Vulcan Materials: Rock On - [Business Breakdowns, REPLAY]
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You can follow Octus on LinkedIn or X. There they will share breaking news and exclusive coverage, and you can find links to everything in the show notes. Quick programming note, we have a replay this week, Vulcan Materials. It may be my favorite business breakdown recording, and I know I shouldn't pick favorites.

But I have a vivid memory of this conversation. And steadily, as we go deeper with Rob, in terms of the business, how they've carved out this niche in this mission critical market that is asset heavy, it looks different than many of the other incredible businesses that have been built over the years. I just had fun with this one. And you can hear it in my voice throughout.

We will be back in the coming weeks with new episodes. Please enjoy this breakdown replay on Vulcan Materials. This is Business Breakdowns. Business Breakdowns is a series of conversations with investors and operators diving deep into a single business. For each business, we explore its history, its business model, its competitive advantages, and what makes it tick.

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This is Matt Russell, and today we are breaking down Vulcan materials. Vulcan is America's largest producer of construction aggregates. Now that's all of the crushed rock, the sand, the gravel, which gets used for the foundation of pretty much everything around us. All of the buildings, the roads, the infrastructure that defines the physical footprint of America.

To break down Vulcan, I was joined by Rob Hansen, Senior Analyst at Bontobel Asset Management. And Rob shared what makes this relatively simple business so successful. So we get into the dynamics of operating quarries, the logistics of moving rocks, and what's cyclical versus what is not. So please enjoy this breakdown of Vulcan Materials, one of my recent favorite episodes to record and to learn about. ♪

All right, Rob, I am excited to have you here to break down Vulcan Materials. It is a large business at the time of this recording, close to a $30 billion market cap. I don't think it's a household name, and I don't think it's necessarily a household product, an industry that's involved in. So I thought maybe we could start there with the simple introduction to Vulcan and the construction aggregates market. If

If you could just introduce us to what exactly is going on there, that'd be a great place to start. Yeah, Vulcan Materials, it's a pretty basic business. They make aggregates. And really what that is, is they take big rocks and crush them into small rocks. And then you use those rocks for different things. It's almost like the foundation of the United States in a way, because you need this underneath a highway. You have 21 inches of this. You

You use it in asphalt, you use it in concrete. It's a very, very important material and it's really used everywhere and you walk on it every day, but you don't think about it at all. So it's a very important piece of the United States.

I like the way that you simplify that, just taking rocks, crushing them down. In terms of Vulcan, are they actually owning quarries and then taking those rocks, breaking them down? Is there some type of contracted involvement there? Just a little bit about the industry structure and where they fit into it as well.

Yeah, so Vulcan is the largest aggregates producer in the United States. They own quarries. They've got about 400 locations and their quarries are located within 60% of the United States population. So the way it works is that the TAM for this industry for aggregates is about, call it around $35 billion.

It's used primarily in asphalt and concrete. Asphalt, 90% of it by weight is aggregates, and concrete by weight, 80% of it is aggregates. I mentioned the stat about the 21 inches too. If you think about a four-lane highway,

If you're building a mile of four-lane highway there, you need about 38,000 tons of aggregates for that. And if you're building a home, you need about 400 tons. This stuff, it's not that expensive. It costs, depending on the market, maybe $10 a ton, maybe $25 if it's a very high-cost market. In terms of the end markets,

The companies try to look at it as just public and private. Public includes the way we look at it as really infrastructure. And so that's all your road building and whatnot. But there's also some institutional because it depends on the funding. So the institutional side would be like a school, things like that, anything where it's publicly funded. Now, on the private side, that's the other call it half of the industry that public

comes from residential and then non-residential. And that's about around 25% each. And non-residential is just think about data centers, warehouses, office buildings, retail, although those have become much smaller piece of that in recent years, just because we're not building many of those things. But the warehouses and data centers are huge markets.

And is there split between that, what I would just reference as government funded versus private market funded? Is that split evenly? Is there a big mismatch between the two and just general trending over time? Has one been significantly better business than the other?

