Earnings Call Transcript
Vulcan Materials CO (VMC)
Earnings Call Transcript - VMC Q4 2022
Operator, Operator
Good morning, ladies and gentlemen, and welcome to Vulcan Materials Company's Fourth Quarter Earnings Call. My name is Gretchen, and I will be your conference call coordinator today. Now I would like to turn the call over to your host, Mr. Mark Warren, Vice President of Investor Relations for Vulcan Materials. Mr. Warren, you may begin.
Mark Warren, Vice President of Investor Relations
Good morning, and thank you for your interest in Vulcan Materials. With me today are Tom Hill, Chairman and CEO; and Mary Andrews Carlisle, Senior Vice President and Chief Financial Officer. Before we begin, 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 any non-GAAP financial measures are defined and reconciled in our earnings release, our supplemental presentation, and other SEC filings. In the interest of time, please limit your Q&A participation to one question. This will allow for more questions during our time together. A supplemental presentation has been posted to our website, vulcanmaterials.com. Additionally, a recording of this call will be available for replay later today at our website. And with that, I will turn the call over to Tom.
Thomas Hill, Chairman and CEO
Thank you, Mark, and thanks to all of you for joining our call this morning. We appreciate your interest in Vulcan Materials Company. In 2022, our teams excelled in confronting macro challenges, and they demonstrated the resiliency of our aggregates-led business. Let's start with the fourth quarter, which really showcased our commitment to controlling what we can control. We generated $375 million of adjusted EBITDA in the quarter, and I was particularly proud of our team for delivering 11% year-over-year growth in aggregates cash gross profit per ton despite a 6% decline in aggregates shipments. Abnormally wet and cold weather across our footprint disrupted construction activity and shipments across all segments, and we also began feeling the impact of a decline in single-family residential. Pricing momentum continued with 15% growth in aggregates mix adjusted price in the fourth quarter. Our people continue to drive performance through good execution, which is grounded in our Vulcan way of selling and the Vulcan way of operating disciplines. Gross profit in both aggregates and asphalt segments increased versus the prior year's fourth quarter despite lower volumes, and pricing momentum more than offset inflationary cost increases. In concrete, a 15% decline in volume driven mostly by extremely wet and cold weather in Texas created operational challenges that eroded pricing gains in that segment. For the full year, adjusted EBITDA improved 12%, with all segments posting year-over-year growth in gross profit. Aggregates segment gross profit improved 9%, a noteworthy performance given the headwinds of generationally high inflation and the unexpected and arbitrary shutdown of our valuable Mexico operations in May of 2022. Aggregates volume increased 6%, and average selling prices improved 10%, accelerating as the year progressed. Importantly, our aggregates cash gross profit per ton improved over 5%, and also accelerated throughout the year, even in a challenging operating environment. In the first quarter, we held our own while inflation ramped up more steadily than expected. Then in the second quarter, cash gross profit per ton grew modestly versus the second quarter of 2021, as we responded quickly with additional pricing action. In the third quarter, cash gross profit per ton increased 9% as pricing momentum accelerated and operating efficiencies offset some of the inflationary pressures. And as I mentioned earlier in the fourth quarter, cash gross profit per ton improved a notable 11%, even as volumes declined. In our asphalt segment, the second half of 2022 marked an inflection point on price and cost dynamics. In the third quarter, robust pricing improvement began outpacing the sharply rising liquid asphalt costs. For the full year, pricing increased by 21% to more than offset the 36% increase in liquid asphalt costs. And volumes grew by 7%, with particular strength in Arizona and California, our two largest asphalt markets. Ultimately, gross profit improved to $57 million versus the prior year's $21 million. In the Concrete segment, full-year gross profit of $89 million increased 64% compared to the prior year due to a full year's contribution from the U.S. concrete assets, in addition to improved earnings in our legacy Northern Virginia and Northern California Concrete Businesses. Inflationary pressures, including diesel and the availability of both cement and drivers had a significant impact on performance in the Concrete segment. Now, let's shift to the new year, first focusing on demand. The demand environment for 2023 is mixed, both in terms of end users and timing. We expect modest growth in overall public demand but contraction in private demand. Residential construction activity is showing the impact of rising construction costs, home prices and mortgage rates on single-family housing. Single-family starts and permits have continued to decline but to a lesser degree in Vulcan-served states and the country as a whole. Currently, multifamily remains positive with a strong pipeline of projects under construction. Housing will certainly be the primary drag on private construction in 2023, but we expect it to quickly return to growth. It is important to remember that the demographics and employment growth in our markets continue to support household formation and the growing need for additional houses in the future. Overall, private nonresidential demand remains at healthy levels. Manufacturing and other heavy industrial projects continue to provide opportunities, but