A Look Into The Crystal Ball: The Ready Mixed Concrete Industry In 2015 And Beyond Presented to The...

A Look Into The Crystal Ball: The A Look Into The Crystal Ball: The Ready Mixed Concrete Industry Ready Mixed Concrete Industry

In 2015In 2015 And Beyond And Beyond

Presented toPresented toThe Mack Trucks Field Sales Meeting The Mack Trucks Field Sales Meeting

ByByPierre G. VillerePierre G. Villere

Allen-Villere PartnersAllen-Villere Partners

July 24, 2007July 24, 2007

Overview: The Areas We See In Our Overview: The Areas We See In Our Crystal BallCrystal Ball

Cement Shortages Were Short-lived (for now)Cement Shortages Were Short-lived (for now)Total Concrete Volume Could Easily Reach Total Concrete Volume Could Easily Reach

600-700M 600-700M Yards by 2015, and possibly more Yards by 2015, and possibly more Consolidation Will ContinueConsolidation Will ContinueHR Will Continue to Be A ChallengeHR Will Continue to Be A ChallengeMore Sophisticated Marketing Will Play A More Sophisticated Marketing Will Play A

Key Role In GrowthKey Role In Growth

Overview: The Areas We See In Our Overview: The Areas We See In Our Crystal Ball OverviewCrystal Ball Overview

Mixers Will Continue to Become More Mixers Will Continue to Become More SophisticatedSophisticated

Permitting And Compliance Will Become Permitting And Compliance Will Become More Daunting Than Ever More Daunting Than Ever

Technology Will Continue To Be The Key Technology Will Continue To Be The Key Driver in Efficiency ImprovementsDriver in Efficiency Improvements

Cement Shortages Were Short-Cement Shortages Were Short-lived (for now)lived (for now)

The length and severity of the shortage has been The length and severity of the shortage has been buffered by the housing slowdownbuffered by the housing slowdown

PCA believes that the correction in the residential PCA believes that the correction in the residential market will continue through 2007 resulting in a market will continue through 2007 resulting in a possible 6.5% decline from 2006.possible 6.5% decline from 2006.

PCA also foresees this correction going into 2008, PCA also foresees this correction going into 2008, resulting in them lowering their 2008 cement resulting in them lowering their 2008 cement consumption expectations by 3 million metric tons. consumption expectations by 3 million metric tons.

Cement Shortages Were Short-Cement Shortages Were Short-lived (for now)lived (for now)

Three big unknowns that can have an impact on the Three big unknowns that can have an impact on the direction of cement demand:direction of cement demand:

The sub-prime and ARM mortgage messThe sub-prime and ARM mortgage mess Housing inventoryHousing inventory Gasoline prices/consumer spendingGasoline prices/consumer spending

Long-Term Cement ConcernsLong-Term Cement Concerns

Portland Cement consumption in 2005 was Portland Cement consumption in 2005 was 127 million metric tons in the United States. 127 million metric tons in the United States. Of that figure, only 87.7 million metric tons Of that figure, only 87.7 million metric tons were produced domesticallywere produced domestically

Over the next 5 to 7 years, domestic producers Over the next 5 to 7 years, domestic producers expect to expand production capacity by 18.7 expect to expand production capacity by 18.7 million metric tons million metric tons

Greenfield Operations: 6 million metric tonsGreenfield Operations: 6 million metric tonsModernization: 12 million metric tonsModernization: 12 million metric tons

Long-term Cement ConcernsLong-term Cement Concerns

These numbers indicate that total These numbers indicate that total domesticdomestic production in 2015 will be approximately production in 2015 will be approximately 125.8 million metric tons of Portland Cement125.8 million metric tons of Portland Cement

With the ready-mixed concrete industry With the ready-mixed concrete industry consuming approximately 75% of the cement consuming approximately 75% of the cement production in the US, our industry cannot production in the US, our industry cannot sustain our current production levels, much sustain our current production levels, much less any growth, without historically high less any growth, without historically high levels of imported cementlevels of imported cement

Long-term Cement ConcernsLong-term Cement Concerns

If the ready-mixed concrete industry achieves If the ready-mixed concrete industry achieves a 600M cubic yard production level in 2015, a 600M cubic yard production level in 2015, this translates into a requirement of 30.4 this translates into a requirement of 30.4 million tons of cement in excess of domestic million tons of cement in excess of domestic production capacity at that timeproduction capacity at that time

This means that imported cement will This means that imported cement will represent represent 30%30% of total domestic consumption, of total domestic consumption, which is hovering near the record high which is hovering near the record high percentages.percentages.

