Concerns about Florida?

Concerns about Florida?
Published: 31 July 2007

JP Morgan’s Building Material analysts have been reviewing Vulcan’s Q2 results noting that there were no real surprises as the company had pre-released on 18 July. Of interest were the disappointing April-June quarter figures for Florida Rock. Vulcan had announced a recommended offer for Florida Rock in February of this year. Florida Rock also reported results yesterday (30 July). Its operating profit for the April-June 2007 quarter was 40% lower than in the same quarter a year ago on sales down by 23.6%.

Weak volumes mainly responsible for decline in Florida Rock’s profitability. The main reason for the weak results from Florida Rock was the decline in volumes caused by the weak housing market. Its aggregate, cement and ready-mixed concrete volumes in the quarter were 21-28% lower than in the same quarter last year, and Florida Rock’s concrete block volumes fell by 53%.

Prices generally held up better than volumes. They declined by 4% for both cement and concrete blocks but increased by 4% for ready-mixed concrete and by 17% for aggregates.

As  a follow on, the JPM analysts reported negative implications for Cemex. Following Cemex’s acquisition of Rinker,  JPM estimates that on a pro-forma basis it= derived about 15% of its 2006 EBITDA from Florida. As Florida Rock derived 65% of its sales last year from Florida and is in similar businesses to Cemex, its results probably provide a good guide to Cemex’s profitability there. If Cemex’s operating profit is also down by 40% in Florida, the impact at group level is about a 6% reduction.

The 40% decline in Florida Rock’s quarterly operating income is similar to the 41% fall reported by Cemex in its 2Q US operating income, which did not include any contribution from Rinker as the latter is being consolidated from 1 July 2007. However, Rinker’s April 2007 forecast of a 0% to 10% decline in its EBITDA in the year to 30 March 2008 now looks significantly too optimistic because more than 50% of its sales are in Florida.

On a brighter note, there are positive implications for CRH. Vulcan’s comment that its “asphalt earnings increased significantly from the prior year” is, in JPM’s view, encouraging for CRH. It estimates that CRH derives about 10% of its group profitability from the supply of asphalt in the US. Vulcan reported that its asphalt prices were 16% higher in 2Q07 than in 2Q06 despite a “slightly lower” cost of liquid asphalt – JPM analysts conclude.