Q4 2020 Vulcan Materials Co Earnings Call

Good morning, ladies and gentlemen, and welcome to Vulcan materials Company's fourth quarter earnings Conference call. My name is Lori and I'll be your conference call coordinator today during the Q&A portion of this call. We ask that you limit your participation to one question. This will allow everyone who wishes the opportunity.

To participate.

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.

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 bulk materials dot 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 measure 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'll now turn the call over to Tom.

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.

'twenty 'twenty represented another year of strong earnings growth for bulk.

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 Twenty-twenty demonstrated the commitment of Vulcan employees as they face uncertainty and had to make adjustments both in their professional and personal lives.

Our team stayed focus on operating safely.

Servicing our customers and making progress on our four strategic disciplines, congratulations on a job well done.

In a few minutes Susanne 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're headed.

Our full year financial results were strong.

Total company adjusted EBITDA increased 4% to $1.3 billion to $4 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%.

Yeah.

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 mix 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 per cent gain in our aggregates cash gross profit per ton.

It's $7 11, since we were making good progress towards our longer term goal of $9 per ton.

This improvement in unit profitability was supported by our four strategic disciplines commercial excellence operational excellence logistics innovation and strategic sourcing.

We also experienced improvements improvements in each of our non aggregates business segments collectively gross profit improved 12% across these three segments.

Unit profitability increased in both asphalt and concrete.

Asphalt gross profit increase $12 million or 19% over the prior year, even though volume volumes declined 7%.

This improvement in profitability resulted from stable sales prices and lower liquid asphalt cost.

Our ready mixed 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 are improving overall EBITDA margin.

Set us up well for 'twenty 'twenty one.

We are well positioned to take advantage of market opportunities and 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 suggest that the growth will continue.

This represents a clear opportunity for us as both permits and starts are growing faster in Vulcan served markets.

How are we Lettings and awards returned to growth in the fourth quarter.

State D O T budgets have stabilized with most of our states showing budgets flat to up from 'twenty 'twenty.

The caution in this market segment is that it will require time to turn awards into shipments given the mid year 'twenty 'twenty low and awards due to the pandemic.

Wow timing of shipments as a variable we will see improvement how we shipments throughout 'twenty 'twenty one.

As we said in the third quarter, the near term outlook for the nonresidential construction sector provides the lease forward visibility.

Dodge construction starts are still down year over year, but certainly indicators are beginning to improve per.

Perhaps signaling the 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 from construction awards.

These projects are typically more aggregate intensive.

And 90 per cent 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 non residential construction projects remains a variable.

We considered these factors if we thought about our 'twenty 'twenty one prospects in guidance.

That said, we expect our adjusted EBITDA to be between $1.34 billion and $1 $4 billion.

We anticipate 'twenty 'twenty, one 'twenty 'twenty, one average shipments.

Our 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 average freight adjusted average selling prices to increase by 2% to 4% in 'twenty 'twenty one.

And gross profit in our non aggregates segments is forecast to improve by mid single to mid high single digits to sum it up 'twenty 'twenty, one will turn out to be a year of solid earnings growth.

Now I'll turn it over to Suzanne for further comments suzanna, Thanks, Tom and good morning to everyone before I discuss fourth quarter 2020 highlights I'll fill in some additional details on our 'twenty 'twenty one guidance, we made significant reductions in our selling general and administrative expenses in 2020.

We expect to further leverage our overhead costs in 'twenty 'twenty, one and anticipate our SG&A expenses to be between 365 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 'twenty 'twenty, we expect to spend between 450 and $475 million in 'twenty 'twenty one.

This includes fully restarting and advancing growth projects that were delayed last spring.

Jazz 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 is necessary.

As you model, you'll note that the combination of our assumptions for 'twenty 'twenty, one 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.

<unk> 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 'twenty 'twenty as compared to those same periods in 2019.

First we recorded a one time noncash pension settlement charge of $23 million or 13 cents 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 'twenty 'twenty 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 <unk>.

<unk> 'twenty.

