Earnings Call Transcript - VMC Q1 2024

Operator, Operator

Good morning, and welcome, everyone, to the Vulcan Materials Company First Quarter 2024 Earnings Call. My name is Jamie, and I will be your conference call coordinator today. Please remember that today's call is being recorded and will be available for replay later today on the company's website. Now I will turn the call over to your host, Mark Warren, Vice President of Investor Relations for Vulcan Materials. Mr. Warren, you may begin.

Mark Warren, Vice President of Investor Relations

Thank you, operator, and 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, Chairman and CEO

Thank you, Mark, and thank all of you for joining our Vulcan Materials earnings call this morning. Our first quarter results moved us towards delivering on a fourth consecutive year of double-digit adjusted EBITDA growth. Although the weather was unusually cold and wet across many geographies for much of the quarter, our teams executed well and improved our Aggregates cash gross profit per ton by 10%. Their commitment to our Vulcan Way of Selling and Vulcan Way of Operating disciplines is driving solid results. In the quarter, we generated $323 million of adjusted EBITDA and expanded our adjusted EBITDA margin. Importantly, several key trends continue: Pricing momentum, cost deceleration, unit profitability expansion, robust cash generation, disciplined capital allocation and return on invested capital improvement. In the Aggregates segment, year-over-year shipments declined by 7%, but the durability of our Aggregates business and the consistency of our execution stood out in a weather-impacted quarter. We again improved our trailing 12 months Aggregate's cash gross profit per ton, pushing it to $9.66 per ton and making further progress toward our current $11 to $12 target. The pricing environment remains positive and year-over-year Aggregates cash cost of sales continues to moderate. Aggregates freight adjusted price improved 10% in the quarter and increased $1.25 per ton sequentially from the fourth quarter, a clear illustration of the success of January increases and the continuous execution of our Vulcan Way of Selling disciplines. Our first quarter cash cost of sales performance resulted in a fourth consecutive quarter of trailing 12 months cost deceleration and improving sequentially by another 230 basis points. Our relentless focus on improving efficiencies in our plants through our Vulcan Way of Operating disciplines remains a key driver of managing costs, expanding unit profitability and ultimately generating attractive free cash flow. There is a healthy pipeline of opportunities to deploy this free cash flow for both attractive acquisitions and complementary strategic greenfield development. These targeted opportunities are at varying stages. But as an example, earlier this week, we closed on a bolt-on Aggregates and Asphalt acquisition in Alabama. I'm proud of how our teams continue to execute our two-pronged growth strategy. They are focused on expanding our reach in addition to enhancing our core with consistent expansion of unit profitability by controlling what we can control, even in a dynamic macro environment and demand environment. On the demand side, I want to provide a few comments about each end use, starting with private demand and then moving to public. Momentum in single-family continues to accelerate across our footprint and points to growth in 2024. However, we continue to expect weaker multifamily residential construction to largely offset the single-family approval this year. Overall, affordability and elevated interest rates remain a challenge, but the underlying fundamentals of population growth and low inventories in Vulcan markets support recovery in residential construction. An improving residential backdrop is also a positive sign for future activity in certain categories of nonresidential construction. And recent data has shown some signs of stabilization in overall demand. However, the landscape continues to vary across categories. As expected, continued moderation in warehouse demand will be the biggest headwind to private and nonresidential demand this year. Currently, light commercial activity remains weak, but over time, we expect it to follow the positive trends in single-family housing. We continue to see and capitalize on opportunities in the manufacturing category. Our unmatched Southeastern footprint and unique logistics capabilities position us well to service these large Aggregates-intensive projects. Our footprint is also an advantage on the public side with over two-thirds of federal highway spending allocated to Vulcan states. Additionally, other public infrastructure activity, which benefits from IIJA funding, is growing faster in Vulcan states than the country as a whole. It sustained an elevated level of highway spending of over $100 billion, coupled with record 2024 state budgets, supports healthy growth in highway and infrastructure demand both in 2024 and for the next several years. Now I'll turn the call over to Mary Andrews for some additional commentary on our first quarter. Mary Andrews?

