It’s been a tough run, with few wins in the books over the past few years. Our focus has shifted to selling, trading, and re-evaluating assets to position for better days.
The scenario recalls legendary sports franchises, but it’s also the new reality for the concrete industry in North America. Even the most renowned teams have taken drastic measures to bounce back from a slump. In 2013, concrete producers tackled similar challenges: aging assets, underperforming operations, and rising expenses.
Producers consulted their playbooks to make the most of an improving economy by “focusing on core business” (divesting of smaller product lines) and “operating more efficiently” (working with a leaner staff). Some struggle to allocate budgets that are stretched too thin, while others invest in new capital to maximize their strengths.
In executive offices, as in clubhouses, owners and general managers remain focused on strategies to stay in the game, while motivating and inspiring their teams to overcome adversity. Based on our annual survey of TCP readers, the stats are encouraging.
On average, concrete producers saw business improve in North America in 2013. Most TCP Survey respondents have raised prices, plan to hire more employees, and are beginning to spend more on equipment. Construction materials producer Martin Marietta of Raleigh, N.C., told shareholders: “We viewed 2013 as a period when the economic downturn would finally bottom, and we anticipated growth in pricing, margins, shipments, and profits.”
Total construction spending increased 4.8% last year according to the U.S. Census Bureau, compared to 2.2% overall U.S. economic growth reported by the U.S. Department of Commerce (GDP rose 2.3% in 2012).
NRMCA reported increasing U.S. ready-mixed production for the second consecutive year: 300 million cubic yards, generating about $30 billion. Likewise, PCA estimated cement consumption reached almost 80 million metric tons in 2013, a 4.5% increase over 2012.
Multinational producers enjoyed stronger returns in the U.S. than in Canada or Mexico. For some it was a refreshing boost to a mixed global portfolio; for others it was a difference-maker. Monterrey, Mexico-based Cemex and Italian-owned Buzzi Unicem both reported only 1% to 2% increases in North American revenue, with U.S. sales narrowly outweighing a bad year in Mexico. Cemex cited low construction activity in the infrastructure and residential sectors.
Italcementi Group, based in Bergamo, Italy, reported a “small improvement” in North America, but a 9.7% drop in ready-mixed concrete sales “largely owing to the downturn in Canada.” French-owned Colas saw revenue fall 8% in Canada due to bad weather during the first half of the year and infrastructure budget cuts.
Many remained realistic about economic growth in the U.S. “While the economy made a pleasing recovery in the United States, it was still burdened by prevailing uncertainties concerning the national budget and future fiscal policy,” said Bernd Scheifele, chairman of the board for HeidelbergCement.
“Congress can easily derail recovery momentum with political drama created by federal shutdown and debt ceilings,” warned PCA Chief Economist Ed Sullivan.
Focusing on fundamentals
All eyes are still on Washington D.C., looking for federal support of infrastructure projects. The uncertainty of MAP-21 transportation funding is fueling instability, as Congress recently approved an $11 billion extension until May 2015, rather than a long-term bill.
In the meantime, projects funded by state and municipal budgets offer a glimmer of hope. “Americans are speaking with their votes, approving bonds and tax measures for highways and other projects locally and at the state level,” said Martin Marietta Materials Chairman Stephen Zelnak and Howard Nye, president and CEO. “Hopefully, these trends will motivate our representatives in Washington D.C. to act accordingly.”
In the meantime, infrastructure construction is going strong in some markets and lagging in others. According to Vulcan Materials, Birmingham, Ala., “Recent growth in highway construction provides evidence that a more stable and predictable highway funding environment leads to improving construction activity.” With operations in growth areas such as Arizona and Texas, the producer is “well positioned to capitalize on market recovery.”
Other regions still await funding. “The state seems to have less money to spend in our area, so there are fewer big bridge jobs,” says Stanley Matthews of Wild Rose Inc., a producer in Tioga, Pa.
Public construction spending dropped 2.8% percent, said Ken Simonson, chief economist for The Associated General Contractors of America (AGC), even with an “unusual surge” in October that pushed total construction spending to its highest level since May 2009.
The U.S. concrete industry benefited most from resurging demand for apartments and single-family homes in 2013. Housing starts increased 18% to 923,400 in 2013, the most since 2008, the U.S. Census Bureau said.
“Residential construction ended on a strong note [up 18% from 2012],” says Simonson. He cautions a rise in single-family homes may be tempered by tight credit lending and demographic shifts, but expects multifamily growth into 2015.
Producers noted significantly more residential activity in California, Arizona, Colorado, Texas, Florida, Georgia, and North Carolina. The housing market is picking up “a little” for Tidewater Block in Suffolk, Va., says Sam Finney, president. But Cody Payne, owner of A-1 Concrete in Cumberland Gap, Tenn., says residential construction “still isn’t growing.”
The only notable nonresidential growth was in hotels and resorts (up 26% from 2012), transportation (8%), and commercial (6%), and manufacturing (5%), according to the AGC. Private nonresidential spending was down 0.4%, but the market “appears to be poised for a rebound,” says Simonson.