So from the company's perspective, it almost doesn't matter who's paying for it because they all pay the same price. The government-funded stuff is a lot more steady because you're constantly fixing roads, you're constantly building roads. An interesting piece of that is that 75% of the spend on the government side actually comes from state and local government. Now, the other piece of it is on the non-res side, the privately funded side,

All of that is coming from businesses and just general construction. So it does tend to be a little bit of a byproduct of economic activity. But you can have a situation like now where there's a lot of public money coming from the federal government that can help. So on the public side, it tends to be very steady eddy and grows and not as much cyclicality that the private side does have a little more cyclicality.

Let's get into the history of this business just a little bit. You were telling me a fun story when we were talking before about their IPO and what that was tied to. So just some background on Vulcan, how it came to be a market leader. And from my research, it seems like only one of the major pure players and operators in this space. But what's the beginning and any key milestones that you would talk about in terms of what led to them being in that leadership role today? Yeah.

Yeah, so Vulcan is a very, very old business. 1909, this was started as Birmingham Slag Company. There were a few different iterations of itself, but business continued to operate and eventually seven families formed together to create this business. But the most important date was in June of 1956, President Eisenhower put funding for the Federal Highway, Interstate Highway System.

So these families came together, merged themselves, and then went public on January 2nd of 1957 in order to take advantage of this government money that was going to be funding this interstate highway program. Fast forward to 1970.

They had about 70 aggregate operations in call it eight states. And then you have today 400 aggregate operations in 22 states. They have about 16 billion tons of aggregate reserves, which is about a 60 year supply. But what's interesting about these quarries is I was looking through one of their 10Ks at one point and there's a Norcross quarry, for example, in Georgia.

And this quarry has actually been in operation since 1970. So these quarries have 50 to 70 year lives. But this one has been in operation since 1970. And then if you look at today, what they have left, it's a 49 year supply based on today's volume. So these things really can last for a long, long, long, long time. Yeah. And I think...

I'm familiar with quarries thinking about some of the finished material you might see in a kitchen, like a granite or a quartz, marble. And I'm not as familiar with the quarry market in the U.S. They started in Alabama. Am I right to think that there were a lot of quarry locations there? Is there anything geographically unique? Oil, you think of Texas and certain other areas. When you think of quarries, are there certain geographical spots that these are most dominated in?

They're pretty much everywhere. The bigger governor is really the cities and towns because no one likes these things. But there is an important fault line. I think it's called the Brevard fault line that runs from D.C. down the mid-Atlantic through Texas, where you can't get as much rock. And then you have Florida, where there really isn't any rock at all. So all of that has to be shipped in by boat.

But everywhere else in the U.S., there are plenty of them. I think in the U.S. in total, there's around 10,000 quarries. Another interesting stat was back in 1976, the number of quarries in the United States peaked at 12,600 or something like that. So we don't tend to make a lot more of them. So that's why I mentioned the bigger governor is just cities and towns really not liking these big, giant pits. Because Vulcan, and there's a couple of other competitors like Martin Materials and Summit Materials and CRH,

These companies are really mining companies. People don't really think about them that way, but they're above ground mining. They just dig a giant hole in the earth and then you have your quarry and you just keep mining it and mining it and mining it for as long as you can. It's an interesting, not in my backyard, NIMBY barrier to entry, it seems like, in terms of having the quarries today and restricting new folks from coming into the market. Is there a difference in quality

between the different locations? You mentioned a little bit before in terms of the cost and the price you might pay and what that looks like. Is that coming down to the specific quality of what's actually being mined? Is there much difference there?

There are some differences. 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

can be very similar. It just depends on where you are. It's not a ton of differentiation, which is why when I look at this business, you're 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.

Yeah, 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 upfront, 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 outstores? 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.

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 to, I know I call it the commodity, but it is scarce. It's got to be close to a population center because this is 10 to call it 20 bucks a ton. So it doesn't travel very far.

