2014/15 State of the Industry

Large industry mergers lead the news as the aggregate industry’s outlook continues to climb.

The North American aggregates industry is in good shape based on recent aggregate production trends and predictions of near-term construction growth. And the nation’s two largest aggregate producers – Martin Marietta and Vulcan Materials – are also reporting positive news.

The past year kicked off with a successful ConExpo-Con/Agg trade show and Martin Marietta’s purchase of Texas Industries. The year also saw changes at the top of Vulcan Materials, where Tom Hill replaced Don James as president and CEO. James is now the company’s executive chairman.

Also, in 2014, the National Stone, Sand & Gravel Association operated for its first full year under the leadership of Mike Johnson. With Johnson, the association is revitalizing its efforts to secure a long-term highway bill, which saw another short-term extension this year: Congress passed an extension of Moving Ahead for Progress in the 21st Century, or MAP-21, through May 31, 2015, and authorized an additional $11 billion of transfers to maintain solvency of the Highway Trust Fund.

The U.S. Geological Survey says crushed stone production grew more than 9 percent in the third quarter of 2014, and construction sand and gravel was up nearly 8 percent.

What will we see in 2015? In addition to a return of the AGG1 Aggregates Academy & Expo – this time in Baltimore – the big news is the pending mega-merger of global heavyweights Lafarge and Holcim. The companies are discussing a union that would create one company whose combined annual sales are about $43 billion. The new company would be called LafargeHolcim, and the deal is expected to close in the first half of 2015.

“This proposed merger is a once-in-a-lifetime opportunity to deliver substantially better value to customers, with more innovation, a wider range of products and solutions, and more sustainability and enhanced returns to shareholders,” says Rolf Soiron, Holcim’s current chairman.

“LafargeHolcim will be uniquely positioned to take advantage of growth in developed markets and the world’s fastest growing economies by supplying the materials that will enable the construction industry to meet the challenges of the future.”

As a part of the merger-approval process, the companies are required to divest certain assets, and Reuters reports that Holcim is expected to have chosen buyers for those assets by the end of January 2015. Holcim says it expects to complete the deal by the middle of next year.

Construction on the rise

In its 2015 Dodge Construction Outlook, Dodge Data & Analytics (formerly McGraw Hill Construction) predicts that total U.S. construction starts for 2015 will rise 9 percent to $612 billion, a larger gain than the 5 percent increase to $564 billion estimated for 2014.

“The construction expansion should become more broad-based in 2015, with support coming from more sectors than was often the case in recent years,” says Robert Murray, chief economist and vice president for Dodge Data & Analytics.

“The economic environment going forward carries several positives that will help to further lift total construction starts. Financing for construction projects is becoming more available, reflecting some easing of bank-lending standards, a greater focus on real estate development by the investment community and more construction bond measures getting passed.

“While federal funding for construction programs is still constrained,” Murray says, “states are now picking up some of the slack. Interest rates for the near term should stay low, and market fundamentals (occupancies and rents) for commercial building and multifamily housing continue to strengthen.”

Based on research of specific construction market sectors, the 2015 Dodge Construction Outlook details the forecast as follows.

■ Single-family housing will rise 15 percent. It’s expected that access to home mortgage loans will be expanded, lifting housing demand. However, the millennial generation is only gradually making the shift toward homeownership, limiting the potential number of new homebuyers in the near term.
■ Multifamily housing will increase 9 percent. Occupancies and rent growth continue to be supportive, although the rate of increase for construction is now decelerating as the multifamily market matures.
■ Commercial building will increase 15 percent, slightly faster than the 14 percent gain estimated for 2014. Office construction has assumed a leading role in the commercial building upturn, aided by expanding private development, as well as healthy construction activity related to technology and finance firms. Hotel and warehouse construction should also strengthen, although the pickup for stores is more tenuous.

