Earnings Call Transcript - VMC Q4 2020

Operator, Operator

Good morning, everyone, and welcome to Vulcan Materials Company's Fourth Quarter Earnings Conference Call. My name is Laurie, and I will be your coordinator for today's call. I will now turn the call over to your host, Mr. Mark Warren, Vice President of Investor Relations for Vulcan Materials. Mr. Warren, you may start.

Mark Warren, Vice President of Investor Relations

Good morning. Thank you for joining our fourth quarter and full year earnings call. With me today are Tom Hill, Chairman and CEO; and Suzanne Wood, 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. Additionally, a recording of this call will be available for replay later today at our website. 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. As the operator indicated, please limit your Q&A participation to one question. This will help maximize participation during our time together. With that, I will now turn the call over to Tom.

Tom Hill, Chairman and CEO

Thank you, Mark, and thanks to everyone for joining the call today. We appreciate your interest in Vulcan Materials Company. We hope you and your families are and will continue to be safe and healthy. 2020 represented another year of strong earnings growth for Vulcan, despite the many challenges associated with the pandemic. Our results demonstrated the strength, flexibility and resilient nature of our aggregates business. But most of all, 2020 demonstrated the commitment of Vulcan employees as they faced uncertainty and had to make adjustments both in their professional and personal lives. Our team stayed focused on operating safely, servicing our customers and making progress on our four strategic disciplines. Congratulations on a job well done. In a few minutes, Suzanne will share some fourth quarter highlights with you, but first, I'd like to summarize our full year 2020 accomplishments and discuss broad themes and where we are headed. Our full year financial results were strong. Total company adjusted EBITDA increased 4% to $1.324 billion, and EBITDA margin expanded by 150 basis points. Cash generation continued to be strong with operating cash flows increasing by 9% to $1.1 billion. And finally, one of our principal measures, return on invested capital, improved by 40 basis points to 14.3%. These results were particularly noteworthy considering our annual aggregates volume declined by 3% as compared to 2019. Higher average selling prices and effective cost control were key drivers of this performance. Aggregates pricing improved by just over 3% on both a reported and mixed adjusted basis. Importantly, these pricing gains were widespread across our footprint. Our total cost of sales per ton increased by 2%, while our unit cash cost of sales, which is more controllable, only grew by 1%. This led to a 5.5% gain in our aggregates cash gross profit per ton. At $7.11, we are making good progress toward our longer-term goal of $9 per ton. This improvement in unit profitability was supported by our four strategic disciplines: Commercial excellence; operations excellence; logistics innovation; and strategic sourcing. We also experienced improvements in each of our non-aggregates business segments. Collectively, gross profit improved 12% across these three segments. Europe profitability increased in both asphalt and concrete. Asphalt gross profit increased $12 million or 19% over the prior year, even though volumes declined 7%. This improvement in profitability resulted from stable sales prices and lower liquid asphalt costs. Our ready-mix concrete unit profitability increased 8%. Average selling prices increased by 2% and volume declined by 5%, primarily as a result of the cement shortages in California. The higher profitability in each of our business segments and our improving overall EBITDA margin set us up well for 2021. We are well positioned to take advantage of market opportunities in our geographic footprint. The demand environment is also improving, particularly in residential construction and highway construction. Let's take each market segment in turn. Residential continues to show strength, especially in single-family. The market fundamentals of low interest rates and reduced supply suggests that the growth will continue. This represents a clear opportunity for us as both permits and starts are growing faster in Vulcan-served markets. Highway lettings and awards returned to growth in the fourth quarter. State DOT budgets have stabilized, with most of our states showing budgets flat to up from 2020. The caution in this market segment is that it will require time to turn awards into shipments given the mid-year 2020 loan awards due to the pandemic. While the timing of shipments is a variable, we will see improvement in highway shipments throughout 2021. As we said in the third quarter, the near-term outlook for the nonresidential construction sector provides the least forward visibility. Dodge construction starts are still down year-over-year, but certainly, indicators are beginning to improve, perhaps signaling that potential improvement is just around the corner. Weakness lingers in the office space and hospitality-related sectors, but there is growth in the heavier nonresidential categories like distribution facilities and data centers. In fact, warehouses are now the largest nonresidential category as measured by square feet and represent approximately one-third of construction awards. These projects are typically more aggregate intensive, and 90% of the near-term growth in this sector will occur in Vulcan-served states according to Dodge. The administration and Congress are committed to an infrastructure-led economic recovery and have indicated that they will focus on an infrastructure bill next after the COVID-19 relief package. Clearly, our leading market positions will mean broad participation in infrastructure-related spending. We believe demand for aggregates will continue to improve as we progress through 2021. That being said, the timing of shipments to highway projects and nonresidential construction projects remains a variable. We consider these factors as we thought about our 2021 prospects and guidance. That said, we expect our adjusted EBITDA to be between $1.34 billion and $1.44 billion. We anticipate 2021 aggregate shipments could fall in a range of a 2% decline to a 2% increase as compared to 2020. Regardless of volume swings, we will improve our full year unit profitability in aggregates. We expect aggregates freight-adjusted average selling prices to increase by 2% to 4% in 2021. And gross profit in our non-aggregate segments is forecast to improve by mid-single to mid-high single digits. To sum it up, 2021 will turn out to be a year of solid earnings growth. Now I'll turn it over to Suzanne for further comments.