Every 40 miles you travel by truck, the cost doubles because it's about 25 cents 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 25 cents per ton mile. If you do it by barge, if you can have a quarry located close to an ocean, it's only one cent 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 quite often, they'll pick it up as well. But in general, the stats around it are that 80% is shipped by truck. And then the other 25% is shipped via barge or rail first and then use a truck. 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. It really is interesting to hear about how Vulcan

important it is from a logistical standpoint. When the price is so impacted by the transportation cost, I can think about coal in the US. 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. These local oligopolies are hugely important and you want to be numbered one or number two in a market. So I mentioned they have 10% share overall. And the number two player in Martin Materials probably has a nine, 10% share as well. But really that doesn't matter 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 pretty 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 their number one or number two.

It's a natural point to ask what is their margin profile today? Where do they come out on that scale? 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 when we can talk more about vertical integration later in the conversation, but it really depends on where the market is and certain factors. And from a sales perspective, what percentage of the business is the aggregates and what percentage is that asphalt and concrete and other?

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, it 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 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. They have some good markets in Northern California where they can compete quite well there. Really interesting when it comes to thinking about that in terms of the vertical integration, 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, 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

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? No, I mean, that makes sense. There's actually data in this industry from the USGS, the US Geological Survey, that goes back to 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. I don't think you're building regular malls anymore, or 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 non-residential declining, residentials 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.

When you think about something like the 1516 timeframe, 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?

During 15, 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.

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 truly to capture those price increases and seemingly pass on inflation while they're doing it from year to year?

If you think about it, it's a very fragmented customer base. And then the other thing is that supply is last. You can turn off the aggregate facility in 15 minutes if you need to. So it's not a factory where you just have to keep pumping out things. That's one key difference between cement and this business. Cement, you've got to keep that kiln fired up. You've got to keep it operating. And whether it's recession or not, you're just going to keep pumping out cement and

And if need be, you're going to ship it by barge to wherever you can to unload it anywhere in the world. And it's a much higher because it's a much higher price. I mean, that goes for 100 bucks a ton at least. So it's really just the fragmented customer base, the fact that you can turn on and off the factory, so to speak. And then, like I mentioned, too, another factor is just the being number one or number two in the market, whether it's maybe three to four players. It's just a little more rational in general.

And is there anything else that they can offer to a customer that maybe a smaller player wouldn't be able to offer? Is there anything just being a large player, having this business that spans wide geographical? Is there anything they can offer just at a local level that differentiates them?

Yes, for sure. These guys have done a really good job at incorporating technology into their business. I mean, this business is super old. The way it was done before is you have your paper ticket, you get the weight, you tell them what you want, where to deliver it, whatever. It was very slow. And then you end up delivering it maybe at the wrong address and it costs you money. These truckers get upset.

These guys have been able to incorporate this technology right down to the customer level and into their plant. And one interesting example of their ability to monitor their inventory position at their customers is they actually have technology where they go and they dump the rock at the customer site and the customer will take it and do what they want with it when they need it.

But they can monitor that, for example, and see when they need to deliver more. So it's kind of like when you have your printer and it automatically orders more ink when your ink gets low. That's exactly what this is, except a giant truck of rock shows up at your facility when you need it. So they can keep replenishing their rock for their customers. But

Even beyond that, simple things like giving an accurate coordinate of where you're going to deliver the rock. Because if you think about it, sometimes there is no road there yet. You're building the road. So there was no ability to say, go on core and main and it's right there. This didn't exist. So

Being able to have a coordinate and deliver it exactly where it needs to be, when it needs to be, on the exact time. They have this app that they use on an iPad or an iPhone, and it shows all the stats with that. And helping the truckers with utilization, too, because it costs them fuel. Those guys pay differently in that respect.

That's probably on the selling side where they've really helped their customers, but they've also used technology in their operations as well. That's fascinating too, because basically they've created almost like a digital twin of all of their rock crushing machines and they can analyze it. If you open your fax set and you look at it like green and red and it's blinking and flashing,

That's what they have for their plants. And they can see, okay, there's an issue at this specific spoke of the crusher. We need to fix this or else our plant's going to have less throughput. So they've been able to basically run the plants less hours, generate more tons. And so you have better throughput and it's this enterprise-wide performance tracking where you can pull this up. Or if there's an issue, instead of having to

call somebody, an expert, and have them come on a plane and a week later and fix it. And so there's all this downtime. They can actually just do it over the phone and tell the person, go into this location, find that, fix this, whatever. And they like to talk about how the number of Sundays they worked has gone down from 20 to two or something like that. Working on a Sunday is expensive because it's all overtime. So

If you can reduce that and incorporate technology into there, it's super important.