Long-Term Cement ConcernsLong-Term Cement Concerns

Additionally, the economics of imported Additionally, the economics of imported cement relies heavily on favorable ocean cement relies heavily on favorable ocean freight rates, and that is a commodity as wellfreight rates, and that is a commodity as well

Current economic growth in China and India, Current economic growth in China and India, and their corresponding demand for cement, and their corresponding demand for cement, creates some concern about the stability of creates some concern about the stability of future supplies of imported cementfuture supplies of imported cement

Portland Cement 2000-2010Portland Cement 2000-2010

Imported Cement As a Percentage of Imported Cement As a Percentage of Total SupplyTotal Supply

Since the early 1980s, imported cement has increased Since the early 1980s, imported cement has increased significantly as a percentage of total supply, significantly as a percentage of total supply, regardless of US economic conditionsregardless of US economic conditionsEarly 1980’s (recession):Early 1980’s (recession): 3% of Total Supply 3% of Total Supply Latter 1980s:Latter 1980s: 15-16% of Total 15-16% of Total

SupplySupplyEarly 1990’s (recession):Early 1990’s (recession): 6-8% of Total Supply6-8% of Total Supply1998:1998: 24% of Total Supply24% of Total Supply1999-2000:1999-2000: 29% of Total Supply29% of Total Supply2005:2005: 27% of Total Supply27% of Total Supply2015:2015: 3030++% of Total Supply% of Total Supply

Total Concrete Volume Could Range Total Concrete Volume Could Range Between Between 600-700M600-700M Yards by 2015 Yards by 2015

We have studied projections from several We have studied projections from several industry sources and examined historical rates industry sources and examined historical rates of consumption growth to project ready-mixed of consumption growth to project ready-mixed concrete production in 2015concrete production in 2015

Our internal estimates indicate total US Our internal estimates indicate total US concrete production will range between a low concrete production will range between a low of of 500 500 million cubic yards (in a mild million cubic yards (in a mild recession) to a high of recession) to a high of 800800 million cubic yards million cubic yards if the current economic expansion continues. if the current economic expansion continues.


Bureau of Census growth projections span such a Bureau of Census growth projections span such a wide range, and coupled with the uncertainty about wide range, and coupled with the uncertainty about economic cycles between now and 2015, it is near economic cycles between now and 2015, it is near impossible to estimate concrete volume with any impossible to estimate concrete volume with any accuracyaccuracy

We believe a 600M cubic yard domestic market by We believe a 600M cubic yard domestic market by 2015 is a real possibility, particularly in a stable 2015 is a real possibility, particularly in a stable commodities and interest-rate environment, and if the commodities and interest-rate environment, and if the current economic expansion continues current economic expansion continues


RMC Production Estimates for 2015

300,000,000

400,000,000

500,000,000

600,000,000

700,000,000

800,000,000

900,000,000

F.W. Dodge

Projection

(1.8%)

PCA

Projection

(2.2%)

NRMCA

Projection

(2.1%)

Historical

Per Capita

(1.54)

Estimated

Inflationary

Growth

(2.5%)

28 year

Average

Historical

Growth

(4.7%)

10 year

Average

Historical

Growth

(6.0%)

Projection Source

Ya

rd

s P

ro

du

ced


The Brookings Institute has reported extensively on The Brookings Institute has reported extensively on the demand for new building space of all types the demand for new building space of all types (commercial/residential/industrial/public) to (commercial/residential/industrial/public) to accommodate our population growth:accommodate our population growth:

By 2030, which is well beyond the relevant By 2030, which is well beyond the relevant projection we are presenting here, but indicative of projection we are presenting here, but indicative of the velocity in growth, they believe: the velocity in growth, they believe:


In 2030, about In 2030, about half half of the buildings in which of the buildings in which Americans live, work, and shop Americans live, work, and shop will have been built will have been built after 2000after 2000

Most of the space built between 2000 and 2030 will Most of the space built between 2000 and 2030 will be residential spacebe residential space

Overall, most new growth will occur in the South and Overall, most new growth will occur in the South and the Westthe West


Though a small component of overall growth, the Though a small component of overall growth, the projected demand for industrial space in the Midwest projected demand for industrial space in the Midwest outpaces that of the other regions, unlike the other outpaces that of the other regions, unlike the other major land usesmajor land uses

While these projections may seem overwhelming, While these projections may seem overwhelming,

they also demonstrate that nearly half of what will be they also demonstrate that nearly half of what will be the built environment in 2030 doesn't even exist yet, the built environment in 2030 doesn't even exist yet, giving the current generation a vital opportunity to giving the current generation a vital opportunity to reshape future developmentreshape future development

2015 Total Concrete Volume 2015 Total Concrete Volume ProjectionsProjections

I know you are saying to yourself, “That is some I know you are saying to yourself, “That is some crystal ball!” crystal ball!”