Mary Carlisle, Senior Vice President and CFO

Thanks, Tom, and good morning. Tom discussed our solid Aggregates results in the quarter and shared some important ongoing trends. In addition to providing a few more details about our first quarter results, I'd like to first expound upon four of the trends Tom highlighted earlier in his remarks: Unit profitability expansion, robust cash generation, disciplined capital allocation, and return on invested capital improvement. For the last four quarters, we have consistently expanded our trailing 12-month unit profitability in all three of our operating segments, increasing cash unit profitability by nearly $1.50 per ton in Aggregates, almost $6 per ton in Asphalt, and nearly $5 per cubic yard in Concrete. Our trailing 12 months gross margin has also steadily improved in each product line. This organic growth is underpinned by our daily focus on execution and driving results through our Vulcan Way of Selling and Vulcan Way of Operating disciplines. Better unit profitability yields better free cash flow. Our free cash flow conversion over the last five years has averaged over 90%, enabling us to strategically allocate capital to reinvest in our franchise, grow our business, and return cash to shareholders. During the quarter, we invested $103 million in capital expenditures and returned $81 million to shareholders through dividends and share repurchases. We continue to expect to spend between $625 million and $675 million on capital expenditures for the full year. Our current balance sheet positions us well to continue to deploy capital to each of our priorities. At the end of the first quarter, our net debt to adjusted EBITDA leverage was 1.5x, with $300 million of cash on hand, following the March 1 redemption of our 2026 senior notes at par for $550 million. Our liquidity position and financial flexibility are competitive strengths as we look to continue to grow and create value for our shareholders. Over the last 12 months, we've achieved a 260 basis points improvement in return on invested capital. Invested capital has increased less than 1%, while adjusted EBITDA has improved 20%. Adjusted EBITDA margin has also improved by 350 basis points through consistent operational execution and disciplined cost management. Expenses in the quarter were in line with our expectations, and we continue to expect to spend between $550 million and $560 million for the full year. Most importantly, we reaffirm our expectations of delivering adjusted EBITDA between $2.15 billion and $2.3 billion for the full year. At the midpoint, this indicates a double-digit year-over-year improvement for a fourth consecutive year.

Tom Hill, Chairman and CEO

Thank you, Mary Andrews. At Vulcan, our number one priority will always be our people, keeping them safe and fostering our Vulcan culture. They are the foundation of our great company. As a team, we are focused on the daily execution of our Vulcan Way of Selling and Vulcan Way of Operating disciplines to ensure attractive cash generation in any macro backdrop. We will be strategic and disciplined in allocating capital to continue to grow our business and deliver value for our shareholders. And now, Mary Andrews and I will be happy to take your questions.

Stanley Elliott, Analyst

Tom, nice start to the year, very clean quarter despite kind of some of the weather issues, I think a lot of people had and some of the comp issues. Can you talk about how the rest of the year plays out, thinking about this more like maybe from a demand standpoint? And then to any extent commentary you could share on April would be great.

Tom Hill, Chairman and CEO

Sure. Looking at the quarter itself, I'd call the quarter volumes as expected within the margin of error. We had fewer shipping days in March, but about the same amount of shipping days in the quarter overall. January was a slow start, really due to wet and cold weather. February and March were a bit better in terms of daily shipping. So Q1, all things considered, was as expected. As we look forward to the rest of the year, I don't see any real change in our thinking on demand. We would still guide to be flat to down overall, and the dynamics are very similar to what we said last quarter, headwinds in nonresidential, some challenges in multifamily. We've got recovering single-family construction and growing public demand. I think our superior position in the Southeast really helps; the footprint makes a difference. And that Southeastern market is probably the healthiest market in the country. I think our Vulcan Way of Selling disciplines and tools will be very helpful with this. So at this point, I'd call it confident for our volume outlook. As far as going into the second quarter, I'd call it this way: when the sun comes out, we're shipping very well.

Jonathan Bettenhausen, Analyst

I'm curious about your outlook on midyear pricing. You had conversations with your customers about midyear. And I'm also wondering how much of that is baked into your guidance?

Tom Hill, Chairman and CEO

Yes. I'd start off by saying that I think the fundamentals in pricing remain very good and very healthy. As you saw, we had a solid start in Q1 with prices a little north of 10%, that was really across every market. So it's a really good start and supports our full-year guidance. Midyear price increases are not in our guidance at this point. We're having those midyear price discussions right now, so it's a little too early to call. Remember, the midyear pricing will be good for 2024, but they're going to be even better for 2025. Our teams are working really hard on this, and I think I'm sure they'll deliver. The most important thing, though, is that the fundamentals for pricing remain very healthy. So I think when it comes to midyears, we'll revisit pricing guidance in August and give you an update.

