Earnings Call Transcript - VMC Q4 2023

Operator, Operator

Thank you, operator. Let me start over operator and we will get started on the earnings call here. Thank you, operator. Good morning, everyone. With me today are Tom Hill, Chairman and CEO; and Mary Andrews Carlisle, Senior Vice President and Chief Financial Officer. Today's call is accompanied by a press release and a supplemental presentation posted to our website, vulcanmaterials.com. Please be reminded that today's discussion may include forward-looking statements, which are subject to risks and uncertainties. These risks, along with other legal disclaimers, are described in detail in the company's earnings release and in other filings with the Securities and Exchange Commission. Reconciliations of non-GAAP financial measures are defined and reconciled in our earnings release, our supplemental presentation, and other SEC filings. During the Q&A, we ask that you limit your participation to one question. This will allow us to accommodate as many as possible during our time we have available. And with that, I'll turn the call over to Tom.

Tom Hill, CEO

Thank you, Mark, and thank all of you for your interest in Vulcan Materials company. Our teams delivered an outstanding year in 2023 and achieved two significant milestones. We generated over $2 billion in adjusted EBITDA and we surpassed $9 of aggregate cash gross profit per ton. We remained focused on continued growth, consistent execution and value creation for our shareholders. Our fourth quarter results again demonstrated the benefits of that focus and our aggregates-led business. We delivered a 27% year-over-year improvement in adjusted EBITDA. Margin expansion in each of our three primary product lines and another 90 basis points of sequential improvement in our trailing 12 months return on invested capital. In the Aggregates segment continued pricing momentum coupled with moderating inflationary costs resulted in $9.92 of aggregate cash gross profit per ton, a 21% improvement over the prior year. Our Vulcan Way of Selling and our operating disciplines continued to contribute to our commercial and operational results. The fourth quarter performance marks 19 of 20 quarters over the past five years of sequential improvement in trailing 12 month aggregate unit profitability. A clear example of our consistent execution and the durability of our business. Aggregate shipments in the fourth quarter increased 2%, compared to a weak prior year quarter that was impacted by abnormal wet and cold weather. Aggregates freight adjusted price improved 14% in the quarter, pushing the year-to-date average selling price to $19 per ton, a $2.60 per ton increase over the prior year. Freight-adjusted unit cash cost of sales increased 7% compared to the prior year quarter. This marked a third consecutive quarter of trailing 12 month deceleration in year-over-year cost. As we move into 2024, we are determined to continue controlling what we can control, most notably the expansion of our aggregates unit profitability. Price momentum remains healthy and we expect freight-adjusted aggregate price to grow from 10% to 12% for the full year. Inflationary cost pressures continue to moderate and we expect freight-adjusted unit cash cost to increase mid-single-digits in 2024, resulting in an attractive mid-teens improvement and cash gross profit per ton. On the demand side, we continue to expect a moderate decline in 2024, with aggregate shipments forecasted to land within a range of flat to down 4% for the full year. Much like 2023, we see varying dynamics across different end uses. So let me provide some commentary on each end use. I'll start with residential, which has quickly entered recovery mode. Single-family housing permits and starts returned to growth in the second half of last year and momentum is accelerating across our footprint. We expect the strength in single-family construction activity to be offset by weaker multifamily starts as they pull back from historically high levels. Overall, the underlying fundamentals for residential construction activity remain firmly in place. Vulcan markets have low housing inventory levels and favorable demographics driving the need for additional housing. We continue to see distinct trends across various categories of private non-residential construction, which we anticipate will result in a year-over-year decline in shipments to this end market. Moderating warehouse starts from recent historical high levels are expected to be the biggest headwind to private non-residential construction. Light commercial activity is expected to remain weak as uncertainty in the macro economy and higher interest rates persist. Manufacturing activity, however, remains a catalyst for non-residential shipments and is concentrated in Vulcan States. We continue to ship on numerous large manufacturing projects, enabling us to offer customers a differentiated solution with our advantageous footprint and logistics capabilities. On the public side, the main backdrop is developing as expected. We began seeing modest growth in the second half of ‘23 and project accelerating demand into 2024. Trailing 12-month highway starts have now surpassed $100 billion. 2024 state budgets are at record levels and strong upcoming funding is anticipated in many Vulcan States. We continue to see growth in both highways and infrastructure activities for the next several years. Coupling our anticipated unit profitability growth with the demand backdrop I just described, at the midpoint of our guidance, we project delivering a fourth consecutive year of double-digit growth in adjusted EBITDA. I'm very proud of our teams and what they have achieved. Now, I'll turn the call over to Mary Andrews for some additional commentary on our 2023 performance and some more details around our 2024 outlook.

