Americas Materials faced a very challenging environment in 2009 with severe volume declines across all product lines. The benefit of lower energy costs along with aggressive actions to reduce fixed cost, improve operating efficiency and increase prices yielded higher operating margins. US Dollar sales revenue and operating profit declined 19% and 16% respectively, and the operating profit margin for the Division increased by 0.3 percentage points to 9.5%.
The Federal stimulus bill provided some additional public projects for our asphalt and paving business, yet continued weakness in residential, commercial and state/local infrastructure construction resulted in volume declines of 23% in aggregates, 15% in asphalt, 32% in readymixed concrete, and a 14% drop in construction revenue.
Aggregates and readymixed concrete selling prices rose 6% and 3% respectively, while our asphalt operations saw prices decline 2% reflecting lower input costs.
Efforts that began in early 2008 to systematically execute commercial and operating best practices delivered excellent results in 2009. Coupled with aggressive fixed cost reductions, these fundamental changes are now ingrained in our culture and will yield more significant benefits as the economy strengthens.
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Overview
Americas Materials faced a very challenging environment in 2009 with an overall US Dollar revenue decline of 19%. Residential construction remained weak at low levels of demand, while the non-residential sector experienced a severe decline from strong 2008 levels, reflecting continued tight credit and increasing unemployment. The Federal stimulus bill (American Recovery and Reinvestment Act ‘ARRA’) provided some additional public projects which had a positive impact primarily on the Division’s asphalt and paving business, but this was more than offset by lower state spending on infrastructure. Overall product volumes were down sharply and with minimal impact from acquisitions, aggregates volumes declined by 23%, asphalt was down 15% and readymixed concrete decreased 32% on 2008 levels.
In order to offset lost economies of scale associated with significantly lower volumes, the Division focussed on delivering high quality materials and service to customers and capturing maximum value for our products. As a result, aggregates and readymixed concrete selling prices rose 6% and 3% respectively, while our asphalt operations saw prices decline 2% reflecting lower input costs.
The price of energy used at our asphalt plants, consisting of fuel oil, recycled oil, electricity and natural gas, declined by 26%. Diesel and gasoline prices, which are important inputs to aggregates, readymixed concrete and paving operations, declined by 32% and 21% respectively versus the prior year. Liquid asphalt prices overall were 14% lower in 2009, following a very volatile year in 2008. Additionally, in late 2008, we expanded our winter-fill capacity (which has historically been concentrated in the east and central United States) by adding storage in Utah, Washington and Idaho, thereby further reducing our exposure to the fluctuating cost of liquid asphalt.
Across all business segments our teams focussed internally on implementing best operating practices and tracking real-time metrics to drive efficiency improvements while adjusting to significantly reduced levels of production. These efforts helped maintain and improve our product margins. Additionally, significant reductions were achieved in fixed costs as our local and regional organisations were restructured to match the smaller market. Overall operating profit margin for the Division was improved by 0.3 percentage points.
Following a slow start to the year, acquisition activity picked up in the second half and we ended 2009 with a total spend of US$231 million. Major transactions included Wheeler Companies in Texas, Hilty Quarries in Missouri, Burdick Paving in Utah and selected aggregates and asphalt assets in Missouri from Lafarge.
Wheeler Companies is a successful asphalt (six plants), readymixed concrete (eight plants) and paving company based in Austin, Texas and provides entry into the high-growth Austin market with opportunity for further vertical integration into aggregates. This acquisition represents a significant expansion of our current business in Texas which we have identified as an attractive growth platform.
Hilty is an excellent geographic and strategic fit with our existing operations in Missouri. This integrated aggregates and asphalt business operates eight quarries and has approximately 95 million tonnes of well-located, quality aggregates reserves.
Burdick Paving is a well-run vertically integrated company in eastern Utah, operating five aggregates plants, three asphalt plants and paving operations. This represents a geographic expansion of our profitable Utah-based operations into a steadily growing, natural resource rich region of the state.
The Lafarge assets in central and eastern Missouri provide 123 million tonnes of well-located reserves along the I-70 interstate between Kansas City and St. Louis.
