Vulcan Materials Company (NYSE:VMC) Q3 2023 Earnings Call Transcript

Vulcan Materials Company (NYSE:VMC) Q3 2023 Earnings Call Transcript October 26, 2023

Vulcan Materials Company beats earnings expectations. Reported EPS is $2.29, expectations were $2.22.

Operator: Good morning. Welcome, everyone, to the Vulcan Materials Company Third Quarter 2023 Earnings Call. My name is Angela, and I will be your conference call coordinator today. [Operator Instructions] After the company's prepared remarks, there will be a question-and-answer session. Now, I will turn the call over to your host, Mr. Mark Warren, Vice President of Investor Relations for Vulcan Materials. Mr. Warren, you may begin.

Mark Warren: 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 the time we have available. And with that, I'll turn the call over to Tom.

A construction site with heavy equipment and people in hard hats working on the next infrastructure project. Editorial photo for a financial news article. 8k. --ar 16:9

Tom Hill: Thank you, Mark, and thank all of you for joining our call this morning. In September, we officially surpassed our prior goal of $9 per ton cash gross profit on a trailing 12-month basis, and that was before reaching the 230 million tons on a same-store basis and despite macro challenges over the past four years that none of us likely anticipated back in the fall of 2019 when we initially set that target. This accomplishment perfectly demonstrates the durability of our aggregates-led business, and I'm really proud of how our teams continue to execute at a high level. Compounding profitability through the solid execution of our Vulcan Way of Selling and Vulcan Way of Operating Strategic Disciplines is at the core of who we are across our coast-to-coast footprint.

Today, our teams are intensely focused on our new target of $11 to $12 of cash gross profit per ton. Cash gross profit per ton growth is key to increasing our free cash flow and continuing to create value for our shareholders. In the quarter, we generated $602 million of adjusted EBITDA, which is a 19% improvement over the prior year. Our aggregates, asphalt and concrete product lines all posted another quarter of year-over-year gross margin improvement. In the aggregates segment gross margin expanded by 200 basis points and cash gross profit per ton improved by 18% despite lower volumes. Shipments declined 2% in the quarter with variations across end uses and geographies. Residential weakness impacted the majority of our markets, while at the same time many of our markets are seeing improving momentum in highway shipments.

Private non-residential construction activity related to large industrial and manufacturing projects continue to drive healthy volume growth, particularly in Georgia and the Carolinas. Remember, footprint matters in the aggregates business. Ours is unmatched in the Southeast, where private demand dynamics are currently strongest, and across the country in states where IIJA investments will be the most significant. Pricing momentum continued across our footprint, with all geographies achieving healthy year-over-year increases. Average selling prices improved 15% in the quarter and 3% sequentially, more than offsetting continued inflationary cost pressures. In asphalt, gross margin improved 660 basis points. Shipments increased 11% and across most geographies with particular strength in California.

Average selling prices improved 2% and cash unit profitability improved over 50%, benefiting from lower liquid asphalt costs and solid manufacturing cost control. Concrete gross margins improved 120 basis points. Cash unit profitability improved by over 30%, despite lower volume that continued to be impacted by the slowdown in residential construction activity. Remember, prior year concrete segment earnings benefited from the contribution of the now divested New York, New Jersey and Pennsylvania concrete operations. Through the first nine months of the year, we have executed well and successfully navigated evolving macro dynamics. Let me comment briefly on what we are currently seeing in each end use. Starting with residential, we are encouraged by the recent growth in single-family permits and starts in many geographies over the last three months.

On the other hand, after providing some support for overall residential demand, multi-family starts have now begun to pull back from historically high levels. Affordability and higher mortgage rates are likely to continue to have some impact on residential activity, but the underlying fundamentals remain firmly in place. Vulcan markets have low housing inventory levels and favorable demographics, driving the need for additional housing. In private non-residential construction, trends differ across categories. As expected, warehouse activity, the largest non-res category, has softened, but manufacturing activity remains at high levels and is concentrated in Vulcan states. We have booked and are shipping on numerous large manufacturing projects where we offer customers a differentiated solution with our advantaged footprint and logistics capabilities.

