Vulcan Materials Company (NYSE:VMC) Q1 2024 Earnings Call Transcript

Vulcan Materials Company (NYSE:VMC) Q1 2024 Earnings Call Transcript May 2, 2024

Vulcan Materials Company beats earnings expectations. Reported EPS is $0.8, expectations were $0.745. VMC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome, everyone, to the Vulcan Materials Company First Quarter 2024 Earnings Call. My name is Jamie, and I will be your conference call coordinator today. Please be reminded that today’s call is being recorded and will be available for replay later today at that company’s website. All lines have been placed in a listen-only mode. After the company’s prepared remarks, there will be a question-and-answer session. Now, I will turn the call over to your host, Mark Warren, Vice President of Investor Relations for Vulcan Materials. Mr. Warren, you may begin.

Mark Warren: Thank you, operator, and good morning, everyone. With me today are Tom Hill, Chairman and CEO; and Mary Andrews Carlisle, Senior Vice President and Chief Financial Officer. Today’s call is accompanied by a press release and a supplemental presentation posted to our website, vulcanmaterials.com. Please be reminded that today’s discussion may include forward-looking statements, which are subject to risks and uncertainties. These risks, along with other legal disclaimers, are described in detail in the Company’s earnings release and in other filings with the Securities and Exchange Commission. Reconciliations of non-GAAP financial measures are defined and reconciled in our earnings release, our supplemental presentation, and other SEC filings. During the Q&A, we ask that you limit your participation to one question. This will allow us to accommodate as many as possible during our time we have available. And with that, I’ll turn the call over to Tom.

Thomas Hill: Thank you, Mark, and thank all of you for joining our Vulcan Materials earnings call this morning. Our first quarter results moved us towards delivering on a fourth consecutive year of double-digit adjusted EBITDA growth. Although the weather was unusually cold and wet across many geographies for much of the quarter, our teams executed well and improved our Aggregates cash gross profit per ton by 10%. Their commitment to our Vulcan Way of Selling and Vulcan Way of Operating Disciplines is driving solid results. In the quarter, we generated $323 million of adjusted EBITDA and expanded our adjusted EBITDA margin. Importantly, several key trends continue: pricing momentum, cost deceleration, unit profitability expansion, robust cash generation, disciplined capital allocation and return on invested capital improvement.

In the Aggregates segment, year-over-year shipments declined by 7%, but the durability of our Aggregates business and the consistency of our execution stood out in a weather impacted quarter. We again improved our trailing 12 months Aggregates cash gross profit per ton, pushing it to $9.66 per ton and making further progress toward our current $11 to $12 target. The pricing environment remains positive and year-over-year Aggregates cash cost of sales continues to moderate. Aggregates freight and adjusted price improved 10% in the quarter and increased $1.25 per ton sequentially from the fourth quarter, a clear illustration of the success of January increases and the continuous execution of our Vulcan Way of Selling disciplines. Our first quarter cash cost of sales performance resulted in a fourth consecutive quarter of trailing 12 months cost deceleration and improving sequentially by another 230 basis points.

Our relentless focus on improving efficiencies in our plants through our Vulcan Way of Operating Disciplines remains a key driver of managing costs, expanding unit profitability and ultimately generating attractive free cash flow. There is a healthy pipeline of opportunities to deploy this free cash flow for both attractive acquisitions and complementary strategic greenfield development. These targeted opportunities are at varying stages. But as an example, earlier this week, we closed on a bolt-on Aggregates and Asphalt acquisition in Alabama, a top 10 state. I’m proud of how our teams continue to execute our two-pronged growth strategy. They are focused on expanding our reach in addition to enhancing our core with consistent expansion of unit profitability by controlling what we can control, even in a dynamic macro environment and demand environment.