The resulting E. P. S effect was four cents per diluted share in the fourth quarter and 18 cents per diluted share for the full year.

Moving onto 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 one six times 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 'twenty 'twenty one.

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 and 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.

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.

Our focus on building, an even stronger and more profitable business, we know that our leading market positions in our aggregates focused business our strength 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 'twenty and 'twenty, one we have confidence in its potential.

Now, we'll be happy to take your questions.

Thank you at this time I would like to inform everyone. If you'd like to ask a question. Please press Star then the number one on your telephone keypad. If your question has been answered and you wish to remove yourself from the queue press. The pound key again, we ask that you. Please limit yourself to one question.

Our first question comes from the line of Trey Grooms of Stephens, Inc.

More drive.

Hey, good morning, Good morning, Tom Suzanne and Mark.

Hope, you're all doing well.

Tom I appreciate your comments in the prepared remarks, there are 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 above 2% decline to a 2% increase and maybe how you can get to the.

Low end versus the high end of that guide.

Yeah, I'll start with just kind of stepping back and looking at the year 'twenty 'twenty. One as you saw our guidance was negative two deposit to volume I.

I would tell you that the aggregate demand outlook is improving and it seems to get brighter kind of weekend a week out.

And we would expect shipments to continue to improve sequentially as we March through 'twenty and 'twenty one.

Residential construction is very good and continues to grow at the same time heavy heavy nonresidential construction is good and it's important because it is aggregate intensity.

At the same time light non residential construction has been a challenge and I think will be a headwind for us in the first half of 'twenty 'twenty, one probably getting better later in the year and then highway lettings are much better they were much better in the fourth quarter and we think they'll continue to be strong throughout 'twenty 'twenty one.

So this all adds up to starts and demand picture improving.

And we'll continue to prove as we March through the year, but as you know the demand outlook environment due to the pandemic has been quite volatile.

So as we set our guidance to you for 'twenty 'twenty, one we've tried to be both transparent and thoughtful about two really important things with a given that we know residential is strong and growing so the first one of those is non residential construction shipments, we know warehouses and distribution centers are good there.

Going there intensive.

Their aggregate intensive we believe that overall non res has stabilized from the fall. We saw you know throughout 2020 now have fast that returns. We don't know the other thing that we're seeing now which is a bright spot as were seeing the LNG projects start to pop up on the Gulf Gulf Coast that were postponed from last year.

So.

We'll just have to see what transpires with the rest of nonresidential construction and then the second thing we try to be thoughtful about was the timing of highway work Lettings, where if you remember we're light in Q3 of last year's D. O trees tried to assess their funds or what was going to happen to their budgets.

Once that stabilized Q4 saw great Lettings and should Q1 and the rest of 'twenty 'twenty. One is most dot's of verified that their budgets will be up to low flat to up and so the question is how fast are those lettings and those projects go to work.

Well as I would say, we think it will be back half loaded.

All said in all markets, our outlook is improving kind of week over week as the pandemic improves so you know getting better but still some some things we got to watch.

Got it okay that all makes sense. Thanks for taking my question and I'll pass it on thank you.

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

Hi, Good morning, good morning, Tom.

Tom could you talk about maybe expectations for a replacement of the fast Act in terms of you know potential timing magnitude and when that could ultimately impact your volumes.

Yeah. So we believe that Congress is going to pass a new highway bill with an increase in funding in 'twenty 'twenty, one and I would probably give you that in three buckets.

One that the Baden administration their agenda has infrastructure next on the list. After the COVID-19, Bill So it is a priority.

Second if you go to the house and Senate Senator Carper, who is chair of of the E. P. W Committee and then Congressman Defazio, who is chair of the House TNI Committee. Both have said they want draft bills out of committee before August.

Before the August recess and the reason they want to do that is they want a target passing a bill before the exploration of the fast Act at the end of September so so the administration's on it.

The Congress of the houses on and then third you got to remember that funding should increase as highway funding right now is starting from a position of strength. So in 'twenty 'twenty. One the funding is up $12 billion year over year to $59 billion 2 billion of that is an increase from appropriations 10 billion of that.

