In World War I, the two armies engaged in bitter combat on the Western Front, marking the first time where a stalemate occurred so early; a series of trenches were built by both armies as each side dug into its positions. Progress was measured in yards, not miles.
Reviewing the previous year’s results for the ready-mix industry, I said that for the first time in four years, we could finally say: “Thank goodness. Progress!” But this year, I am reminded of trench warfare, with progress being measured, figuratively and literally, in yards.
The release of the 2014 survey at the NRMCA ConcreteWorks Conference in Indianapolis in the fall surprised me and my colleagues, as we had expected a couple of positive metrics based on the anecdotal evidence we had seen in our client base in 2013. First, we were sure the industry was returning to profitability, and secondly, we thought volumes and selling prices would advance much further than they did. The result, however, was a year of slower progress than expected, as the industry continues to fight its way out of the deep trenches of the Great Construction Recession, as I have come to call it.
While the industry significantly reduced its operating losses between 2011 and 2012, trench warfare was apparent in 2013, with continued losses. More importantly, precious little ground was gained in Earnings Before Interest, Taxes, Depreciation & Amortization, or EBITDA, the measure of free cash a business generates. Last year, I said, “2013 has continued to demonstrate progress, and I am calling for the industry’s return to profitability this year.” Wrong!
To generate this data, NRMCA producer members provide detailed data on their financial performance for the prior year. An outside CPA firm processes the information and assures the privacy of all data. The report delivers results sorted in various ways: an analysis by size; by region, by company area type (rural, urban, and mixed); and a five-year trend. The report compares the respondents to the Average NRMCA Member, as well as the Upper and Lowest Quartiles from the standpoint of profitability. The 2014 Industry Data Survey reports the results for 2013, the most recent year available.
Small volume, price increases
In 2013, total volume of concrete produced increased only 3% over 2012, not enough to create the tailwind on selling price that comes from a strong increase in volume. While prices were up, they lagged most other building product categories in terms of percentage gains. Here are some of the key highlights:
- The average selling price of a yard of concrete rose to $93.42 in 2013 compared to $90.10 in 2012, a $3.32 increase. While this is the second year in a row that prices increased since the price slide began in 2010, it was not a breakout year. Anecdotally, that rise continued in 2014, as we saw $100-plus per cubic yard prices emerging in many areas.
- Operating losses contracted to $2.18/yard in 2012 from $7.23/yard in 2011, an almost two-thirds improvement. But the progress slowed dramatically in 2013, with the operating loss dropping to $1.03/yard. We predicted the industry would return to profitability in 2013, and despite the belt-tightening during the recession, we just didn’t get there. But the industrywide loss was still about half of 2012, at $310 million compared to a $632 million loss the prior year. Thankfully, this is a vast improvement over the record $1.92 billion industry loss in 2011.
- EBITDA growth also slowed compared to the prior year. It grew from a $0.77/yard loss in 2011 to a solid, positive $3.25 per yard profit in 2012, a swing of over $4. But in 2013, EBITDA only grew to $3.87, a gain of $0.62. This is slightly more than half of the $7.27/yard peak reported in 2010.
- After a solid gain in volume in 2012 of almost 25 million cubic yards, (289.5 million yards in 2012 versus 265.7 million yards in 2011), volume grew to just over 300 million in 2013, or about 11 million yards. The industry peaked at 458 million cubic yards in 2005, so last year’s volume only brings the recovery to two-thirds of the industry high. In 2013, a brutally cold winter and a very wet spring stunted volume growth, but I believe that in this year’s survey, we will learn that the industry produced 325 million cubic yards in 2014.
- As in past years, the difference between the Upper Quartile (producers whose profits fall in the top 25% of the survey) and the Lowest Quartile (producers whose profits fall in the bottom 25%) continues to be almost solely due to their top-line selling prices. The results demonstrate that the Lowest Quartile producers are good operators, so it isn’t a question of substandard operating performance. As we learned last year, companies falling into the Lowest and Upper Quartiles rarely stay in that category for more than two or three years, driven by swings in the profitability in their businesses that can go both ways. Most companies move in and out of both categories, and are often found in the Average Member category. Here is a comparison of both groups’ key metrics:
- The difference in their top-line selling price is where almost all of the performance edge lies: $91.78 for the Lowest Quartile versus $107.11 for the Upper Quartile, an advantage of $15.33 per yard for the best performers. But in what may be the single most interesting statistic this year, both ends of the spectrum substantially increased their selling prices compared to the Average Member. The Lowest Quartile’s price grew from $83.77 in 2012 to $91.78 in 2013, a $8.01 gain, and the Upper Quartile grew from $93.01 to $107.11, for an astonishing $14.10 expansion in their top-line selling price. Both of these compare to only a $3.32/yard increase for the Average Member.
- Operating losses for the Lowest Quartile were $11.52 per cubic yard, while the Upper Quartile earned a profit of $10.20, a difference of $21.72. This is an expansion of an additional $9.49 in operating profit between the two groups, as the difference in 2012 was $12.23. If anything, the Upper Quartile continues to expand its profit margins over the Lowest Quartile, driven by the marked differences in their top-line selling price.
- EBITDA was a negative $3.64 for the Lowest Quartile, compared to a positive $13.95 for the Upper Quartile, a difference of $17.59, which is yet another expansion of the margin differences between the two groups, a trend we have witnessed for the last few years. This is a huge chasm in terms of cash flow, and highlights the challenges the Lowest Quartile faces in trying to grow their top-line selling price.
- While the disparity between the Upper and Lowest Quartiles is always interesting, the Average Member, defined as the average of all producer respondents, saw improvements, with annual yards, yards-per-plant, yards-per-truck, and the all-important total delivery cost per minute all improved over 2012.
The trench warfare has continued through 2014 with modest and hard-fought gains. Perhaps in 2015 we will see true breakthroughs.
