Vulcan Materials Company (VMC) — Q2 2024 Earnings Call Transcript

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

Thank you, Mark, and thank all of you for your interest in Vulcan Materials. Our results demonstrate how our teams have successfully navigated a challenging first half of the year. Unfavorable weather conditions in many key markets impacted our shipments and operating efficiencies. Our second quarter performance reinforces our consistent execution, the durable characteristics of our aggregates-led business, and the benefits of our continued focus on both enhancing our core and expanding our reach. Even in the face of lower aggregate shipments, and weather-driven inefficiencies, our teams delivered a seventh consecutive quarter of double-digit year-over-year improvement in aggregates unit profitability. In our trailing 12 months, average cash gross profit per ton has reached $9.96 per ton, marking consistent progress towards our $11 to $12 target. These achievements exhibit the benefits of our commitment to enhancing our core through our Vulcan selling and Vulcan way of operating disciplines. But our strategy is two-pronged, and we are also focused on expanding our reach. During the second quarter, we closed two strategic bolt-on acquisitions. These acquisitions enhance both our aggregate production and distribution capabilities, as well as our downstream asphalt business in Alabama and Texas, two of our top 10 states. In the quarter, we generated $603 million of adjusted EBITDA and expanded our adjusted EBITDA margin by 170 basis points despite 5% lower area shipments. Shipments in the quarter were negatively impacted by a significant number of rain days in many markets, particularly in May across 70% of our geographies, and in select key markets in April and June. The pricing environment remained positive and freight-adjusted average selling prices improved 12% or $2.29 per ton versus the prior year. Freight-adjusted unit cash cost of sales increased 13% or $1.13 per ton. Most importantly, cash gross profit per ton improved over $1 per ton or 12%. We remain consistently focused on improving unit profitability on every ton we sell to maximize earnings in any market environment. Let me share with you my thoughts on the current demand backdrop by discussing each end use. Single-family starts are again recovering in the second half of last year and continue to point to growth in 2024, albeit at a slightly lower level than we had initially anticipated. The timing of starts converting to shipments, continued affordability issues, and persistent elevated interest rates are impacting both the pace of recovery and the likelihood of single-family growth fully offsetting weaker multifamily activity. Looking ahead, the underlying fundamentals of population growth and low inventories in Vulcan markets continue to support long-term growth in residential construction. In private non-residential construction, the landscape continues to vary across categories, but is unfolding largely as we anticipated for 2024. Warehouse activity is the biggest headwind with some positive momentum in manufacturing activity in data centers. Light commercial activity is still relatively weak, but over time, we expect it to follow the positive trends in single-family housing and benefit from lower interest rates. On the public side, we continue to expect growth in 2024 as two consecutive years of record growth in contract awards flow into projects and aggregate shipments. The IIJ funding is benefiting both highways and other public infrastructure activity. Given the demand backdrop just discussed and the weather-impacted first half shipments being down 6%, we now expect aggregate shipments to decline between 4% and 7% for the full year. Combined with a solid pricing environment and double-digit profitability improvement, we still anticipate same-store adjusted EBITDA growth, margin expansion, and attractive free cash flow generation in 2024. Now I'll turn the call over to Mary Andrews for some additional commentary on our results and revised outlook.

