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Vulcan Materials Touts Aggregates Shipments, Price Improvements


Vulcan Materials Co. announced results for the fourth quarter ended Dec. 31, 2016. The company's fourth quarter results reflect solid price growth in aggregates and higher gross profits in the company's Asphalt and Concrete segments, partially offsetting the earnings effect from a 3.5 percent decline in aggregates shipments.

Net earnings were $113 million, or 27 percent higher than the prior year's fourth quarter, and Adjusted EBITDA was $230 million, or 6 percent lower than the prior year's fourth quarter.

For the year, net earnings were $419 million and Adjusted EBITDA was $966 million, which represent gains of 90 percent and 16 percent, respectively, over the prior year. Aggregates shipments grew 2 percent, and pricing increased 7 percent. Incremental aggregates gross profit equaled 65 percent of incremental freight-adjusted revenues. 

Aggregates gross profit as a percentage of freight-adjusted revenues expanded to 38 percent from 36 percent. Total company gross profit margin expanded to 28 percent from 25 percent, and total company gross profit margin excluding freight and delivery revenues expanded to 33 percent from 30 percent.

Tom Hill, chairman and chief executive officer, said, "Vulcan's operating momentum remains strong. While our fourth quarter results reflect a mid-December ramp-down of the construction season in many of our markets, which was earlier than in 2015, our solid full year results and outlook for 2017 demonstrate a continuation of longer-term trends in volume recovery, price increases, and margin expansion. Our daily aggregates shipment rates in October and November exceeded the prior year's strong comparison before falling off in the second half of December. In addition, and important to our forward outlook, key measures of both public and private construction starts have improved steadily since July. Adjusted for product and geographic mix, aggregates pricing growth over last year's fourth quarter was approximately 7 percent, in line with the full-year trend. Several temporary and timing-related factors combined to impact fourth quarter unit margin and flow-through comparisons. Full year results better represent the underlying trend and our forward expectations. For 2017, we expect to deliver Adjusted EBITDA of between $1.125 and $1.225 billion. We expect aggregates shipments to grow between 5 percent and 8 percent and average selling prices to increase between 5 percent and 7 percent. The flow-through of freight-adjusted revenues to gross profit in our Aggregates segment should remain in line with the longer-term trend of greater than 60 percent. We remain focused on continuous, compounding improvement in profitability and cash flows, and expect them to continue – not only for 2017 but for years to come."

Aggregates

The quarter-over-quarter decline in shipments primarily resulted from an earlier ramp-down to the construction season relative to the prior year's strong shipment rates through late December and continued volume weakness in California, Illinois and coastal Texas, according to the company.

Excluding these markets, daily shipment rates were 9 percent ahead of the prior year pace in October and November, but fell 7 percent below the prior year in December. In contrast, daily shipment rates for the quarter in California, Illinois and coastal Texas remained more than 15 percent below the prior year's pace. With an earlier end to the construction season, Illinois shipments in December were more than 45 percent below the prior year. Price increases in California and Illinois partially offset the revenue impact of lower shipments. Average selling prices for these two states were more than 10 percent above the prior year.

For the year, shipments rose 2 percent over the prior year, with this gain coming despite double-digit shipment declines in California, Illinois and Texas.  For the year, shipments in the company's other markets grew 10 percent on average.

Trailing 12-month construction start activity, both public and private, has steadily improved since July. This improvement has helped reverse year-over-year declines from May to October, which negatively impacted shipments in the second half of the year. The backlog of construction projects in development continues to grow as well. In addition, state and local governments continue to pass measures to increase public infrastructure investment.  While the company believes conditions remain in place for a sustained, multi-year recovery in demand for aggregates, quarter-to-quarter trends may vary significantly.

For the quarter, freight-adjusted average sales price for aggregates increased 5 percent, or $0.60 per ton, versus the prior year. Pricing was negatively impacted by product and geographic mix in the fourth quarter. Excluding this effect, overall pricing increased 7 percent. 