Mary Andrews Carlisle, CFO

Thanks, Tom, and good morning. Our strong operational and strategic execution in 2023 set us up well to continue our long track record of growth through disciplined capital allocation and consistent execution. Over the last 10 years, we increased our revenues at an annual growth rate of 11%; grew our adjusted EBITDA at an annual growth rate of 16%; strengthened our free cash flow generation at an annual growth rate of 23%; and improved our return on invested capital by 1000 basis points. During 2023, we generated $1.5 billion of operating cash flows and received proceeds of over $700 million from the sales of non-core businesses and real estate. Having followed our long-standing capital allocation priorities of reinvesting in our franchise, investing in attractive growth opportunities, and returning cash to shareholders through both dividends and share repurchases, we ended the year with over $900 million in cash on hand and net debt to adjusted EBITDA leverage of 1.5 times. Our balance sheet is a source of strength and provides us considerable financial flexibility to continue to grow. We will remain disciplined in optimizing our overall portfolio of assets, as evidenced by the fourth quarter disposition of our Texas Concrete business and sale of excess real estate in Northern Virginia. Our return on invested capital improved by 280 basis points over the last 12 months, and we are focused on continued improvement. We also remain committed to driving value for the business through disciplined investments and SAG expenses that support our organic growth initiatives and innovation through technology. SAG expenses as a percentage of revenue remained at 7% in 2023. Overall, we expanded our adjusted EBITDA margin by 360 basis points and project further expansion in 2024. Let me provide a few additional details around the 2024 guidance to supplement the demand, pricing, and aggregates unit profitability outlook Tom highlighted earlier. We expect our downstream businesses to contribute approximately $275 million in cash gross profit, reflective of asphalt earnings consistent with 2023, contributing approximately 70% of the total, and concrete earnings adjusted for the divestiture of our Texas Concrete assets contributing approximately 30% to total. We expect SAG expenses between $550 million and $560 million, a modest low single-digit increase year-over-year. We project depreciation, depletion, amortization, and accretion expenses of approximately $610 million, interest expense of approximately $155 million, and an effective tax rate between 22% and 23%. In 2024, we plan to reinvest in our franchise through operating and maintenance and internal growth capital expenditures of between $625 million and $675 million. We expect another year of attractive growth in adjusted EBITDA and strong cash generation in 2024, despite a shift in the construction demand environment. We forecast adjusted EBITDA of between $2.15 billion and $2.3 billion for the full year. At the midpoint, this represents an 11% organic improvement over 2023. I'll now turn the call back over to Tom to provide a few closing remarks.

Tom Hill, CEO

Thank you, Mary Andrews. Vulcan’s culture and people are fundamental to our success. Our employees work tirelessly each day to deliver value to our customers, our communities, and shareholders, and their meaningful contributions were highlighted with three unsolicited recognitions last year. Vulcan Materials was named one of the top 200 best companies to work for by US News and World Report, one of America's Most Responsible Companies in 2024 by Newsweek, and was included in the American Opportunity Index, which measures how well large companies invest in human talent to drive business performance and individual employee growth. I'm excited about what Vulcan Materials will achieve in 2024. We will remain focused on keeping our people safe, growing our business, capitalizing on our Vulcan Way of Selling, and Vulcan Way of Operating Disciplines, and continue to deliver value to our shareholders. Now, Mary Andrews and I will be happy to take your questions.

Operator, Operator

And we'll take our first question from Trey Grooms with Stephens. Please go ahead.

Trey Grooms, Analyst

Good morning, Tom and Mary Andrews.

