Fitch Upgrades Vulcan's IDR to 'BBB-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has upgraded the ratings of Vulcan Materials Company VMC, including the company's Issuer Default Rating (IDR), to 'BBB-' from 'BB+'. The Rating Outlook is Stable. A complete list of rating actions follows at the end of the release.

KEY RATING DRIVERS

The upgrade of Vulcan Materials Company's (Vulcan) IDR to 'BBB-' reflects the company's improving financial and credit metrics and Fitch's expectation that Vulcan will maintain (or further improve) these credit metrics. Fitch believes that the company's profile has been enhanced over the past few years and should be able to sustain an investment grade rating through the cycle.

The rating for Vulcan is based on the company's leading market position in the aggregates industry, geographically diverse quarry network, solid liquidity position and strong credit metrics. The ratings also take into account the expected relatively stable demand for construction products prompted by committed federal government funding of transportation projects, high barriers to entry, and the operating leverage of the company. Fitch's concerns include the historic relative volatility of state and federal spending on highway construction, the cyclical and seasonal nature of the construction industry and the high level of fixed costs in the company's cost structure.

The Stable Outlook reflects Fitch's expectation that demand for Vulcan's products will continue to grow in the near to intermediate term as the U.S. construction market maintains its moderate recovery. In particular, highway construction, which represents about 26% of the company's aggregates shipments, is expected to expand in the intermediate term given the passage of the new long-term highway bill in December 2015. Fitch believes that the new long-term highway bill provides greater certainty of funding from the federal government, which allows individual states to plan longer-term projects.

LEADERSHIP POSITION

Vulcan is the largest producer of construction aggregates in the U.S. with coast-to-coast operations. Vulcan operated 236 aggregates quarries and 108 other aggregates facilities at fiscal year-end 2015 with 15.7 billion tons of aggregates reserves that principally serve markets in 20 states, Washington D.C. and the local markets surrounding its operations in Mexico and the Bahamas. Management believes that it has the #1 or #2 position in 85% of its markets.

In 2014, the company sharpened its focus on its aggregates business with the sale of its Florida cement and concrete assets. The aggregates industry has typically exhibited less volatile characteristics than the cement sector due to less price volatility. Aggregates are diminishing assets and aggregates producers continued to realize higher pricing even when volumes declined meaningfully during the last construction downturn. Vulcan also has asphalt and ready-mixed concrete businesses in certain markets where it has a large aggregates presence. The company considers these downstream products an extension of its aggregates business.

Barriers to entry in the aggregates industry are high due to increasingly more stringent zoning and environmental restrictions that can limit new quarry development. Additionally, the aggregates business is capital intensive and the high weight of aggregates makes transportation expensive. Fitch believes that the high barriers to entry can deter new entrants and somewhat limit competition, thereby supporting the sustainability of the company's leading market position over the intermediate to long term.

GROWTH STRATEGY

The company has in the past been a relatively active acquirer, including between 1999 and 2001 when the company spent about $1.2 billion on acquisitions. In November 2007, the company acquired 100% of the outstanding stock of Florida Rock Industries in a cash and stock deal valued at $4.7 billion ($3.3 billion of cash and $1.4 billion of stock). At that time, Florida Rock was a leading producer of construction aggregates, cement, concrete and concrete products in the southeastern and mid-Atlantic states.

Most recently, the company supplemented organic growth with selective bolt-on acquisitions. During 2014, Vulcan completed eight transactions that expanded its aggregates business in Arizona, California, New Mexico, Texas, Virginia and Washington D.C., its asphalt business in Arizona and New Mexico, and its ready-mixed concrete operations in New Mexico. The company spent $331.8 million for acquisitions during 2014, including cash of $284.2 million, $45.2 million of stock, and $2.4 million of asset swaps.

In 2015, the company completed several acquisitions, including an aggregates facility in Tennessee, three aggregates facilities and seven ready-mixed concrete operations in Arizona and New Mexico, and 13 asphalt mix plants, primarily in Arizona. These acquisitions totalled $47.2 million, which were funded with $27.2 million of cash and $20 million of asset swaps.

Going forward, Fitch expects the company will continue to be more focused on bolt-on acquisitions to expand operations in its current markets. There may also be opportunities to swap assets with other operators where both parties can benefit from the transaction.

IMPROVING CREDIT METRICS

Vulcan's credit metrics have improved significantly from trough levels reported during 2011. Debt to EBITDA improved from 7.7x at the end of 2011 to 6.0x at year-end 2012, 5.2x at the conclusion of 2013, 3.4x at the end of 2014 and 2.4x at year-end 2015. The company reduced its debt levels from about $3.6 billion following the Florida Rock acquisition in 2007 to $2 billion currently. Fitch expects further improvement in leverage as the company continues to increase EBITDA and maintains current debt levels. Fitch projects leverage will be around 2.0x by the end of 2016.

EBITDA to interest also increased from 1.6x during 2011 to 1.9x during 2012, 2.4x during 2013, 3.5x during 2014 and 5.5x during 2015. Fitch expects interest coverage will settle above 6.5x by year-end 2016.

Management has indicated that it is committed to pursuing and maintaining an investment grade rating and intends to manage leverage (debt to EBITDA) consistently between 2.0x and 2.5x.

