July 1, 2010
First quarter earnings report
Is the worst behind us?
By George H. Reddin
George H. Reddin is a principal at FMI’s Investment Banking practice. He can be reached at 919-785-9286 or at email@example.com.
The construction materials peer group fared poorly in the first quarter of 2010 when compared to the first quarter of 2009. Revenues were down for all the companies except Holcim, which benefited from a more significant exposure to the growth in emerging markets. International-focused companies like Holcim and Heidelberg benefited from business activities in emerging markets, while companies concentrated in North America saw the most significant decreases in revenue. A rainy and cold first quarter also contributed to these poor results. Overall, the peer group had a median revenue decrease of just over 10 percent when compared to the same period in 2009 (see Figure 1).
On the bright side, product shipments for Cemex and Vulcan increased in March and April when compared to the same period in 2009, the first increase since 2006. This, together with a greater outlook for leading indicators of future demand such as contract awards for residential and highway construction, suggests an improved outlook for the balance of 2010, with most of this improvement expected in the second half of 2010.
Earnings for the peer group followed revenue for the most part with a median decline in EBITDA of 15.5 percent when compared to the prior year in 2009 (see Figure 2). Holcim, benefiting from its presence in emerging markets, showed a 28.6-percent increase in EBITDA, while the balance of the peer group showed decreases.
Balance sheet management was emphasized over the last year as companies sought to refinance debt and raise capital. Significant increases in debt associated with major acquisitions during 2003-2007, coupled with a near collapse of the credit markets in the latter half of 2008, had these companies focused on their leverage. Figures 3 and 4 present total debt/EBITDA (Figure 3) and EBITDA/interest expense (Figure 4) coverage ratios at the end of the first quarter in 2010 versus the same period in 2009.
As shown, the results are mixed. While improvements have been made on overall levels of debt and liquidity, decreases in EBITDA have resulted in a mixed bag in the coverage ratios. We expect continued diligence to balance sheet issues.
The construction materials peer group saw an average increase of more than 40 percent in its total enterprise value/revenue valuations (see Figure 5) at the end of the first quarter versus the same period in 2009. During the same time, the S&P 500 and Dow Jones Industries increased by 46.6 percent and 42.7 percent, respectively.
The industry hopes that the worst is behind it and, with increased forecasted demand and improved credit markets, there is an improved outlook for the balance of 2010. Economic indicators and demand dynamics present an opportunity for modest optimism. That said, this optimism remains fragile.
Since the last report, Summit Materials, LLC acquired a majority stake in Continental Cement Co., LLC on May 27, 2010. The financial terms of the deal were not disclosed. Continental’s new state-of-the-art cement manufacturing and waste processing facilities are located in Hannibal, Mo., 100 miles north of St. Louis. With distribution terminals in St. Louis, Mo., and Bettendorf, Iowa, Continental supplies cement to customers in Missouri, Iowa, and Illinois.
Asphalt paving company Hardrives Inc., in St. Cloud, Minn., acquired Lakeland-based Tower Asphalt Inc. for an undisclosed amount. Tower Asphalt and Hardrives Inc. are competitors on highway projects for counties and cities in the Twin Cities and for the Minnesota DOT.
Titan America sold its Cumberland quarry in Salem, Ky. The quarry has more than a billion tons of reserves on the Cumberland River and barges aggregates to various locations along the Mississippi River, including New Orleans and neighboring markets.
In an agreement that has yet to be finalized, Meadow Vista, Calif.-based Chevreaux Aggregates Inc. would be sold to a partnership consisting of Sacramento-based Teichert Materials and Rocklin-based Western Care Construction Co. The partnership, Green Vista Holdings, has the option to purchase Chevreaux Aggregates and is currently conducting due diligence. Teichert has been responsible for managing the plant. AM