Business Breakdowns
· Rob Hansen, Matt Reustle
[00:00:00] S1: Yes. 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 yes, it's pretty normal. I mean some of the smaller companies, maybe it's a little bit less because you've got Summit Materials, 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, is CRH, formerly listed in the U.K. and now they actually just relisted here. They have a -- they're a very big company. They're a lot more vertically integrated. They do a lot more asphalt, a lot more paving and a lot more ready-mix. But Vulcan is aggregates-led, 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 traded about two points higher than -- Vulcan's traded two points higher than Martin. So maybe Martin sees that and wants to try to change that. [00:00:00] S0: 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?
· Matt Reustle, Rob Hansen
[00:00:00] S0: 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? [00:00:00] S1: 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 in 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. [00:00:00] S0: That makes sense. Thinking about risks to this business, is there ever risk that an alternative solution is provided, something that could replace composites?
· Matt Reustle, Rob Hansen
[00:00:00] S0: That makes sense. Thinking about risks to this business, is there ever risk that an alternative solution is provided, something that could replace composites? [00:00:00] S1: No, I don't think so. And I should have highlighted this earlier, it's 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 and water, that's really it. Fly ash can displace cement a little bit. But other than that, there's really no substitute. [00:00:00] S0: 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?
· Rob Hansen
[00:00:00] S1: 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 a more important risk is the capital allocation, maybe you choose the wrong market. And I talked about how maybe you were 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 in 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 were 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 of weeks on end. So there are those kind of risks where maybe they missed 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 multiyear 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.
· Matt Reustle
[00:00:00] S0: Yes, 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?
· Rob Hansen
[00:00:00] S1: I think one thing that's super important is that mundane is good. Often, everybody is after the next fab EV this or cryptocurrency that, and get really excited, but you could just own this and not have to worry too much. It's crushed 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, you'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, too. Firstly, I think everybody's frame of reference is the GFC and the big decline in volumes there. But I think that should be a 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, oh, the cycle's 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 and say, "It's not cheap enough because earnings are down, stock hasn't moved. This is too high of 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. 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.