The past year brought North American cement, concrete and aggregate producers record sized mergers (Cemex + RMC, Holcim + Aggregate Industries), record
The past year brought North American cement, concrete and aggregate producers record sized mergers (Cemex + RMC, Holcim + Aggregate Industries), record profits, and double-digit price increases that migrated from mills and quarries to job sites. Stock price gains in 2005 averaging 27 percent across 14 publicly traded companies represented rewards from the securities markets unlike the industry had enjoyed since the early 1960s.
Among those rewarded is relative Wall Street newcomer U.S. Concrete, Inc., whose strategy couples price of entry metrics Û like building local market density and demonstrating standardization-driven economies in procurement and operations Û with development of a work force wise to concrete fundamentals and customer service, and a little finance jargon.
Everyone in the company needs to think like an owner. At our level of production and today’s prices, a small fraction of a cubic yard per man-hour productivity improvement can add up to $2.0 million in improved earnings, says U.S. Concrete President and CEO Eugene Martineau. Whether it’s a delivery professional, batch plant operator, or regional vice president, we want our team members to know what a benchmark like EBITDA [earnings before interest, taxes, depreciation and amortization] means and what their roles are in the bottom line.
With or without EBITDA insight, team members continue to have among benefit options a stock purchase plan where 1 to 10 percent of earnings can be used to purchase U.S. Concrete shares at discounts. Employees who opted into the plan had cause to celebrate on both sides of the winter holidays. In 2005, U.S. Concrete’s stock climbed 23 percent, mainly in the fourth quarter, followed by additional gains to near-record highs in January; 2005 EBITDA, as reported early this month, reached 9 percent, compared to 8.2 percent in 2004; and, revenues topped $575 million, up from $500 million the year prior. The 2005 revenue figure marks a nearly two and half-fold increase over numbers from 1999, when U.S. Concrete assembled five ready mixed producers, plus a precast business, and effected an initial public offering (IPO).
A strong 2005 finish has the company set for what Portland Cement Association projects will be a record year for ready mixed and concrete product industry shipments. Continuing a rebound that began in mid-2004, last year’s financial performance also enables U.S. Concrete to roll out Winning the Game. A company-wide, team-building effort, it is aimed at educating its 2,000-plus team members on operating metrics and financial performance, offering a review of production and profit data previously limited to regional managers and above.
Better returns are likewise supporting a major overhaul of five ready mixed plants in New Jersey and California, scheduled for completion by 2007, along with mixer fleet additions the company plans prior to bracing for premiums of 2007 engine-equipped trucks. Another big ticket investment is proceeding in Phoenix at Smith Precast, one of six plants specializing in utility and underground products U.S. Concrete has added since its founding. While ready mixed is the core product, positive returns from Smith Precast and sister properties Û and three block plants that accompanied post-2000 deals Û will keep manufactured-concrete a company target.
Concrete Products visited U.S. Concrete headquarters recently for the first time since 1999. Gene Martineau and his colleagues weighed in on the year ahead; how they have solidified field operations and market presence; and, their recent rounding out of a hands on senior management team committed to operational excellence Û a term coined in the widely subscribed business book, Discipline of Market Leaders.
U.S. Concrete went public in May 1999 at $8/share, trading over the counter under RMIX. Stock since the initial offering has hovered much of the time in the $6-9 range, dipping below $5 in 2003 when conditions worsened in Dallas and northern California. As all markets had begun to rebound by the middle of last year, and improved 2005 financials were imminent, the stock was poised last summer for a three-point spike that began in the fourth quarter, signaling a bright 2006.
Since the second week of January, when RMIX closed above $10 for the first time, the stock has ranged from $11 to nearly $13. The price held following U.S. Concrete’s sale of 8 million new shares at $11.25 during an early February offering. Viewed by management as an unqualified success, the offering raised about $85 million. Along with $25 million in cash on hand, the stock proceeds are earmarked for acquisitions Û projected over the next 12 months Û or general corporate purposes. A credit facility on top of the cash affords the company in excess of $150 million for deals and capital expenditures. The most likely targets are operators that can be treated as bolt-ons to existing platforms; however, management is interested and believes it can finance larger new-market entries.
U.S. Concrete closed 2005 with $43 million in bolt-on transactions Û City Concrete in Memphis and Go-Crete/South Loop Development in Dallas. Factoring sales from those two deals, plus anticipated gains from strong product pricing and record or near-record shipments has the company projecting 2006 earnings improvement of at least 60 percent above last year’s levels. Part of that is tied to a projected rebound in commercial construction, which plays to U.S. Concrete’s strengths in selling higher margin, value-added mixes when compared to typical residential-concrete jobs.
