Business Breakdowns
· 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?
· Rob Hansen
[00:00:00] S1: No, I mean, that makes sense. There's actually data in this industry from the USGS, the U.S. Geological Survey that goes back until 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. And I don't think you're building regular malls anymore, but 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 nonresidential declining, residential's 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.
· Matt Reustle, Rob Hansen
[00:00:00] S0: When you think about something like the '15, '16 time frame, 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? [00:00:00] S1: During '15 and '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. [00:00:00] S0: 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 to really to capture those price increases and seemingly pass on inflation while they're doing it from year-to-year?
· Matt Reustle, Rob Hansen
[00:00:00] S0: 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 to really to capture those price increases and seemingly pass on inflation while they're doing it from year-to-year? [00:00:00] S1: If you think about it, it's a very fragmented customer base. And then the other thing is that supply is less. 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 a recession or not, you're just going to keep pumping out cement. 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 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, and other factors, just that being #1 or #2 in the market, whether it's maybe three to four players, it's just a little more rational in general.