Business Breakdowns
· Rob Hansen
[00:00:00] S1: CapEx 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 CapEx. 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 is our next leg of growth going to be in 20 years? Because -- where is Atlanta 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 it just lasts 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.
· Matt Reustle
[00:00:00] S0: 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.
· Rob Hansen
[00:00:00] S1: 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 into 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 risk, 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 wide variety of risks, and that's why you have to have a bunch of different irons in 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, now you got this quarry, and there's no construction to fill this in, so that is definitely a risk. It's 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 you're like, "Oh, wait, I did have this quarry still."
· Matt Reustle
[00:00:00] S0: 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 role that plays when it comes to the transportation cost. 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?
· Rob Hansen
[00:00:00] S1: 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 a better way. Or there are times when you can swap assets with another company, too, which is a unique thing. It's like the NBA 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 quarry 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 shift 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 that nice little flywheel. So really, I think people look at M&A and they're like, "Okay, oh, you paid x 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, too. 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 100 years, so you just don't quite know. So even using the 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 return on 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.
· Rob Hansen, Matt Reustle
But even if you "overpay" at 20x EBITDA, it still could be a very good deal because maybe, based on where your existing quarries are, it allows you to have a better cost cut than just "synergies." There's just a lot more strategy that goes into it than you'd otherwise expect from just a rock crushing operation. [00:00:00] S0: I was waiting for you to use the word synergy. I think it can have this negative, overused 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?