we are monitoring leading indicators such as more recent ABI measures, moderation in the Dodge Momentum Index, and survey data indicating declining loan demand and lending tightening. On the public side, we expect positive momentum throughout 2023 and beyond as states and municipalities move forward with much-needed infrastructure investment. Highway and infrastructure starts are both positive. In highways, starts strengthened significantly in the second half of 2022, growing at 25% on a trailing 12-month basis at the end of the year. The Infrastructure Investment and Jobs Act funding is now reflected in proposed state fiscal year 2023, 2024 budgets across our footprint. The multiyear outlook for public infrastructure is solid. We continue to believe that the increased funding will begin impacting aggregates shipments modestly as we move through 2023 and more meaningfully in 2024. In addition to IIJA funding, state tax receipts in Vulcan states are the highest they've been in the past 10 years. Strong state and municipal revenue support non-highway infrastructure investment as public entities continue to play catch-up from the last decade of housing growth that has driven a fundamental need for infrastructure investment. Overall 2023 demand for aggregates will be dependent upon the depth and the duration of the declines in residential construction activity, the impact of rising interest rates on private nonresidential construction activity as the year progresses, and the timing of highway starts converting to aggregates demand. Considering these dynamics, we currently expect our aggregate shipments to decline between 2% and 6% in 2023. Pricing momentum and operational execution will drive our 2023 performance. We expect aggregate pricing to increase between 11% and 13%. Most importantly, we will continue to improve our industry-leading aggregates cash gross profit per ton and deliver solid earnings growth in 2023.
Mary Andrews Carlisle, Senior Vice President and CFO
Thanks, Tom, and good morning. Our 2022 operating performance led to another year of solid cash generation and disciplined capital allocation. Over the last four years, our free cash flow conversion has averaged over 90%, with a 93% conversion ratio for 2022. After investing over $600 million in capital expenditures for both maintenance and growth projects, we put additional capital to work by completing $529 million in bolt-on acquisitions and also returned $213 million to shareholders via our growing and importantly sustainable dividend. During 2022, we also reduced our leverage back to within our stated target range of 2 times to 2.5 times after completing the U.S. Concrete acquisition in August of 2021. Net debt to adjusted EBITDA was 2.3 times at year-end. Our investment-grade balance sheet and significant cash generation capability give us the capacity to continue to invest in both organic and inorganic opportunities with a constant focus on improving shareholder returns and return on invested capital as we grow and optimize our portfolio. During the fourth quarter, we completed the previously announced sale of our ready-mix assets in New York, New Jersey, and Pennsylvania. On a trailing 12-month basis, our return on invested capital at year-end was 13.5%, inclusive of the loss of earnings historically generated from the network of assets supporting our shutdown of Mexico operations. We also remain focused on continuing to leverage our SAG cost base. SAG expenses as a percentage of revenue improved by 50 basis points versus the prior year to 7% of revenues. Having strategically managed our balance sheet, our portfolio, and our overhead cost structure, we entered 2023 from a position of strength. Tom shared with you our views on the macro demand environment and resulting aggregates expectations. Even with the challenging and uncertain macro backdrop, we expect to grow our adjusted EBITDA to between $1.725 billion and $1.875 billion by capitalizing on the strengths of our aggregates-led business and executing on our foundational strategic discipline. In our downstream businesses, we expect total cash gross profit dollars to approximate 2022 levels. Continued improvement in asphalt segment profitability and the benefit of improving highway demand should offset both the impact of the 2022 divestiture of our concrete businesses in New York, New Jersey, and Pennsylvania, and the impact of slowing residential construction activity on our remaining concrete businesses. We expect SAG expenses of between $515 million and $530 million as we remain focused on driving efficiencies in our support functions while delivering new capabilities for the business through investments in technology and talent. We also expect depreciation, depletion, and amortization, and accretion expenses of approximately $610 million; interest expense of approximately $195 million; and an effective tax rate of approximately 22%. In 2023, we plan to consistently reinvest in our franchise with $600 million to $650 million of capital expenditures for both maintenance and growth projects.
Thomas Hill, Chairman and CEO
Thank you, Mary Andrews. Before we move to Q&A, I want to thank our entire Vulcan team for a successful year in 2022. And I have great confidence in our ability to continue to execute in 2023, even with the uncertainty in the macro environment. As always, we will be keenly focused on keeping our people safe, driving value for our customers, and capitalizing on the profitability expansion opportunities supported by the Vulcan way of selling and the Vulcan way of operating disciplines. Vulcan is uniquely positioned to create long-term sustainable value with the right products, in the right markets, with the right focus from the right people. And now, Mary Andrews and I will be happy to take your questions.