Tom Hill, CEO

Good morning, Trey.

Trey Grooms, Analyst

Good morning. I was looking for another year of double-digit growth ahead here for pricing. So, Tom, what’s driving the confidence there as we move into 2024 on the pricing outlook?

Tom Hill, CEO

Trey, I mean, we saw a fundamental change in our markets in 2022. We realized in March of 2022 that we had worldwide inflation, and so we took the lead in 2022 and pulled mid-year prices forward to May 1st that year in every market. And then followed that up by pooling all the 2023 price increases to January 1 where some had been April 1. So I think today the fundamentals for pricing are very good and I think embedded in those fundamentals are three key changes that we are seeing in our markets. One, there is a more disciplined approach to price increases, two, our aggregates price increases are now effective January rather than April 1, and third, our mid-year price increase conversations are expected in all markets. So we are in a really good place from a pricing perspective, historically speaking, and you couple that with the tools and disciplines of Vulcan with selling, I think our future looks very good.

Mary Andrews Carlisle, CFO

Yeah, Trey, I’ll just add that headline pricing is one thing, but as we always like to...

Operator, Operator

With Stifel. Please go ahead.

Stanley Elliott, Analyst

Hey, good morning, everyone. And congratulations on the quarter and the outlook. Last question was a perfect lead-in. I was curious if you guys could talk a little bit more about what you're seeing on the cost side? Maybe how does this mid-single digit sort of cost inflation that you're expecting in the coming year come together? Any puts and takes there would be great.

Tom Hill, CEO

Thanks, Stanley. You saw that cost in the fourth quarter was up 7% and that's down from what we've been seeing, which was low double-digit in prior quarters. I think it was in the third quarter where it started to come down. So what we're seeing is the impact of inflation started to dampen. As we said, we thought we would see this year in the mid-single-digit range. That said, I would expect this to go this way that cost will be highest year-over-year in Q1 and then tail off as we march through the year. That's due to two reasons: one, lessening inflationary pressures, but two, you're starting to see improving operating efficiencies from the Vulcan Way of Operating. So when you couple that together, I think we're starting to catch up on the kind of runaway costs we've seen for a couple of years, and I think we'll see improvement as we go through the year.

Stanley Elliott, Analyst

Perfect. That's great. Thanks so much and best of luck.

Tom Hill, CEO

Thank you.

Mary Andrews Carlisle, CFO

Thanks.

Operator, Operator

And our next question comes from the line of Kathryn Thompson with Thompson Research Group. Please go ahead.

Kathryn Thompson, Analyst

Hi, thank you for taking my question today. Could you provide some more color on the volume guidance and what you're seeing from an end market perspective? How does your guidance factor in mid-year price increases?

Tom Hill, CEO

Yeah, I'll take the mid-year pricing first. There’s not much included for mega price increases. Now, we will or have announced mid-year price increases and started those conversations in April. So I'm not saying there's none; it's just not in the plan, but we'll certainly have those conversations. Very little of it is up to plans. On volume, as we talked about in November, we're predicting a modest decline in demand for 2024. We see strength on the public side, and kind of a mix of strengths and weaknesses on the private side. Highways are predicted to have steady growth, and we will continue to see that ramp up and we feel good about it. There’s a lot of funding there being put to work. Non-highway infrastructure will see solid growth, but private non-residential sectors, I think, will be challenged, particularly traditional non-residential warehouses and distribution. That said, while single-family construction activity was challenged in ‘23, it's a strength for us in ‘24 as it's back into growth mode and recovering rapidly. Meanwhile, multifamily construction is likely to be challenged. As we said, we're calling for volumes to be flat to negative 4 now, partly due to January and February where, as everyone knows, we were dealing with both a freeze out or washout or both. We're seeing a slow start. That being said, it's still early in the year, so I think we feel very good about full-year guidance. We're anticipating a modest decline in volumes for ’24. Nonetheless, we should still see healthy double-digit earnings growth.