Although the company has maintained moderate profitability through much of the past seven years, 2005 saw validation of a business plan that has been tested since 1999 by a national recession; regional market shifts tied to dot-com and telecom meltdowns; aftermath of September 11; overall stock market decline; and, sustained bad weather in Texas and California markets. That plan has allowed the company to realize local market densities around charter and post-IPO platform businesses, then progress to staff development undertakings that management feels will differentiate U.S. Concrete from larger, more integrated companies’ concrete divisions.
Our message to investors about growth and product pricing potential hasn’t changed much. We see the concrete industry continuing to consolidate at the hands of major companies in multiple markets, says Martineau. We have spent much time educating the investment community about the differences between cement and concrete. Pricing and profit growth in concrete production has caught investors’ attention and also elicited more respect from the cement industry, which views our business as more of partner than it had in the past.
In Securities and Exchange Commission filings, the company cites estimates of 2,300-plus independent ready mixed producers with more than 6,000 plants. Typically family-owned, U.S. Concrete suggests, these producers are likely to find it increasingly difficult to grow their business and compete effectively against larger, more cost efficient and technically capable operators.
Since its launch, U.S. Concrete has grown from 33 ready mixed and two precast plants in five markets to 111 sites in seven regions or states, with seven portable concrete plants and two aggregate properties serving two of its three largest markets. Today’s portfolio is more diversified that it was seven years ago. U.S. Concrete, for example, has ready mixed assets in long term, high growth Texas and California, and dense to moderately populated, lower growth markets in the mid Atlantic, South and upper Midwest.
In 1999, company was heavily weighted toward northern California, where the Central Concrete Supply Co. franchise represented nearly 80 percent of revenues. That figure is now closer to 40 percent, as the company has expanded into the high volume but cyclical Dallas/Ft. Worth market (Beall, Go-Crete/South Loop); greatly increased its presence in northern New Jersey, where the (pre-Lafarge) Blue Circle Raia properties served as a significant bolt-on to U.S. Concrete charter operator, Baer Concrete; and, built a leading position in Memphis and northern Mississippi through deals in late 1999 and 2005. The Memphis properties have been rebranded under the most recently acquired business, City Concrete, and New Jersey operations as Eastern Concrete Materials. Similar rebranding has taken place at Washington, D.C., northern Maryland, and Michigan properties. While no business unit operates under the U.S. Concrete name, they all operate as U.S. Concrete Companies.
ENDING THE SHORT SELL
U.S. Concrete figures, combined with National Ready Mixed Concrete Association and F.W. Dodge data, reflect ready mixed price gains of about 30 percent over the past decade against shipments of similar percentage growth. As an industry, the price of our product can still increase considerably without market share loss. Our products continue to offer the end user a significant value as compared to competitive building materials, Gene Martineau contends. Those are conditions investors embrace.
In background provided to investors and prospects, the company cites a marketing strategy that emphasizes the sale of value-added product to customers more focused on reducing their in-place building materials costs than on price per cubic yard of ready mixed they purchase.
Ready mixed pricing is up almost across the board in U.S. Concrete’s markets, with the company citing an average 11.5 percent per yard increase for 2005. In northern California, where the company has a strong position in the San Francisco Bay Area and San Francisco-Sacramento corridor, concrete has been selling for more than $100 per yard. In the fours years leading up to mid-2004, U.S. Concrete was able to maintain stable pricing and reasonable profits in the face of increasing raw material costs and a 20 percent drop in market volume.
However, conditions in the second highest cement-consuming state differ. The current $60-70 per cubic yard price for ready mixed in Dallas is below what the product was sold for when U.S. Concrete entered the market in 2000. There is room for correction, Martineau argues, citing California and Texas, and for comparison sake, Florida, where ready mixed is selling for around $90 per cubic yard. The difference in raw material costs and operating expenses between the three states does not justify the $20 to $30 per cubic yard price spread.
Our product is undervalued. We want the industry to look at the real cost of finished or placed concrete and price it accordingly, affirms Martineau. Concrete producers can tailor a product for just what a contractor wants and needs. If the producer and contractor both do their jobs right, the result is a product that will virtually last forever.