Based on this data, it is reasonable to assume that Based on this data, it is reasonable to assume that production by the end of 2015 could range production by the end of 2015 could range between between 600-700M 600-700M cubic yard mark for the US cubic yard mark for the US

Obviously, the higher the production potential, Obviously, the higher the production potential, the greater impact on the future growth of the the greater impact on the future growth of the ready mixed concrete industryready mixed concrete industry

Consolidation Will ContinueConsolidation Will Continue

We estimate that more than 500 companies We estimate that more than 500 companies have been consolidated since the late 90’shave been consolidated since the late 90’s

Succession, estate planning, and a Succession, estate planning, and a concentration of net worth in the family concentration of net worth in the family business will continue to motivate the sale of business will continue to motivate the sale of smaller producers to the larger onessmaller producers to the larger ones

The Top 25 producers in the US represent 50-The Top 25 producers in the US represent 50-55% of total production in 200655% of total production in 2006


We think the Top 25 producers in the US will We think the Top 25 producers in the US will represent represent 80%80% of total production in 2015 of total production in 2015

Of those, the Top 10 could command more Of those, the Top 10 could command more than 50% of the marketthan 50% of the market

The smaller independents in local markets will The smaller independents in local markets will find it more difficult to compete with larger, find it more difficult to compete with larger, more sophisticated operationsmore sophisticated operations


The exception will be the smallest producers The exception will be the smallest producers in the smallest markets, who will be with us in the smallest markets, who will be with us foreverforever


[insert bullet points on impact to Mack [insert bullet points on impact to Mack Trucks]Trucks]

HR Will Continue to Be A ChallengeHR Will Continue to Be A Challenge

There has been so much written on the There has been so much written on the challenges of hiring truck drivers, and there is challenges of hiring truck drivers, and there is really no relief in sight. really no relief in sight.

In markets with large pools of new In markets with large pools of new immigrants, or with an ingrained blue collar immigrants, or with an ingrained blue collar culture, the problem will not be so acute culture, the problem will not be so acute

HR Will Continue to Be A ChallengeHR Will Continue to Be A Challenge

In markets where such pools don’t exist, the In markets where such pools don’t exist, the available labor pools will become even more available labor pools will become even more challengingchallenging

New initiatives, such as captive Driver New initiatives, such as captive Driver Training Schools, outreach programs to local Training Schools, outreach programs to local high schools, etc. will become a must for high schools, etc. will become a must for producers in the tougher labor pool marketsproducers in the tougher labor pool markets

More Sophisticated Marketing Will More Sophisticated Marketing Will Play A Key Role In GrowthPlay A Key Role In Growth

The role of our state and national The role of our state and national associations will continue to grow in associations will continue to grow in educating the specifying community and educating the specifying community and consumers at largeconsumers at large

A continued effort to educate the industry A continued effort to educate the industry to sell concrete, rather than price concrete, to sell concrete, rather than price concrete, will be adopted and/or grown by the leaders will be adopted and/or grown by the leaders in individual marketsin individual markets

More Sophisticated Marketing Will More Sophisticated Marketing Will Play A Key Role In GrowthPlay A Key Role In Growth

Continuing to educate the customer base at Continuing to educate the customer base at large of the benefits of concrete over asphalt large of the benefits of concrete over asphalt will be critical in continuing to grow volumes will be critical in continuing to grow volumes at the national levelat the national level

Mixers Will Continue to Become Mixers Will Continue to Become More SophisticatedMore Sophisticated

By 2015, new mixers being delivered By 2015, new mixers being delivered without without GPS/camera/tracking systems will be the exception, GPS/camera/tracking systems will be the exception, not the rulenot the rule

Truck tracking will be more accurate, with intelligent, Truck tracking will be more accurate, with intelligent, real-time routing to compensate for traffic patterns, real-time routing to compensate for traffic patterns, weight restrictions, etc., translating into more weight restrictions, etc., translating into more efficient fleet utilizationefficient fleet utilization

Electronic detection devices that already measure Electronic detection devices that already measure slumps and quantities of water added at the job site slumps and quantities of water added at the job site will be supplemented by sensors that report mileage, will be supplemented by sensors that report mileage, fuel usage, hydraulic temperature and pressure, water fuel usage, hydraulic temperature and pressure, water temperature, and the top speed a driver reached temperature, and the top speed a driver reached