Thanks, Tom, and good morning. The strong fundamentals of our aggregates-led business and our consistent execution continued to deliver attractive cash generation, which, coupled with disciplined capital allocation, is driving our returns on invested capital higher over time. During the second quarter, we deployed capital to reinvest in and expand our existing franchise to grow our business through acquisitions and to return cash to shareholders. Capital expenditures for maintenance and growth projects were $195 million in the quarter and $298 million on a year-to-date basis. We continue to expect to spend between $625 million and $675 million for the full year. During the quarter, we also allocated $181 million to the strategic bolt-on acquisition Tom mentioned earlier and returned $111 million to shareholders through our quarterly dividend and common stock repurchases. At June 30, our return on invested capital has improved 160 basis points over the last 12 months, with a 10% improvement in adjusted EBITDA generated on flat average invested capital. And with net debt-to-adjusted EBITDA leverage of 1.7 times at quarter-end, we have considerable investment capacity within our target leverage range of 2 to 2.5 times to capitalize on attractive acquisition opportunities that will drive long-term value creation for shareholders. SAG expenses in the quarter were 6.7% of revenue and year-to-date have increased less than 3% over the prior year. We are focused on both disciplined cost control and, in the first six months and lower shipments, we now expect unit freight adjusted cash cost of sales to increase high single digits compared to the prior year. We continue to expect aggregates prices to increase 10% to 12% for the year, driving another year of double-digit improvement in cash gross profit per ton. We anticipate that the strong unit profitability improvement, coupled with the lower volume expectations, will generate adjusted EBITDA between $2 billion and $2.15 billion for the full year. I'll now turn the call back over to Tom to provide a few closing remarks.

Thank you, Mary Andrews. I want to conclude by thanking our talented Vulcan team for their commitments to each other and to excellence. As they work each day to operate safely and deliver value for our customers and our shareholders. I am confident that we have the right, two-pronged strategy of enhancing our core and expanding our reach. And I'm excited about the runway ahead of us on both fronts to drive attractive growth for Vulcan Materials. And now Mary Andrews and I will be happy to take your questions.

Good morning, everyone. Thank you all for taking the question. Tom, could you talk a little bit more about just the overall demand environment? I understand there's been pretty tough operating conditions kind of on a year-to-date basis, and probably even into July a little bit. Any sort of help in how we should think about the balance of the year, kind of where you see momentum and things like that?

Yes, good morning, Stanley. I think all of the data and the leading indicators would support demand as we originally expected back in February, with the exception of single-family demand growth. The growth in single-family is a little slower than we would have expected maybe four or five months ago, and we'll talk about that a little bit later. But as we look at the current volume guidance, as you said, we had a very wet July that influenced those numbers and will definitely have a negative impact on Q3. Where we ultimately fall in that volume range of a negative 4% to negative 7% will really come down to the number of dry shipping days we have left in the last five months of the year. So I'd frame it as underlying demand as expected, except a little bit slower growth in single-family. Weather has not been our friend. We'll see how the second half goes. I think the good news is we continue to expand unit margins by double digits. And I think our folks have taken a difficult hand in the first half and turned it into a winner, and I'm proud of their performance.

Great, guys, thanks so much. And Beth, welcome to the backyard.

Thank you.

Hi, thanks. Just wanted to follow up on that point with respect to the second half volume outlook. I was wondering if you could go into maybe a little bit more detail on how to think about the pent-up demand opportunity. I think you did speak to weather influencing you can get all the projects done. But is this the case of projects being delayed and not canceled, and just maybe a little bit more color on how you expect the second half of the year to play out from demand? Thanks.

Sure. I think that if you kind of look at what's happened and take that into the second half, your point of demand doesn't go away. It's absolutely spot on. And you've probably got some pent-up demand there, and it comes down to what the weather does to us. I think it's - looking back, if you'll explain the future that we were really impacted by rain in the first half, and I'll give you a couple of examples. In Q2, Nashville had 30 rain days, and it dramatically impacted shipments. Look, we lost half of our shipping days in that Middle Tennessee market, DFW had double the amount of rainfall. So we just have dried out and couldn't ship. The flip side of that is, you saw Atlanta weather pretty much normal and shipments were as expected. L.A. had weather normal and shipments were right on where we had planned. So weather has played a role, it will impact Q3 as July was very wet. And now we're experiencing a tropical storm on the East Coast. So a tough start to the third quarter. But as you said, the demand is still there. It's as we thought it was going to be. So these are temporary events and it doesn't go away. So we get dry days, we're shipping just fine.

Great, thank you.

Operator, is there another question?

Good morning.

Good morning.

