Will Stimulus Funds Pave the Way to a Better Future?

Although long-term transportation funding is still up in the air, industry experts indicate that stimulus funds will aid industry in 2010.

By Therese Dunphy, Editor in Chief

During some of the toughest economic times since the Great Depression, federal stimulus funds have had a significant impact on many aggregates companies. At an economics and financial roundtable session held on Feb. 17 during the National Stone, Sand & Gravel Association’s (NSSGA) annual meeting held in Cincinnati, Ohio, nearly half of audience members indicated that their companies benefited from stimulus-related projects. “It has made a difference, but it hasn’t lifted all boats,” said Ken Simonson, chief economist for the Associated General Contractors of America (AGC). “Stimulus has worked, but it’s not a panacea.”

Two of the nation’s top aggregate producers highlighted the impact of stimulus funding as they outlined how streamlined costs and reduced capital expenditures have improved their overall financial health and helped them weather the current downturn in demand.

On Feb. 8, Vulcan Materials Co. announced its unaudited fourth quarter results. Aggregates shipments declined 23 percent while aggregates pricing increased 5 percent. For 2009 as a whole, shipments were down 26 percent and pricing was up 3 percent.

“Continued weakness in private construction activity, uncertainty surrounding the timing and amount of either a formal extension or reauthorization of the multi-year federal highway program, and extremely wet weather suppressed momentum gained from stimulus-related construction,” reported Don James, Vulcan’s chairman and chief executive officer. “Nonetheless, we finished the year with strong cash generation. For the full year 2009, free cash flow was $343 million, an increase of $261 million from the prior year, and cash earnings per ton of aggregates remained in line with the prior year.”

Martin Marietta Materials, Inc. released its fourth quarter 2009 results and preliminary outlook for 2010 on Feb. 9. Its heritage aggregates product line volume was down 24 percent with pricing down 1 percent for the fourth quarter. For the year, production was down 23 percent and pricing was up 2 percent.

“In 2009, Martin Marietta successfully navigated the most difficult economic environment we have seen in our industry since the Great Depression,” announced Ward Nye, president and CEO. “However, because of our ability to achieve positive pricing growth and maintaining our discipline and focusing on controlling the corporation’s costs, we were able to remain profitable and generate significant cash flows despite the 15th consecutive quarter of declining shipment volume.” He noted that aggregate production volumes have declined 40 percent since the peak of the cycle in 2006.

“We continue to believe that 2010 will be the biggest year for stimulus-related highway construction,” says Don James, Vulcan Materials Co. chairman and CEO.

“With respect to cost containment, our consolidated cost of sales decreased 13.4 percent, or $41.4 million, for the quarter, and 16.6 percent, or $230.3 million, for the year,” Nye added. “While a $74.0 million reduction in energy costs for the year was the single largest variance contributor, we reduced our cost of sales in every significant category, with the exception of fixed costs related to depreciation and pension. These reduced costs are particularly compelling considering our aggregates business continues to operate significantly below capacity, which restricts our ability to capitalize certain costs into inventory.”

Both companies reduced investments in capital expenditures during 2009. Vulcan reported that its full-year capital spending was $110 million, compared with $353 million in 2008. It anticipates capital spending of approximately $125 million this year. Martin Marietta invested $139.2 million in capital expenditures, a $119-million reduction compared to 2008 spending levels. This year, it forecasts capital expenditures of $160 million.

Looking forward, executives of both companies predict small increases in terms of both production volumes and price increases.

“Overall, our outlook for aggregates demand in 2010 reflects an increase in highway and other infrastructure-related construction activity due primarily to stimulus-related funding. While we have assumed that regular federal funding will remain at an annualized level consistent with fiscal year 2009 under SAFETEA-LU, Congress will need to act quickly to restore fiscal year 2010 funding levels and contract authority prior to the start of the construction season,” said Vulcan’s James, noting that concerns regarding long-term highway funding, weakness in private non-residential construction, and increases in residential construction all impact the company’s forecast. “As a result, aggregates volumes are expected to be flat to up 5 percent from the 2009 levels,” he added. “For the full year 2010, we expect aggregates pricing to improve 2 to 3 percent.”