On the demand side, I want to provide a few comments about each end use, starting with private demand and then moving to public. Momentum in single-family continues to accelerate across our footprint and points to growth in 2024. However, we continue to expect weaker multifamily residential construction to largely offset the single-family approval this year. Overall, affordability and elevated interest rates remains a challenge, but the underlying fundamentals of population growth and low inventories in Vulcan markets support recovery in residential construction. An improving residential backdrop is also a positive sign for future activity in certain categories of non-residential construction. And recent data has shown some signs of stabilization in overall starts.

However, the landscape continues to vary across categories. As expected, continued moderation in warehouse starts will be the biggest headwind to private and non-residential demand this year. Currently, light commercial activity remains weak, but over time, we expected to follow the positive trends in single-family housing. We continue to see and capitalize on opportunities in the manufacturing category. Our unmatched Southeastern footprint and unique logistics capabilities positions us well to service these large aggregate intensive projects. Our footprint is also an advantage on the public side with over two-thirds of federal highway spending allocated to Vulcan states. Additionally, other public infrastructure activity, which benefits from IIJA funding is growing faster in Vulcan states than the country as a whole.

A sustained elevated level of highway starts of over $100 billion, coupled with record 2024 state budgets, supports healthy growth in highway and infrastructure demand both in 2024 and for the next several years. Now I’ll turn the call over to Mary Andrews for some additional commentary on our first quarter. Mary Andrews?

Mary Andrews Carlisle: Thanks, Tom, and good morning. Tom discussed our solid Aggregates results in the quarter and shared some important ongoing trends. In addition to providing a few more details about our first quarter results, I’d like to first expound upon four of the trends Tom highlighted earlier in his remarks, unit profitability expansion, robust cash generation, disciplined capital allocation and return on invested capital improvement. For the last four quarters, we have consistently expanded our trailing 12-month unit profitability in all three of our operating segments. Increasing cash unit profitability by nearly $1.50 per ton in Aggregates, almost $6 per ton in Asphalt and nearly $5 per cubic yard in Concrete. Our trailing 12 months gross margin has also steadily improved in each product line.

This organic growth is underpinned by our daily focus on execution and driving results through our Vulcan Way of Selling and Vulcan Way of Operating Disciplines. Better unit profitability yields better free cash flow. Our free cash flow conversion over the last five years has averaged over 90%, enabling us to strategically allocate capital to reinvest in our franchise, grow our business and return cash to shareholders. During the quarter, we invested $103 million in capital expenditures and returned $81 million to shareholders through dividends and share repurchases. We continue to expect to spend between $625 million and $675 million on capital expenditures for the full-year. Our current balance sheet positions us well to continue to deploy capital to each of our priorities.

At the end of the first quarter, our net debt to adjusted EBITDA leverage was 1.5x, with $300 million of cash on hand, following the March 1 redemption of our 2026 senior notes at par for $550 million. Our liquidity position and financial flexibility are competitive strengths as we look to continue to grow and create value for our shareholders. Over the last 12 months, we’ve achieved a 260 basis points improvement in return on invested capital. Invested capital has increased less than 1%, while adjusted EBITDA has improved 20%. Adjusted EBITDA margin has also improved by 350 basis points through consistent operational execution and disciplined SAG cost management. SAG expenses in the quarter were in line with our expectations, and we continue to expect to spend between $550 million and $560 million for the full-year.

Most importantly, we reaffirm our expectations of delivering adjusted EBITDA between $2.15 billion and $2.3 billion for the full-year. At the mid-point, a double-digit year-over-year improvement for a fourth consecutive year. I’ll now turn the call back over to Tom to provide a few closing remarks.

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

See also 30 Most Miserable Countries in the World and 10 Best Languages to Learn for the Future.

Q&A Session

Operator: Thank you. [Operator Instructions] We’ll take our first question from Stanley Elliott with Stifel.

Stanley Elliott: Hey. Good morning, Tom. Good morning, Mary Andrews. Thank you for the question. Tom, I started the year very clean quarter despite kind of some of the weather issues, I think a lot of people had and some of the comp issues. Can you talk about how the rest of the year plays out, thinking about this more like maybe from a demand standpoint? And then to any extent commentary you could share on April would be great.