Even with the assurance of long service life and specially tailored mixes, the industry is still selling concrete at the equivalent of about 2 cents a pound, he continues. Two cents per pound for a product that can only be obtained by companies who tie up enormous capital in land, mineral reserves, cement production, aggregate mining, batch plants, and delivery fleets, while assuming significant risks to me spells undervalued.
One of U.S. Concrete’s first company-wide education efforts was Pricing Management and Optimization Training, applying an advanced approach to pricing theory to construction materials. Modeled after the widely used Miller Hieman Sales Training series, it has compelled company marketing and sales professionals to weigh value-adding mix designs and delivery options for concrete orders. Contributing to the effort has been Degussa Admixtures, which as a U.S. Concrete alliance partner assists in sales and marketing of premium products, plus research and development supporting future projects.
U.S. Concrete’s proprietary Pricing Optimization training series garnered an Excellence in Training Award from the National Ready Mixed Concrete Association in 2004. Building on the program’s success is the company’s Sales Activity Process (SAP), which over the past two years has helped a sales force of more than 100 members adopt a uniform system of tracking orders, customers by volume and profit level, and forecasting. Not to be confused with the broadly adopted enterprise software, U.S. Concrete’s SAP is run regionally on a common platform.
Administering the program is Wally Johnson, who was named vice president of marketing and sales in late 2004 after a long tenure in similar capacities with Grace Construction Products and information technology provider Systech Inc. SAP is about tracking bids, market share and profitability by customer. We are committed to making sure the sales staff has all the tools and uses SAP to help understand why we land or lose orders. Is it service, quality or price? says Johnson.
In addition to overseeing SAP, which encompasses more than 10,000 accounts in 11 states, he is also working with larger customers who are building in more than one of the company’s regions on a national account basis. Johnson is also responsible for assisting regional sales staff in organizing architect/engineer/contract-geared Awareness Forums, which in addition to standard concrete promotion topics have been expanded to include green building themes.
One of few job titles created upon U.S. Concrete’s launch was vice president of operational integration Û for which Gene Martineau tapped a former Florida Mining/Southdown colleague, Terry Green.
Generally, we have targeted well run profitable companies for acquisition over the years, says Green, who has recently been named senior vice president of operations. Immediately following our IPO, we developed a detailed plan to monitor plant equipment and rolling stock. Today, our entire fleet is managed on a uniform maintenance tracking platform, while most plants have uniform batch panels and dispatch systems. Repetition has eased integration of additional businesses and iron, whether they are from bolt-on deals or in new markets, he adds.
U.S. Concrete’s vehicle fleet includes upwards of 1,100 rear- and front-discharge mixers, the latter based mainly at its Michigan and Delaware operations. From a mix of plants with varying construction seasons, trucks are planned for 12-year service runs. With stepped up purchases in the past few years, the company is targeting a fleet-wide average age of 6.5 years per mixer truck. Continuing an example he set at Southdown, Green has created for each region truck spec teams consisting of delivery professionals and mechanics, along with representatives from senior management, McNeilus Cos. and Mack Trucks.
Typical of other major producers, U.S. Concrete has adopted a safety protocol and programmed training for its delivery professionals and all operations staff. A corporate safety manager, Rick Maidens, coordinates data collection and training through regional safety professionals. Among regular training activities they schedule are mock OSHA inspections.
BEATING THE ODDS
U.S. Concrete was formed by a process the financial community dubs roll up, where a group of similar companies in different regions are consolidated into one entity and taken public with a stock offering. The method had been used during the 1990s with mixed results in waste hauling, electrical contracting, nursing home, physician practice management and other businesses.
Many times the Îroll-up strategyÌ did not succeed because it was too often a pure financial play, where you tried to leverage the multiple you could buy private companies for against the stock price multiple Wall Street was willing to value the company, says Michael Harlan, who had a 10-year tour of duty in roll-up experience prior to becoming U.S. Concrete’s first chief financial officer. He credits the company’s success to its strong management team, with Gene Martineau leading the operations along with former owners, combined with the financial and merger & acquisition expertise of Main Street Merchant Partners, a Houston venture capital firm that organized and helped underwrite U.S. Concrete’s IPO. Another company Main Street took public, electrical and telecom contractor Quanta Services, provided U.S. Concrete a template for success in the risk-prone arena of roll-ups.