Suzanne Wood, Senior Vice President and Chief Financial Officer

Thanks, Tom, and good morning to everyone. Before I discuss fourth quarter 2020 highlights, I'll fill in some additional details on our 2021 guidance. We made significant reductions in our selling, general and administrative expenses in 2020. We expect to further leverage our overhead cost in 2021 and anticipate our SG&A expenses to be between $365 million and $375 million. We anticipate interest expense to approximate $130 million for the full year. Barring any changes to federal tax law, our effective tax rate will be about 21%. The category of depreciation, depletion, accretion and amortization expenses will be around $400 million. Now with respect to capital expenditures, we invested $361 million in 2020. We expect to spend between $450 million and $475 million in 2021. This includes fully restarting and advancing growth projects that were delayed last spring, such as the opening of a new quarry in California, capacity expansion at other quarries and improvements to our logistics and distribution network. It also reflects a catch-up of operating CapEx that was postponed at the start of the pandemic. As always, we'll carefully monitor the economic environment and adjust our capital spending as necessary. As you model, you'll note that the combination of our assumptions for 2021 leads to another healthy year of cash generation. I'll now give a little color on the fourth quarter of 2020. Adjusted EBITDA was $311 million, up 4% from last year's fourth quarter. Aggregates volume declined by 1%, while reported pricing increased by 3% and mix adjusted pricing by 2%. Costs were slightly higher in the quarter due to additional stripping costs in advance of future shipping growth and the timing of repairs. There were two items that affected the comparability of our fully diluted earnings per share in both the fourth quarter and full year 2020 as compared to those same periods in 2019. First, we recorded a one-time noncash pension settlement charge of $23 million or $0.13 per diluted share in connection with a voluntary lump sum distribution of benefits to certain fully vested plan participants. This liability management action will benefit future pension expense and funding requirements. And second, the tax rate for fourth quarter and full year 2020 was higher than in the comparable periods in 2019. Last year, the tax benefits associated with share-based compensation and R&D credits were greater than the same benefits in 2020. The resulting EPS effect was $0.04 per diluted share in the fourth quarter and $0.18 per diluted share for the full year. Moving on to the balance sheet, our financial position remains very strong, with a weighted average debt maturity of 13 years and a weighted average interest rate of 4%. Our net debt-to-EBITDA leverage ratio was 1.6x as of December 31, reflecting $1.2 billion of cash on hand. Approximately $500 million of this cash will be used to repay a debt maturity coming due next month. As Tom mentioned, our cash flow was robust in 2020 and contributed to year-over-year leverage reduction. Due to the uncertainty surrounding the pandemic and the resulting slowdown in economic activity, M&A was lighter than usual in 2020. We returned $206 million to shareholders through increased dividends and share repurchases. Our capital allocation priorities, which have helped to drive an improvement of 220 basis points in our return on invested capital over the last three years, remain unchanged. And now I'll turn the call back over to Tom for closing remarks.

Tom Hill, Chairman and CEO

Thanks, Suzanne. Before we go to Q&A, I would like to thank our investors, our customers, and our Vulcan family for their support during a challenging year. We will continue to operate Vulcan for the long-term, and our focus on building an even stronger and more profitable business remains steadfast. We know that our leading market positions and our aggregates-focused business are strengths, along with our strong balance sheet. When combined with the execution capabilities that we demonstrated in 2020, as well as solid long-term fundamentals, we are excited about our future. While there may be challenges in 2021, we have confidence in its potential. Now we'll be happy to take your questions.

Operator, Operator

Our first question comes from Trey Grooms of Stephens Inc.