Fitch believes that the company can sustain these investment grade credit metrics through the cycle. The company has taken steps to reduce its cost structure and also eliminated its exposure to the more volatile cement sector. Vulcan's EBIT margin of 16.6% during 2015 is the highest since 2002 except during the peak construction years of 2006 (20.6% EBIT margin) and 2007 (19.7%). At the peak in 2006, the company shipped approximately 300 million tons of aggregates. By comparison, the company shipped 178.3 million tons of aggregates during 2015 (about 40% below peak levels).

SOLID LIQUIDITY POSITION

Vulcan has a solid liquidity position with cash of $284.1 million and $476.1 million of borrowing capacity under its $750 million revolving credit facility that matures in June 2020. The company completed a number of transactions last year that lowered its interest expense and extended its debt maturities. In 2015, the company issued $400 million of 4% senior unsecured notes and borrowed $235 million on its revolver to repurchase, tender and retire at maturity about $635 million of existing debt. The company's debt maturities are well-laddered, with no major debt maturities until 2018, when about $522.5 million of senior notes become due.

FREE CASH FLOW

Vulcan reported free cash flow (FCF; cash flow from operations less capital expenditures and dividends) of $160.8 million (4.7% FCF margin) during 2015 compared with $6.6 million (0.2%) during 2014, $75.8 million (2.7%) during 2013 and $139.9 million (5.4%) during 2012. The FCF during 2013 and 2012 included $153 million and $73.6 million, respectively, of proceeds from the sale of future aggregates production. Fitch projects Vulcan will generate FCF margin of 7%-8% during 2016, excluding any growth capital expenditures. Between 2002 and 2005, Vulcan reported FCF margins averaging about 7%.

Vulcan increased its quarterly dividend twice during 2014, from $.01 per share to $0.05 per share in February 2014 and $0.06 per share in July 2014. In February 2015, the company grew its quarterly dividend to $0.10 per share. In February 2016, Vulcan doubled its quarterly dividend to $0.20 per share. Fitch expects Vulcan will continue to increase dividends as earnings grow.

Fitch projects Vulcan will generate sufficient cash flow to fund capital expenditures and dividends, and excess cash flow will be deployed for bolt-on acquisitions and share repurchases.

CONSTRUCTION OUTLOOK

Fitch projects overall construction spending (Value of Construction Put In Place as measured by the Census Bureau) will advance 7.1% during 2016 following a 10.5% increase in 2015, a 5.4% improvement in 2014 and a 5.8% growth in 2013. Private residential construction spending is projected to advance 9.5% while private non-residential construction is expected to improve 7% this year. Public construction spending is forecast to increase 4%. Fitch expects industry aggregates shipments and pricing will expand mid-single-digit percentage this year.

Fitch believes that highway spending will grow and remain relatively stable in the intermediate term given the recent certainty of funding from the federal government. On Dec. 4, 2015, President Obama signed into law a new five-year, $305 billion highway bill. This measure is the first long-term highway program put in place since the expiration of the last long-term highway bill in 2009. Spending will also be supported by state initiatives to fund highway projects. State governments continue to seek alternative revenue sources to fund highway projects, including increasing state gas and motor fuel taxes, raising sales taxes, and transferring general fund revenues to highway fund budgets. Several states have initiated some of these approaches and have also tapped the private sector to supplement funding for highway expenditures.

Fitch believes that the passage of a long-term highway bill, combined with state initiatives, will allow individual states to plan longer-term (and more aggregates-intensive) construction projects.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Vulcan include:

--Overall U.S. construction spending grows 7.1% during 2016;

--Vulcan's same-store aggregates shipments and pricing rise mid-single digits during 2016;

--EBITDA margins expand 100 basis points (bps)-200 bps this year;

--Vulcan generates FCF margin of 7%-8% during 2016 (excluding any growth capital expenditures);

--Debt to EBITDA settles around 2.0x by the end of 2016;

--Interest coverage is above 6.5x during 2016.

RATING SENSITIVITIES

Additional positive rating actions may be considered if the company shows sustained improvement in financial results and credit metrics, including debt to EBITDA consistently and comfortably within the company's target leverage of 2.0x-2.5x range, funds from operations (FFO) adjusted leverage below 3.0x and interest coverage steadily above 7.5x. In considering positive rating actions, Fitch will also take into account Vulcan's ability to sustain these credit metrics through the cycle.

On the other hand, a negative rating action may be considered if there is a sustained erosion of profits and cash flows due to particularly weak construction activity (possibly prompted by an untypically severe downturn), meaningful and continued loss of market share, and/or ongoing cost pressures resulting in margin contraction and deterioration in credit metrics, including debt to EBITDA levels consistently in the 3.0x-3.5x range, FFO adjusted leverage is routinely above 4.0x and interest coverage falls below 6x.

FULL LIST OF RATING ACTIONS

Fitch has upgraded the following ratings:

Vulcan Materials Company:

--Long-term IDR to 'BBB-' from 'BB+';

--Senior unsecured notes to 'BBB-' from 'BB+/RR4'.

Fitch has also assigned a 'BBB-' rating to Vulcan's $750 million unsecured revolving credit facility that matures in June 2020.

The Rating Outlook is Stable.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

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