You raised the guide for cost inflation from mid-single digit to high single-digit. Should we think about that incremental cost inflation as essentially all volume deleverage? And are there any other kind of puts or takes, either good or bad, that we should think about for the second half on costs, whether it's diesel or other items?

Yes, I appreciate your observation regarding the volume impact. It certainly affects us. You noticed our first half was 11%. I would also mention that inflation was as we anticipated. The weather made a significant difference, and we shouldn't underestimate the efficiency challenges of handling wet, sticky material compared to dry rock. We believe we can recoup some of those costs in the second half, aiming to return to high single-digit growth for the full year, instead of the current 11%. All of this should enable us to maintain our double-digit unit margin growth.

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

Thank you.

Hi Tom, Mary Andrews, Mark. Good morning. Pricing for aggregates was really strong in the quarter, up nicely sequentially. Can you just talk about the confidence around mid-year that you focused on price guidance did not assume major pricing? It feels like you've got momentum just from contracts rolling. So I'm wondering if you could just give us an update on how you expect the tailwind just from natural contracts rolling to play out in the third quarter, compared to last year and then the incremental opportunity from mid-year?

Yes, I'll give you some color on price. Let Mary just talk about sequential. The pricing momentum continues in all markets and all product lines. We had a successful mid-year pricing campaign. I think both by customer and by market, I would call it as we thought it was going to be as anticipated. But remember, as we explained, those mid-year prices will have a small impact on '24, but a much bigger impact on '25. So we've already begun to set the solid foundation for pricing for '25. As always, we would ultimately guide you the unit margin growth which was 12% despite weather and volumes down 5%. So I'm proud of our operators' hard work. Look, that kind of margin growth is tough to begin with. It's particularly difficult to earn when it's raining.

And Jerry, in terms of sequential growth, candidly, I would have expected a bit less sequential improvement in Q2 than what we realized, really due to mix and timing. We still expect some modest additional sequential improvement in the back half given the impact of the mid-year that Tom just discussed, paired with a higher jumping-off point from Q2 where we already captured some of the expected sequential improvement. I guess, as Tom said to me, what's really important is the solid underlying price environment, our continued expectation of realizing price increases in that 10% to 12% range for the full year. And of course, ultimately, what you can take to the bottom line, like Tom just highlighted.

Thank you.

Thank you.

Hi, good morning, and thank you for taking my question today. Please provide some good detail on projects on your work. It's not necessarily lost, but it's delayed. And you've also given some good color just on pricing and continuing that double-digit pace, perhaps pointing to shrink a little bit more on the pricing question because it's a particular focus given lighter volumes even though those volumes are delayed. What type of impact are you seeing from product mix and geographic mix, and really not as much looking backwards, but looking forward, in part because our channel checks are showing that you're starting to see a ramp-up of some larger infrastructure projects that were taking a while to build up. So any color that you can talk about in terms of product mix, geographic mix, and how that may impact pricing on a go-forward basis? Thank you.

Yes. So I think you're correct with the ramp-up of infrastructure and public works. You'll see more base in fines, which is a little bit lower prices. That being said, it's also lower cost, and you need that mix to balance your plants, otherwise you get out of whack. I think that being said, while we'll have some impact on price, I don't expect it to have an impact on your margins. So while it's maybe not as material, it may not be as high as price as a concrete outer asphalt rock, it also comes with a cost benefit. So I would expect us to continue our present pace of elevated unit margins regardless of mix.

Okay, great. Thank you very much.

Thank you.

Hi, thanks. Good morning. Thanks for taking my question. Just to deliberate point, but I just wanted to maybe touch base on the price discussion a little bit more. To the extent that these midyears that you've done, give you any kind of insight into preliminary views in 2025. Can you just talk about what kind of the shape of that is in terms of kind of the magnitude? Are we still talking about price increases next year in the kind of high single digits, low double digits range? And kind of along with that, just any sense of kind of customer sensitivity and kind of competitive discipline around price increases would be helpful.