Mary Carlisle, Senior Vice President and CFO

And one more thought on price. We always like to point out how important it is to remember that regardless of what the level of pricing is, the key is really how much price we're able to take to the bottom line. In the first quarter, we achieved a 10% improvement in cash gross profit per ton and some Aggregates margin expansion even given the lower volume quarter due to the weather. Overall, gross margin also improved by 140 basis points and adjusted EBITDA margin expanded as well. So importantly, we expect this margin expansion to continue and improve further through the balance of the year.

Anthony Pettinari, Analyst

I'm wondering if you could talk a little bit more about how costs have kind of been trending among your major cost categories. If you can touch on maybe some of the non-energy categories. And then also just with higher diesel, how that's impacted conversations around price increases or just how you think about the full year from that context?

Tom Hill, Chairman and CEO

Yes. I think the first quarter for cost is always tricky as volumes and weather definitely had an impact on costs in the first quarter. That said, I think we're still comfortable with the cost guidance of up mid-single digits for the full year. As always, we would get you to look at costs on a trailing 12-month basis because it's just going to be choppy on a quarter-to-quarter basis. And if you look back on a trailing 12-month basis over the last year, cost increases have fallen from, I'd say, mid-teens to single digits. So as we said in the prepared remarks, we've seen four quarters of decelerating cost and as we march through this year, we should see that those increases decline as we march through the year, next quarter better, next quarter better, next quarter better as we saw over the last four quarters. So I think we're on a good path to that mid-single-digit cost for the full year. As far as different categories, diesel was probably a slight tailwind in the quarter. What remains elevated are parts and services, but our comps are getting easier. Through the Vulcan Way of Operating, we're improving our operating efficiencies and will continue to offset those inflated parts and services. So I think we're in a good place, and I think the teams are addressing this, and I'm pleased with what I see.

Mary Carlisle, Senior Vice President and CFO

Yes. And in terms of diesel, Anthony, we do assume in our plan that it will move somewhat higher through the rest of the year. And you're right, while diesel prices are always hard to predict, they can really be a good thing in this business since we have the ability to adjust pricing as it goes up and also take advantage of it when it goes down.

Kathryn Thompson, Analyst

Stepping back, just looking at the bigger picture. Last year, you divested mainly downstream operations just in terms of optimizing the portfolio. As you look into 2024 and beyond what are your priorities in terms of overall Vulcan Materials and product mix? And how does this mix strategy align with a broad reindustrialization of the U.S. and putting Vulcan in the best position possible?

Tom Hill, Chairman and CEO

Well, as always, we would tell you that that is Aggregates; we are an Aggregates company. We have the highest percentage of EBITDA in Aggregates of probably anybody in the sector, and that's what we do. Now we have strategic downstream operations. As we always say, we see it as a portfolio. If one of those sectors or geographies doesn't earn an appropriate return or if somebody else would divest of it and reinvest that capital back into our Aggregates business, we will do so. Nothing has changed as far as how we view the world. As we look at growth, the part of M&A in greenfields will be Aggregates-focused.

Trey Grooms, Analyst

I want to follow up on the comment Mary Andrews made earlier about cash gross profit per ton. It was clearly up 10% in the quarter. I think you were initially looking for mid- to high single-digit improvement. Perhaps better than expected there. Looking for mid-teens type improvement for the full year. Can you help us understand the progress? I think it's going to accelerate somewhat as we go through the year. Any insight on that would be helpful. And then maybe stepping back a little longer term, these are better numbers than what you've historically averaged. Do you see the opportunity for more consistent improvement going forward versus those historical averages?

Tom Hill, Chairman and CEO

Yes. Let me take your last question first about the long term. This is why we have developed the Vulcan Way of Selling and Vulcan Way of Operating disciplines. I think they secure our ability to improve cash gross profit per ton, which we've done on a 12-month basis every quarter consistently for five years. That's pretty good consistency despite market dynamics. Overall, comparing to history, we're in a better place for higher improvements in cash gross profit per ton, and that's not by accident, that's by design. We've been working on that for years, and our tools are only getting better as we refine our processes. As far as this year is concerned, as we've talked about, as we progress through the year, we've got cost increases decelerating and as we face easier comparisons with inflation, our operating efficiencies will improve. So, coupled with our ability to raise prices, both in project work and fixed plant, I believe we have the opportunity to continue to enhance our unit margin improvement through the year.

Jerry Revich, Analyst

I'm wondering if you could just talk about how you expect the pricing cadence to play out this year. Over the past couple of years, in the third quarter versus the second quarter, we saw a considerable step-up in pricing. Is that something you're assuming this year to achieve your guidance? Mary Andrews, could you expand on how you expect the cadence to play out? How much higher might it be if we implement midyear price increases?