Trey Grooms, Analyst

Tom, I appreciate your comments in the prepared remarks there on the end markets. But maybe if you could walk us through some of the puts and takes around the aggregates volume outlook for this year of a 2% decline to a 2% increase and maybe how you can get to the low end versus the high end of that guide?

Tom Hill, Chairman and CEO

I'll begin by taking a step back to reflect on the year 2021. Our guidance indicated a volume change ranging from a 2% decline to a 2% increase. The aggregate demand outlook is showing improvement and seems to brighten more with each passing week. We anticipate that shipments will continue to improve sequentially throughout 2021. Residential construction remains strong and is on the rise. Additionally, heavy nonresidential construction is performing well, which is significant due to its overall intensity. However, light nonresidential construction has faced challenges and is likely to impact us negatively in the first half of 2021, but we expect conditions to improve later in the year. On a positive note, highway lettings have significantly improved, especially in the fourth quarter, and we believe they will remain robust throughout 2021. All of this contributes to a more favorable outlook for demand as we progress through the year. That said, the demand environment has been quite unstable due to the pandemic. When establishing our guidance for 2021, we aimed to be open and considerate about two critical aspects, especially given that we know residential construction is strong and growing. The first focus is on nonresidential construction shipments. We understand that warehouses and distribution centers are expanding and are essential to overall growth. We think that nonresidential construction has stabilized following the decline experienced in 2020. However, the speed of its recovery remains uncertain. Another positive we are observing is the emergence of LNG projects on the Gulf Coast that were delayed last year. We will need to monitor how the rest of the nonresidential construction develops. The second focus is on the timing of highway work. Last year, lettings were minimal in Q3 as departments of transportation assessed their funding and budget situations. Once that situation stabilized, Q4 witnessed significant lettings, which we expect to carry on into Q1 and the remainder of 2021 as most departments of transportation have confirmed their budgets will remain stable or increase slightly. The key question is how quickly these lettings and projects are put into action. We believe the later half of the year will be busier. Overall, our outlook across all markets is improving week by week as the pandemic situation gets better, but there are still factors we need to keep an eye on.

Operator, Operator

Your next question comes from the line of Anthony Pettinari of Citi.

Anthony Pettinari, Analyst

Tom, could you talk about maybe expectations for replacement of the FAST Act in terms of potential timing, magnitude and when that could ultimately impact your volumes?

Tom Hill, Chairman and CEO

We believe that Congress will pass a new highway bill with increased funding in 2021. There are three main points to consider. First, the Biden administration prioritizes infrastructure following the COVID-19 relief efforts. Second, both the Chair of the EPW Committee, Senator Carper, and Congressman DeFazio, Chair of the House T&I Committee, have expressed their intention to draft bills before the August recess, aiming for passage before the FAST Act expires at the end of September. Lastly, highway funding is currently strong, with an expected increase of $12 billion year-over-year to $59 billion in 2021. This includes $2 billion from appropriations and $10 billion from COVID relief, starting from a higher funding baseline. Lawmakers are not looking to decrease highway funding, so we anticipate seeing the new bill before the year ends, ideally before the FAST Act expires, and at higher funding levels.

Anthony Pettinari, Analyst

Great. That's very helpful. And then just maybe switching gears. We're obviously seeing historically cold weather in the U.S. South and some middle parts of the country, as well as some power outages in states like Texas and some other places that you operate. Understanding the situation is very dynamic. I'm just wondering if you could help us understand what you're seeing on the ground and maybe potential impact if this could be more along with.

Tom Hill, Chairman and CEO

Well, it's snowing in Central Alabama this morning. However, it's the first quarter, which includes January, February, and March, typically the smallest quarter. Weather impacts are expected during this time. I would compare this situation to a week of heavy rain; it causes an interruption, but demand remains. This early part of the year may show some delays, but we will recover from it. I attribute this to typical first-quarter fluctuations and wouldn't draw significant conclusions from it.

Operator, Operator

Your next question comes from the line of Kathryn Thompson of Thompson Research Group.

Kathryn Thompson, Analyst

Really focusing a little bit more on the state DOT side, our state revenue report which focuses on many of your states are showing much better general fund collections. And you also noted in your prepared commentary of the better DOT trends. From our perspective, California, Georgia, Illinois are looking pretty good going into '22. I wanted to get your thoughts on that? And could you give color on these states, other states that are important for you, like Texas, Virginia, and Florida? And layering on top of that, what if any impact does the current administration's green focus have on how state DOTs are planning their future projects?

