Vulcan Materials Co., the nation’s largest producer of construction aggregates announced results for the first quarter ended March 31, 2011.
A quick recap:
First Quarter Summary and Comparisons with the Prior Year
- Freight-adjusted aggregates pricing approximated the prior year level.
- Aggregates shipments declined about 3 percent, reflecting varied market conditions across our footprint as well as significantly more wet weather in March in many markets.
- Average unit selling prices for both ready-mixed concrete and asphalt mix increased 4 percent, contributing to higher unit materials margins in both product lines.
- Unit cost for diesel fuel and liquid asphalt increased 34 percent and 12 percent respectively, reducing pretax earnings by $10 million. Most of this earnings effect was offset by production efficiency gains in aggregates and higher pricing for asphalt mix.
- Selling, administrative and general (SAG) expenses were down from the prior year due primarily to the $9 million noncash charge recorded in the prior year for the fair market value of donated real estate.
- Net earnings were a loss of $55 million, or $0.42 per diluted share. The quarter’s results include income of $0.08 per diluted share from discontinued operations as well as $0.12 per diluted share for the insurance arbitration award to the Company for recovery of settlement costs and legal costs related to the lawsuit settled last year with the Illinois Department of Transportation.
Don James, Vulcan’s chairman and CEO, stated, “We are pleased with the improvements in first quarter production efficiencies in our aggregates business which offset most of the earnings effects of sharply higher diesel fuel costs. We are also encouraged with the pricing momentum in both our asphalt and concrete businesses. Shipments in all our businesses remained challenged in the first quarter. After a solid start in January and February, extremely wet weather hampered aggregates, asphalt and concrete shipments in March in many of our key markets. We continue to expect volume and earnings growth for the full year in 2011.”
First Quarter Operating Results and Commentary
First quarter aggregates earnings were lower than the prior year due mostly to lower shipments. A number of Vulcan-served markets, most notably markets in California, the mid-Atlantic and the Southeast experienced unusually wet weather in March. Despite the inclement March weather, our Virginia, Tennessee and Georgia aggregates businesses increased shipments versus the prior year’s first quarter, due primarily to stronger demand from public infrastructure projects. Markets that experienced declines in shipments include South Carolina, Florida and along the Gulf Coast.
The average selling price for aggregates was in line with the prior year. Adjusted for freight to remote distribution yards and mix, the overall average selling price was slightly above last year’s level. The adjusted selling price in Florida increased from the prior year’s level. A number of other markets reported unit selling prices at or above the prior year’s first quarter price. However, some geographic and end-use markets that have experienced the steepest overall declines in demand reported lower average prices when compared with the prior year. Reflecting production efficiencies and effective cost control measures, aggregates unit costs of sales were in line with the first quarter of 2010 despite sharply higher costs for diesel. Overall, segment earnings in aggregates were $11 million versus $15 million in the prior year’s first quarter.
Segment earnings in asphalt were a loss of $0.2 million compared with earnings of $1 million in the prior year’s first quarter. Selling prices for asphalt mix increased approximately 4 percent, offsetting most of the earnings effect of higher liquid asphalt costs. Asphalt volumes decreased 2 percent from the prior year’s first quarter due primarily to wet weather in March. Unit materials margins in the first quarter were higher than the prior year and were in line with the improved levels achieved in the second half of 2010.
The concrete segment reported a loss of $14 million, an improvement from the prior year’s first quarter. Unit materials margins in ready-mixed concrete improved from the prior year’s first quarter due mostly to higher pricing. Concrete prices increased 4 percent from the prior year’s first quarter. Cement segment earnings in the first quarter were a loss of $3 million due mostly to a scheduled maintenance event in the current year first quarter.
SAG expenses in the first quarter were $77.5 million versus $86.5 million in the prior year’s first quarter. Excluding the effects of the donated real estate from the prior year’s first quarter, SAG expenses were flat with the prior year.
The $8.4 million difference between the fair value of the donated real estate and the carrying value was recorded as a gain on sale of property, plant & equipment and businesses in the prior year. In March 2010, the company recorded a pretax gain of approximately $39 million on the sale of three non-strategic aggregates facilities in rural Virginia. There were no similar gains recorded in the current year’s first quarter.