All along, we have avoided the temptation to overpay for deals and maintained a disciplined acquisition strategy, says Harlan. Through 33 deals, we have stuck to strict valuation parameters and targeted companies that agree with our marketing and operating philosophy. Former owners helped much in the transition to a public company, he adds, although many have left after serving for interim periods. Today, Murray Simpson, one of the original founders and a former chairman of the National Ready Mixed Concrete Association, remains active as an independent member of the Board of Directors, while brothers Bill and Tom Albanese (Central Concrete) are actively involved in the day-to-day operation of the northern California ready mixed and precast products region.
Two years ago, Harlan transitioned from CFO to a new title, chief operating officer. To enable the switch, he and Martineau complemented the management team with Senior Vice President and CFO Robert Hardy, who joined U.S. Concrete from a mining and processing-wise paint pigment company, NL Industries; and, Vice President of Human Resources Gary Konnie, whose two most recent positions were with energy services provider El Paso Corp. and the (Martin Marietta-acquired) Meridian Aggregates.
With those two tending to matters like Sarbanes Oxley compliance, human resources and training and securing new talent, Harlan is proceeding with an original plan to spend less time with spreadsheets showing plant and fleet equipment expenses, and more time working with field managers and their staff on continuing to execute the company’s long range strategic plan. Our goal has never been to grow this company to a certain size and try to sell it, he says. Our plan all along has been to create a premier operating company in ready mixed concrete and related concrete products industry.
INVESTORS VALIDATE PURE PLAY STRATEGY
Aside from his stake in U.S. Concrete, few industry veterans can match Gene Martineau’s appreciation for the traction concrete assets have gained among the investment community. Since the company’s May 1999 initial public offering, he and his backers maintained that a pure play concrete producer, with little or no integrated raw materials assets, could yield sufficient returns for Wall Street. A review of global companies’ post-1999 merger and acquisition activity underscores U.S. Concrete’s foresight of profit potential in ready mixed, as each of these $500 million-plus deals included a sizable domestic concrete franchise:
- Hanson-Pioneer (2000)
- Cemex-Southdown (2000)
- Lafarge Group-Blue Circle (2001)
- Rinker Materials-Kiewit Materials (2002)
- Cemex-RMC Group (2005)
- Holcim-Aggregate Industries (2005)
Additional transactions in the past seven years have shored up the concrete positions of the above suitors and other public companies:
Shortly after closing on RMC Group, the company announced a joint venture with Birmingham-based Ready Mix USA, spanning 100-plus ready mixed plants in Alabama, Georgia and Florida and seven concrete block plants in those three states, plus Mississippi, Arkansas, Tennessee and Kentucky. One of RMC USA’s largest markets is northern California, home to U.S. Concrete’s lead franchise, Central Concrete Supply.
Picked up 11 ready mixed and two block plants in June 2000 from Southern Concrete Construction, Albany, Ga. In early 2006, acquired four-plant Newington Concrete Corp. in northern Virginia.
Lafarge North America
After taking over Blue Circle’s Georgia and Alabama concrete properties, has effected a series of bolt-on deals in both states, plus similar transactions to expand market-leading New Orleans franchise. In 2004, it acquired The Concrete Co., Columbus, Ga., bringing more than 40 ready mixed plants and 1 million yd. output.
Knife River Corp. subsidiary capped its mid to late 1990s deals for Hawaiian Cement and Morse Bros. (Oregon) with a string of acquisitions in 1999 and beyond. Among those carrying ready mixed plant assets: JTL Group and subsequent Montana bolt-ons; Bauerly Bros. and Gesell Concrete in Minnesota and the Dakotas; and, bolt-ons to Morse Bros. and Hawaiian Cement.
Prior to 2000, company confined its investments in ready mixed to deals where such operations were tightly integrated with aggregate and asphalt production. Over the past six years, it has increased its annual ready mixed shipments perhaps 50 percent, owing to deals in Salt Lake City (Conroc, Hanson Aggregates), Ohio (Buckeye Ready Mix joint venture with Columbus-based Anderson Concrete), Iowa (American Ready Mix), and, most recently, Delaware (Pioneer Concrete). The latter deal brought it into a market U.S. Concrete entered in 2003 with its purchase of Wyoming Concrete Materials.
Company has gained at least 1.5 million yd. of annual ready mixed production by acquiring American Limestone in Tennessee; Kiewit Materials Corp. in Phoenix; Hanson Aggregates’ Las Vegas ready mixed plants; and (pre-Cemex) RMC Industries’ Florida Panhandle plants. American Limestone brought it into Knoxville, a market where U.S. Concrete had already set up shop through Ready Mix Concrete Co.