Against this background, producers large and small are waging a battle for capital. Local producers such as Metheny Concrete Products in Oklahoma City are taking cautious steps to rebuild business. “We downsized in late 2012 and early 2013 and are now growing again,” says president Richard Metheny. “We will grow modestly this year both in trucks and people, but will watch closely. We may just end up updating our fleet.”
“We are all in the same fight,” says Henry Batten, president of Concrete Supply Co. in Charlotte, N.C. “Everyone has been trying to stop the hemorrhaging to the bottom line and looking at how we can move forward with the most rational strategy.” In 2013, Concrete Supply Co. boosted its production capacity to more than 2 million cubic yards with 72 plants in North and South Carolina.
Batten, a former NRMCA chairman, saw an opportunity to grow his 56-year-old ready-mix business by absorbing what Cemex and Holcim considered “non-core assets.” Last year, he entered into a joint venture with Cemex, including more than 20 operating plants and signed an agreement to lease five Holcim plants.
The long-time proponent of industry consolidation believes it would work in his own market. “We have too many players and not enough business for everyone involved,” Batten says. “Consolidation won’t fix the problem, but it can allow producers to sustain themselves longer.”
Concrete Supply’s expansion was just one of many deals last year. In March, TXI exchanged expanded shale and clay operations in Texas, Colorado, and California for Trinity Industries assets, including 42 ready-mix plants in east Texas and southwestern Arkansas. The move was part of TXI’s growth in Texas and California, the two largest U.S. cement markets and hotbeds of infrastructure construction. In January 2014, TXI became part of construction materials giant, Martin Marietta.
Oldcastle Materials, part of Dublin-based CRH, spent $105 million on 13 quarries, five strategic reserves locations, and seven ready-mix plants in Colorado, Oregon, and Mississippi. CRH also bought Edmonton-based Expocrete Concrete Products to expand into the “attractive western Canada market” in April.
Lafarge sold six aggregate quarries in Georgia and all of its North American gypsum operations in 2013, and five Maryland aggregate quarries this year. This April, the industry learned of Lafarge’s plan to merge with Holcim, casting a new light on both companies’ recent strategic moves.
The pending LafargeHolcim merger, expected to close in early 2015, raises a new question. While most small and mid-sized producers catch their collective breath after several hard years, Batten asks, “What will happen to all the non-essential ready-mix assets the global players want to divest? There aren’t many ready-mix producers in the industry with the capital to invest in more operations. Businesses that were cash-starved now have to invest in their fleets and new equipment.”
Meanwhile, barriers for start-up ready-mix operations have also increased. “During the past decade, public concerns about dust, process water runoff, noise and truck traffic associated with the operation of these types of plants have made obtaining permits and licenses more difficult,” reports Euless, Texas-based U.S. Concrete.
Batten predicts private equity firms will take on a consolidator role by buying assets, packaging them, and reselling them for a profit. “We’re going to see nontraditional investors driving industry growth. Unfortunately, the investor community is not as sensitive to industry needs. That’s not their core focus.”
Back in the game
For now, producers appear to be back on their feet after a hard-fought battle to stay in the game. Most TCP readers surveyed expect sales to improve in 2014, and many predict steady growth. “The economy is the real question for late fourth quarter, and the final effects of Obamacare in 2015,” says Keith Wallis Jr., corporate secretary for Prestressed Casting Co. in Springfield, Mo.
PCA’s Sullivan forecasts cement consumption will increase 7.9% in 2014, which is almost double that of 2013. “There is considerable evidence that the economy’s growth path has softened during the past several months, but we believe the underlying economic fundamentals are stronger than the data suggest,” he said.
This spring, ABC said concrete products prices were up 3.4%, increasing for five consecutive months. Anirban Basu, ABC chief economist called it, “the longest streak in more than two years.”
Seventy percent of TCP survey respondents have raised their prices in 2014, and the same number expect delivered materials prices to increase in 2015. Brian Wells of The Wells Group in West Liberty, Ky., anticipates “more government regulations leading to higher costs for the consumer.”
Of the TCP readers who expect to hire new employees in 2014, almost one- half seek drivers or heavy equipment operators. “We’ve lost a lot of drivers to other industries,” says Batten.
AGC’s Simonson says less than one-half of the 1.1 million construction professionals unemployed from 2010-14 have stayed in the industry.
“Finding good qualified applicants has proven a challenge so we are working with local schools to develop better CDL training programs,” says Tim Ozinga, marketing communications director for Mokena, Ill.-based Ozinga Brothers Inc. The producer donated a used ready-mix truck to a Chicago college for use in vocational training.
With better times ahead, producers will be devoting even more energy and resources to scouting and developing the talent they’ll need to succeed.
Methodology: Data sources include the U.S. Census Bureau, U.S. Department of Commerce, The Associated General Contractors of America, Portland Cement Association, National Precast Concrete Association, NRMCA, and corporate financial reports and websites.