On the public side, leading indicators remain supportive of continued growth in both highway and infrastructure. Trailing 12-month highway starts are up 18% and 2024 state budgets are at record levels. We continue to expect accelerating growth in public construction activity into next year and continued growth for the next several years. Our nimble sales and operating teams are well prepared to deliver value for our customers in any demand environment and to continue to improve unit profitability and drive value for our shareholders. Now, I'll turn the call over to Mary Andrews for some additional commentary on our third quarter performance and upgraded 2023 outlook. Mary Andrews?

Mary Andrews Carlisle: Thanks, Tom, and good morning. Over the last 12 months, we have improved our adjusted EBITDA margin by 220 basis points, posted a 97% free cash flow conversion ratio before our strategic reserve purchases, returned $275 million to shareholders via dividends and repurchases, improved our return on invested capital by 180 basis points, and reduced our net debt to adjusted EBITDA leverage to 1.8 times. Our robust operational performance that Tom highlighted, coupled with our sound capital allocation and strong balance sheet, position us well for continued success on our strategic objectives of further enhancing our core and expanding our reach. As part of our ongoing portfolio optimization, we are currently working to finalize an agreement for the disposition of our Texas concrete assets.

As a result, during the quarter, we classified these assets as held for sale and recorded a $28 million pretax charge to adjust the carrying value to fair value. During the first nine months, we have invested $411 million in maintenance and growth capital. We continue to expect to spend between $600 million and $650 million on maintenance and growth capital and $200 million on strategic reserve purchases for the full year. Year to date, our SAG expenses have increased a modest 3% and improved by 30 basis points as a percentage of revenue. Year-over-year increases are due mostly to higher incentive accruals congruent with improved earnings. Our investments in talent and technology to support our business objectives are paying off in operational results.

After another quarter of strong operational execution and financial results, we now expect to achieve between $1.95 billion and $2 billion of adjusted EBITDA for the full year 2023, a greater than 20% improvement versus the prior year at the midpoint. We plan on carrying this strong momentum into next year. So I'll now turn the call back over to Tom to provide some initial commentary on 2024 and a few closing remarks.

Tom Hill: Thank you, Mary Andrews. While we are still finalizing our operating plans for 2024, let me offer some early commentary on our expectations, and I'll start with the two things I'm most confident in regarding 2024. First, aggregates pricing momentum. For the last seven quarters, aggregate prices have exceeded historical norms, and the price environment remains quite positive. Our Vulcan Way of Selling is driving our commercial execution. We expect prices to improve at least high single-digit in 2024. Second, public demand. We are confident in growing public demand, supported by the recent growth in contract award activity and healthy state DOT budgets for 2024. We expect public construction activity to accelerate next year.

Now, there's more uncertainty regarding the impact of the microeconomic environment on private demand that makes it, frankly, a little bit or too early to call. While current trends in single-family residential activity are positive, uncertainty remains as to how higher rates and affordability challenges may impact that sector overall and influence whether or not it returns to growth next year. In private non-residential demand, similar uncertainties exist as to how a higher rate environment could impact the sector overall. Additionally, if warehouse activity continues to pull back from the recent historical high levels, it may further mask the current strength in manufacturing activity and will be a key driver of the decline - the degree of decline in non-residential demand.

We'll give you an update in February as to how we see these dynamics unfolding and what that means for aggregate shipments in 2024. I am confident that our teams are well equipped to deliver unit profitability growth in any macro environment, and they have a proven track record of doing so. Over the last 12 months, even in the face of a volatile macro backdrop and lower aggregate shipments, our aggregates cash gross profit per ton has expanded by 18% and our adjusted EBITDA has improved 17%. As we work to finish this year strong and finalize our plans for 2024 over the next couple of months, we remain focused on keeping our people safe, stay committed to our Vulcan Way of Selling and Vulcan Way of Operating Disciplines and continue to deliver value for our shareholders.

And now, Mary Andrews and I will be happy to take your questions.

See also 12 Best Clean Laundry Detergent Brands and 15 Best-Selling Car Brands in the U.S..

To continue reading the Q&A session, please click here.