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09/27/2010

Mark Warren of Vulcan Materials Talks About the Outlook for the Construction Materials Sector


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Vulcan Materials Company, the nation’s largest producer of construction aggregates, will be presenting at NYSSA’s fifth annual Construction Materials Conference on September 29. We recently spoke with Mark Warren, Vulcan’s director of investor relations, about the outlook for the industry. Warren also described Vulcan’s sustainability and corporate social responsibility initiatives, which have been critical to its ability to maintain and grow its business.

From Vulcan’s perspective what is the near-term outlook for the construction materials sector?

Mark Warren: Public construction, in particular highway construction, has been generally stable and growing relative to private construction. The $27.5 billion in stimulus funding for highway and bridge construction and repair that was part of the overall economic stimulus plan signed into law in February 2009 has been flowing to the states and that it is helping to support the sector. Trailing twelve-month contract awards through July for highways, for example, are up 8% and nonhighway infrastructure awards are up 5%.

On the private side, we are starting to see some recovery in residential construction, albeit coming from a small base. Single-family housing fell 74% from the peak to what was essentially the trough in the fall of last year and since then it is up 14% on a trailing, 12-month basis. What will sustain the recovery in housing is consumer confidence and employment. Additionally, when employment growth begins to improve nonresidential construction activity will begin to improve.

The wild card is private nonresidential buildings. This is an area where we have not seen the hoped-for improvements. While the public building side is down about 18% it is performing well relative to private nonresidential building, which is down more than 40% from a year ago. The silver lining is that the rate of decline in the sector has slowed and we feel it is starting to form a bottom.

Are there any optimistic signals for the industry coming from Washington?

Mark Warren: What we found positive about President Obama’s recent speech in Milwaukee was that for the first time he talked about a new six-year federal housing bill. Up until that time the administration had been silent on the subject. (The last federal highway bill expired on September 30, 2009.) The President also talked about front-end loading that bill with $50 billion in incremental spending to jumpstart improvements in our infrastructure and our economic competitiveness. With 20% unemployed in the construction industry it is also a tangible way to put people to work. Both Republicans and Democrats are generally supportive of spending on highways. However, I don’t think there is time to get a bill passed before the mid-term elections in November, and, although there is a chance to get something passed in the lame duck session, there is a greater possibility of progress towards reauthorization in the first half of 2011.

Meantime the Congressional Budget Office released a projection in September indicating that, even without a new bill’s passage, there is enough money in the Highway Trust Fund for continued spending at about $42 billion annually into 2013. This is good news because one of the challenges we have had since the last bill expired was that many State DOTs went into a state of paralysis and stopped awarding new projects because they had no visibility of funding. So even if the passage of a new, six-year highway bill gets delayed into late 2011 or early 2012, some of that uncertainty can be removed.

How has Vulcan been navigating the challenges of the current recession?

Mark Warren: For Vulcan it has been a pretty severe downturn. We have been focused on trying to effectively manage our business through cost control and disciplined pricing. So though our volumes have fallen approximately 50% from the peak, our profitability defined as cash earning per ton is more than 40% higher than it was at the peak of demand. We have preserved the profitability, now we just need some volume and our earnings leverage should be robust as a recovery in demand occurs.

 

Can you describe some of Vulcan’s sustainability initiatives and talk about why the company feels they are key to preserving shareholder value?

Mark Warren: Sustainability is integral to the way we do business and we take that very seriously. We have been a public company since 1956 and we operate several hundred quarries in over 20 states, so ours is a very local business. We have to be responsible citizens in those communities to maintain and, when needed, expand our operations.

For example, our industrial hygiene programs have been in place for decades and have become industry standards. Our internal safety standards targets surpass the industry’s. We are also leaders in environmental stewardship—we have 41 certified wildlife habitats sites in place on our quarry sites. We host 30,000 to 40,000 school kids a year through our quarries for geology and other earth science studies. The new sustainability section on our website reports in detail on our wildlife habitat enhancements, resource and land management initiatives, as well as our health and safety, education, and charitable foundation programs.

These initiatives and programs are a necessary cost of doing business. They are the right thing to do, but more important, they are essential to maintaining and growing our business.

–Susan Arterian Chang is a financial writer and is the content developer for Capital Institute.

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