I think we feel like the price run continues. We feel good about what we're bidding today. As I said, those mid-years, while they have a little bit of impact on the second half of this year, they're going to have a much bigger impact in the first half of next year. So that leads us to also helps you when you saw having your price increase conversations in October for the beginning of the year. I think it's too early to make a call on the level of pricing for 2025. But as I said, I think the conversations that happened for mid-year price increases are encouraging for 2025.

That's helpful. And if I may just kind of clarify on the pricing, just a quick one. But 10% to 12%, I thought that was kind of the guidance that you had laid out before mid-year. So what kind of change so that it now includes mid-year? Can you just help us understand that?

Well, I think, as I said, the mid-year help a little bit, but it doesn't get you out of that 10% to 12%. What it does is it sets you up for 2025.

Got it. Thank you.

Thank you.

Hi Tom, Mary Andrews. Thanks for taking my question. It just as maybe just to help clarify kind of the cadence because it sounds like even with July, understandably some things are moved around with whether it's not like August. It's probably been fantastic either. But when you're thinking about those puts and takes from the volume and also some of the price cost dynamics, can you put a finer point on within your guide, how you'd expect 3Q versus 4Q to play out?

Yes. First of all, the third quarter has already faced challenges. July was very rainy, especially in our southeastern markets, and now there's a tropical storm affecting the East Coast. So, Q3 is starting off a bit rough. However, the underlying demand fundamentals remain strong, with pent-up demand present. When the weather improves, we expect to ship well. Asphalt producers have indicated we need to be prepared for the dry spells to come. The fourth quarter is always difficult to predict due to weather influences, and we hope the season will extend. A year with significant moisture may slightly extend the season, potentially providing a boost in Q4 as people aim to complete projects. It really depends on the number of shipping days available and their timing. So, while July and this week with the storm have been rocky starts, demand is there, and when the sun shines, we are able to ship effectively, as I've mentioned with L.A. and Atlanta.

Yes. And Mike, one other thing to keep in mind as you think about third quarter versus fourth quarter and the challenging start, Tom just mentioned from a weather perspective, is that strictly from a seasonal basis, we have relatively easier comps in the fourth quarter than we do in the third quarter. So if you think about where those volumes fall, that's something else to keep in mind as to how the back half might play out.

Got it, thank you.

Thank you.

Hi Tom. Good morning. So you guys have closed a few bolt-on acquisitions this year. But if you could maybe talk about the pipeline there. Are you seeing any more or less opportunities? And any potential for larger transactions out there?

Yes. As you said, you saw us close on two smaller, I call it very strategic bolt-on acquisitions, one in North Alabama and one in Texas. I would tell you that we'll close on some more meaningful acquisitions in the near future and which we'll share with you when the time is right. But it's a busy season for acquisitions.

Good to hear, thank you.

Thank you.

This is Jon Allen on for David. I was just hoping you could provide some detail on what you're seeing for 2025 DOT budgets in key states for Vulcan and maybe what's playing into your pricing outlook for 2025 and the ability to sustain double-digit pricing growth?

Yes, as we examine the current public demand and the highway market, we're observing the impact of the IIJA and state and local funds on highway projects. The overall growth in demand aligns with our expectations, showing steady public demand growth. We have significantly increased funding in key states, with Tennessee, Georgia, and Florida all raising their budgets. Georgia has increased by $1.5 billion, Tennessee by $3 billion, and Florida by $4 billion. We anticipate this funding will flow into projects in 2025, 2026, and 2027. Six of our larger states are reaching record funding levels, and Texas and California are also at all-time highs. All of this suggests growth in public demand over the next three to four years, indicating that a slow and steady approach will be successful.

Great, thanks.

Thank you.

Hi, good morning, everyone. I thought it was a solid quarter. Like Trey, I’m also interested in M&A. It seems like every international materials company is looking to increase their presence in the U.S. Are you noticing more competition for deals?

I don't think much changed. The same bidders are out there. There's a lot going on. You also got to remember, you got pent-up demand from nothing going on last year as everybody was worried about a recession. So we'll get a look at all those opportunities. We pass on a lot of them. I think it comes down to M&A, it's about discipline, what markets do you want to be in, what synergies do you have, what are you willing to pay for it and make sure you can get a return on what you're paying, and then once you buy it, integrate it accurately and rapidly.

