Vulcan Materials Company (NYSE:VMC) Q4 2023 Earnings Call Transcript

Vulcan Materials Company (NYSE:VMC) Q4 2023 Earnings Call Transcript February 16, 2024

Vulcan Materials Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Please unmute your conference line Mr. Warren as we are not able to hear you.

Mark Warren: Thank you, operator. Let me start over operator and we will get started on the earnings call here. Thank you, operator. Good morning, everyone. With me today are Tom Hill, Chairman and CEO; and Mary Andrews Carlisle, Senior Vice President and Chief Financial Officer. Today’s call is accompanied by a press release and a supplemental presentation posted to our website, vulcanmaterials.com. Please be reminded that today’s discussion may include forward-looking statements, which are subject to risks and uncertainties. These risks, along with other legal disclaimers, are described in detail in the company’s earnings release and in other filings with the Securities and Exchange Commission. Reconciliations of non-GAAP financial measures are defined and reconciled in our earnings release, our supplemental presentation, and other SEC filings.

During the Q&A, we ask that you limit your participation to one question. This will allow us to accommodate as many as possible during our time we have available. And with that, I’ll turn the call over to Tom.

Tom Hill: Thank you, Mark, and thank all of you for your interest in Vulcan Materials company. Our teams delivered an outstanding year in 2023 and achieved two significant milestones. We generated over $2 billion in adjusted EBITDA and we surpassed $9 of aggregate cash gross profit per ton. We remained focused on continued growth, consistent execution and value creation for our shoulders. Our fourth quarter results again demonstrated the benefits of that focus and our aggregates-led business. We delivered a 27% year-over-year improvement in adjusted EBITDA. Margin expansion in each of our three primary product lines and another 90 basis points of sequential improvement in our trailing 12 months return on invested capital. In the Aggregates segment continued pricing momentum coupled with moderating inflationary costs resulted in $9.92 of aggregate cash gross profit per ton, a 21% improvement over prior year.

Our Vulcan Way of Selling evoke we have operating disciplines continued to contribute to our commercial and operational results. The fourth quarter performance marks 19 of 20 quarters over the past five years of sequential improvement in trailing 12 month aggregate unit profitability. A clear example of our consistent execution and the durability of our business. Aggregate shipments in the fourth quarter increased 2%, compared to a week prior year quarter that was impacted by abnormal wet and cold weather. Aggregates freight adjusted price improved 14% in the quarter, pushing the year-to-date average selling price to $19 per ton, $2.60 per ton increase over the prior year. Freight-adjusted unit cash cost of sales increased 7% compared to the prior year quarter.

This Marked a third consecutive quarter of trailing 12 month deceleration in year-over-year cost. As we move into 2024, we are determined to continue controlling what we can control most notably the expansion of our aggregates unit profitability. Price momentum remains healthy and we expect freight-adjusted aggregate price to grow from 10% to 12% for the full year. Inflationary cost pressures continue to moderate and we expect freight-adjusted unit cash cost to increase mid-single-digit in 2024 resulting in an attractive mid-teens improvement and cash gross profit per ton. On the demand side, we continue to expect a moderate decline in 2024 with aggregate shipments forecasted land within a range of flat to down 4% for the full year. Much like 2023, we see varying dynamics across different end uses.

So let me provide some commentary on each end use. I’ll start with residential, which has quickly entered recovery mode single-family housing permits and starts return to growth in the second half of last year and momentum is accelerating across our footprint. We expect the strength in single-family construction activity be offset by weaker multifamily starts as they pull back from historically high levels. Overall, the underlying fundamentals for residential construction activity remained firmly in place. Vulcan markets have low housing inventory levels and favorable demographics driving the need for additional housing. We continue to see distinct trends across various categories of private non-residential construction, which we anticipate will result in a year-over-year decline in shipments to this end market.

Moderating Warehouse starts from recent historical high levels are expected to be biggest headwind to private non-residential construction. Light commercial activity is expect to remain weak as uncertainty in the macro economy and higher interest rates persist. Manufacturing activity however remains a catalyst for non-residential shipments and is concentrated in Vulcan States. We continue to ship on numerous large manufacturing projects, which we offer customers a differentiated solution with our advantage footprint and logistics capabilities. On the public side, the main backdrop is developing as expected. We began seeing modest growth in the second half of ‘23 and project accelerating demand into 2024. Trailing 12-month highway starts have now surpassed $100 billion.

