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Presented to The Florida Concrete Industrys Future Leaders Group By Pierre G. Villere Allen-Villere Partners November 1, 2007 Slide 2 Overview: The Areas We See In Our Crystal Ball Cement Shortages Were Short-lived (for now) Total Concrete Volume Could Easily Reach 600-700M Yards by 2015, and possibly more Consolidation Will Continue Fleet Efficiency Will Continue To Grow HR Will Continue to Be A Challenge More Sophisticated Marketing Will Play A Key Role In Growth Slide 3 Overview: The Areas We See In Our Crystal Ball Mixers Will Continue to Become More Sophisticated Permitting And Compliance Will Become More Daunting Than Ever Technology Will Continue To Be The Key Driver in Efficiency Improvements Slide 4 Cement Shortages Were Short-lived (for now) The length and severity of the shortage has been buffered by the housing slowdown PCA believes the correction in the housing market will continue through 2008, resulting in a possible 9.4 % decline in cement shipments from 2006 PCA has also modified its forecast for 2009, lowering cement consumption expectations by an additional 3.8% IF the economy slips in to a recession Slide 5 Cement Shortages Were Short-lived (for now) Three big unknowns that can have an impact on the direction of cement demand: The sub-prime and ARM mortgage mess Housing inventory Gasoline prices/consumer spending Slide 6 Long-Term Cement Concerns Portland Cement consumption in 2006 was 121 million metric tons, down from 127 million in 2005. Of that figure, only 85.5 million metric tons were produced domestically, compared to 87.7 million in 2005 Over the next 5 to 7 years, domestic producers expect to expand production capacity by 18.7 million metric tons Greenfield Operations: 6 million metric tons Modernization: 12 million metric tons Slide 7 Long-Term Cement Concerns These numbers indicate that total domestic production in 2015 will be approximately 125.8 million metric tons of Portland Cement With the ready-mixed concrete industry consuming approximately 75% of the cement production in the US, our industry cannot sustain production levels expected in the recovery, much less any growth, without historically high levels of imported cement Slide 8 Long-Term Cement Concerns If the ready-mixed concrete industry achieves a 600M cubic yard production level in 2015, this translates into a requirement of 30.4 million tons of cement in excess of domestic production capacity at that time This means that imported cement will represent 30% of total domestic consumption, which is hovering near the record high percentages. Slide 9 Long-Term Cement Concerns Additionally, the economics of imported cement relies heavily on favorable ocean freight rates, and that is a commodity as well Current economic growth in China and India, and their corresponding demand for cement, creates some concern about the stability of future supplies of imported cement Slide 10 Imported Cement As a Percentage of Total Supply Since the early 1980s, imported cement has increased significantly as a percentage of total supply, regardless of US economic conditions Early 1980s (recession):3% of Total Supply Latter 1980s:15-16% of Total Supply Early 1990s (recession):6-8% of Total Supply 1998:24% of Total Supply 1999-2000:29% of Total Supply 2005:27% of Total Supply 2015:30+% of Total Supply Slide 11 600-700M Total Concrete Volume Could Range Between 600-700M Yards by 2015 We have studied projections from several industry sources and examined historical rates of consumption growth to project ready-mixed concrete production in 2015 Our internal estimates indicate total US concrete production will range between a low of 500 million cubic yards (in the case of a near-term, mild recession) to a high of 800 million cubic yards if economic expansion resumes Slide 12 600-700M Total Concrete Volume Could Range Between 600-700M Yards by 2015 Bureau of Census growth projections span such a wide range, and coupled with the uncertainty about economic cycles between now and 2015, it is near impossible to estimate concrete volume with any accuracy We believe a 600M cubic yard domestic market by 2015 is a real possibility, particularly in a stable commodities and interest-rate environment, and if economic expansion returns by the end of 2008 Slide 13 600-700M Total Concrete Volume Could Range Between 600-700M Yards by 2015 Slide 14 The Brookings Institute has reported extensively on the demand for new building space of all types (commercial/residential/industrial/public) to accommodate our population growth: By 2030, which is well beyond the relevant projection we are presenting here, but indicative of the velocity in growth, they believe: Slide 15 600-700M Total Concrete Volume Could Range Between 600-700M Yards by 2015 In 2030, about half of the buildings in which Americans live, work, and shop will have been built after 2000 Most of the space built between 2000 and 2030 will be residential space Overall, most