MLM Martin Marietta Materials Inc

Vulcan Materials Company (VMC) posted a loss of 42 cents per share in the first quarter of 2012 narrower than a loss of 62 cents per share in the same quarter of 2011 (excluding special items) and the Zacks Consensus Estimate of a loss of 44 cents share. Improved top line and gross margins led to the curtailed loss in the quarter.

Total revenue in the quarter rose 10% to $535.9 million driven by meaningful gains in every segment, especially the Aggregates business. Revenues were also higher than the Zacks Consensus Estimate of $487 million.

Vulcan serves both the private and public sectors. Demand for public construction projects, such as bridges, dams and roads remains strong. The public sector projects are responsible for more than half of Vulcan's business. Management believes that the private sector is slowly recovering.

The consolidated gross margins improved 600 basis points in the quarter due to top-line growth and improved productivity and cost savings. Total Selling, Administrative and General (SAG) expense declined 16.3% in quarter to $64.9 million due to the company’s cost-reduction efforts. Adjusted EBITDA was $46.1 million, up significantly from $5.3 million in the prior year quarter, driven by improved gross margins and lower SAG costs.

The nation’s largest producer of construction aggregates has four operating segments going by the principal product lines: Aggregates, Concrete, Asphalt mix and Cement.

Segment Results

Aggregates: The construction Aggregates segment includes crushed stone, sand and gravel and recycled concrete. Revenues in the Aggregates segment inched up 7.5% to $324.5 million in the quarter driven by increased volume.

Gross profit rose 217% to $34.1 million, led by revenue growth and improved productivity despite a rise in cost of fuel. Aggregates shipments increased 10% from the prior year. However, average sales price declined 1% from the prior year due to an unfavorable product mix.

Concrete: The Concrete segment deals with the production and sale of ready-mixed concrete and other products such as block, pre-stressed and pre-cast beams. Revenues in the Concrete segment scaled up 11.9% to $92.0 million.

Ready-mixed concrete volumes increased 12% while average sales price increased 1% versus the prior-year quarter. The segment recorded a gross loss of $12.3 million narrower than a loss of $14.4 million due to improved revenues.

Asphalt Mix: The segment produces asphalt mix. Revenues in the Asphalt Mix segment rose 10.4% to $71.4 million. The segment recorded a gross loss of $0.7 million wider than a loss of $0.2 million in the prior-year quarter, due mainly to higher liquid asphalt costs. Asphalt mix volume increased 3% from the prior year. The average sales price escalated 6%.

Cement: The Cement segment produces mainly for Vulcan’s Concrete segment Revenues in the Cement segment surged 57.3% to $12.0 million. The segment recorded a gross profit of $0.9 million versus a loss of $3.2 million in the prior-year quarter due to increased volumes and lower operating costs.

Restructuring Initiatives

The company announced at the first quarter conference call that the Profit Enhancement Plan (“PEP”) discussed in February 2012 remains on track. In February this year, the company announced its PEP program and planned asset sales, in order to improve earnings and cash flows, pay off debt and thereby strengthen its overall credit profile.

The PEP plan is designed to reduce costs as well as enhance profitability by streamlining the management structure over the next 18 months. The plan is expected to improve EBITDA by $100 million on an annual basis by 2014.

Under the planned assets sale, the company shall divest its non-core assets in order to improve the company’s liquidity position and earnings. These sales are expected to generate after-tax net proceeds of $500 million by mid-2013 later than prior expectations of within 12-18 months. Though these initiatives will hurt the company’s earnings in the near term, they will improve the company’s earnings overall growth profile in the long term.

Outlook

Vulcan expects each product line to deliver improved earnings in 2012 from the prior year due to better pricing, modest volume growth and lower expenses.

The company continues to maintain that the Aggregates segment earnings will improve substantially in 2012. This will be driven by 2% to 4% increase in aggregates shipments versus prior expectations of 1%-2%.

However, pricing is now expected to contribute just 1% to 3% versus prior expectations of 2% to 4% pricing growth. Reduced costs from PEP, improved productivity, and restructuring of overhead support functions are also expected to boost earnings.

The company anticipates Asphalt Mix segment earnings to increase due to higher pricing and modest volume growth. Earnings in the Concrete segment are expected to improve from better ready-mixed concrete pricing and improved shipments. Meanwhile, Cement earnings are expected to approach break-even levels in 2012.

As regards costs, Vulcan expects SAG costs to be approximately $270 million in 2012. Energy costs, especially for diesel fuel and liquid asphalt, are expected to increase 5%-10% in 2012, higher than prior expectations of the costs remaining flat from 2011 levels.

For the year, Vulcan continues to anticipate EBITDA of $500 million, including $25 million from PEP. However, the EBITDA guidance now excludes the impact from planned asset sales and costs associated with the Martin Marietta Materials, Inc (MLM) unsolicited exchange offer which were previously included in the outlook. Capital expenditures are expected to be $100 million in 2012.

Our Recommendation

We currently have a Neutral recommendation on Vulcan. The stock carries a Zacks #3 Rank in the near term (Hold rating).

We are encouraged by the company’s better-than-forecast results, in particular the impressive performance at the Aggregates segment which is slowly gaining momentum. We also like the company’s expanded cost initiatives which will improve the overall credit profile of the company in the long run.

Though public construction spending remains stable, low levels of growth in the private sector are still a concern. This, combined with rising costs of energy and other raw materials as well as the company’s high debt load, keeps us on the sidelines. In the end, we maintain our Neutral recommendation on the stock.

 
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