How construction materials producers are coping with uncertainty

P&Q: There was a lot of excitement and buzz – as there should have been last November – when we saw IIJA passed and signed into law. There’s still some excitement there. But as we’ve heard you declare, we just aren’t seeing the IIJA money make its way into the market. What are you guys seeing with the rollout of the federal infrastructure bill’s funding at this point, and what can we expect as we look ahead?

REDDIN: It wasn’t but a year ago when we got the passage of the act. We celebrated for about 24 hours, and then we started getting reports on inflation.

Nobody expected much to happen this year. If it was going to happen, it was going to be late in the year. The DOTs are challenged, like many people, with labor shortages. They’re trying to get work out and get it bid.

Compounding that is we’re seeing on some of the major projects with long-term project timelines bids coming in well north of engineers’ estimates. That’s an impact of inflation, and we have a disconnect right now in those. That’s resulting in project delays and, in some cases, projects being pulled totally.

The good news is that resurfacing projects – good consumers of construction aggregates – don’t have those long-term time horizons and don’t have the same risk. I think that will bode well. But until we get this letting/bidding dynamic to an equilibrium, we won’t feel the real, full impact of the IIJA.

MINEO: Even if you didn’t want to look specifically at IIJA dollars, I think in general we’re seeing some delays in infrastructure spending from some of the funding we have. California is a great example. They came out with their budget, and they had $5 billion they had expected to spend in the current year that’s being pushed into next year. They’ve got money flowing in but it’s a matter of getting the projects spent correctly and allocating the dollars.

P&Q: What else is happening at the moment that’s impacting construction materials producers. Are you seeing any trends or new developments surface?

MINEO: ESG (environmental, social and governance) is a great example of something to note. It used to be more of a buzzword, and people kind of gave it lip service. It wasn’t a huge focus of the industry, but I think it’s becoming more en vogue.

We are seeing a lot more recycle deals happen in the market. On top of that, we see that even smaller players are getting involved with RAP (reclaimed asphalt pavement) and RAS (reclaimed asphalt shingles). There’s a general shift in how you can take ESG and make it profitable.

From an investor standpoint – and this is not just in construction materials – there’s a mandate for a lot of the dollars out there to be spent with ESG in mind. Not necessarily solely in environmental projects, but there has to be some sort of related idea that a company is embracing social governance. Now, we’re seeing companies actually win work based off their ESG diligence and ability.

REDDIN: The industry’s publicly traded companies – the 17 [or so] in the sector – all now have an ESG score. So it’s definitely impacting them from an investor relations and investor community point of view. This is relatively new, and we’ll see behavioral changes in the private sector. But right now it’s very front and center for the public companies.

P&Q: Finally, since mergers and acquisitions are a specialty for FMI Capital Advisors, we’ve got to ask what it is you’re seeing as we look into 2023 and wrap up 2022. Last year, it seemed like M&A activity was gangbusters in terms of the sheer volume of deals that were happening in construction materials. It seems like the pace of dealmaking slowed a bit in 2022. Is this indeed the case? And what is it you’re seeing as we’re now in the fourth quarter of the year?

REDDIN: This is the time of year when we start seeing buyers frantically work toward closing deals. We’ll probably have a wave of announcements toward the end of the year or in the beginning of ‘23.

Keep in mind that the deals that will be closing soon probably started sometime in the early to middle part of this year. If there was a title for the M&A environment right now, it would be: ‘look both ways and proceed with caution.’

If you’re a buyer, you’re going to be more selective and strategic in this time of uncertainty. Think of it more as hunting with a rifle rather than a shotgun.

The major buyers are long term in their thinking. Their thinking goes well beyond the impact of what’s likely to be a historically typical, short recession impact. The buyers have this dilemma: they have to grow. Organic growth doesn’t achieve their objectives with investors. So M&A will continue to be a big part of this.

I think what we’ll see in periods of uncertainty like this is a focus on existing markets rather than new geographies. Those are safer bets, and I think we’ll see that theme play out in 2023.

MINEO: Historically for construction and construction materials, LTM (last 12 months) has been a good indication of how a buyer is going to look at your company’s performance. They would kind of base their valuation off of that. It was interesting when COVID hit. That was a global event, and everyone kind of knew it was not necessarily something they can mandate performance on as they looked at the future.

So there was a bit of a shift to the next 12 months (or NTM-style) evaluations. On top of that, you have the anticipation of the IIJA passing. A lot of excitement got built up about what you can do versus what you have done.

I think when we enter back into a less certain environment, the shift is moving back toward the LTM. In this rising cost environment, buyers want to see how your company has performed during this less certain time. From there, they’ll be able to judge the look for.

Given that, there’s just a general shift in the market about how values are being looked at.

« Prev Page 1 2 Next Page »