new growth will occur in the South and the West Slide 16 600-700M Total Concrete Volume Could Range Between 600-700M Yards by 2015 Though a small component of overall growth, the projected demand for industrial space in the Midwest outpaces that of the other regions, unlike the other major land uses While these projections may seem overwhelming, they also demonstrate that nearly half of what will be the built environment in 2030 doesn't even exist yet, giving the current generation a vital opportunity to reshape future development Slide 17 2015 Total Concrete Volume Projections I know you are saying to yourself, That is some crystal ball! Based on this data, it is reasonable to assume that production by the end of 2015 could range between 600-700M cubic yard mark for the US Obviously, the higher the production potential, the greater impact on the future growth of the ready mixed concrete industry Slide 18 Consolidation Will Continue We estimate that more than 500 companies have been consolidated since the late 90s Succession, estate planning, and a concentration of net worth in the family business will continue to motivate the sale of smaller producers to the larger ones The Top 25 producers in the US represent 50-55% of total production in 2006 Slide 19 Consolidation Will Continue We think the Top 25 producers in the US will represent 80% of total production in 2015 Of those, the Top 10 could command more than 50% of the market The smaller independents in local markets will find it more difficult to compete with larger, more sophisticated operations Slide 20 Consolidation Will Continue The exception will be the smallest producers in the smallest markets, who will be with us forever Slide 21 Fleet Efficiency Will Continue To Grow In 1995, the average yards delivered/year/truck was 4398, against a US market totaling 261.5 million cubic yards In 2005, the average yards delivered/year/truck was 5846, against a US market totaling 458.3 million cubic yards This represents a per-truck delivery efficiency improvement of 33% over the ten-year period. Slide 22 Fleet Efficiency Will Continue To Grow During this same period, total production yardage grew by 75% (261.5M vs. 458.3M) Finally, the US mixer fleet grew from 59,454 units in 1995 to 78,393 in 2005, for an increase of 31% Anecdotally, with believe the total fleet may be 5-10% larger, because smaller producers are difficult to measure Slide 23 HR Will Continue to Be A Challenge There has been so much written on the challenges of hiring truck drivers, and there is really no relief in sight. In markets with large pools of new immigrants, or with an ingrained blue collar culture, the problem will not be so acute Slide 24 HR Will Continue to Be A Challenge In markets where such pools dont exist, the available labor pools will become even more challenging New initiatives, such as captive Driver Training Schools, outreach programs to local high schools, etc. will become a must for producers in the tougher labor pool markets Slide 25 More Sophisticated Marketing Will Play A Key Role In Growth The role of our state and national associations will continue to grow in educating the specifying community and consumers at large A continued effort to educate the industry to sell concrete, rather than price concrete, will be adopted and/or grown by the leaders in individual markets Slide 26 More Sophisticated Marketing Will Play A Key Role In Growth Continuing to educate the customer base at large of the benefits of concrete over asphalt will be critical in continuing to grow volumes at the national level Slide 27 Mixers Will Continue to Become More Sophisticated By 2015, new mixers being delivered without GPS/camera/tracking systems will be the exception, not the rule Truck tracking will be more accurate, with intelligent, real-time routing to compensate for traffic patterns, weight restrictions, etc., translating into more efficient fleet utilization Slide 28 Mixers Will Continue to Become More Sophisticated Electronic detection devices that already measure slumps and quantities of water added at the job site will be supplemented by sensors that report mileage, fuel usage, hydraulic temperature and pressure, water temperature, and the top speed a driver reached In-cab cameras will make use of video, increasing safety awareness and efficiency Multiple cameras at various angles around the truck will also monitor job site activity Slide 29 Permitting And Compliance Will Become More Daunting Than Ever Federal EPA and state environmental compliance will continue to become more stringent in most states, and compliance costs will continue to escalate Environmental compliance costs may accelerate at the same percentage rates as recent increases in insurance, fuel, and cement Slide 30 Permitting And Compliance Will Become More Daunting Than Ever With new plants as unpopular as prisons and landfills, permitting for greenfield locations will become harder, and will probably be eliminated