Who Makes Billions Paving America's Roads?

This is a plant and quarry owned by the largest road paver in America, CRH. In 2022, it made $32.7 billion From this quarry comes the rock that will become this. There are about 2.8 million miles of roads in the United States. Companies like CRH are newly flush with billions from the U.S. government. The largest buyer of asphalt in the country. But there are some strings attached.

More money is going to projects that prove they are better for the environment. The companies have the technology, but implementing it is not so easy. Because it's one thing to say, hey, let's use this recycled material, this is great. It's a win win until you look at it and you go, Yeah, but the performance is going to be lousy. Of the nearly 3 million roads in

the U.S., 94% are surfaced with asphalt. Asphalt is a mixture of aggregate and a petroleum based binder. The small percentage of surface is not paved with asphalt or made of concrete, a more rigid material that is better for vertical structures, bridges, overpasses or even buildings. Its rigidity makes it more prone to cracking when concrete needs to be replaced. The whole structure needs to be removed. Asphalt

on the other hand, is more flexible. It is applied in layers. A crew can resurface an asphalt road by shaving off and replacing the top layer and more importantly, a piece of a road. A single lane on a freeway can be ripped up and replaced without disturbing the rest. So what am I looking at here? So this is our broken up past fault because. depending on

where you are, you're going to have something different that you're going to need. So asphalt isn't just the same everywhere. No, it really No, About 30% of America's urban roads are in poor condition. They carry 70% of the 3.2 trillion miles driven annually in the country. And the reason for that is there is more and heavier traffic than ever. A 2019 report from the Transportation Research

Board requested by Congress showed that much of the country's interstate highway system is built on foundations that are 50 to 60 years old. Paving over aging foundations is producing diminishing returns. most of the system would need to be reconstructed from the ground up, and that would require nearly doubling the investment in the long term to make those improvements. if you took every lane mile owned by

Tex Dot, you could drive around the Earth's circumference eight times. almost 200,000 lane miles of roadway that doesn't include county roads and city streets. And so if you think about the scale of the network that we have, it's huge. And so financing that network and maintaining it is a really big deal. At the federal level, most of the money to repair roads comes from the Highway

Trust Fund, which historic Lee has been funded, mostly through taxes on gasoline and diesel. Those taxes haven't been raised in decades. The fund has had to rely on transfers from general federal revenues to stay afloat. Every few years it is not on a regular schedule. Congress passes big bills to authorize spending on highways and transportation. Hence the Infrastructure Investment and Jobs Act signed into law in

November 2021. It was a historic investment set to boost federal highway spending by 40-50% over five years. the Biden administration has made combating climate change a top priority. Purchasing materials that can demonstrate lower carbon emissions throughout their life cycle is an integral part of that. Among other things, the industry is touting asphalt. 95% recyclability rate. It's made investments in substances like warm mix asphalt, which can

be made at lower temperatures. Therefore, reducing carbon emissions at plants and on roads. These technologies, companies say, are positioning the industry to take advantage of this new era in infrastructure spending. 65% of the asphalt industry's business comes from publicly funded contracts. Most of those are for highways. And there is a small share for airstrips. The remainder of the industry's business is commercial and residential. About half

of public contracts are federally funded. The other half are state and local contracts range in size dramatically. In 2021, the federal government spent $50 billion on federal aid highways, which include interstate highways and other highways and roads. These make up about a quarter of all the roads in the United States. Roughly 60% of that money goes toward pavements. in 2022, that rose to 70 billion because

of the Infrastructure Investment and Jobs Act. The infrastructure bill passed by Congress and signed by President Biden in 2021. The Consolidated Appropriations Act, passed in late 2022, added another $70 billion. Federal funding for road and bridge construction is expected to total $360 billion over the five years from the date the bill was signed into law in November 2021 through 2026. This facility belongs to telecon and

Asphalt Company in the Northeast United States. It is a subsidiary of one of the largest asphalt companies in the world, CRH. CRH cells, a lot of other building materials to Somewhat unusual among competitors. The company also builds with what it sells. of the $32.7 billion CRH made in 2020 to $20.5 billion came from North America. you have a company which has been generating, particularly over the

last number of years, very attractive returns on the assets that they're operating. They have shown very strong levels of margin resilience, particularly as the cost backdrop has been quite volatile. Its road paving business made up half of its North American revenue. That business has 830 locations across 41 states and two in Canada As of May 26, share prices had increased by 25% since the beginning of

