Business Breakdowns
· Matt Reustle
[00:00:00] S0: This is Matt Reustle 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 Hansen, Senior Analyst at Vontobel Asset Management. And Rob shared what makes this relatively simple business so successful. Speaking 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, an 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 would be a great place to start.
· Rob Hansen, Matt Reustle
[00:00:00] S1: Yes. 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 a 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. [00:00:00] S0: I like the way that you simplified 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.
· Rob Hansen
[00:00:00] S1: Yes. 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, call it, 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 if 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, call it, half of the industry, that comes from residential and then nonresidential. And that's about around 25% each. And nonresidential's just -- think about data centers, warehouses, office buildings, retail, although those have become a 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.
· Matt Reustle, Rob Hansen
[00:00:00] S0: And is there a split between that, what I would just reference as 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? [00:00:00] S1: 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 nonres 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 Eddie and grows and not as much cyclicality. The private side does have a little more cyclicality.
· Rob Hansen, Matt Reustle
[00:00:00] S1: 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 nonres 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 Eddie and grows and not as much cyclicality. The private side does have a little more cyclicality. [00:00:00] S0: 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?
· Rob Hansen
[00:00:00] S1: Yes. So Vulcan is a very, very old business. 1909, this was started as Birmingham Slag 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 2, 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 in, call it, 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 10-Ks 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 the 49-year supply based on today's volume. So these things really can last for a long, long, long time.