This industrial company returned 34% in 2023, and it's swimming in product demand

When you think of building materials, you invariably think of construction. And when you think of construction in today's market, you think of a downturn precipitated by high borrowing costs, lower access to capital, and pricer input costs. 

Adbri (ASX: ABC), one of the country's leading premix concrete suppliers to the residential, commercial and infrastructure sectors, is having none of it.

According to its CEO David Irwin, the defining external factor affecting its operation is high demand for its product. 

Full-year revenue came in at $926.4 million (up versus consensus estimates of $885.7 million), offset by a miss on underlying EBIT of $82.1 million against estimates of $83 million. 

The stock retraced about 14% on the back of the news, but it should be noted that it had rallied 70% year to date into the results. 

Despite the results sell-off, brokers Jefferies, Citi and Jarden all raised their target prices on the stock, despite concerns around leverage and an uncertain dividend outlook. 

In this interview, Adbri CEO Mark Irwin explains that despite a softening outlook in residential construction, its focus remains squarely on increased cashflow, expanded margins, and a grinding and blending project at Birkenhead.   

Edited transcript

What are some key figures investors should be across?

There's a couple I'd like to call out. The first one is you say is our revenue, which came in at $926 million. That's a significant uptick compared to the prior period, as well as an EBITDA of $149 million, which again is a significant increase relative to the comparable period last year.

The stock sold off following the results. How would you allay investor concerns?

The share market is something that I'm definitely not experienced in myself as an investor, so I think my job is actually to focus on the business itself and that's actually where it is. So the market is the market. It's important. Shareholders are really critical, but my job is to focus on the company performance and the market will respond accordingly. 

What external factors affected operations over the past 6 months, and how are you addressing them?

So one of the largest external factors was demand. It was very strong across all of our products. So cement, lime, concrete aggregates, or let's call it quarries, material from quarries, and masonry. 

Year on year, we saw strong demand and that's really positive. So what that also then did, because of that strong demand, it focus on how we think about our customers, how we think about our products and how we think about the product pricing. 

So there was significant focus by us, which is a primary focus by me when I started, around sales price discipline and margin discipline. So that's the largest external factor. Secondary factors which have impacted on us, and the Australian economy more generally, are energy related inflationary costs. They continue to be somewhat elevated relative to historical pricing.How do you plan to increase cashflows and expand margins?

We had a strong margin expansion relative to the end of last year and on an EBITDA basis, it increased from 12% to circa 16%. 

So the key thing for us is to continue to maintain that discipline going forward. So for us, it's really important around controlling the revenue line as well as good operating discipline as it relates to costs, as it relates to those costs I spoke about such as energy. It's about managing the usage. We are involved in a number of activities as to how we can reduce our energy usage more generally. This and that's also consistent with our focus on a net zero roadmap out to 2050. Secondly, it's how we think about what that usage mix looks like, as well as the actual act itself of reducing the consumption.

Are there any exciting acquisitions or projects on the horizon?

There are a number of projects. If I look at our South Australian footprint, our major asset is called Birkenhead. We're actually doing a study there to see how we can increase our blending capacity, the ability of by doing that and also increasing our grinding capacity. That has a number of benefits. First, it will increase throughput through the plant. Secondly, if we do the study and find that it makes sense to build and construct the grinding facility and blending facility, that will enable us to have an improved product offering, which has lower carbon contained material in our cement to our mining customers and also to our commercial and residential customers. So we're excited by that and we're also looking at how we think about our aggregates or our quarry footprint, how can we continue to organically expand them over time. I think that's probably more important for us than looking at mergers and acquisitions in the short term.

Why should investors be excited about ADBRI over the next 12 months?

I think there's a few things. What we actually did talk about in our market outlook is that we said the second half will be moderately superior in terms of EBITDA performance relative to the first half that's just published. So I think that will give an indication to the market about how people think and should think about our product. We see no reason why that wouldn't continue into the following calendar year, so the outlook is positive for us. Second, we believe we have a very good suite of assets in Australia being ostensibly a domestic manufacturer.

So we don't have to take the same view and risk around currency and currency fluctuations as some of our competitors who don't have the same domestic production footprint that we have. So that's actually thinking about it as it relates to earnings, or sovereign capability. The third thing I would say is that we are actually rolling out a suite of products or rebranding from a market awareness perspective, a series of products that we think the market likes that enables the market to actually have products with less embodied carbon in it. We think that supports the industry, so we're excited about that. 

Construction is facing tighter conditions, how is that affecting Adbri?

We're actually very diversified. We have geographical diversification, and each state is different and territory is different in Australia. It has its own nuances. The second thing is we actually have a different product mix and market mix. So we have quite a large exposure to the mining sector, both in terms of our cement products and in terms of our lime products. For us, the lower the Aussie dollar, the more competitive those products are internationally, so we are well insulated in that particular sector with our customers. That's the first thing. 

In terms of residential, there is some softening or some mild softening we think in some of the markets. Having said that, we think that the industrial market and the commercial market is actually soaking up whatever excess capacity there might be with this short-term softening from a concrete perspective.

We also believe, as do others, that whatever short-term softening there could be on residential will largely correct itself over the next 12 to 18 months. I think the other thing that I would say, and you look at Queensland as an example, whilst there could be some softening and residential, and we're not seeing that, I must say, from our perspective. Because of our products and our reputation, we're not seeing the softening. But what there is over the next number of years is very significant investment excluding the Olympics on infrastructure. We think we are really well placed with that, with our asset portfolio and our ability to service those markets and grow accordingly.

What are the key growth opportunities?

So what I've been really pleased about in the time that I've been here is our growth in aggregates. Aggregates is quarry material and that material is either sold to ourselves to make concrete or to the external market. Our demand for that is up really significantly. So I'm a fan of aggregate production and seeing how we can expand that over time because they're limited assets, they're quality assets and I think that's going to help underpin us. That's something that I find really interesting.

Where else are there opportunities?

Again, I think the changing out of a cement type and reducing the amount of clinker in cement and supplementing that with other products such as limestone and other related products will actually reduce the amount of CO2 in that product. I think those suppliers who can do that and sell that to their customers, it's a win-win from a CO2 perspective. So they're a couple of key areas that I'm really interested in and really excited about, actually.

Recent years have seen an uptick in infrastructure spending. How is Adbri exposed to this tailwind?

We have larger market shares in different products. Infrastructure for us is actually a sector that we're still growing in. We are seeing significant year on year compounding growth off a relatively low base. As we look into next year, it's a market that we feel that we will continue to grow in, again, off a low base. We do it in a way where we are not taking maybe the risk that larger participants in that sector have taken in the past. So we actually do it on a cost through basis. We do it on an open book margin basis as opposed to taking fixed price risk, which has put others in the past at exposure as it relates to raw material, input costs, energy costs, et cetera. So for us, that's a growing market.

How does Adbri contribute to sustainable outcomes?

One of the greatest challenges for our industry is that the CO2 that is produced, a lot of it comes out from the act of creating cement in itself, the actual technical liberation of CO2. At Birkenhead, which actually has the lowest embodied carbon in Australia, 70% of our CO2 emissions come from the act of creating cement, not from the use of energy. So what's our solution to that? We are already a user of gas at Birkenhead and it's not uncommon for others to use coal. That's the first thing. The second thing is we're trying to substitute our gas and we are through our clinker. So we are moving towards a plan for 100% substitution of gas through our clinker over time. Then as you correctly say, what else can be done? So we have a strategy around thinking about offsets, what's our strategy there? What's a credible strategy as opposed to just purchasing credits at the lowest price? What is something that's truly going to negate the emissions that we produce through our production process?