Transportation spending also on the rise

Energy prices remain relatively low, overall inflation is low, unemployment is holding around 6.2 percent, GDP is still a bit unsteady and growing slower than we’d like to see, but it “increased at an annual rate of 4.2 percent in the second quarter of 2014,” says FMI’s 2014 Q3 Construction Outlook Report. Select market predictions include:

■ Transportation – Transportation construction continues at a solid pace with 7 percent growth in 2014.
■ Residential – Multifamily construction is still expected to grow at a healthy pace of 13 percent in 2015 after reaching a near-record pace in 2014. The inventory for new homes increased to six months in July, showing some weakness in sales, but housing starts in July were 21.7 percent above July 2013 levels.
■ Office – Dropping unemployment rates and rising GDP have provided a lift in the office forecast now expected to reach 8 percent growth in 2014 and grow an additional 7 percent in 2015. Large metropolitan areas like New York City will benefit the most, as vacancy rates drop to 10.6 percent compared with national vacancy rates hovering around the 16 to 17 percent range.

View from the top

Ward Nye, chairman, president and CEO of Martin Marietta, says his company’s third-quarter 2014 results reflect the acquisition of Texas Industries Inc., the benefits of our larger presence in the western United States, continued growth and enhanced profitability across the company’s heritage business and a disciplined approach to cost.

“The acquisition of TXI added $274 million of net sales and, even in advance of full integration and realization of significant synergies, contributed $44.5 million of gross profit, excluding the one-time increase in cost of sales for acquired inventory,” Nye says. “Based on our evaluation to date, we expect to surpass our stated target of $70 million in annual synergies prior to 2017. This transformational acquisition, when combined with our solid heritage business, creates a strong and broad foundation for dynamic revenue and profit growth in 2015 and beyond, positioning Martin Marietta to capitalize on increasing demand for building materials.

“In addition to aggregates and ready mixed operations, the TXI acquisition provided us with a leading position in the Texas cement markets, as well as a state-of-the-art, rail-located cement plant in Southern California. Driven by a sold-out Texas market, cement made a solid contribution to our quarterly earnings, as volumes increased 16 percent in the third quarter compared with the three months ended August 31, 2013, when Martin Marietta did not yet own the business.”

Nye says, “Job growth continues as a significant catalyst for construction activity, and Texas leads the nation in employment gains. Texas’ strong Department of Transportation budget is supporting investment in multiyear construction projects, including the expansion of Interstate Highway 35E in Dallas and the TIFIA-funded Grand Parkway project in Houston. These and other numerous state-level major projects have provided for continued stability in public-sector construction activity.”

Product line growth

For Martin Marietta, heritage aggregates product line shipments reflect growth in the three largest end-use markets. Shipments to the infrastructure market comprised 47 percent of quarterly volumes and increased 3 percent. Growth was strongest in the West Group, notably in Texas and Colorado, which continue to benefit from strong state Department of Transportation programs.

Highway awards in Texas increased about 26 percent for the trailing 12 months through August. Infrastructure shipments in Colorado were up 21 percent, reflecting activity from the Responsible Acceleration of Maintenance and Partnerships, or RAMP, program as well as reconstruction efforts resulting from the historic flooding in 2013.

The nonresidential market represented 30 percent of quarterly shipments and increased 3 percent, driven largely by energy-sector shipments. The company continues to benefit from the nation’s increasing investment in shale energy, particularly in South Texas. Martin Marietta believes this trend will continue, driven by $100 billion of anticipated energy projects along the Gulf Coast, including a significant portion in Texas, as well as anticipated infrastructure repairs in South Texas.

The residential end-use market accounted for 14 percent of quarterly shipments, and volumes to this market increased 9 percent. The overall rate of residential growth has slowed, owing in part to a reduction in available lot inventory. However, the company continues to experience significant growth in certain markets and expects an increase in aggregates-intensive subdivision development.