Very interesting to see dashboards and other industries outside of finance. Finance, it's usually just the green and red, like you mentioned. You have refineries seeing where their oil is coming from Nigeria, North Dakota here and crack spreads. The example you just described, which is excellent. It seems like it actually has a meaningful impact on cost. I love that where technology is really coming into play and impacting the operations when they talk about actualization.

actual profitability of the business. It's profit on a per ton basis. We explained a little bit just in terms of what's driving the revenue. When you split out cost per ton, you talked a lot about the transportation side of things. What other big buckets are there? And how have you thought about that trend line over time, just in terms of the cost of what they're producing and whether that's inching upwards or downwards and how they control that?

So I'm going to attack this from a little bit different of a perspective. In the aggregates industry, these guys were very much at least a pioneer in talking about it more publicly, which is cash gross profit per ton. So you're excluding the depreciation, amortization, and the depletion, which comes with your quarry. So this is just the pure cash basis. And

Barclays has done some good work that companies whose cash gross profit per ton has risen the most over the years, the stock has done better. So it's been a good predictor of performance. But these guys were first at least talking about that more publicly. And the goal there is really to keep costs down and raise price. Price obviously helps a lot, but there are some input costs

Like diesel is about 10%. Got labor at 30%. You've got supplies and fixing the machines. That's another 20%. Those are the big cost buckets. But as I mentioned,

The biggest piece of that is that they call it the Vulcan way of operating. That was what I talked about before with the technology piece is really honing in on all those costs, becoming way more efficient and running those crushers with much better throughput and operating with less man hours and really trying to hone in on that. That's where they've been focused on for a very, very long time. And it's been hugely important and hugely helpful.

One of the things that they've mentioned is they were originally talking about $9 per ton of cash gross profit when they were, I think, around 220,000 or 225,000 tons or something like that. They revised that up to $11 to $12 per ton.

around 250 or 260,000 tons. So they've actually outperformed their expectations. My guess is the inflation has helped them a little bit because they've been able to raise prices by 19% this year. It's been good for these guys. It's funny, there was a customer and

And one of the things he talked about was he was like, they're world class at raising prices. So part of that is price, but they really do have this tremendous focus on cost. And it's been a really big driver. Has that historically ever come back to bite them where pricing has lost them business or there's been any snapback in terms of how far they can go on the pricing side?

To my knowledge, not really, because everybody's doing it at the same time. One of their competitors, Martin, talks about a value over volume strategy, and they've raised prices over 20% this past year, so a little bit higher. The other aspect is aggregates are 5% to maybe 10% of the cost of the job. So if it's up 10%, it's not going to have a humongous impact on your overall cost. In this day and age, the

inflation last year, everything was rising pretty significant amount. So it was really one thing on the long list of everything that's rising.

When you think about that cash gross profit for ton, that number trending upwards, how much of that actually trickles down through the earnings, through the income statement, all the way down to the earnings line and potentially bringing it all the way into free cash flow? Is there anything unique about the business and how it's able to convert revenue and gross earnings into actual cash flow?

They convert about 75 to 100% of net income into free cash flow. It's a very good business in that respect.

In terms of the cash flowing down through the income statement too, incremental EBITDA margins, when things are normal, absent a big M&A transaction, et cetera, they're really around 60% on each incremental ton of volume. So it falls down very fast.

The problem is sometimes you end up doing M&A transactions or little deals. And so all of a sudden you'll see in their income statement, their years, and you're like, why don't gross margins just go down by 4%? But it's really because maybe they did a big transaction, a bunch of costs they have to maneuver. And we can talk more about M&A later, but it's just one of those things where there's a lot of different factors involved.

