Business Breakdowns
· Matt Reustle, Rob Hansen
[00:00:00] S0: 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 U.S., 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? [00:00:00] S1: These local oligopolies are hugely important. And you want to be #1 or #2 in a market. So I mentioned they have 10% share overall. And then #2 player, Martin Marietta probably has a 9%, 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. So I was reading a Harvard Business School case because they looked at the IPO of Summit Materials. And one of the factoids in there was very 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 oligopolies 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 they're in, they're #1 or #2. [00:00:00] S0: It's a natural point to ask, what is their margin profile today? Where do they come out on that scale?
· Matt Reustle, Rob Hansen
[00:00:00] S0: It's a natural point to ask, what is their margin profile today? Where do they come out on that scale? [00:00:00] S1: 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 -- and we can talk more about vertical integration later on in the conversation, but it really depends on where the market is and certain factors. [00:00:00] S0: And from a sales perspective, what percentage of the business is the aggregates and what percentage is that asphalts and concrete and other?
· Rob Hansen
[00:00:00] S1: Aggregates are 60% of sales but 90% of gross profits. So it's really an aggregates 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 led? 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 accretive to be in aggregates, and it's return on capital accretive because those businesses are very capital light. 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 a cement player because they control the cement, and they can whip you around on price, and you're just the lonely aggregates guy. 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.
· Matt Reustle
[00:00:00] S0: Really interesting when it comes to thinking about that in terms of the vertical integration and 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. To start with volume, you referenced 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 oversimplifying? Is there anything else you would mention there?
· Rob Hansen
[00:00:00] S1: No, I mean, that makes sense. There's actually data in this industry from the USGS, the U.S. Geological Survey that goes back until 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 about 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. And I don't think you're building regular malls anymore, but 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 two to three 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 nonresidential 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.
· Matt Reustle, Rob Hansen
[00:00:00] S0: 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? [00:00:00] S1: During '15 and '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 that part of the business, it's nice. There's some visibility into it in terms of the big project business. [00:00:00] S0: 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 to capture those price increases and seemingly pass on inflation while they're doing it from year-to-year?