Aggregate Industries has filed its Annual Report and Financial Statements for the year ended 31 December 2018. They show pre tax profits of £68.5m, up from £46.3m in 2017, on sales of £1,297m, up 2% from £1,272m.
But whilst some might report "Profits Surge for Aggregate Industries", in actual fact pre tax profits are still short of the £105m reported for 2016, and the £102m (pre-exceptional) reported for 2015.
For comparison, competitor Breedon posted pre tax profits of £80m on sales of £863m in 2018.
Aggregate Industries sells about 44m tonnes of material each year. That works out as an average price of about £29 per tonne, compared with Breedon’s 31m tonnes at £28 per tonne. AI's parent LafargeHolcim sold 600m tonnes of material in 2018 at an average price of about £37 per tonne.
What sets these companies apart however is profitability. Aggregate Industries’ pre tax profit is just £1.56 per tonne, a margin of little more than 5%, whilst Breedon’s is £3.00 per tonne, a margin of more than 10%. LafargeHolcim’s is £3.18 per tonne, a margin of 8.6%.
Clearly, Aggregate Industries is not firing on all cylinders, and LafargeHolcim’s Swiss bean counters will be all too aware of this. We've already posted this month that Aggregate Industries has reduced its workforce by 7% over the last two years.
Perhaps Aggregate Industries has taken its eye off the profits ball, forgotten that from an economic standpoint "the reason for a business's existence is to turn a profit."
As an example of AI's thinking on profits, you only need to look at the company’s plans for Straitgate Farm. As we posted last year in AI’s profits down 56% in 2017; Breedon’s profits up 52%:
If the way Aggregate Industries has run its planning application for Straitgate Farm – spending years and goodness knows how much money going after an ever diminishing amount of sand and gravel some 23 miles away from where it would be processed – is any indication of how the wider company operates, is it any wonder… etc etc
In fact, given that Aggregate Industries has made a pre tax profit of just £1.30 per tonne averaged over the last 2 years – with economies of scale at super quarries Glensanda ("annual production capacity in excess of 9 million tonnes"), Bardon Hill ("approximately 4 million tonnes of aggregates per year") and Torr Quarry ("produces in excess of 5 million tonnes per annum") – you wonder how much profit would be generated from a greenfield quarry in East Devon yielding 150,000 tonnes per year, less than 1 million tonnes in total, where each as-dug load necessitates a round trip of 46 miles before onward delivery. Any at all? Or less than zero?
We’ve already estimated that AI’s haulage costs for such an operation would be in the region of £500k per year – before any allowance for haulier's profit. As-dug material from Straitgate would contain 20% waste, so that's £4 per tonne just to get material to the processing plant. We posted that "over 10 years, it would cost AI £1m just to transport the waste" and said:
It doesn't look like economics is Aggregate Industries' strongest suit. The haulage scheme is plainly bonkers. Plainly unsustainable. And plainly not, as we keep being told, "at the forefront of efforts to mitigate climate change."
But Aggregate Industries' problems are bigger than Straitgate. Clearly things aren’t getting any easier for the UK construction industry. Witness the woes at Kier, Costain, Interserve, Carillion etc, witness the storm clouds of Brexit and uncertainty over HS2. With just a few months left in 2019, what Outlook in its financial report did Aggregate Industries paint for this year? Strangely enough, given the worsening backdrop, an identical one – word for word identical, bar the year – as the company painted for 2018, in its report for the year ended 31 December 2017:
Outlook
It is anticipated that UK Construction Output will reduce in 2019, albeit not significantly. As a result it is envisaged that demand levels for our products and services will be, at best, flat. The outlook for the Sector is encouraging for the medium to long term, with major infrastructure projects and the need for increased housing provision. However, the slowing economy and the uncertainty emanating from the decision to leave the European Union is expected to suppress investment in the short term.
In addition, it is anticipated that input costs, particularly oil related and energy will increase at levels well above inflation. However, we have instigated a number of initiatives aimed at reducing the overall cost base of the business. These are focussed, principally, in the operational excellence, procurement, logistics and sales and general administration functions.
The target will be to further improve the key performance indicators of the business but in an, at best, flat market scenario much will depend on our ability to recover the cost increases through price and service improvements.
Perhaps Aggregate Industries has finally got the profits message, and is now saving costs on financial report writers too.