Tom Hill, Chairman and CEO

I'm sorry, I missed the last part, are planning what?

Kathryn Thompson, Analyst

Their future projects. So just with the Biden administration focus on green.

Tom Hill, Chairman and CEO

We've experienced a slight downturn in lettings during Q3, but they rebounded strongly in Q4. When looking at the last six months and the past three months' starts, we've seen an increase in double digits, which is promising. Given the improvements in state DOT budgets that you mentioned, we anticipate growth and enhancements in highway work as we progress through 2021, especially with fourth-quarter lettings impacting future shipments. Most of our 20 states will have increased funding and lettings for fiscal year 2021, notably in key states like Texas and California, as well as in our southeastern states, which are either up year-over-year or stable compared to 2019, which experienced significant growth. This signifies solid funding as we move beyond the pandemic disruptions. Additionally, we have $10 billion in COVID-19 relief funds allocated for highways, with over half expected to be utilized in states served by Vulcan, contributing to growth. While some of this funding will be used in 2021, it seems that the majority will be directed towards shipments in 2022, possibly extending into 2023. Overall, this is encouraging news, though we need to allow shipments to align with the improved lettings. We should see better performance in Q3 and Q4, possibly into Q1, and the funding is on an upward trend, with expectations that federal support will strengthen later in the year.

Operator, Operator

Your next question comes from the line of Nishu Sood of UBS.

Nishchal Sood, Analyst

So I wanted to ask first about the SG&A, the guidance for roughly $370 million. So returning to 2019 levels, can you just talk about some of the dynamics there? Are you assuming a full return to pre-pandemic cost structures? I'm sure there was some unusual reduction in expenses last year, or do you think there are some expenses that you're anticipating will be sustainably lower going forward?

Suzanne Wood, Senior Vice President and Chief Financial Officer

Yes. We are definitely not expecting a return to the prior cost structure. I mean, for the year, we reduced our SG&A costs by $11 million or 3%. And we talked about that previously. I mean, basically, we benefited from some cost reduction actions that we took right at the end of 2019 as well as some ongoing initiatives that we put in place during the pandemic in 2020 and certainly contributing to some of that certainly not all of it was lower T&E. And as we talked about in the third quarter, I mean that's really an area where this year, depending on what happens with vaccine distribution, et cetera, I mean, we may see a little bit of an increase, but we certainly are not going to return to the old normal there. We've learned a lot during this time, as have a lot of other companies about different, more efficient ways of communicating and accomplishing what we need to do. So we are always looking for ways to leverage SG&A. I suspect we will continue to find some more of those as we go through. The range that we set, if you look at the midpoint of the range in terms of SG&A as a percentage of revenue, that's 7.3%, just a tick under 7.4%. So we'll see where we get to in the year. But certainly, as we did last year, we continue to look for ways to reduce that, and that improvement really sort of accelerated through the year. And if we find that we're doing a little better-than-expected as we go through the year, then we'll update the guidance.

Nishchal Sood, Analyst

Got you. You had a very strong performance in 2020 with an increase in gross profit despite lower revenues, showing a continued increase from mid-single-digit to high single-digit growth. Building on that, could you explain the assumptions regarding a return to revenue growth? Some input costs, like liquid asphalt, might be a bit higher. Please walk us through the factors contributing to that mid to high single-digit growth in gross profits.

Tom Hill, Chairman and CEO

Sure. The mid-single-digit to high single-digit growth is primarily driven by asphalt, particularly due to enhanced volume from improved Department of Transportation projects. This is evident in states where we produce asphalt, such as Texas, California, Arizona, Alabama, and Tennessee. There are larger projects and increased work in these areas. Ready-mix has seen a slight increase as well, but it is more influenced by unit margins than by volume.

Operator, Operator

Your next question comes from the line of Jerry Revich of Goldman Sachs.

Jerry Revich, Analyst

I just wanted to ask, really impressive outlook for aggregates gross profit growth of $70 million on flat volumes, so essentially pricing dropping down to the bottom line. But I know you're going to be facing a headwind from diesel costs, labor inflation. So can you just talk about what's allowing you to offset those inflationary items of, call it, $50 million or $60 million, that still allows you to drop down the pricing straight to the bottom line?