Mary Andrews Carlisle, CFO

Yeah, Kathryn, I'll give you a couple of other things to think about regarding Q1 volumes that may serve as helpful context. Last February was seasonally adjusted the strongest single month of shipments we had in 2023, and the strongest February in at least the last 10 years. Also, this year, given how the calendar falls, we anticipate 10% fewer shipping days in March, which as we all know is the most important month of the quarter. Now the good news is that’s just timing; we take those days back up in April, but from a Q1 perspective, that will be impactful for overall volumes. So, pricing will be strong and should fall within our guidance range. I would expect that paired with the probable volume impacts may lead to mid-to-high-single-digit growth in cash gross profit per ton in the first quarter, alongside an attractive mid-teens improvement for the full year.

Kathryn Thompson, Analyst

Thank you so much.

Operator, Operator

And we'll take our next question from the line of Anthony Pettinari with Citi. Please go ahead.

Anthony Pettinari, Analyst

Good morning. Can you talk a little more about capital allocation? Given that we've seen several large deals in construction materials recently, what is your view on potential M&A attractiveness and what might the pipeline look like in 2024?

Tom Hill, CEO

Yeah, sure, Anthony. The balance sheet is really well positioned to fund all of our capital allocation priorities in 2024, especially regarding M&A growth. As we mentioned, we ended the year with over $900 million in cash and net leverage of one and a half times. So we'll think about capital allocation in 2024 in a very consistent manner as we have in the past, considering a very attractive M&A pipeline—this is where we're focused on deploying our available capacity. I’ll let Mary Andrews add any additional comments on those pipelines.

Mary Andrews Carlisle, CFO

Sure. We follow a three-pronged strategy for growth which has proven very effective and has provided us with double-digit revenues and EBITDA for the last three years, and will again in 2024. The three prongs are number one: organic growth in what we are selling and operating, which you have seen us do. We've grown unit margins consistently for five years. Second is M&A, which while relatively quiet in ’23 due to various uncertainties, we're expecting to be very active in 2024 and plan to bring some deals to fruition. Finally, we have expansion opportunities through Greenfield growth—some of those projects are starting this year. I feel optimistic about our growth strategy and anticipate that M&A will be a much larger component in ’24 compared to ’23.

Anthony Pettinari, Analyst

Okay. That's helpful. I'll turn it over.

Tom Hill, CEO

Thank you.

Operator, Operator

And our next question comes from the line of Jerry Revich with Goldman Sachs. Please go ahead.

Jerry Revich, Analyst

Hi, Tom, Mary Andrews. Good morning. In the fourth quarter, your margin performance was really outstanding and a full point ahead of normal seasonality. Can you just talk about what improved in the quarter? And is there an opportunity for improvements moving forward that could lead us to the lower end of your growth outlook?

Tom Hill, CEO

Well, I think what we're seeing is as I said earlier, two things: moderating inflationary pressures and easier comparisons moving forward, which I expect we will continue to see. Also, if you look at our operating parameters, remember we implemented automation and technological insights within the top-100 plants last year. You start to see those improvements reflected in our throughput and critical sizes. I think as we progress through 2024, our costs should continue to improve sequentially throughout the year. Although we may experience hiccups from one or two major outages, generally speaking, I expect our costs to consistently improve over the next four or five quarters.

Jerry Revich, Analyst

Excellent. Thank you.

Operator, Operator

And our next question comes from the line of Philip Ng with Jefferies. Please go ahead.

Philip Ng, Analyst

Hey guys. Congrats on a really strong quarter. Tom, last year your pricing philosophy was to take a strong early approach, but adopt a more measured approach for mid-year pricing. How do you see that evolving in this more moderating inflationary environment? Will double-digit pricing become the norm?

Tom Hill, CEO

As I mentioned, we're in a very favorable position from a pricing standpoint based on the prevailing fundamentals and the processes inherent in the Vulcan Way of Selling. I think our early approach has been effective, and that will carry on into January. We believe we set appropriate January 1 prices, and already initiated mid-year pricing discussions in a few markets. As we move into the end of the quarter, we’re likely to announce mid-year increases across our other markets as well, leading into July and August. Given the fact that we did implement January pricing and that there's an expectation for further mid-year discussions, I feel confident about our pricing trajectory.