Operator, Operator
Our first question comes from Stanley Elliott from Stifel.
Mark Warren, Vice President of Investor Relations
Good morning, Stanley.
Stanley Elliott, Analyst
Thanks. Good morning, everybody. I guess my question would be about why we are now seeing a 2% to 6% kind of volume outlook decline. What changed, if anything, resulting in that? And is there anything you could share with us about what you're seeing across those end markets? Thank you.
Thomas Hill, Chairman and CEO
Yes. Sure. Looking into '23, we saw some good bounce-back in January from the bad weather we've had in the fourth quarter, so solid shipments; that being said, with the exception of California, which experienced floods. The markets look pretty good. The leading indicators this year are not as clear as they usually are, so we tried to be thoughtful in our demand outlook. A lot of it boils down to timing. The full impact of single-family demand gets us towards the end of the first quarter to beginning of the second quarter where we expect a single-family decline of about 20%. Non-residential indicators look positive, but leading indicators such as commercial loans could lead to challenges in the second half of the year. We expect that public segment to grow at low-single digits. So we tried to be thoughtful about the dynamics that impact shipments and timing. While we can't control demand, we can control our operations, and we believe we'll grow our unit margins.
Stanley Elliott, Analyst
Great, guys. And nice work on the profitability improvement. Thanks a lot.
Mark Warren, Vice President of Investor Relations
Thank you.
Mary Andrews Carlisle, Senior Vice President and CFO
Thanks.
Trey Grooms, Analyst
Hi. Good morning, everyone. I want to echo good work on profitability. The guide implies an acceleration there on cash gross profit per unit. Can you discuss that a bit, including what's bolstered by pricing and expected profitability cadence throughout the year?
Thomas Hill, Chairman and CEO
I would call it pretty consistent. We carry good pricing momentum into 2023, and we're guiding for 11% to 13%. Our pricing discussions for January 1 went very well, and they are in place. You have to remember that as we progressed through last year, pricing accelerated, which makes the comps in the second half of the year tougher. But we're confident that our teams can handle that. I would expect a steady growth in unit margin quarter after quarter.
Mary Andrews Carlisle, Senior Vice President and CFO
Yes, and we expect solid unit profitability growth throughout the year. The first half may have tougher seasonal comps, while the second half offers some easing. Overall, we may have more challenging growth from a volume perspective in the first half.
Trey Grooms, Analyst
Got it. Thanks, Mary Andrews. That's super helpful.
Thomas Hill, Chairman and CEO
Sure. Regarding pricing, about 40% of our work is fixed plant, priced once or twice a year. We have dedicated discussions around price increases on bid work we engage with at that time. Therefore, we are confident in our guidance, but we need to continue earning that from customers.
Trey Grooms, Analyst
Understood. Thank you for the clarity.
Thomas Hill, Chairman and CEO
Thank you.
Operator, Operator
Our next question comes from Kathryn Thompson from Thompson Research Group.
Thomas Hill, Chairman and CEO
Good morning, Kathryn.
Mary Andrews Carlisle, Senior Vice President and CFO
Good morning.
Kathryn Thompson, Analyst
Good morning. Thanks for taking my question today. Regarding your confidence in unit margin growth amid historic volatility in pricing and costs, can you share insights focused on aggregates and the performance of concrete following the divestiture of Northeast assets?
Thomas Hill, Chairman and CEO
Looking at 2022, we set records in unit margins, and we're pleased with the growth. We expect to grow those again in 2023, aiming for mid-teens growth. Our performance shows that our sales approach and operational focus are effective. We're confident regarding unit margin growth because of past performance consistency.
Mary Andrews Carlisle, Senior Vice President and CFO
Yes. We have seen consistent growth in cash gross profit per ton, and we expect this to continue into 2023. Inflation has also impacted how we report inventory, affecting bottom-line profitability.
Thomas Hill, Chairman and CEO
Expect unit margin growth in other product lines too.
Kathryn Thompson, Analyst
Great. Thank you very much.
Thomas Hill, Chairman and CEO
Thank you.
Operator, Operator
Our next question comes from Anthony Pettinari from Citi.
Anthony Pettinari, Analyst
Hi. Good morning. Regarding aggregates volume guidance, should we think of that as organic change? Or is there any impact from downstream divestitures impacting upstream shipments?
Thomas Hill, Chairman and CEO
I don't see an impact from divestitures. We will continue to service the plants that we acquired partially in 2022. Those are factored into our guidance.