The company is encouraged by positive trends in its business and markets, notably:

■ Nonresidential construction is expected to increase in both the heavy industrial and commercial sectors. The commercial building sector is expected to benefit from improved market fundamentals, such as higher occupancies and rents, strengthened property values and increased real estate lending.
■ Residential construction should continue to grow, driven by historically low levels of construction activity over the previous several years, together with low mortgage rates, significant lot absorption, higher multi-family rental rates and rising housing prices. Total annual housing starts are anticipated to exceed 1 million units for the first time since 2007.
■ Heritage aggregates product line shipments to increase by 6 to 8 percent compared with 2013 levels.
■ Heritage aggregates product line pricing to increase by 3 to 5 percent for the year compared with 2013.

Positive outlook

Tom Hill, president and CEO of Vulcan Materials Co., says, “Strong growth in aggregates volumes and solid operating performance in our aggregates businesses led to significant earnings growth for the company. Our third-quarter results continued to demonstrate the earnings leverage of volume growth in our aggregates business. We are also seeing the benefit of our continuing efforts to grow unit profitability and leverage our overhead structure.”

Over the past 12 months, aggregates shipments for Vulcan Materials increased 9 percent, or 13 million tons. During the same period, aggregates segment gross profit increased 30 percent, or $117 million.

“The overall pricing outlook for our aggregates products continues to improve with the recovery in demand for construction materials,” Hill says. “Our aggregates shipments have grown for six consecutive quarters, and we expect this demand momentum to lead to accelerating price growth. This lead-lag relationship between growing volumes followed by accelerating price growth is typical for our business. We already see price increases between 5 and 10 percent in certain markets, particularly where the recovery in construction activity is further along. As we look ahead, we believe price momentum will increase with continued volume growth.”

Aggregates sales were $689 million, up 15 percent from the prior year’s third quarter, due largely to strong volume growth across most of the company’s footprint. Third quarter aggregates shipments increased 12 percent compared to the prior year. Shipments in Illinois and Texas increased 31 and 21 percent, respectively, owing in part to large-project work.

Other markets, including Florida, Georgia, North Carolina and Virginia, reported volume growth of 10 to 15 percent versus the prior year. During the third quarter, the company completed several bolt-on acquisitions. Excluding shipments from these new operations, same-store aggregates shipments increased 10.5 percent from the prior year.

The freight-adjusted average sales price for aggregates increased 2 percent, or 23 cents per ton, versus the prior year’s third quarter, as almost all of the company’s markets realized price improvement. It marks the 13th consecutive quarter of year-over-year price improvement. The sharp volume increase in Illinois negatively impacted the overall increase in average selling price by 1 percent. Additionally, several large shipments of base material and other lower-priced products also impacted the reported average selling price for the quarter by about 1 percent.

2015 and beyond

Regarding the company’s outlook for the remainder of the year, Hill says, “Growth in private end markets continues to drive increased construction activity and demand for our products. Leading indicators, such as housing starts, nonresidential contract awards and employment levels, continue to show favorable above-average growth trends in Vulcan-served markets, and Vulcan markets continue to grow faster than U.S. markets as a whole.

Hill says the company will continue to convert these higher volumes into higher unit margins by operating efficiently at the plant level.

“This strong execution has resulted in a 19-percent increase in our trailing 12-month unit profitability, as measured by aggregates segment gross profit per ton, from what are already industry-leading profitability levels. This improved unit profitability, coupled with above-average demand growth, positions us well for significant future earnings growth.”

Based on these market trends, the company expects the following:

■ Strong full-year aggregates volume growth near the top end of guidance range of between 7 and 9 percent, assuming normal weather patterns in the fourth quarter.
■ Full-year pricing growth at the low end of guidance range of between 3 and 5 percent, with positive impact from current pricing actions benefiting price growth in 2015.
■ Capital spending for 2014 to be about $240 million to support the increased level of shipments and to further improve production costs and operating efficiencies.

Hill says, “Our business continues to improve. Our employees remain focused on increasing unit profitability, delivering expected incremental earnings and improving our valuable aggregates franchise. Our confidence in the prospects for a sustained multi-year recovery in aggregates demand continues to grow. Our markets are recovering from trough levels of demand and are outpacing the rest of the U.S.”