Sounds good. Thank you, Tom.

Thank you.

Hi guys. I guess, Tom, just a little more perspective on this midyear increase. How did it kind of shake out relative to perhaps last year, appreciating a lot of this is really seasonal. So help us kind of conceptualize perhaps how much of a carrier or price lift you could see next year? And the demand...

From a macro perspective, I would say it’s quite similar. However, this can vary as we have different customers, product lines, and geographical factors that may have changed compared to last year. Overall, I would characterize it as very similar.

Could you provide some insight on what to expect regarding carrier pricing next year? From what I've heard, the underlying demand is still quite strong when weather conditions are normal, suggesting some of this demand might be pushed to 2025. If that happens, do you anticipate being able to grow volumes next year, considering the trends over the past few years?

I think it's early to call. I think you continue to see growth in the public side. I think that we do know just because the funds are there and they're starting to flow into lettings. On the private side, I feel good that single-family will continue to grow. It's a little slower than what we anticipated. And it has some catch-up to do with lead indicators. And obviously, interest rates will help that. But we just don't have the inventory of houses in these markets to keep up with population growth. So I would expect the residential to kind of slow and steady growth. Also, I think the big question will be non-res. We've taken the hit on warehouses and distribution centers. The manufacturing is good, but interest rates will help that sector also. It's a matter of timing, I believe.

Thank you. Appreciate the call.

Sure.

Good morning, gentlemen. Mary Andrews.

Good morning.

Tom, let me follow-up your final remark there to Phil. On the large private heavy non-res opportunities, can you talk about what your backlog looks like, how it looks on bidding relative to what it's been in the last six to 12 months? Are we seeing an acceleration of some of the larger type projects that are in your areas that you can certainly serve into over the next couple of years? Is that potentially a tailwind as we look through the second half of this year weather permitting in 2025?

Yes. It is definitely a tailwind. It is helping us with backlog. A number of those big projects and big manufacturing projects. We're shipping on them now when the rain fits. And I think that will help us in '25. And I think there's more behind that. You've got 12 projects in our footprint, you've got a number of data centers, and you continue to see growth in the reshoring of manufacturing facilities. So it is a tailwind for us. I don't think it's a big enough tailwind yet to take on what happened with warehouses and distribution centers, but it's definitely helpful.

Thank you.

Operator, do you have another question?

Hi, everyone. Thank you for taking my question. Tom, regarding the manufacturing sector, your backlog pipeline suggests it's been a positive factor for private non-residential projects. Do you anticipate this stability continuing into 2025? Is there any concern that some of these manufacturing projects may be tapering off, leaving insufficient new projects to replace them? Additionally, I noticed your comments on public infrastructure, particularly the impressive growth in highway contract awards that have benefited infrastructure this year. There have been some mixed signals recently in this area. Do you believe this is just a temporary slowdown, and will we see more funding that supports this trend into 2025 and 2026?

Yes. I'll take the highway on first. I think that's just a matter of timing. The fund is sort of too big there. You got a lot more coming, as I talked about, the additional state funding and IIJA. On the public side, I think that I wouldn't get too worked up about a moment in time. As I said, I think slow and steady wins the race there, and I think it will be slow and steady for the next three or four years. So I think that's solid. There will be some hotter moments and cooler moments, but overall, I think it will continue steady growth. On the manufacturing, we've got a healthy backlog, I think, and we're shipping on some of that backlog, but I don't see a big dip in the pipeline there. I think we continue to have other projects come up. And I think that's probably a strong point, particularly for Vulcan with the footprint we have. In closing, I'd like to thank you for your time and interest in Vulcan Materials Company. Our thoughts go out to our employees, our neighbors who have been or will be in the path of the storm. We hope they stay safe. We look forward to speaking with you through the quarter, and thank you again for your time this morning.