Tom Hill, Chairman and CEO

I wouldn't say we're facing significant headwinds. I believe our challenges are less severe than that. Our guidance for unit margins and the cost aspects of those margins is fundamentally supported by our commitment to operational disciplines and processes. Looking back, we saw improvements in our aggregates operating efficiencies last year, including throughput, plant availability, and later efficiencies. However, yield and energy efficiencies remained mostly flat or slightly decreased, largely due to volatile production volumes and some product split issues related to yield, which can be traced back to the pandemic. As we move into 2021, we anticipate that rising diesel prices will create a headwind for us, costing roughly $10 million to $20 million. Nevertheless, we expect our unit cash cost for aggregates to remain stable or increase only slightly. This is backed by the operational strategic disciplines we've been enhancing over the last two years. I want to commend our operators for prioritizing safety and health during a challenging year and for their ongoing dedication to continuous improvement in the factors affecting our operating efficiencies that contribute to our cost savings. Their efforts are significantly impacting our unit margins.

Operator, Operator

Your next question comes from the line of Mike Dahl of RBC Capital Markets.

Michael Dahl, Analyst

A couple of things you just answered, especially on the cost. So that was helpful color. I guess just on the volume piece within aggs, you gave some good commentary on kind of end markets. But if we're thinking about cadence through the year, any comments around kind of cadence that we should be thinking about first half versus second half from a volume perspective in aggs within the guide?

Tom Hill, Chairman and CEO

Yes, I would expect second half will be heavily loaded. But I would also tell you, Mike, that I would think as we progress through the year kind of month in and month out, week in and week out, that we'll see improvements. And what you're seeing there is improvements of the overall view of the world. And so whether it's non-res projects, that people have confidence in to start back up or whether it's highway projects that are maturing because they've been let and now they're kicking in. I think you'll see that sequential improvement as we march through 2021.

Michael Dahl, Analyst

Okay. And just a quick follow-up on that sequential improvement. Obviously, there is still some seasonality, right? And I think there was a question earlier around the weather. But just to be clear, in terms of sequential improvement, that's not a comment that we should expect volumes up sequentially each quarter relative to 4Q, right?

Tom Hill, Chairman and CEO

No. What I'm comparing it to is the quarter in the prior year. So Q1, Q2 may be up a little more than Q2 last year versus what Q1 was and so forth.

Operator, Operator

Your next question comes from the line of Phil Ng of Jefferies.

Philip Ng, Analyst

I guess, a few of your peers on the heavy side have reported, actually, they're expecting low to mid single-digit growth in 2021. Appreciating the range you've provided is quite wide. But would have thought just based on your footprint and just your comments on resi and highway being up, you could see a little more growth. Are you baking in a little conservatism? And then when should we expect volumes to be up year-over-year? Is that more back half? Or could we see that happen as soon as 2Q, Tom?

Tom Hill, Chairman and CEO

I think the variation in our projections is primarily due to the timing of work. For highways, the situation has improved as lettings have increased. However, the speed at which these lettings translate into shipments remains uncertain. We’ve observed projects progressing rapidly, yet we’ve also seen delays over the past couple of years. Ideally, if the Department of Transportation is efficient, we can expect fewer delays, allowing work to ramp up more quickly than we might expect. Weather tends to be a factor in the first quarter, but typically, conditions improve in the second and third quarters, which we hope aligns with highway projects. On the non-residential side, we are witnessing strengths in both heavy and light sectors. While there are some challenges, we believe the situation has stabilized. The pace at which private investments regain confidence in the economy remains uncertain. As we move through the early part of 2021, each week shows slight improvements over the previous ones. Much of what we are experiencing is linked to the pandemic, and as conditions improve, private investment should follow suit. We remain optimistic that this recovery will occur faster than anticipated, but we are cautious and aim to plan thoughtfully based on the best visibility we have.

Philip Ng, Analyst

Got it. But Tom, to be clear, you're not seeing any incremental bottleneck per se. You're saying, hey, we're giving us some cushion here just because we just don't know how quickly these DOT projects show up, but you're not seeing any incremental bottlenecks per se?

Tom Hill, Chairman and CEO

I'm not quite sure I understand your question. I'm sorry.

Philip Ng, Analyst

My question is, you made the point that you had visibility in terms of bidding activity, but how quickly this stuff ramps up is unclear. My question is, are you seeing any incremental bottlenecks that could delay this? Or is it pretty steady like what you've seen for some time?

Tom Hill, Chairman and CEO

I don't see any significant delays. In fact, from the Department of Transportation's perspective, they have become more mature over the last couple of years and have increased their funding. They are well-equipped in terms of engineering, permitting, and starting work. Therefore, I don't identify any bottlenecks causing delays. It simply needs to progress through the process so that the contractors can begin their work.

