Investor's Business Daily, April 5th, 2007
Vulcan Materials, the nation's top producer of construction aggregates, hasn't completed its acquisition of Florida Rock Industries, but already it's looking for more deals.
Consolidation has been ongoing for years in the construction materials industry, but there are still more opportunities for acquisitions, says Vulcan VMC CEO Donald James. The Birmingham, Ala.-based company expects to close its $4.6 billion buy of Florida Rock FRK by midyear.
Even with Florida Rock, Vulcan will have less than 10% of the U.S. production of construction aggregates, James says. He estimates there are about 5,000 privately owned aggregate producers in the U.S. Aggregates are crushed stone, sand and gravel used to build highways and make concrete.
Vulcan has made about 100 "bolt-on acquisitions" of relatively small operations since 1990, as well as several large public company purchases, James says. He keeps an eye out for acquisitions large and small in strong, fast-growing markets.
James spoke with IBD about the industry and the challenges ahead.
IBD: How's the market for aggregates, concrete and building materials right now?
James: Demand from public infrastructure (projects) is up. Demand from private, nonresidential construction is up. And demand from housing is down. But overall we see demand for our products, particularly aggregates, being stable.
IBD: Looking at factors driving sales, do public infrastructure projects such as highway and airport improvements hold the most opportunity?
James: Public infrastructure spending is and always has been our largest demand segment. It is generally very stable. It is not affected by economic cycles and interest rates. And it is more aggregate-intensive per dollar of construction put in place than any other end market. That is, a dollar of spending for public infrastructure has more aggregates in it than private, nonresidential or housing. So we're delighted to be focused on public infrastructure.
IBD: Is there a major political aspect to it? There's been talk for some time that the government has been under-funding highway construction.
James: That's absolutely true. The quality of the federal highway system is not improving. It's declining.
There are gasoline and diesel fuel taxes collected at the pump that go into the federal Highway Trust Fund. We're getting good increases each year in the total appropriation for highways out of the trust fund, but the trust fund is not growing nearly as fast as the needs for public infrastructure.
IBD: What are state governments doing?
James: As a result of the federal program not growing fast enough to meet the needs, you're seeing many of the states be very innovative and creative in finding other sources to keep the highway systems moving forward.
Perhaps the boldest currently is the state of California, under Gov. (Arnold) Schwarzenegger, where he proposed a $223 billion, 10-year program of public infrastructure improvements.
California is moving forward with a huge infrastructure program for highways, schools, waterways and low-income housing, which we are very encouraged about. That's one example of many where states are stepping up to take up the funding needs for public infrastructure.
IBD: Vulcan has focused on growth states like California, right?
James: That's been our strategy for a number of years. California is our largest single state. It's about 25% of our total revenues. For that reason we are particularly enthusiastic about the new infrastructure program in California.
We have a strong presence in Texas, Georgia, North Carolina, Virginia and in the Chicago metropolitan area. One of the things we focus on is being a major supplier with good long-term reserves in the fastest-growing metropolitan markets in the United States. We are a major supplier in eight or nine of the top 10 fastest-growing metropolitan areas in the country.
The Florida Rock acquisition will certainly improve our growth profile. Florida continues to grow at rates that are much faster than the U.S. as a whole and even much faster than the other Sunbelt states.
IBD: You've talked about the importance of reserves. Are aggregates difficult to come by?
James: The situation is: aggregates are cheap and they're heavy. So they don't move very far economically, which puts a premium on aggregate reserves in or very close to growing metropolitan areas. And that's where our focus has been for years -- building our reserve base close in to these large, fast-growing metropolitan areas.
Vulcan has been very visionary in establishing reserve positions in the growth corridors in these fast-growing metropolitan areas before the growth gets there. Because once the growth gets there, it's impossible to open a quarry for all sorts of reasons.
We are blessed with something like 45 years of reserves on average in our quarries, and much of that is close in to growing metropolitan areas.
Copyright 2007 Investor's Business Daily, Inc.
