Continental Building Products: How low (cost) can you go?
Continental Building Products is a leading producer of wallboard in the United States. Through its unique operating model, CBP has been able to achieve industry leading operating margins and grow its market share, despite sub-scale operations relative to its peers.
“We are extremely focused on operational excellence, and our strategy is centered on exceptional customer service, profit maximization and disciplined cost management” – Isaac Preston, former CEO
Continental Building Products (CBP) is a leading U.S. manufacturer of gypsum wallboard with an estimated 10% share of the U.S. market. The company manufactures over 2.2 billion square feet of wallboard annually through five manufacturing facilities located in the U.S. and Canada.
More commonly known as drywall, gypsum wallboard is used to form the interior walls of buildings. Wallboard is created by taking raw gypsum, and compressing it into a plaster that is then compressed and hardened between two sheets of paper. The following video illustrates this process:
Given that wallboard is essentially a commodity, manufacturers compete mainly on price, which highlights the importance of being a low cost producer. Furthermore, wallboard consumption is tied to a cyclical end market (new home construction), which requires wallboard manufacturers to have a flexible production system.
Over time, CBP has successfully developed an operating model that has allowed it to achieve its strategic objective of being one of the lowest cost and most flexible wallboard producers. I chose CBP because I think it’s fascinating to see how a small competitor has achieved a strong competitive advantage amongst its larger peers through the following aspects of its operating model:
- Direct access to low-cost inputs. Unlike many of its peers, CBP uses only synthetic gypsum. Synthetic gypsum has the same chemical composition as naturally mined gypsum, but is cheaper given the costs associated to mine natural gypsum. Core to CBP’s operating model is strategically locating its facilities near coal-fired power plants, which produce synthetic gypsum as a by-product from burning coal. This decision not only allows CBP access to cheap raw materials, but it also reduces the costs required to transport the gypsum to its facilities.
- State of the art facilities. Since 2000, CBP has invested over $550mm in its manufacturing facilities. As a result, three of its plants are among the fastest in the industry with capacity of 450-600 ft per minute, which drives lower fixed costs per unit of production. Furthermore, the company is well positioned in the event the forecasted rebound in the U.S. housing market materializes. CBP currently produces 2.2bn square feet of wallboard, below its estimated capacity of 3.3bn, which translates to 66% utilization.
- Primarily non-unionized labor force. As of today, only 14% of the Company’s workforce is unionized. Since the peak of the market in 2007, the company has reduced its headcount by 35%, to align its cost structure with the current environment. Employing a primarily non-unionized workforce protects CBP from excessive wage inflation, which would pressure margins.
- Close proximity to large housing markets (see map). Given the commoditized nature of wallboard, one of the ways CBP differentiates itself is offering same-day delivery service. This also allows CBP to have lower transportation costs of finished goods, which is estimated to account for 20% of the price. Also, the company is able to maintain a lower level of inventory, which currently turns on average 9.7x annually.
- Incenting management through organizing as public company. CBP was spun-out from LaFarge industries in February 2014. By operating as its own company, the Company’s board can now tie management’s compensation directly to the performance of CBP. This is critical to ensuring that one of CBP’s key assets, its management, creates value for the organization.
The alignment between the CBP’s strategic objective and its operating model has resulted in industry leading EBITDA margins of 29%, relative to its peers who average 20%, and market share growth from 2% in 1997 to 10% today. By having a relentless focus on its operations, CBP is well positioned to continue to generate strong growth and profitability well into the foreseeable future.
Sources:
Note: Peers cited include USG Corporation and Eagle Materials. Data as of December 4, 2015 per CapitalIQ.
1. Continental Building Products, Inc., Q1 2014 Earnings Call, May 12, 2014.
2. Sterne Agee. Continental Building Products Initiating Coverage Report, November 16, 2015.
3. Continental Building Products, Inc., Investor Presentation, November 2015.
4. https://nationalgypsum.com/about/board-production.htm
5. Continental Building Products, Annual Report (10-K), February 25, 2015.
6. http://www.gypsum.org/about/gypsum-101/what-is-gypsum/
7. SunTrust Robinson Humphrey. Continental Building Products, Inc.: Initiate with a Buy & $23 PT. March 3, 2014.
8. Barclays Equity Research. Continental Building Products: Initiate Coverage at Overweight. March 3, 2014.
9. http://www.continental-bp.com/about-us/history/
Nice post. It is impressive that they have been able to maintain their manufacturing capacity through the downturn while operating at a low utilization. This must be greatly enabled by a trimmed workforce of non-union employees.
Fantastic post and extremely thought provoking. I am amazed that a commodity gypsum manufacturer can achieve EBITDA margins near 30%. What do through-the-cycle margins look like for CBP? How can the company flex its non-labor inputs in a downturn to maintain profitability?