Philip Ng, Analyst

And will double-digit pricing become a new norm going forward?

Tom Hill, CEO

I feel good about pricing overall.

Operator, Operator

And we'll take our next question from the line of Michael Feniger with Bank of America. Please go ahead.

Michael Feniger, Analyst

Thank you for taking my questions. Tom, could you elaborate on pricing cadence for this year? Are we still in that 10% to 12% range, or are we lower because you started strong?

Tom Hill, CEO

No, I think pricing will remain consistent throughout the year in that 10 to 12 range. I don’t foresee significant changes. As we approach the third quarter, we'll be able to assess what mid-year pricing adjustments could reveal. I think there will be variable dynamics across different markets. However, I expect low double-digit pricing to remain throughout the year.

Michael Feniger, Analyst

Great. To follow up on the shipment growth with different segments, when we think ahead to 2025, will the volume guidance be similar? Since it’s driven by infrastructure growth, how does that impact pricing compared to residential or private construction?

Tom Hill, CEO

I believe all demand growth is beneficial, regardless of its source. Public demand typically provides greater visibility and assuredness than private demand, where projects can be postponed or delayed. However, the upside is that public demand is predictable and will translate into effective pricing. Ultimately, when it comes to pricing dynamics, the distinction between public and private demand isn’t significant.

Operator, Operator

And we'll take our next question from the line of Mike Dahl with RBC Capital markets. Please go ahead.

Mike Dahl, Analyst

Hi, thanks for taking my question. Going back to M&A and capital allocation, you raised healthy funds from the sale of certain assets, could you elaborate on the rationale for making the move now? Additionally, what is the potential size and nature of M&A deals you envision completing this year?

Tom Hill, CEO

I see our M&A strategy being more focused on traditional bolt-on acquisitions that fit within our operational footprint, ensuring the highest returns. We are considering small to mid-sized deals, which might occasionally extend beyond the mid-size range. As for the timing, 2023 was a quieter year due to significant economic uncertainties, which caused both buyers and sellers to hesitate. With those uncertainties behind us, we anticipate seeing an uptick in activity in 2024.

Mike Dahl, Analyst

What was the rationale for exiting the ready-mix assets?

Tom Hill, CEO

We view our assets as a collection. If we determine that some businesses would be better suited for other owners and are not strategic for us, it makes sense to divest them. This allows us to redirect resources towards our core aggregates business, aligning with our long-term strategy.

Operator, Operator

And we'll take our next question from the line of Keith Hughes with Truist. Please go ahead.

Keith Hughes, Analyst

Hey, how are you doing? Thanks for taking the question. Can you discuss the aggregates, asphalt, and concrete guidance, and provide more detailed context around the cash gross profit expectations for 2024?

Tom Hill, CEO

I think the asphalt performance with a 13% gross margin is commendable. Looking back approximately three years, many questioned why we held onto asphalt, and now everyone seems eager to invest more in it. Asphalt is positioned well, and we expect its performance to remain consistent at these high levels in 2024, with hot mix prices offsetting rising liquid and aggregate costs. Our ready mix operations are projected to remain flat in a challenging market, but as a reminder, ready mix only constitutes 2% of our total EBITDA. So given the circumstances, both our asphalt and ready mix businesses can thrive moving forward.

Mary Andrews Carlisle, CFO

In terms of our ready mix, we completed the divestiture of Texas Concrete in mid-November, which accounted for about 4 million cubic yards annually. This means we estimate volumes to be around 4 million cubic yards for same-store performance in 2023. We anticipate a modest decline in volumes in our 2024 outlook, with our cash gross profit from ready mix projected to account for 30% of the $275 million total, which remains consistent from a gross margin percentage standpoint with 2023. We look to expand cash gross profit margins over time in the attractive markets we have retained.

Keith Hughes, Analyst

Okay, thank you.

Tom Hill, CEO

Thank you.

Operator, Operator

And we'll take our next question from the line of Garik Shmois with Loop Capital. Please go ahead.

Garik Shmois, Analyst

Hi, thanks. Congrats on the strong results. I wanted to follow up on the cost side. I know it seems more favorable than what you had previously outlined. Have there been any specific improvements on costs that you could highlight since your last call?