altogether in many large, urban markets In the face of permitting challenges, sited and permitted plants will continue to rise in value Slide 31 Permitting And Compliance Will Become More Daunting Than Ever The trend towards siting plants in aggregates suppliers yards will be one way around this issue Slide 32 Technology Will Continue To Be The Key Driver in Efficiency Improvements Technology will continue to drive improvements in productivity, profitability, and the ability to work smarter Things that now take a while will be instantaneous, will all real-time metrics loaded onto your screen You will know the profitability of each load the moment the truck is batched, and the erosion of that profit based on waiting time/return Slide 33 Technology Innovations Improvements in GPS Next generation will take into account traffic patterns, weight restrictions, etc. Complete integration with back office, truck maintenance, etc. Voice & Status (like Never Lost or OnStar) Slide 34 Technology Innovations Complete, seamless, integration of all systems Dispatch Payroll A/P QC Truck Maintenance Real Time Productivity and Profitability By Load, as the truck is rolling out of the plant By Customer, in real time By Plant, in real time Slide 35 Plant Innovations The advent of truly smart plants Batching performance will be measured in real time Temperature and humidity levels will be measured in real time, and adjustments made to the mix designs Wireless Technology will be prevalent in all aspects of operations, from dispatch to batching to trucks and delivery These systems will move and monitor gates, valves, conveyors, and other mechanical parts Slide 36 Plant Innovations IP Addressable Valves Automatic Maintenance Signals or e-mail identifying failing or failed components Automatic QC Information Immediate e-mail notification of mix issues Inventory Automatic e-mail or integration of materials based on inventory, outstanding orders, and production models Slide 37 Communication Innovations Cameras in Plants Centralized Batching Cameras on Trucks Job Site Conditions Safety Issues Voice Over IP Connectivity at Low Costs Slide 38 Communication Innovations Electronic or Web Business Orders Tickets Invoices Payment Delivery Schedules PDAs Slide 39 Summary Our Opinion Ready mixed concrete production will grow to between 600-700 million cubic yards by 2015 An average yard of concrete will sell in a range of $105 - $115, with certain markets well over $120 - $125, without value-added products Fleet utilization will continue to climb due to technology Driver recruiting and training will grow to being the biggest challenge for many producers Slide 40 Summary Our Opinion Environmental compliance costs will continue to climb, becoming one of the fastest growing costs by percentage Many of you will be far more computer-literate than you are today Many of you will become better marketers All of you will have had to adapt to are larger, consolidated industry ever striving for greater efficiency Slide 41 And Finally, A Word About Us Allen-Villere Partners is a transaction- oriented private investment banking and consulting services firm that focuses on the ready-mixed concrete, aggregates and concrete products industries Slide 42 Industry Activities The firm was pivotal in the creation and refinement of the annual Industry Data Survey, and still provides significant time and resources in assisting NRMCA in the planning and execution of the survey each year. It is considered a key benchmarking tool and has become a standard of measure for performance in the ready-mixed concrete industry Slide 43 Industry Activities Seven years ago, the firm led the initiative to create an industry-standard Chart of Accounts, which is in the process of being implemented by the ABA and AICPA, and as a revised SIC code Slide 44 Value Added Services Mergers & Acquisitions Valuation & Fairness Opinions Financial Restructuring and Workout Services Financing Services Strategic Planning Environmental & Permitting Services Management Consulting & Training Expert Testimony Slide 45 Our Track Record We have been involved in almost 50 M&A transactions over the past 20 years, with almost twenty of those in the last five. We have conducted over 500 valuations of ready mixed concrete companies in 40 states. We are considered the pre-eminent investment bank working exclusively in the middle markets of the ready mixed concrete, construction aggregates, and concrete products industries. Slide 46 The William B. Allen Award NRMCA created this award which is to be bestowed annually to an individual in lifetime recognition of outstanding contributions to the business of the ready mixed concrete industry The Award was named after our Founder and Senior Partner, Bill Allen, acknowledging almost 60 years of leadership in this industry The 2007 Recipient was Gene Martineau, the retired CEO of U.S. Concrete, who received his award at the NRMCA Annual Convention in March Slide 47 And finally Thank You!