Operator, Operator

Your next question comes from the line of Garik Shmois of Loop Capital.

Garik Shmois, Analyst

You mentioned some of the stripping cost expenses from the fourth quarter. Can you provide a specific amount for that? Does this suggest that some costs are being advanced from next year or this year? Additionally, how should we view the incremental gross margins overall for 2021?

Tom Hill, Chairman and CEO

Yes. Specifically, the stripping cost increased by about $4.5 million to $5 million. Overall, the cost was up about $0.30 per ton in the fourth quarter. As we entered the fourth quarter, considering the success we had for the entire year and improvements in the pandemic and market conditions, we made the decision to undertake some preventive maintenance projects on both fixed and mobile equipment. At the same time, we chose to reengage our larger stripping projects because we believe it’s important to look long term, beyond just one year, but rather 24 to 36 months out, considering these are mines where quick changes are not feasible. Given the improved visibility to demand factors, the smaller volume perspective in the fourth quarter, and our capacity and resources to complete the work, we felt it was the right time to initiate these projects.

Garik Shmois, Analyst

Great. And can you provide some color on how you're thinking about incremental margins in 2021?

Tom Hill, Chairman and CEO

Yes. Incremental margins in times like this at this inflection point, incremental margins are probably not as meaningful. And I would encourage you to really turn to unit margins as a better metric. And we saw mid-single-digit growth in 2020 even with volumes going down 3%. And we should see that kind of growth, mid-single-digit margin growth or growth in cash cost fund in 2021. And I think as you look at the factors of this and what we have in the plan, that's what we expect and continue on our march towards our $9 per ton of cash gross profit per ton regardless of what headwinds or tailwinds we see out there.

Suzanne Wood, Senior Vice President and Chief Financial Officer

Yes. And I would just add to that, Tom's right. I mean, when there's volatility, when volumes are flat and/or declining you just get really strange math when you try to do these numbers. If you look back at 2020, we had quarters where the flow-through number, if you calculated it, could be 40% or it could be 240%. And so as we said all through 2020, and until we get back to the point where volumes are fully positive and moving forward, we're just going to continue to talk about the drivers and the cash gross profit because I just think that's more meaningful than the flow-through numbers just because it's just volatile, and they're just strange numbers that really don't necessarily mean a lot.

Operator, Operator

Your next question comes from the line of Timna Tanners of Bank of America.

Timna Tanners, Analyst

I wanted to just probe a little bit the infrastructure opportunity. Just a little bit more detail on if we do see this new infrastructure focus manifests itself in kind of more green energy or green projects. Can you kind of give us more detail on how that can affect your product mix and what the opportunity can look like?

Tom Hill, Chairman and CEO

Yes. I think if you kind of just step back and really simplify this, Vulcan is going to participate in all new construction. You just have to. Our rock has to go in the foundations. It has to go to the infrastructure. So as we see new green construction, aggregates demand will benefit, particularly if it's green projects where there are aggregate-intensive construction projects, so things like water, sewer, alternative energy sources, all of which are going to be supported by this administration, those are pretty aggregate intensive and we'll benefit from that demand growth.

Timna Tanners, Analyst

Okay. Are there any that are more or less? I'm just trying to get a flavor of if we get an announcement, how to think about that?

Tom Hill, Chairman and CEO

The three areas I would highlight as being very aggregate-intensive are water, sewer, and wind energy. Additionally, when considering ports and airports, whether they are categorized as green or not, the standout sectors remain water, sewer, and wind energy.

Operator, Operator

Your next question comes from the line of Michael Dudas of Vertical Research Partners.

Michael Dudas, Analyst

I'm glad to see your guidance for capital spending this year. Just to clarify, are the growth capital projects you're allocating those that were deferred in 2020? Are there any new or expanded projects in there? Additionally, Tom, how do you see your business development team operating, and do you perceive 2021 as an opportunity, given your balance sheet, to explore potential opportunities for organic growth?