2024 state budgets are at record levels and strong upcoming ladings are anticipated in many Vulcan States. We continue to see growth in both highways and infrastructure activities for the next several years. Coupling our anticipated unit profitability growth was the demand backdrop I just described at midpoint of our guidance we project delivering a fourth consecutive year of double-digit growth in adjusted EBITDA. I’m very proud of our teams what they have and will achieve. Now, I’ll turn the call over to Mary Andrews for some additional commentary on our 2023 performance and some more details around our 2024 outlook. Andrews?

Mary Andrews Carlisle: Thanks, Tom and good morning. Our strong operational and strategic execution in 2023 set us up well to continue our long track record of growth through disciplined capital allocation and consistent execution. Over the last 10 years, we increased our revenues at an annual growth rate of 11%; grew our adjusted EBITDA at an annual growth rate of 16% percent; strengthened our free cash flow generation at an annual growth rate of 23%; and improved our return on invested capital by 1000 basis points. During 2023, we generated $1.5 billion of operating cash flows and received proceeds of over $700 million for the sales of non-core businesses and real estate. Having followed our long-standing capital allocation priorities of reinvesting in our franchise, investing in attractive growth opportunity and returning cash to shareholders through both dividends and share repurchases, we ended the year with over $900 million dollars of cash on hand and net debt to adjusted EBITDA leverage of 1.5 times.

Our balance sheet is a source of strength and provides us considerable financial flexibility to continue to grow. We will remain disciplined in optimizing our overall portfolio of assets. As evidenced by the fourth quarter disposition of our Texas Concrete business and sale of excess real estate in Northern Virginia. Our return on invested capital improved by 280 basis points over the last 12 months and we are focused on continued improvement. We also remain focused on continuing to drive value for the business through disciplined investments and SAG expenses that support our organic growth initiatives and innovation through technology. SAG expenses as a percentage of revenue remained at 7% in 2023. Overall, we expanded our adjusted EBITDA margin by 360 basis points and project further expansion in 2024.

Let me provide a few additional details around the 2024 guidance to supplement the demand, pricing, and Aggregates unit profitability outlook Tom highlighted earlier. We expect our downstream businesses to contribute approximately $275 million in cash gross profit reflective of asphalt earnings consistent with 2023 contributing approximately 70% of the total and concrete earnings adjusted for the divestiture of our Texas Concrete assets contributing approximately 30% to total. We expect SAG expenses between $550 million and $560 million, a modest low single-digit increase year-over-year. We project depreciation, depletion, amortization and accretion expenses of approximately $610 million, interest expense of approximately $155 million and an effective tax rate between 22% and 23%.

In 2024, we plan to reinvest in our franchise through operating and maintenance and internal growth capital expenditures of between $625 million and 675 million. We expect another year of attractive growth in adjusted EBITDA and strong cash generation in 2024, despite a shift in construction demand environment. We forecast adjusted EBITDA of between $2.15 billion and $2.3 billion for the full year. At the midpoint, this represent an 11% percent organic improvement over 2023. I’ll now turn the call back over to Tom to provide a few closing remarks.

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

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Q&A Session

Operator: [Operator Instructions] And we’ll take our first question from the line of Trey Grooms with Stephens. Please go ahead.

Trey Grooms: Good morning, Tom and Mary Andrews.

Tom Hills: Good morning, Trey.

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

Tom Hills: Trey, I mean, we saw a fundamental change in our markets in 2022. We realized in March of 2022 that we had a worldwide inflation and so we took the lead in 2022 and pulled mid-year prices forward to May 1st that year in every market. And then followed that up with we pooled all the 2023 price increases to January 1 where some of it been April 1. So I think today the fundamentals for pricing is very, very good and I think embedded in those fundamentals are three crew changes that we are seeing in our markets. One, there is more disciplined in house price increases, two, our aggregates price increases are now January not April 1, and third, our mid-year price increase conversations are expected in all markets. So we are in a really good place in pricing – price good place as we’ve been historically and you couple that with the tools and disciplines of Vulcan with selling I think our future looks very good.

Mary Andrews Carlisle: Yeah, Trey, I’ll just add that headline pricing is one thing but as we always like [Audio Gap]

Operator: With Stifel. Please go ahead.

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

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

Stanley Elliott : Perfect. That’s great. Thanks so much and best of luck.

Tom Hill: Thank you.

Mary Andrews Carlisle: Thanks.

