Will Stimulus Funds Pave the Way to a Better Future?

Brooke Wisdom

March 1, 2010

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

stimulus-2During 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.”

Nye predicted Martin Marietta aggregate volumes to increase by 2 to 4 percent, unless commercial construction declines more than anticipated. “Aggregates pricing for 2010 is also dependent on stability in overall aggregates demand. However, pricing increases will be more difficult to obtain due to the unprecedented decline in volume during this recession,” he said. “We currently expect flat to 2-percent increased aggregates pricing in 2010; however, geographic and/or product mix, as well as competitive dynamics, could further pressure pricing.”

“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.

As with Vulcan, stimulus funding also plays a major factor in Martin Marietta’s 2010 outlook. “Our current view of 2010 is framed by the expectation of stability in overall aggregates demand in the corporation’s markets,” Nye said. “In particular, we expect volumes sold to the infrastructure construction market to increase since over 80 percent of infrastructure stimulus money in our top five states was obligated in 2009, but less than 15 percent was actually spent during the year.

“We believe federal highway authorization, and other jobs creations legislation, will restore state-level confidence, reduce budget pressures, and allow state Departments of Transportation to progress multi-year construction projects to the bid-and-award stage,” he added. “However, we expect that the federal highway bill reauthorization will likely occur too late in the year to meaningfully affect 2010 aggregates demand.”

A key point from both executives is the need for long-term infrastructure funding. AGC’s Simonson echoed that sentiment at the NSSGA roundtable. “Stimulus alone isn’t enough,” he said. “It has to be the opening act.” AM

Vulcan at a Glance

Cash earnings were $369 million from continuing operations and $12 million from discontinued operations.

Aggregates shipments declined 26 percent.

Aggregates pricing increased by 3 percent.

Capital spending was $110 million compared with $353 million in 2008.

Martin Marietta at a Glance

Annual net sales of $1.497 billion, compared with $1.860 for 2008.

Heritage aggregates product line volume decreased 23 percent.

Aggregates pricing increased by 2 percent.

Capital spending was $139.2 million, compared with $258 million in 2008.

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