Full year pricing increased 7 percent, with virtually all of the company's markets realizing higher pricing versus the prior year. The overall pricing climate remains favorable as visibility to a sustained recovery improves and as construction materials producers stay focused on earning adequate returns on capital.

Fourth quarter unit cost of sales in the Aggregates segment increased 13 percent versus the prior year's fourth quarter, and per ton profitability – although near record levels – declined for the first time in nearly four years. These quarter-over-quarter declines were driven primarily by reduced fixed cost absorption, the timing of repair and maintenance and stripping expenses, and other items and variances in end-of-year accounting adjustments for inventory.

For the year, unit cost of sales increased 3 percent. Unit gross profit increased 14 percent, to $4.81 per ton, while unit cash gross profit increased 11 percent to $6.12 per ton. The flow-through rate from freight-adjusted aggregates revenues to segment gross profit was 65 percent. These improvements in the company's core profitability were delivered despite modest shipment growth and a year-over-year decline in inventory levels.

Asphalt, Concrete and Calcium

In the fourth quarter, Asphalt segment gross profit increased 19 percent to $22 million. Shipments increased 4 percent and the average sales price decreased 2 percent. Solid sales and operating disciplines, as well as effective materials margin management, more than offset the modest decline in price.

For the full year, Asphalt segment gross profit increased 25 percent to $98 million. Volumes and price decreased 3 percent and 2 percent, respectively, versus the prior year while gross profit margin expanded 430 basis points due mostly to lower unit costs for liquid asphalt.

Concrete segment gross profit was $8 million in the quarter compared to $5 million in the prior year period. Sales volumes increased 16 percent versus the prior year as volumes increased in each of the company's concrete markets.

Full year Concrete segment gross profit increased 32 percent and margin expanded 130 basis points versus the prior year. Shipments increased 7 percent and the average sales price increased 3 percent. Material margins expanded, offsetting higher costs for internally supplied aggregates and other raw materials.

In the fourth quarter, the company's Calcium segment reported gross profit of $0.9 million versus approximately $1.0 million in the prior year.

For non-aggregates segments in total, full year 2016 gross profit was $128 million, a 25 percent increase over 2015.

Outlook for 2017

Regarding the company's earnings outlook for 2017, Hill stated, "The strong fundamentals of our aggregates-focused business and the outstanding improvement in our core profitability have led to strong earnings growth during the last three years of recovery. In 2017, we expect continued growth across the vast majority of our markets and across each of the end use segments we serve. Our expectation for full year Adjusted EBITDA of $1.125 to $1.225 billion is driven by a continuing recovery in shipments, with higher levels of publicly funded construction activity just beginning to join the ongoing recovery in private demand, as well as a favorable pricing environment."

The following assumptions support the company's outlook for strong year-over-year growth in Adjusted EBITDA in 2017.

  • Aggregates shipments growth of 5 to 8 percent from 2016, with growth weighted more toward the second half of the year.
  • Freight-adjusted aggregates price increase of 5 to 7 percent, with unit margins continuing to grow faster than pricing.
  • Asphalt, Concrete and Calcium gross profit growth of approximately 15 percent.
  • SAG expenses of approximately $320 million, 2 percent higher than the prior year and excluding business development-related expenses.

Other expectations include:

  • Core capital spending of approximately $300 million to support the increased level of shipments and further improve production costs and operating efficiencies.
  • Interest expense of approximately $140 million.
  • Depreciation, depletion, accretion and amortization expense of approximately $300 million.
  • Effective tax rate of 28 percent.

Hill concluded, "Our 2017 outlook reflects earnings growth and unit margin performance consistent with recent trends as well as our longer range goals.  Since the beginning of this recovery, our teams' efforts have resulted in Aggregates segment gross profit increasing $515 million on a 41 million ton increase in shipments. During this period, unit cash gross profit in our core Aggregates segment has improved 46 percent on a trailing 12-month basis.  We remain focused on continuous improvement and on turning in another strong year."