Tom Hill, CEO

What you’re observing is the positive impact of the Vulcan Way of Operating and the efficiencies we have embedded in our plants. This includes the integration of technology, critical training focused on operational safety, and improved inspection processes. We are also experiencing increased throughput in more critical sizes. Therefore, with both moderating inflationary pressures and substantial operating efficiencies, we are committed to overcoming inflation rather than merely accepting it.

Operator, Operator

And we'll take our next question from the line of Angel Castillo with Morgan Stanley. Please go ahead.

Angel Castillo, Analyst

Hi, good morning. Thank you for taking my question and congratulations on the quarter. I noticed your cash position seemed strong enough to allow for organic investment, M&A, and also return cash to shareholders. Could you discuss buyback intentions for the year, and your willingness to possibly increase leverage for the right opportunities?

Mary Andrews Carlisle, CFO

Yes, as you've noted, we are well positioned to fund all of our capital allocation priorities in 2024. Reinvesting in the business through M&A and Greenfields is a priority, alongside returning cash to shareholders via share buybacks and dividends. Our philosophy has always ensured a balanced approach to returning capital. In 2023, we repurchased $200 million in shares, and as we move into 2024, we will make capital allocation decisions in a disciplined manner. Leverage-wise, we are disciplined about conducting smart deals that have attractive returns, and while we may exceed our target leverage range occasionally, we always seek to return to our long-term target as promptly as possible.

Angel Castillo, Analyst

Very helpful. Thank you.

Tom Hill, CEO

Thank you.

Operator, Operator

And we'll take our next question from the line of Michael Dudas with Vertical Research. Please go ahead.

Michael Dudas, Analyst

Good morning, Mary Andrews, Mark, Tom. I'm curious about your thoughts on civil public infrastructure trends, especially since there seems to be a record-high transportation budget. Are these budgets prepared to pull through? I've also heard about CALTRANS increasing their budgets; can you provide insights on that?

Tom Hill, CEO

While challenges remain, there is substantial funding set aside for capital projects. We currently observe steady improvement in highway growth forecasted at mid-single-digit in 2024, which is an increase from low-single-digits in 2023. This is partly due to the Infrastructure Investment and Jobs Act, which is past the two-year mark, translating into gradual growth. For CALTRANS, funding looks positive, and while there may be some bureaucratic hurdles, the funds must be allocated to infrastructure projects.

Michael Dudas, Analyst

Excellent. Thank you, Tom.

Tom Hill, CEO

Thank you.

Operator, Operator

And we'll take our last question from the line of Brent Stillman with D.A. Davidson. Please go ahead.

Brent Stillman, Analyst

Hey, thanks. Tom and Mary, could you clarify the size of your ready-mix operations following the divestiture in the last year? What are your expectations for movement in the volume given market conditions?

Tom Hill, CEO

Overall, the performance for our ready-mix business has remained flat in a challenging market, particularly with private-sector pressures. Looking ahead, those pressures should gradually improve. Based on our prior scale, we believe our forecasts for ‘24 remain largely unchanged as our residential sectors continue to improve, but light non-residential markets will likely lag until mid-2025. Given these dynamics, we anticipate some success in this space maybe by '25-‘26.

Mary Andrews Carlisle, CFO

Regarding ready mix, we completed the divestiture of Texas Concrete by mid-November, reporting roughly a same-store basis of 4 million cubic yards annually. We expect volumes to moderately decline and project cash gross profit to account for 30% of the projected $275 million total. Our goal is to maintain consistent margin performance while improving cash gross profit margins over time for the attractive markets we have retained.

Brent Stillman, Analyst

Okay, thank you.

Tom Hill, CEO

Thank you.

Operator, Operator

We have no further questions at this time. I'll turn the call back over to Tom for any closing remarks.

Tom Hill, CEO

Thank you for your time this morning. We appreciate your interest in Vulcan Materials Company. We look forward to talking to you throughout the quarter. Please keep yourselves and your families safe. Thank you.

Operator, Operator

This concludes today's conference. Thank you for your participation. And you may now disconnect.