Mixers Will Continue to Become Mixers Will Continue to Become More SophisticatedMore Sophisticated

In-cab cameras will make use of video, In-cab cameras will make use of video, increasing safety awareness and efficiencyincreasing safety awareness and efficiency

Multiple cameras at various angles around the Multiple cameras at various angles around the truck will also monitor job site activitytruck will also monitor job site activity

Permitting And Compliance Will Permitting And Compliance Will Become More Daunting Than EverBecome More Daunting Than Ever

Federal EPA and state environmental Federal EPA and state environmental compliance will continue to become more compliance will continue to become more stringent in most states, and compliance costs stringent in most states, and compliance costs will continue to escalatewill continue to escalate

Environmental compliance costs may Environmental compliance costs may accelerate at the same percentage rates as accelerate at the same percentage rates as recent increases in insurance, fuel, and cementrecent increases in insurance, fuel, and cement


With new plants as unpopular as prisons and With new plants as unpopular as prisons and landfills, permitting for “greenfield” locations landfills, permitting for “greenfield” locations will become harder, and will probably be will become harder, and will probably be eliminated altogether in many large, urban eliminated altogether in many large, urban marketsmarkets

In the face of permitting challenges, sited and In the face of permitting challenges, sited and permitted plants will continue to rise in valuepermitted plants will continue to rise in value


The trend towards siting plants in aggregates The trend towards siting plants in aggregates suppliers’ yards will be one way around this suppliers’ yards will be one way around this issueissue

Technology Will Continue To Be Technology Will Continue To Be The Key Driver in Efficiency The Key Driver in Efficiency

ImprovementsImprovements

Technology will continue to drive improvements in Technology will continue to drive improvements in productivity, profitability, and the ability to “work productivity, profitability, and the ability to “work smarter”smarter”

Things that now “take a while” will be instantaneous, Things that now “take a while” will be instantaneous, will all real-time metrics loaded onto your screenwill all real-time metrics loaded onto your screen

You will know the profitability of each load the You will know the profitability of each load the moment the truck is batched, and the erosion of that moment the truck is batched, and the erosion of that profit based on waiting time/returnprofit based on waiting time/return

Technology InnovationsTechnology Innovations

Improvements in GPSImprovements in GPS Next generation will take Next generation will take

into account traffic into account traffic patterns, weight patterns, weight restrictions, etc.restrictions, etc.

Complete integration with Complete integration with back office, truck back office, truck maintenance, etc.maintenance, etc.

Voice & Status (like Never Voice & Status (like Never Lost or OnStar)Lost or OnStar)

Technology InnovationsTechnology Innovations

Complete, seamless, integration of all systemsComplete, seamless, integration of all systems DispatchDispatch PayrollPayroll A/PA/P QCQC Truck MaintenanceTruck Maintenance

Real Time Productivity and ProfitabilityReal Time Productivity and Profitability By Load, as the truck is rolling out of the plantBy Load, as the truck is rolling out of the plant By Customer, in real timeBy Customer, in real time By Plant, in real timeBy Plant, in real time

Plant InnovationsPlant Innovations The advent of truly “smart” plantsThe advent of truly “smart” plants Batching performance will be Batching performance will be

measured in real timemeasured in real time Temperature and humidity levels Temperature and humidity levels

will be measured in real time, and will be measured in real time, and adjustments made to the mix designsadjustments made to the mix designs

Wireless Technology will be Wireless Technology will be prevalent in all aspects of operations, prevalent in all aspects of operations, from dispatch to batching to trucks from dispatch to batching to trucks and deliveryand delivery

These systems will move and monitor These systems will move and monitor gates, valves, conveyors, and other gates, valves, conveyors, and other mechanical partsmechanical parts

Plant InnovationsPlant Innovations

IP Addressable ValvesIP Addressable Valves Automatic MaintenanceAutomatic Maintenance

Signals or e-mail identifying failing or Signals or e-mail identifying failing or failed componentsfailed components

Automatic QC InformationAutomatic QC Information Immediate e-mail notification of mix Immediate e-mail notification of mix

issuesissues

InventoryInventory Automatic e-mail or integration of Automatic e-mail or integration of

materials based on inventory, materials based on inventory, outstanding orders, and production outstanding orders, and production modelsmodels

Communication InnovationsCommunication Innovations

Cameras in PlantsCameras in PlantsCentralized BatchingCentralized BatchingCameras on TrucksCameras on Trucks