In addition, the Division completed six other transactions adding another 162 million tonnes of aggregates reserves.
Our operations are geographically organised, segmented into East and West sectors, each containing four divisions.
East
The Northeast division (ME, NH, VT, MA, RI, NY, NJ, CT) delivered a mixed performance. The Pike group capitalised on early ARRA bid lettings in Maine and New Hampshire and delivered record operating profits with improved margins and solid asphalt volumes and construction revenues. Massachusetts and Upstate New York also moved operating profits ahead strongly with good overall infrastructure demand. The metropolitan New York operations suffered primarily from dramatic commercial activity declines while lower volumes and intense market competition continued in New Jersey. In Connecticut, continued softness in residential and commercial activity outweighed improvements in infrastructure construction activity. Overall the Northeast division operating profit was lower than the prior year.
The Mid-Atlantic division (PA, DE, VA, WV, KY, TN, NC, MA) suffered operating profit declines in Pennsylvania and Delaware as these markets continued to deteriorate. Operating profits in Virginia, West Virginia, Kentucky, Tennessee and North Carolina also fell off from excellent levels in 2008 due to volume declines. Aggressive pricing initiatives and cost reductions resulted in margin improvement throughout the Mid-Atlantic division, moderating the operating profit decline.
A strong stimulus programme in Michigan along with sound pricing initiatives, good bitumen purchasing and excellent cost controls in both Michigan and Ohio enabled our Central division to achieve improved profit margins. While volumes declined in line with the Materials Division averages, operating profit was within 15% of the record 2008 outcome.
The Southeast division (GA, AL, SC, FL) experienced another difficult year leading to a sharp fall in operating profit. Continued declines in the Florida residential and commercial markets negatively impacted the readymixed concrete operations acquired in late 2007 and our new cement joint venture (American Cement Company) which began production in June. Additionally, significant state budget deficits in both Florida and Alabama adversely affected highway lettings and consequently the volumes of asphalt and rail-transported aggregates in both states.
West
The Southwest division (MS, TX, OK, AR, MO, KS, TN) was impacted by volume declines for all products and lower construction sales. However, margin increases in all product lines, coupled with aggressive fixed cost reductions, more than offset lower volumes and construction margins, leading to a good advance in overall operating profit.
In the Rocky Mountain/Midwest division (IA, SD, MT, WY, CO, NM, ID, MN, NE, IL), operating profit declined in 2009 due to weak demand and lower construction margins. Our Midwest businesses experienced good asphalt demand in Iowa from significant ARRA projects and achieved margin improvements from pricing and cost initiatives. However, these advances in the Midwest division were more than offset by reduced highway activity in Minnesota, Idaho and Montana, and overall operating profit was below the 2008 level.
In the Northwest division (ID, WA, OR), worsening economies in northern Idaho and Oregon impacted volumes and operating profits despite strong pricing and significant benefits from cost controls and restructuring.
The Staker Parson operations (UT, ID, AZ, NV) saw a significant decline in volumes reflecting a weakening economy in all regions. The continued slide in residential and commercial construction led to reduced demand for readymixed concrete and aggregates and drew additional competition to the highway construction business. Profit margins were maintained, but operating profit declined.
Outlook
The ARRA Federal stimulus bill will provide increased construction activity in 2010, however there is much uncertainty concerning the reauthorisation of a long-term Federal highway bill and/or the passage of a second job stimulus bill. This uncertainty has caused many fiscally-challenged states to become even more cautious with their highway programmes. Overall, we would anticipate the combined Federal and state spending on highway construction in 2010 to be similar to 2009. Residential activity should improve modestly from a low level, likely showing gains in the second half of 2010. The important non-residential sector will decline further in 2010 from weak 2009 levels due to continued tight credit, high vacancy rates and high unemployment.
Overall we expect ongoing product volumes and construction revenues to be flat in 2010. Margins in construction are expected to be lower due to increased competition and intense bidding for limited work, however product margins should improve with product price increases and cost-efficiency improvements. These efforts coupled with continued reductions in fixed overhead and contributions from 2009 acquisitions should result in a good advance in operating profit for Americas Materials in 2010.