Suzanne Wood, Senior Vice President and Chief Financial Officer

Yes. Sure. I'll address the CapEx question first. You're right. These are internal growth projects that have a good return and are important to us that we did defer when the pandemic hit last spring. You saw that we spent a bit more money in the fourth quarter than initially guided on CapEx, and that related to the restarting of a couple of these growth projects that we just wanted to get the jump on before we went into the new year. But really, they are principally the projects that we had in place last year. We'd like to go ahead and finish those as soon as we can since we lost a year on them and start reaping the benefit of that. And you're right. I mean, with respect to M&A, as we've talked about many times, 2020 was just a year of inactivity because things sort of shut down as a result of the pandemic. We are beginning to see some deals come to market. We're beginning to see a bit of a pickup there. Certainly, given our position in the industry, if anything is coming to market, I mean, we're going to know about it, get contacted, and we're going to have a look at it, and we will continue to use the same disciplines that we've used in the past as we think about those deals. They've got to fit us strategically, they need to be returns enhancing, they need to be accretive. And look, when you look at our balance sheet, we have the firepower to do about anything we'd like to do. But we're going to be sensible about what we do and do deals that, as I said, fit the strategy and the returns criteria and don't lose all of the financial advantage that we've worked hard to create from a balance sheet position over the last few years.

Tom Hill, Chairman and CEO

I agree with what Suzanne mentioned. There was a complete absence of M&A activity in 2020, and we anticipated a significant rebound in 2021, which is indeed happening. As always, we will participate in these opportunities, focusing on deals that align with our strategy and understanding the markets and product lines that appeal to us. We will be selective, but we will also seek out those that are a good fit.

Operator, Operator

Your next question comes from the line of Courtney Yakavonis of Morgan Stanley.

Courtney Yakavonis, Analyst

Appreciate the comments you guys gave about how the first half versus second half cadence really depends on how those lettings turn into shipments. But can you give us any insight into how you're thinking about the cadence for pricing through the year? Will that be more consistent? Or is that also going to trend with how shipments trend? Also, any insight into pricing for your non-aggregates business?

Tom Hill, Chairman and CEO

Yes, good question. Fundamentally, the conditions for price increases are continuing to improve. The market's visibility to increasing demand really supports this. As we mentioned, residential is very healthy and continues to improve. Non-residential, while facing some challenges, has stabilized on the light side and is performing well on the heavy side. Additionally, we are beginning to see progress in LNG work, which is encouraging. The increase in lettings and improved visibility to lettings is positive because it indicates upcoming work. Overall, this is beneficial for pricing. I expect price increases to gain momentum as we move through 2021, particularly starting in Q2 when most of our fixed plant prices take effect. I anticipate acceleration throughout the year. While pricing is crucial, the most important aspect is unit margins. Alongside costs, we achieved nearly 6% growth in margins last year despite lower volumes. I am confident that we will see growth in both price and unit margins in 2021, irrespective of external volume influences.

Operator, Operator

Your next question comes from the line of David MacGregor of Longbow Research.

David MacGregor, Analyst

I am curious if you could discuss the regional disparities related to the 1% decline in fourth-quarter aggregate volumes and how you are considering these disparities in your shipment guidance for 2021.

Tom Hill, Chairman and CEO

In the fourth quarter, the Southeast emerged as a strong area for us, while Arizona and Illinois showed some weakness. Despite facing challenges from fires, the pandemic, and cement shortages in California, our performance there was on par with the previous year, indicating improvement. Looking ahead to volumes in 2021, we anticipate marked improvements across most of our markets, with the Southeast continuing to be a strong performer. Texas is also expected to perform well, and California is on the mend. Many of the difficulties faced last year in California have diminished, so we expect to see positive changes there as well.

David MacGregor, Analyst

Right. Maybe you can talk about kind of just to build on the pricing question prior to me. Just help us understand the nonres pricing situation right now. And is pricing up in that segment? Is it close to comparable with the average? How are you thinking about '21?

Tom Hill, Chairman and CEO

There's not much variation in pricing by market segment; it's more about geography. We're planning price increases across our entire footprint. It's quite challenging to differentiate pricing between residential or non-residential markets, as pricing is more related to product lines within geographic areas. However, it's fair to say that the price increases will be widespread geographically and across all product lines as we look ahead to 2021.

Operator, Operator

Your next question comes from the line of Josh Wilson of Raymond James.

Joshua Wilson, Analyst

I wanted to ask some cash questions as well. Given your plans for CapEx, and we know you're going to pay down the $500 million maturity, but you're still carrying quite a bit more cash on your balance sheet than you did pre-pandemic. So Suzanne, can you give us your thoughts on how much of a war chest you want to maintain versus when you might consider restarting share repurchases or something like that?

