Business Breakdowns
· Rob Hansen
[00:00:00] S1: 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 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 NBA or something. It's not like a normal business in that respect. But what's also important for 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 shift 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 that 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 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 the 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.
· Rob Hansen, Matt Reustle
But even if you "overpay" at 20x EBITDA, it still could be a very good deal because maybe, based on where your existing quarries are, it allows you to have a better cost cut than just "synergies." There's just a lot more strategy that goes into it than you'd otherwise expect from just a rock crushing operation. [00:00:00] S0: 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 they doing there?
· Rob Hansen
[00:00:00] S1: Yes. So they typically haven't used stock for M&A. It's all been cash and debt. And they keep their leverage within 2 to 2.5x. 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've 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 turn 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, US 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. I think they sold it for maybe $800 million. 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.
· Matt Reustle
[00:00:00] S0: 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? Like how core is it to the thesis of the business and the opportunity?
· Rob Hansen
[00:00:00] S1: Ideally, they'll keep buying small operations. 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 quarries. 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 one it was trading -- maybe on a P/E basis, it was trading around 20-ish times around, something like that, which typically this company trades in 25 to even as high as 30x sometimes when people get very excited about a coming election and infrastructure bills and things like that.
· Matt Reustle
[00:00:00] S0: As we've broken it down, impressive earnings stream, an impressive industry. And I think you mentioned before, they have 10% of the market, the 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 has the earnings growth trended? And just generally, what is the expectation there for how that can trend over time?