Mary Carlisle, Senior Vice President and CFO

Yes, sure. I would expect a cadence of some sequential growth in the second quarter, more in the third quarter as you referenced, and then we would typically see less in the fourth quarter due mostly to seasonality. The magnitude of the midyear increases, which as Tom referenced earlier, it's just too early to call at this point, but that will influence the third quarter sequential improvement and to what level that will reach overall.

Jerry Revich, Analyst

Okay. In terms of just the exit rate with double-digit pricing growth exiting the year and potential midyears on top of it, I guess that suggests the starting point for 2025 should be in the high single-digit pricing range just from a carryover effect. I just want to confirm if that's consistent with your thinking.

Tom Hill, Chairman and CEO

Yes. I think when it comes to midyears, we're going to call that when we've earned it. I think we feel good about midyears, and I think those conversations are going fine. As I said, they mean a lot for 2025. I do think it's a bit early to call where 2025 will start. We've got to finalize midyears and evaluate how things play in the early part of 2025. But, I feel optimistic about the midyears being a good indicator for 2025 pricing.

Michael Dahl, Analyst

I want to follow up again on kind of midyears. I think last quarter you mentioned that those conversations would be April conversations, so maybe it's just semantics, and you want to have those finalized before communicating to us. But I'm wondering if given some of the wet weather to start the year, if some of those conversations perhaps got pushed out relative to your expectations or how you would characterize that? Any regional pricing differences you may be experiencing that you didn’t anticipate coming into the year?

Tom Hill, Chairman and CEO

I don't think weather had an impact. You may have read a little too much into the April month comment. You send the letters out in April, you spend May having those conversations, and finalize them at the end of May, beginning of June. So I don’t see any variance in timing or sequencing versus last year. That said, I am encouraged by the conversations we’re having, and I think we will implement solid midyear price increases. But I wouldn't read anything into the comment on weather affecting April timing.

Mary Carlisle, Senior Vice President and CFO

One other thought on pricing for the rest of the year is that we've had positive momentum over the last 12 months in our bid work, and that should also act as a good catalyst for us transitioning from where we ended Q1 to where we expect to be for the full year, in addition to whatever is realized on midyear increases.

Garik Shmois, Analyst

I wanted to ask about the M&A environment. If you could provide a little more detail on the bolt-on you just completed? Is it possible to size how much you anticipate spending on acquisitions this year and the types of deals you're looking at?

Tom Hill, Chairman and CEO

Yes. As you saw, we completed a small but strategic bolt-on northeast of Birmingham, up sort of Guntersville. It's about 2 million tons of Aggregates and just under 0.5 million tons of Asphalt. It fits well within our portfolio. I think as you look at the next 12 months, the M&A outlook is quite favorable. So more to come. I'm having many conversations and remain very encouraged. M&A will always be Aggregates-led and conducted with a disciplined approach. I think we feel confident that this year will be busy for M&A activity.

David S. MacGregor, Analyst

I guess I wanted to tap into your extensive experience in this business concerning the second half of this year in election years. Do you find that projects tend to accelerate as people focus on infrastructure spending? Or do things tend to slow down as people wait to see how the election plays out? I'm trying to gauge how you're assessing the risk around second-half volumes in public sector spending.

Tom Hill, Chairman and CEO

I don't see any impact from the election year on our demand. Our guidance has accounted for these factors. I think on the public side, it’s really about the DOTs trying to get highway dollars into projects. And I think that's happening. As we previously mentioned, we anticipate mid-single-digit growth on the private side. We have some challenges with non-residential and multi-family segments. But single-family continues to recover with strength. That's how I view the landscape without significant impact from the election year.

Timna Tanners, Analyst

I wanted to ask about the demand side as well. How is the government infrastructure funding flowing through? How are you sensing the pace of that activity? Any evidence of the larger IRA projects? And are there any signs that data centers could mitigate some of the decline in warehouse demand?

Tom Hill, Chairman and CEO

Yes. I will start with highways. We're seeing IIJA money and local funds flowing into projects. At this point, we maintain our mid-single-digit growth projection for the public sector this year, which includes both non-highway and highway infrastructure. We foresee steady growth for years to come. We're also seeing additional state funding come into play with states like Tennessee adding $3 billion, Florida $4 billion, and Georgia $1.5 billion. Overall, for public demand, slow and steady wins the race, particularly as we enhance our margins.