Suzanne Wood, Senior Vice President and Chief Financial Officer

Yes, that's a great question. As we entered the pandemic, we didn't intend to accumulate excess cash, as keeping it idle on the balance sheet isn't the best long-term strategy. However, due to the uncertainty we encountered, we decided to delay some capital expenditures, and having some cash on hand for safety seemed wise. The first use of the $1.2 billion will be to handle the $500 million maturity in March, which has been planned. Regarding our capital allocation priorities, we have clear strategies that have served us well. Beyond maintaining and enhancing our dividend, which is essential for us, our second priority is to invest more cash into growth, focusing on internal projects. As for mergers and acquisitions, we'll explore opportunities as they arise. However, growth projects and dividends take precedence over share repurchase. We'll need to observe how growth unfolds and evaluate our cash flow and other opportunities throughout the year before considering share repurchases.

Joshua Wilson, Analyst

And if I could follow-up, in terms of the CapEx guidance, is that pretty evenly spread through the year? Or is that back-end weighted? And for like 2022, is there some catch-up in '21 that makes it unusually higher? Or how should we think about the long-term CapEx rate?

Tom Hill, Chairman and CEO

First of all, there is some catch-up. If you go back to the beginning of 2020, our guidance then was to spend $475 million. However, we only spent $361 million in 2020 due to project delays. We are guiding towards a spending range of $450 million to $475 million. The goal is to catch up on operating capital expenditures and growth projects. While it's not a significant amount, we do plan to restart those growth projects. As for the timing throughout the year, I would say it's generally evenly distributed. However, spending tends to be higher during the hot summer months when we can bill for construction projects. The rest of the replacement capital is spent evenly, but growth capital will likely be a bit heavier in the second and third quarters.

Operator, Operator

Your next question comes from the line of Adam Thalhimer of Thompson Davis.

Adam Thalhimer, Analyst

A quick question for you, Tom. The states that you saw some weak volumes in Q4. So California, Arizona, Illinois. What's the outlook for those states specifically this year?

Tom Hill, Chairman and CEO

California's performance wasn't actually weak; it was flat, facing some significant challenges. It's important to note that California is a crucial market for us. The situation has already improved, with wildfires out and the cement shortage resolved. Demand is also picking up in 2021. Northern California is recovering, although it experienced the longest recovery due to severe restrictions, wildfires, and cement shortages in 2020. While we expect improvement this year, it may be gradual. Looking at the highway sector, SB1 lettings are set to increase by 14%, which will drive growth in aggregates and asphalt. In Southern California, we anticipate high single-digit to double-digit growth in both residential and non-residential sectors, particularly in warehouses and distribution centers. It's worth mentioning that despite facing significant demand challenges last year, including the pandemic and various shortages, we still achieved greater profitability in 2020 compared to 2019. This strong unit profitability positions us well for 2021 as we see improving volumes and margins. California will benefit from a lack of 2020's challenges. In Arizona, the residential sector is performing well, and highway work is solid, with growth supported by an increasing population. Illinois faces challenges, particularly in non-highway infrastructure, though highway and toll work might be stable. Overall, it remains a somewhat challenging market for us.

Operator, Operator

Our final question today will come from the line of Stanley Elliott of Stifel.

Stanley Elliott, Analyst

I have a question for you. Great job on the inventories. As we look at things today, we are on track to meet 2018 levels. You're indicating that the highway business might pick up later in the year. Do you expect any mix issues from a production perspective? Or do you think where you currently stand is a good indicator for the flow-through on that front?

Tom Hill, Chairman and CEO

Yes. I believe you will see some improvement. I mentioned earlier about the impact of mix on yields. With new construction, there is an increase in basin fines, which enhances yields. Although the price might be lower, it is necessary for improving overall unit margins. I expect the mix to be better in 2021 compared to 2020 due to an increase in new construction. Additionally, on the residential side, we are now developing new subdivisions rather than simply completing existing ones. This change is more aggregate intensive because it requires work on roads and utilities, and it also provides a better mix since there is substructure of basin fines under those roads and utilities and slabs. Therefore, I anticipate improvements that will positively affect margins as we move into 2021. So thank you for everyone for joining the call today. Thank you for your continuing support of Vulcan. I think we're proud of our 2020 performance. And we made good progress in 2020 to our longer-term goals. We believe we're going to take that momentum into 2021, and we look forward to sharing that news with you over the next few quarters. I hope all of you stay healthy, keep your family safe and healthy, and we look forward to talking to you soon. Thanks.

Suzanne Wood, Senior Vice President and Chief Financial Officer

Yes. Goodbye.

Operator, Operator

Thank you for participating in the Vulcan Materials Company Q4 2020 Earnings Conference Call. You may now disconnect.