The $25.5 million in recovery from legal settlement included in the current year’s first quarter results reflects the arbitration award from insurers related to the lawsuit settled last year with the Illinois Department of Transportation. Earnings from discontinued operations are due principally to receipt of an earn-out related to the 2005 sale of the company’s chemicals business as well as a $7.5 million pretax gain due to an insurance arbitration award referable to previously settled lawsuits against the company’s divested chemicals business.
All results are unaudited.
Outlook Highlights and Commentary
Commenting on the company’s outlook for the remainder of 2011, James stated, “While economic improvement and growth in construction activity across our footprint have not materialized equally, we expect aggregates shipments and pricing to increase from the prior year, leading to earnings growth in 2011.
“Looking more specifically at our construction end-markets, public construction activity, particularly highways, should continue to provide solid support for aggregates demand. In April, Congress passed and the President signed legislation to fund government programs through the remainder of the current fiscal year ending September 30, 2011. That legislation maintains core federal-aid highway funding at fiscal year 2010 levels.
“During the three months ended March 2011, total contract awards for highway construction in Vulcan-served states, including awards for federal, state and local projects, were in line with the prior year as compared to a decline for all other states. According to the Federal Highway Administration, approximately $6.0 billion, or 36 percent, of the total stimulus funds apportioned for highways in Vulcan-served states remains to be spent. This absolute level of funding is more than twice the $2.8 billion remaining for other states.
“In general, private construction activity remains at low levels. However, some indications of stability are developing. Single-family housing starts bottomed late in 2009 and multi-family starts have shown strength in recent months – both positive indicators for residential construction activity. Our current outlook for residential construction activity assumes continued growth in 2011, albeit from a small base.
“While private nonresidential construction remains weak, the rate of decline in contract awards has slowed considerably. Trailing twelve-month contract awards for construction activity referable to the manufacturing sector have been strong while modest growth in retail and office construction was realized in contract awards for the trailing three months ended March 2011 versus the prior year. A number of external forecasts are calling for private nonresidential construction activity to bottom in 2011 and these increases in contract award activity provide some support to those views. The start of a sustained recovery in this end-market will be influenced by employment growth, capacity utilization, and business investment and lending activity.
“Overall, expected growth in demand for our products in 2011 largely depends on modest growth in residential construction, the stabilization of private nonresidential construction and the continuity of federal funding for highways at current levels. More specifically, we expect the full year growth in volumes to be weighted more towards the second half of the year driven primarily by growth in demand.
Certain large projects in a number of key markets are expected to drive aggregates volume growth in the second half of the year. The mid-point of our estimated range in aggregates shipments continues to be 2 percent above the prior year’s level. Additionally, recent weather-related disruptions from tornadoes and flooding are likely to affect second quarter aggregates shipments in a number of southeastern and Mississippi River markets and push some demand to later in the year. We believe a more stable demand outlook will benefit pricing and we expect most of our markets to achieve year-over-year price growth in 2011. As a result, we continue to expect aggregates pricing in 2011 to increase 1 to 3 percent from the prior year’s level. The earnings effect of the increase in aggregates pricing will be somewhat offset by the energy-related cost pressures expected throughout the remainder of the year. With that said, we expect aggregates earnings in 2011 to increase from the prior year due to higher shipments, increased average selling prices and the benefits of production efficiencies and cost management measures.
“In our asphalt business, the average selling price has increased in recent quarters, better reflecting the higher cost of liquid asphalt. As a result, the materials margin on each ton of asphalt mix sold has continued to improve. We expect this trend to continue throughout the remainder of 2011. Overall, we expect asphalt earnings to increase from the prior year, reflecting a modest increase in sales volumes as well as improved materials margins.
“In concrete, we expect higher sales volumes and slightly higher selling prices. As a result, we expect the loss reported in 2010 to narrow somewhat. In cement, we now expect the segment loss in 2011 to increase modestly from the loss reported in the prior year.
“Selling, administrative and general expenses in 2011 are expected to be lower than the prior year. Total SAG expenses of $327 million in 2010 included about $24 million of certain adjustments and charges referable to the fair market value of donated real estate, severance costs and expenses related to legal settlements. In 2011, we do not anticipate similar adjustments and charges. As a result, we expect SAG expenses in 2011 of $305 million.
“For the full year, we expect capital spending to be approximately $125 million, up from $86 million in 2010.”