Business Breakdowns
· Rob Hansen, Matt Reustle
[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. [00:00:00] S0: 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?
· Rob Hansen
[00:00:00] S1: 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 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 where 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 Google Maps, 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 of the stats with that and helping the truckers with utilization, too, because it costs them fuel. Those guys are paid 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 their rock crushing machines, and they can analyze it. If you open your FactSet and you look in the 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.
· Rob Hansen
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 in 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 2 or something like that. Working on Sunday is expensive because it's all overtime. So if you can reduce that and incorporate technology into there, super important.
· Matt Reustle
[00:00:00] S0: Very interesting to see dashboards in 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 and 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 operations. When they talk about 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?
· Rob Hansen
[00:00:00] S1: 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 there. 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%. You 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 250,000 or 260,000 tons. So they've actually outperformed their expectations. And 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 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.
· Matt Reustle, Rob Hansen
[00:00:00] S0: Has that historically ever come back to bite them where pricing has lost some business or there's been any snapback in terms of how far they can go on the pricing side? [00:00:00] S1: To my knowledge, not really because everybody is 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, with the inflation last year, everything was rising a pretty significant amount. So it was really the one thing on the long list of everything that's rising. [00:00:00] S0: When you think about that cash gross profit per 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?