2023. A shareholder who bought the stock when the group was formed would have an annual return of 14.8%, They'd have a bit less if they'd bought it in 2013. A group of U.S. peers has had a slightly higher overall return in that time. But CRH has outperformed global states seen a lot of, analysis on their return on invested capital. They generate a premium to the rest

of the sector. We think that those returns are defensible. We think that they can reinvest the excess capital that they generate in the business into expanding the business, in 2023. It plans to distribute $960 billion in dividends and repurchased nearly $2.6 billion in shares. Combining these figures implies $3.5 billion in shareholder returns, equivalent to about 9% of CRH as existing enterprise value. The average of its

construction materials peers was 3% last year and the dividend yield on U.S. peers is lower. I think the stock performance has been good over time. My particular view would be that there isn't enough appreciation of the quality of the assets that they have. Firstly, of hope differentiated. Their proposition is on how much values are delivering to customers And then we also have a loadout screen in

which we control all three scales for the trucks that we asked to come on and we pretty much tell them what silo to go to for the product that they're asking for. CRH is business is vulnerable to the construction industries, cyclical ups and downs. A few factors lessen this almost a quarter of revenue is infrastructure related. over the past 25 years, U.S. infrastructure spending has had

the ability to ordinarily reduce project times, reduce costs. They can incorporate sustainability into a project. And of course, ultimately it is not value that they're offering to their customers, which gives us the confidence to say that the margins are generating, the returns are generating, should have a good runway into the future and might even improve thereafter. The company is currently listed on the London Stock Exchange,

but will be moving to the New York Stock Exchange on or around September 25th, 2023. we think that'll enable more scaling of this differentiated strategy and it will enable them to enhance their organic growth prospects, which have always been quite attractive, but at the moment there aren't any real chinks in the armory. Money from the Infrastructure Investment and Jobs Act is flowing in. About half of

it is going to maintenance projects and the other half is going to build new roads. Because it operates in several sectors. CRH expects to benefit from the $370 billion Inflation Reduction Act, which supports domestic energy production and manufacturing. The company sees an opportunity to provide concrete for wind turbines and utilities. There is also the $280 billion Chips and Science Act intended to increase U.S. semiconductor capacity

and foster regional high tech hubs. the bump in domestic manufacturing and offshoring produced plans for about 30 megaprojects, each worth more than $1 billion in 2022. Well, the overall outlook appears quite bullish. There are challenges. First, the IJA might not be helping as much as it seems. While it has boosted funding by about 40-50%, inflation has driven up highway construction costs by nearly 30%. Two tools

CRH says it can use to reduce contract costs. Design and Circularity. CRH says recycled pavements can lower costs. At the moment, about 25% of every mile of pavement it lays down is made of recycled materials, Recycled asphalt, pavement or wrap is what it sounds like. Asphalt that has been pulled up off the road, ground up and used again. More than 95% of existing asphalt is recycled.

But nationwide, and only about 20% of the new roads laid down are made of recycled asphalt. that is an average. Some states use much more. Michigan allows up to 50%. And CRH has test projects in aggregate, poor Florida, which are using up to 70%. the industry is trying to increase the allowable share of recycled asphalt to 50%. As of 2023, many states capped the percentage of

recycled asphalt in any given mix, primarily over fears it won't perform as well as virgin pavement again. One of asphalt strengths is that it's flexible. It can hold heavy loads without cracking as easily as concrete. The ideal asphalt mixture is one that flexes just enough without cracking and without forming the kinds of ruts you might see on an old unrepaired road. But asphalt ages in the

field, and when it does, it gets stiffer. When rap was first introduced in the 1980s, there were failures. Those experiences have contributed to the caps. I'm not saying that we have it completely figured out, but we're a lot farther along than we were 15 years ago. And I think you're going to start to see the performance of a lot of your pavements improved because of that

and improve with a more recycled footprint in them. Asphalt laboratories, often at universities are exploring a wide range of research. This includes testing different mixes of aggregate to see how well they perform over the long term. They are exploring higher performing binders and testing both recycled asphalt as well as other materials such as ground up tires or recycled plastics. one of our biggest challenges comes in

how do we take what we learn in the lab and predict what's going to happen in the field? Because in the field you're building it under traffic, you're building it with heavy equipment that you know, spans out 20 foot wide. You're rolling it with seven foot wide rollers. It's cooling at different temperatures, right? So what happens in the lab and what happens in the field? Two

very different things. And so tons of research going into what do our testing the lab tell us about what's going to happen in the field so that we can make better decisions on what materials to put into our mixes to get the type of performance we want. and researchers like McGuinness say one of the best sustainability and long term cost saving measures is building roads that

last longer. how do we rebuild these roadways under traffic in such a way that we'll get another 60 years out of them because there's not a light switch. You can't just turn these roadways off. People use them, commerce uses them. how are we going to rebuild these things under traffic? How are we going to do it fast without sacrificing quality? It's a huge challenge.