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

Kathryn Thompson: Hi, thank you for taking my question today. Two part on the – just some more color on the volume guide bridge and what you’re seeing from an end market perspective? And how you had it in prepared commentary, but maybe a little bit more color just in terms of growth rates by end market and in previous calls, you were able to give some quantification of what mega projects are of your total expected sales. Just a clarification on the earlier question on pricing. Is – does the pricing guidance – does that include the thought for mid-year price increases? Or is it just carry over from previous pricing actions? Or is it a combination of both? Thank you.

Tom Hill: Yeah, I’ll take the mid-year first. Well, there’s not much in there for me mega price increases. Now we will or have announced mid-year price increases and started those conversations in April. So I’m not saying there’s no – it’s not in the plan, but we’ll have – we’ll, for sure have the conversations very little up to the plan. On volume, as we talked about in November, we’re predicting a modest decline in demand for ‘24. We see strength on the public side and kind of a mix bag of strengths and weaknesses on the private side and I’ll go through those. Highways, steady growth wins race and we will continue to see that ramp up and we feel good about it. Lots of funding there and start to be put to work. Non-highway infrastructure will see solid growth and non-res most sectors I think will be challenged that the traditional non-res warehouses distribution.

And as we talked about that’s partially offset in our footprint with the large industrial projects and I think we have some 10 of those and we can we talk about that later. But they’re meaningful. While single-family, what we saw was challenged in ‘23, it’ll be a strength for us in ‘24. It’s back into growth mode and recovering rapidly. At the same time I think multifamily, as everybody knows will be challenged. So, as we said we call volumes flat to negative 4 now, January February where as everybody knows where both are either a freeze out or washout or both. So, we’re seeing a slow start that being said it’s still on January February. So, I think we feel very good about full year guidance. So, probably a modest decline in volumes for ’24.

That said we should still see healthy double-digit earnings growth.

Mary Andrews Carlisle: Yeah, Catherine, I’ll give you a couple of other things to think about regarding Q1 volume that may be helpful context. Last February was seasonally adjusted the strongest single month of shipments we had in 2023 and the strongest February in at least the last 10 years and also this year, simply given the way the calendar falls we will have approximately 10% fewer shipping days in March, which clearly we all know is the most important month of the quarter. Now the good news there is that’s just timing what we take those days back up in April, but from a Q1 perspective, it will be impactful. So, overall volumes will be challenged in the first quarter. Pricing will be strong and it should fall within our guidance range.

And I would expect that paired with the probable volume impacts to cause I’d expect maybe mid-to-high-single-digit growth and cash gross profit per ton in the first quarter still with the very attractive mid-teens improvement for the full year.

Kathryn Thompson: Thank you so much.

Operator: And we’ll take our next question from the line of Anthony Pettinari with Citi.

Anthony Pettinari: Good morning. Hey, I’m wondering if you could talk a little bit more about capital allocation. And you we’ve seen a number of I guess very large deals in construction materials over the past few months. Just wondering if you talked about potential attractiveness of M&A and what the pipeline might look like from your perspective in 2024?

Tom Hill: Yeah, sure. Anthony the balance sheet is really well positioned to fund all of our capital allocation priorities in 2024, particularly M&A growth. As we mentioned, we ended the year with over $900 million of cash and net leverage of one and a half times. So, we’ll think about capital allocation in 2024, very consistently as we have in the past that there is a very attractive M&A pipeline and that’s what we’re focused on in terms of being able to deploy the capacity that we have and I’ll let Tom, do you want to make any more comments on those pipelines?

Tom Hill: Sure. Well, I think if I have to go back and look at it, ours is a three pronged strategy to growth and it’s very effective and has provided us with double-digit revenues and EBITDA for the last three years and will again in 2024. Those three are number one, organic growth in what we are selling what we are operating which you see us do. And, we’ve been very consistent we were able to grow unit margins for consistently for five years. Second is as you talked about is M&A. I think M&A while it was pretty quiet in ‘23 with a lot of unknowns out there. I think you’ll be very busy in 2024. And we expect us to bring some deals to the finish line. And then I would supplementing that M&A is Greenfield growth, which is picking up that we have a handful of those projects beginning this year.

It will take a little bit of time to get through that and we’ll get a little closer to it. We’ll talk about some of those, but I feel really good about growth strategy and M&A I think would be a much bigger part of it in ‘24 than what we saw in ‘23.

Anthony Pettinari: Okay. That’s helpful. I’ll turn it over.

Tom Hill: Thank you.

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

Tom Hill: Hey, Jerry.