Thomas Hill: Sure. Looking at the quarter itself, I’d call the quarter – volumes in the quarter as expected within the margin of error. We had less shipping days in March, but about the same amount of shipping days in the quarter overall. January was a slow start, really due to wet weather and cold weather. February and March, I call it a bit better – better on a daily shipping basis. So Q1 – all things considered as expected. As we look forward to the rest of the year, I don’t see any real change in our thinking on demand. We would still guide to the flat to down 4 and the dynamics are very similar to what we said last quarter, headwinds in non-residential, some challenges in multifamily. We’ve got recovering single-family construction and growing public demand.

I think that our position – our superior position in the Southeast really helps the footprint makes a difference. And that southeastern market is probably the healthiest market in the country. I think our Vulcan Way of Selling disciplines and tools are very helpful with this. So at this point, I’d call confident for volume outlook. As far as going into the second quarter, I’d call it this way, when the sun comes out, we’re shipping very well.

Stanley Elliott: Great, guys. That’s nice to hear. Thanks so much and best of luck.

Thomas Hill: Thank you.

Mary Andrews Carlisle: Thanks, Stan.

Operator: We’ll go next to Jonathan Bettenhausen with Truist Securities.

Jonathan Bettenhausen: Hey, guys. Thanks for taking my question. I’m on for Keith Hughes this morning. I’m curious about your outlook on mid-year pricing. Have you had any conversations with your customers about mid-year and also wondering how much of that is baked into your guide?

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

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

Jonathan Bettenhausen: Perfect. Thanks for the color.

Thomas Hill: Thank you.

Operator: We’ll go now with Anthony Pettinari with Citi.

Anthony Pettinari: Good morning.

Thomas Hill: Good morning.

Mary Andrews Carlisle: Good morning.

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

Thomas Hill: Yes. I think the first quarter for cost is always tricky as volumes and weather definitely had an impact on costs in the first quarter. That said, I think we’re still comfortable with the cost guidance of up mid-single digit for the full year. As always, we would get you to look at costs on a trailing 12-month basis because it’s just going to be choppy on quarter-to-quarter. And if you look back on a trailing 12-month basis over the last year, cost increases have fallen from, I’d say, mid-teens to single-digit. So as we said in the prepared remarks, we’ve seen four quarters of decelerating cost and as we march through this year, we should see that those increases decline as we march through the year, next quarter better, next quarter better, next quarter better as we saw over the last four quarters.

So I think we’re on a good path to that mid single-digit cost for the full-year. As far as different pieces of this, diesel was probably a slight tailwind in the quarter. What stays up is parts and services remain elevated, but our comps are getting easier. And I think that we also through the Vulcan way of operating, we’re improving our operating efficiencies and will continue over the next two years with that to offset those inflated parts and services. So I think we’re in a good place, and I think the teams are working through this, and I’m pleased with what I see.

Mary Andrews Carlisle: Yes. And in terms of diesel, Anthony, we do assume in our plan that it will move somewhat higher through the rest of the year. And you’re right, while diesel prices for us – well, they’re always hard to predict and – but they can really be a good thing in this business since we have the ability to catch it with pricing as it goes up and also take advantage of it when it goes down.

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

Thomas Hill: Thank you.

Operator: We’ll go now to Kathryn Thompson with Thompson Research Group.

Thomas Hill: Good morning, Kathryn.

Mary Andrews Carlisle: Good morning.

Kathryn Thompson: Good morning. Thank you for taking my question today. Stepping back, just looking at the bigger picture. In last year, you divested mainly downstream ops just in terms of optimizing portfolio. As you look into 2024 and beyond what are your priorities in terms of overall Vulcan materials and product mix? And how does this mix strategy – how do you think about that against the backdrop of a broad reindustrialization of the U.S. and putting Vulcan in the best position possible? Thank you.