Mary Carlisle, Senior Vice President and CFO

Timna, you also mentioned data centers, which have provided opportunities for us in some markets. We have booked recent projects in Virginia, Alabama, and Georgia. It's a subject garnering considerable press. However, it’s essential to remember the square footage for data centers according to Dodge accounts for a low single-digit percentage of total non-residential construction. There are numerous categories and dynamics at play in private non-residential, so data centers may not significantly impact the overall outlook.

Patrick Brown, Analyst

You're doing a great job on unit margins, but I'm curious what you're seeing on the plant productivity side. Going back to the Vulcan Way of Operating, regarding some of the technology rollouts in the plants discussed at the Analyst Day, I'm wondering how those are tracking, whether you're observing improved plant utilization and if this guidance extends through 2025?

Tom Hill, Chairman and CEO

Yes, with respect to the process intelligence in our plants, we implemented it in our top 100 plants, which represent roughly 7% of our production capabilities. About 25% to 30% of those plants are fully utilizing these tools. While there's much work involved in refining and training for the screens, we are making marked progress. As we move through the year, I expect that by the first part of next year, we'll achieve full utilization. This improvement will positively impact our operational efficiency and be visible in our numbers through 2024, 2025, and into 2026.

Adam Thalhimer, Analyst

Great quarter. On the demand side, I wanted to inquire about the current landscape, especially regarding private construction demand in general. Are you observing any incremental weakness or strength?

Tom Hill, Chairman and CEO

I think it depends on the sector we are discussing. On the non-residential side, there’s weakness in warehouses and traditional light non-residential construction. That said, in warehousing, the decline in new starts is slowing, which is a positive sign. We also have strength in large manufacturing projects, of which we are currently shipping on 11, with more expected. So it’s still early to declare if conditions are improving or worsening, but that's our current perspective. For housing, weakness persists in multifamily construction, which we anticipate will be temporary, and we expect recovery in single-family construction with momentum.

Philip Ng, Analyst

Congrats on a really strong quarter. A competitor of yours has just closed on a deal in the Southeast and announced midyear price increases in those markets, noting pricing in those areas is below their corporate average. I've always regarded the Southeast as a favorable pricing market. Do you anticipate any improvement in pricing dynamics there? Also, any insights into California, which seems to be priced lower than what the market would typically warrant, given the cost and demand profile?

Tom Hill, Chairman and CEO

We must be cautious when discussing pricing on specific markets. That said, the Southeast is performing well from a pricing perspective, likely some of the best we have. We're observing marked improvement in pricing in the western part of the United States, and I anticipate this momentum will continue.

Angel Castillo Malpica, Analyst

Just wanted to clarify, for pricing, is the assumption still 10% to 12%, given the kind of unchanged top line? And then you mentioned no impact from the election year. Could you elaborate on some other dynamics influencing non-residential weakness, such as interest rates and those challenges? Is that having any effects on your midyear pricing discussions?

Tom Hill, Chairman and CEO

Yes, we're seeing some improvement in single-family construction, which is beneficial. The key element is that we have visible and strong public demand, which will lay a solid foundation for pricing. Interest rates have affected demand and volumes, but they have not significantly impacted pricing. The election year has not influenced our pricing dynamics either. With strong public demand and improvements in residential, these factors are working together positively for our pricing expectations.

Michael Dudas, Analyst

It’s noteworthy that 67% of IIJA dollars are directed to the Vulcan states. Could you detail which states this aligns with months? What areas or states might be lagging in terms of performance, providing opportunities for catch-up in the next few quarters?

Tom Hill, Chairman and CEO

A large portion of that is towards the major DOTs such as Caltrans, TxDOT, Georgia DOT, and Virginia. Tennessee is a leader because of its early funding initiatives. Georgia initially struggled but is catching up. Caltrans is effectively mobilizing funds, while Illinois has faced challenges in their funding. However, progress is evident in project lettings. They all are enhancing their efficiencies as they move into '25 budgeting right now, with an expectation of increased rather than decreased funding. A long road ahead, yet steady growth is evident, especially in public infrastructure, including ports, airports, and sewage treatment, with substantial growth expected this year and into the future. I thank all of you for your time this morning and your interest and support of Vulcan Materials Company. We hope you and your families are healthy and safe and stay that way through the quarter, and we look forward to talking to you over the next few months. Thanks.

Operator, Operator

Once again, ladies and gentlemen, that will conclude today's call. Thank you for your participation. You may disconnect at this time.