Mary Andrews Carlisle: Good morning.

Jerry Revich : Hi, Tom, Mary Andrews. Good morning. I want to ask you in the fourth quarter, your margin performance was really outstanding sequentially full point ahead of normal seasonality. So it looks like costs are already starting to come down for you folks. Can you just talk about what improved in the quarter? And is there an opportunity if some of those improvements continue for us to be at the lower end of the growth outlook that you outlined in the prepared remarks, Tom?

Tom Hill: Well, I think what you’re seeing is as I said early two things you are moderating inflationary pressures of the comparisons get a lot easier and I think we’ll continue to see that. But also if you look at our operating parameters and you remember we put the automation and the insights of the technology including the top-100 plants over last year, you start to see those things go to work which helps us with throughput and throughput of critical sizes. So, I think that as we march through 2024, I think our costs should improve sequentially as we go through the quarter now, we will whether it can have a hiccup on that or one two big outages can have a hit on that. But it’s overall, I would expect our cost to continue to improve over the next four, five quarters.

Jerry Revich : Excellent. Thank you. Thank you.

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

Tom Hill: Good morning, Phil.

Mary Andrews Carlisle: Good morning.

Philip Ng: Hey guys. Congrats on a really strong quarter. It sounds like Tom, last year your pricing philosophy I think was to go big to start the year on average pricing and take a more measured approach on mid-years. If I’ve heard you correctly, If I heard you correctly you’re at least having a conversation on that year’s ready. So just give a little color to how you’re thinking about your approach and philosophy this year? And in a more moderating deflate inflationary environment do you think double-digit pricing is kind of a new norm going forward? Thanks.

Tom Hill: Well, as I said, I think we’re in a very, very good place from a pricing perspective based on the fundamentals that we’re seeing and also the Vulcan Way of Selling those tools help us dramatically and did work. I think that we went we went early as we have and I think that will continue to January 1 which helps obviously helps. We think we were appropriate on our January 1 prices. We announced mid-years in a few markets already. I think over the next probably the next beginning – end of the quarter we will probably announce it mid years for the other markets, and obviously you spend April, May and June having those conversations, so that you’re ready for July/August for mid-year price increase. So I think that what those – the fact that it’s all in January and the fact that everybody expects to have conversations about mid-year price increases, I think is very important for our markets.

Philip Ng: And then double-digit pricing there I like the new norm going forward?

Tom Hill: I feel good about pricing.

Philip Ng: Okay. All right. I appreciate the color. Thank you.

Tom Hill: You bet.

Operator: And we’ll take our next call or our next question from the line of Michael Feniger with Bank of America. Please go ahead.

Michael Feniger: Yeah, thank you for taking my questions. Tom, to follow up on just the pricing can you just – the Cadence of pricing for this year you gave great color on the cadence of how you think cost plays out. Just on pricing, do you think about the end of the year? Are you still kind of in that 10% to 12% range? Are you below it because you start strong. Just kind of how we should think about that?

Tom Hill: No, I think I think the pricing will be pretty consistent through the year in that 10 to 12 range. I don’t see a big changes in that. Now you also got is – in the third quarter you got to see what happens with mid years. And we’ll have that conversation after we get past July 1. I’ll give you a lot more clarity because we’ll just have a clear picture of it. And every market is going to be different that in their ways are. But I would call it pretty consistent low-double-digit pricing throughout the year.

Michael Feniger: Great. And Tom just to follow-up, on you gave great color on kind of the volume, your shipment growth with the different segments. Just when we think of Upstate fast-forward to 2025 and obviously, we’ll see how to 2024 plays out. But if you – in a similar range in 2025 with the volume kind of guidance, and it’s underpinned by growth in infrastructure, can you just help us understand how that informs pricing relative to maybe if it’s being driven by residential or private construction markets how – having it underpinned by infrastructure. So that’s kind of maybe shifts the pricing conversations?

Tom Hill: I will tell you that my philosophy is all demand growth are good things I don’t see it where it comes from I like it. But the pricing between public and private, there’s really not a big difference there. I think that the one thing I would call out, the good thing about public demand is it’s very visible and it’s for sure. I mean, on the private side people could hold projects or delay them, but you know public growth is going to go to work. It’s not a matter if it to twin and so that visibility to growing demand on the public side is really good for pricing. But a ton of concrete rock for public or private is probably the same number. The difference is the public people know it’s there. They know it’s coming and they can take a risk on value and price.