Business Breakdowns
· Rob Hansen
[00:00:00] S1: Yes. So they typically haven't used stock for M&A. It's all been cash and debt. And they keep their leverage within 2 to 2.5x. The most recent transaction they did was actually U.S. Concrete, which is a little bit of a name. They're not all concrete. And sometimes what you do is -- like I've mentioned how there's better owners for assets. They bought U.S. 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 an 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 the ink 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. I think they sold it for maybe $800 million. 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 own them. They're making a lot of money for them. Was it a terrible deal? I don't know, maybe it worked out in the end.
· Matt Reustle
[00:00:00] S0: 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 deals that you referenced 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?
· Rob Hansen
[00:00:00] S1: Ideally, they'll keep buying small operations. Just this last year, they spent around $500 million 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 core to their growth. It's core to 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 quarries here and there because this is a highly fragmented industry, and there are tons and tons and tons of quarries. 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 is 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 is 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 one it was trading -- maybe on a P/E basis, it was trading around 20-ish times around, something like that, which typically this company trades in 25 to even as high as 30x sometimes when people get very excited about a coming election and infrastructure bills and things like that.
· Matt Reustle
[00:00:00] S0: As we've broken it down, impressive earnings stream, an impressive industry. And I think you mentioned before, they have 10% of the market, the 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 volumes trending with the macro, it seems like they're getting more and more operationally efficient. How has the earnings growth trended? And just generally, what is the expectation there for how that can trend over time?
· Rob Hansen
[00:00:00] S1: So over the last five years, earnings have compounded at about 10%. So then you add in a dividend yield of 1% or whatever. And so you get a total return of around 10%, maybe 12%. But going forward, because of the IIJA and the IRA and then you have the CHIPS Act and 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 it a super cycle in pricing. This has been almost 20% a 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 of years. 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 onshoring 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.
· Matt Reustle
[00:00:00] S0: Yes. 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 and the duration of the asset and how much inventory they have, does that stand out relative to peers? I 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?