And that 60% EBITDA increments is absolutely wild. What's the baseline EBITDA margin for the business? Yeah, so baseline is about 30%. As I mentioned earlier, it's about a 30% gross margin. And then you have 10% sales, so you have a 20% EBIT margin. And then you have a depreciation, depletion, and amortization, which is another call at 10%. So that's how you get your 30% EBITDA margin.

which is why they use that cash gross profit per ton metric because it's very similar to your gross profit.

Yeah, absolutely. I think with some of these businesses, especially anything that there's a production of, whether we call it a commodity or not, something like that, it's tricky, but something along those lines helps you understand at the base level what it's costing and what they're profiting for production of each incremental thing. I want to get into capital allocation a little bit before we jump to M&A, just on that earnings conversion into cash flow. I assume that's the CapEx line that's swinging it. Are there large capital outlays related to new quarries?

When you think about capital expenses, what do those typically look like and how much is their volatility just in terms of spending and big spending programs, anything along those lines? 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's our next leg of growth going to be in 20 years? Because where is Atlanta going to grow? Which quarter? That

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 just last 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, when I was going back through it, from 2016, they

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.

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. 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 in 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 risks though, I mean, you could spend a lot of that money and then the town just says, no, sorry. Yeah.

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 and now you've got this quarry and there's no construction to fill this in. So that is definitely a risk as 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 they're like, oh, wait, I did have this quarry. So...

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 costs. 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?

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 it 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 MBA or something.

It's not like a normal business in that respect. But what's also important from 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 ship 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 a 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 there.

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 a 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. But even if you quote unquote overpay at 20 times EBITDA, it still could be a very good deal because maybe based on where your existing queries are, it allows you to have a better cost cut than just quote unquote synergies. There's just a lot more strategy,

that goes into it than you'd otherwise expect from just a rock crushing operation.

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

What are they doing there? - Yeah, so they typically haven't used stock for M&A. It's all been cash and debt. And they keep their leverage within two to two and a half times.

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 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 turned 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, U.S. 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. And I think they sold it for maybe 800 million bucks. 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. 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? How core is it to the thesis of the business and the opportunity? Ideally, they'll keep buying small operations, right?

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 cores. 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 when...

It was trading maybe on a PE basis. It was trading around 20-ish times around something like that, which typically this company trades in 25 to even as high as 30 times sometimes when people get very excited about a coming election and infrastructure bills and things like that. As we've broken it down, impressive earning stream, impressive industry. And I think you mentioned before, they have 10% of the market, 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 is the earnings growth trended? And just generally, what is the expectation there for how that can trend over time?

So over the last five years, earnings have compounded 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, you're

Because of the IIJA and the IRA, and then you have the CHIPS Act 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% year. 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. Yeah, very interesting to find these in various places.

places in the economy. And when you have an asset with that long shelf life, just thinking about that a little bit in the duration of the asset and how much inventory they have, does that stand out relative to peers? That was 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?

Yeah, 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 yeah, it's pretty normal. I mean, some of the smaller companies, maybe it's a little bit less because...

You've got Summit Materials that 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, CRH, formerly listed in the UK. And now they actually just relisted here. They're a very big company. They're a lot more vertically integrated. They do a lot more asphalt, a lot more paving, a lot more ready mix. But

Vulcan is a 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. 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.

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? 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. That makes sense. Thinking about risks to this business, is there ever risk that an alternative solution is provided? Something that could replace composites?

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. 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?

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 and 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 to

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 situation.

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 miss a quarter because of weather. There's all these random exogenous factors where that can impact it on a quarterly basis. But when you look at this on a multi-year 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. Yeah, 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?

I think one thing that's super important is that mundane is good. Often everybody's after the next fad, BV 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

If you're confident you have the right management team, we'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 to everything.

Personally, 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 all the cycles 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. I mean, 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.

I think you put it really well there. This is an interesting one. It feels very unique just in terms of the market that it operates in and how unique it is just in terms of the barriers to entry. So it's been fun talking through it. As simple as it is, it's very interesting. It's going to stick with me after this recording. So thanks a lot, Rob. I appreciate you joining us. You're welcome. Thanks for having me.

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