Anthony Pettinari, Analyst
That's helpful. I'll turn it over.
Operator, Operator
Our next question comes from Jerry Revich from Goldman Sachs.
Jerry Revich, Analyst
Hi Tom and Mary Andrews. Given the interesting price-cost spread in aggregates this year, what precedent is there for another year of significant price growth as we head into 2024?
Thomas Hill, Chairman and CEO
We have a lot of positive public demand, which is essential for price growth. We have a disciplined approach to prices, which will support our performance in 2023 and beyond. Visibility to public demand and stable trends are crucial as we plan this. It's all about timing and execution.
Jerry Revich, Analyst
Thank you.
Thomas Hill, Chairman and CEO
Thank you.
Mary Andrews Carlisle, Senior Vice President and CFO
Thanks.
Operator, Operator
Our next question comes from Michael Feniger from Bank of America.
Michael Feniger, Analyst
Thanks for taking my questions. Can you help us understand the incremental cost increase from energy and raw materials in 2022 versus 2021?
Thomas Hill, Chairman and CEO
Mary, why don't you take '22 and I'll take '23?
Mary Andrews Carlisle, Senior Vice President and CFO
Energy was a considerable headwind in 2022 and cost us about $225 million between diesel and liquid. Diesel in the fourth quarter was almost 40% higher than in the first quarter of 2022, and liquid was almost 20% higher in Q4 versus Q4.
Thomas Hill, Chairman and CEO
I think what we plan right now is probably high single-digit inflation, combined with efficiency improvements to keep cost increases at bay.
Mary Andrews Carlisle, Senior Vice President and CFO
We expect energy costs in 2023 to be more stable, remaining at elevated levels early in the year and then moderating as the year progresses.
Michael Feniger, Analyst
Great. I also wanted to ask about the portfolio and potential further deals.
Thomas Hill, Chairman and CEO
We are always looking for acquisitions but remain disciplined. We will invest in opportunities that meet our criteria and strategic goals. I think there are always some opportunities available, but timing may vary.
Rohit Seth, Analyst
Good morning. Can you clarify on the non-residential exposure and mix?
Thomas Hill, Chairman and CEO
We're heavier on the heavy non-residential side. The lighter projects may catch up with residential growth later on. Overall, we're positioned well for future growth in heavy res.
Rohit Seth, Analyst
Understood. Thank you.
Thomas Hill, Chairman and CEO
Thank you.
Operator, Operator
Our next question comes from Keith Hughes from Truist.
Keith Hughes, Analyst
Thank you. I had some questions on the high single-digit cost increases.
Thomas Hill, Chairman and CEO
Energy costs will be a headwind in the first half of the year but will moderate as the year goes on. Other costs are expected to be up mid to high single digits.
Keith Hughes, Analyst
Thank you.
Thomas Hill, Chairman and CEO
Thank you.
Operator, Operator
Our next question comes from Michael Dudas from Vertical Research.
Michael Dudas, Analyst
Tom, can you share areas where you see potential surprises in project flows?
Thomas Hill, Chairman and CEO
The main question revolves around timing of highway projects and how quickly they get from being let to beginning shipments. We remain optimistic.
Michael Dudas, Analyst
Thank you, Tom.
Mark Warren, Vice President of Investor Relations
Thank you.
Operator, Operator
Our next question comes from Adam Thalhimer from Thompson Davis.
Adam Thalhimer, Analyst
Can I get your help with your margin guidance on aggregates gross margin improvement this year?
Mary Andrews Carlisle, Senior Vice President and CFO
We expect aggregates gross margin expansion of at least 100 to 200 basis points this year, along with improvement in EBITDA margins throughout the year.
Adam Thalhimer, Analyst
Do you see a lot of variability between quarters, or is it more consistent?
Mary Andrews Carlisle, Senior Vice President and CFO
We expect consistent improvement throughout the year.
Adam Thalhimer, Analyst
Okay. Very helpful. Thanks.
Thomas Hill, Chairman and CEO
Thank you.
Operator, Operator
Our last question comes from Rohit Seth from Seaport Research Partners.
Thomas Hill, Chairman and CEO
Good morning.
Rohit Seth, Analyst
Thank you for taking my question.
Thomas Hill, Chairman and CEO
Thank you.
Operator, Operator
It appears you have no further questions at this time. I will now turn the program back over to Tom for any additional closing remarks.
Thomas Hill, Chairman and CEO
Thank you for your time this morning. Thank you for your interest in Vulcan Materials. We look forward to talking to you throughout the quarter and throughout the year. Please stay safe and we look forward to seeing you soon. Thank you.
Operator, Operator
Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.