Job Site ConditionsJob Site Conditions Safety IssuesSafety Issues

Voice Over IPVoice Over IP Connectivity at Low Connectivity at Low

CostsCosts

Communication InnovationsCommunication Innovations

Electronic or Web BusinessElectronic or Web BusinessOrdersOrdersTicketsTicketsInvoicesInvoicesPaymentPaymentDelivery SchedulesDelivery SchedulesPDAsPDAs

Summary – Our OpinionSummary – Our OpinionReady mixed concrete production will grow to Ready mixed concrete production will grow to

between between 600-700 million cubic yards by 2015600-700 million cubic yards by 2015An average yard of concrete will sell in a range of An average yard of concrete will sell in a range of

$105 - $115, with certain markets well over $120 - $105 - $115, with certain markets well over $120 - $125, without value-added products $125, without value-added products

Fleet utilization will continue to climb due to Fleet utilization will continue to climb due to technologytechnology

Driver recruiting and training will grow to being the Driver recruiting and training will grow to being the biggest challenge for many producers biggest challenge for many producers

Summary – Our OpinionSummary – Our Opinion

Environmental compliance costs will continue Environmental compliance costs will continue to climb, becoming one of the fastest growing to climb, becoming one of the fastest growing costs by percentagecosts by percentage

Many of you will be far more computer-Many of you will be far more computer-literate than you are todayliterate than you are today

Many of you will become better marketersMany of you will become better marketersSome of you will have sold and will be living Some of you will have sold and will be living

in Floridain Florida

And Finally, A Word About UsAnd Finally, A Word About Us

Allen-Villere Partners is a transaction- Allen-Villere Partners is a transaction- oriented private investment banking and oriented private investment banking and consulting services firm that focuses on the consulting services firm that focuses on the ready-mixed concrete, aggregates and ready-mixed concrete, aggregates and concrete products industriesconcrete products industries

Industry ActivitiesIndustry ActivitiesThe firm was pivotal in the creation and The firm was pivotal in the creation and

refinement of the annual Industry Data Survey, refinement of the annual Industry Data Survey, and still provides significant time and resources and still provides significant time and resources in assisting NRMCA in the planning and in assisting NRMCA in the planning and execution of the survey each year. It is execution of the survey each year. It is considered a key benchmarking tool and has considered a key benchmarking tool and has become a standard of measure for performance in become a standard of measure for performance in the ready-mixed concrete industrythe ready-mixed concrete industry

Six years ago, the firm led the initiative to create Six years ago, the firm led the initiative to create an industry-standard Chart of Accounts, which is an industry-standard Chart of Accounts, which is in the process of being implemented by the ABA in the process of being implemented by the ABA and AICPA, and as a revised SIC codeand AICPA, and as a revised SIC code

Value Added ServicesValue Added Services

Mergers & AcquisitionsMergers & AcquisitionsValuation & Fairness OpinionsValuation & Fairness OpinionsFinancial Restructuring and Workout Financial Restructuring and Workout

ServicesServicesFinancing ServicesFinancing ServicesStrategic PlanningStrategic PlanningEnvironmental & Permitting ServicesEnvironmental & Permitting ServicesManagement Consulting & TrainingManagement Consulting & TrainingExpert TestimonyExpert Testimony

Our Track RecordOur Track Record

We have been involved in almost 50 M&A We have been involved in almost 50 M&A transactions over the past 20 years, with almost transactions over the past 20 years, with almost twenty of those in the last five.twenty of those in the last five.

We have conducted over 500 valuations of ready We have conducted over 500 valuations of ready mixed concrete companies in 40 states.mixed concrete companies in 40 states.

We are considered the pre-eminent investment bank We are considered the pre-eminent investment bank working exclusively in the middle markets of the working exclusively in the middle markets of the ready mixed concrete, construction aggregates, and ready mixed concrete, construction aggregates, and concrete products industries. concrete products industries.

The William B. Allen AwardThe William B. Allen Award

NRMCA created this award which is to be bestowed NRMCA created this award which is to be bestowed annually to an individual in lifetime recognition of annually to an individual in lifetime recognition of outstanding contributions to the business of the ready outstanding contributions to the business of the ready mixed concrete industrymixed concrete industry

The Award was named after our Founder and Senior The Award was named after our Founder and Senior Partner, Bill Allen, acknowledging almost 60 years of Partner, Bill Allen, acknowledging almost 60 years of leadership in this industryleadership in this industry

The 2007 Recipient is Gene Martineau, the CEO of The 2007 Recipient is Gene Martineau, the CEO of U.S. Concrete, who will receive his award at the U.S. Concrete, who will receive his award at the NRMCA Annual Convention in MarchNRMCA Annual Convention in March

And finally…And finally…

Thank You!Thank You!

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