Business Breakdowns
· Rob Hansen, Matt Reustle
[00:00:00] S1: There are some differences, and that's why it's crushed stone, sand and gravel. So there are different types of rock that are used for different things and some of them are more specific. There's the certain sands that are used in oil and gas. But for the most part, a lot of it can be very similar or it just depends on where you are. It's not a ton of differentiation, which is why when I look at this business, like this is a commodity product in a pretty fragmented industry and that's capital intensive, how could it be any good? It's actually kind of the opposite. You can have a great business based on some of these characteristics that you'd otherwise think wouldn't be the case. [00:00:00] S0: Yes. No, it's quite interesting. I think you referenced one of the reasons why it could be a good business with the regulatory barriers to entry. The other I wanted to ask about is just the actual mining operations that's typically capital intensive. There's usually a lot of different costs that go into it up front, but then logistically, how does the business think about the cost profile of what they're doing? And what are they actually required to do in terms of, okay, they're mining that, are they required for the transportation as well? How much of that is integrated into the business versus outsourced? And anything that you could talk about just in terms of the cost profile of what they're doing and operational excellence, if that is a thing in this space.
· Rob Hansen
[00:00:00] S1: Opening a new quarry is very time intensive and it's very capital intensive. You need to have maybe $50 million if you want one that's close in, and it's going to take you 10 to 20 years to get this permitted through the environmental piece. It's very, very complex and one of the major barriers to entry. It's a scarce resource, too. I know I call it a commodity but it is scarce. It's got to be close to a population center because this is $10 to, call it, $20 a ton, so it doesn't travel very far. Every 40 miles you travel by truck, the cost doubles because it's about $0.25 per ton mile. So you've got to have the logistics and the trucking there. And then you have to have relationships with some of these downstream contractors, too, because you need to have people to use your product. So it's a very hard industry to get into. And greenfielding, Vulcan, they do greenfields every maybe one, maybe two a year, but some of those are just really distribution sites where they mine it, and then they put some rail tracks down. What's interesting though is the logistics piece is just so important. And part of that is because if you're going to transport this stuff -- I mentioned by truck, it's $0.25 per ton mile. If you do it by barge, if you can have a quarry located close to an ocean, it's only $0.01 per ton mile. Whereas then rail, I believe, is about $0.08 to $0.10 per ton mile. So transportation of this material is hugely important. I think it's an overlooked piece of the business that is just hugely important. In terms of who pays for that transportation, generally, the way they price it, they price it on a per ton basis and the transportation is included in the price. But quite often, the customer's paying for that. And -- but often, they'll pick it up as well. But in general, the stats around are that 80% is shipped by truck, and then the other 25% is shipped via barge or rail first and then using trucks. You always have to use that truck, and it's highly expensive, which is why in certain markets, you want to have multiple quarries and that's why you have this platform approach. There's a lot of different ways Vulcan adds value in terms of the operational piece to really get the price down as much as they can for their customer.
· 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?