you have to worry about too much there is the cycle piece to personally I think everybody's
frame of reference is the GFC and the big decline in volumes there but I think that should be at once
in a generation event so I think getting too caught up in the cycle will sometimes lead you to the
wrong decision sometimes you're looking at all the cycles bad or whatever that's actually probably
the time when you really want to get into the name anyway that's when you're going to look at it say
it's not cheap enough because earnings are down stock hasn't moved this is too I have a multiple so
that's I think the key lessons are mundane or boring is good and not to get too carried away
with the cycle I mean obviously it's important but life is going to go on and we're all going to
recover no matter what and they're going to keep producing more rock I think but really well
there this is an interesting one it feels very unique just in terms of the market that it operates
in and how unique it is just in terms of barriers to entry so it's been fun talking through it
as simple as it is it's very interesting it's going to stick with me after this recording so
thanks a lot Robb I appreciate you joining us you're welcome thanks for having me
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