It is from Covid relief. This starts to highway funding baseline from a higher point and no one on the hill wants to reduce funding for highways. So we believe it will see it before the end of the year hopefully before the exploration of the fast Act and we will think it'll be at higher levels.

Great 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 you know if this could be more along with well and it's sort of almost snowing. This morning, but you know look it's the first quarter. It's it's January February March it's the smallest quarter youre going to have weather I would tell you that.

This is this is not a lot different from a big week of rain do you know what your just your do you have an interruption that demand go away. It is interrupted in the first part of the year and we will catch it up so chalked it up to the first quarter and would not read a lot into it.

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

Thanks.

Your next question comes from the line of Kathryn Thompson of Thompson Research group Good morning, Catherine I Kathryn good morning.

Thank you guys for taking my question today are really focusing a little bit more on the state Dot's side. Our state revenue report, which focuses on many per stage of showing much better channel fund collections from you also noted in your prepared commentary, but better D O T trends.

From our perspective, California, Georgia, Illinois are looking pretty good going into 'twenty two wanted to get your thoughts on that and could you give color on these two these states. Other states that are important for you like Texas, Virginia and Florida.

And and layering them on top of that what if any impact does the current administration's green okay.

Cash on how.

How state teams are planning their their feature project. Thank you.

I'm, sorry, I missed the last part planning planning what.

Their their future projects, so just with the Buckeye administrations focus from Green.

As we said you know we've got a little bit of a GAAP with Lettings down in Q3, they came storming back in Q4.

If you look at the trailing six month and trailing three months starts they're up double digits. So that's really good news based on the state D O T budgets, which you pointed out improvements in those budgets, we should see growth, we should see improvement and in how we work and should grow as we.

<unk> through 'twenty and 'twenty, one, particularly as we see those lettings in the fourth quarter talk to mature in the shipments.

The majority of our 20 states will see funding and Lettings up for fiscal year 'twenty 'twenty, one, particularly as you pointed out important states like Texas, and California, and really importantly, our south Eastern states, which are either up year over year. Other flat from 19, which was excuse me flat from 'twenty, which saw a big jump from.

From 19, so really good solid funding we're past the interruption of the pandemic and then you've got the 10 billion of COVID-19 relief funds for highways more than half of that 10 billion will be spent in Vulcan served states and support growth some of that in 'twenty 'twenty one although it presently appears that.

Joy of those funds will support shipments in 'twenty, two maybe going a little bit into 'twenty. Three so all of this I'd tell you is good news and we still have to let the shipments catch up with the recently approved Lettings. So we could see this I would tell you probably a little better in Q3 and Q4, maybe in Q1, but good news.

And it is it is stabilized and now we're starting the funding is growing and we think the feds will support that later in the year.

Great. Thank you very much thank you.

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

Thank you.

So I wanted to ask first about the a b S E G.

The guidance for roughly $370 million. So were turning to 2019 AR levels can you just talk about some of the dynamics. There are you assuming a full return to pre pandemic cost structure as I'm sure there was.

Some made some some unusual reduction in expenses last year or do you think there are some expenses that you're anticipating will be sustainably low lower going forward yes.

Yeah, we are definitely not expecting a return to the prior cost structure I mean for the year, we reduced our S. A G 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 and in 2020, and certainly contributing to some of that certainly not all of it was was low or T. N E and as we talked about it in the third quarter I mean, that's really an area where this year, depending on you know what happens with vaccine distribution etcetera.

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 you know different and more efficient ways of communicating and accomplishing what we need to do so and you know we are.

Always looking for ways to leverage S. A G I suspect we will.

Continue to find some more of those as we as we go through the range that we set if you look at the midpoint of the range.

And in terms of S. A G as a percentage of revenue that 7.3% just a tick under $7 four per cent. So so we'll see where we get to in the year, but certainly you know as as we as we did last year, we continue to look for ways to reduce that and and that improvement.

Really you know sort of accelerated through the year and if we find you know that we're doing a little better than expected as we go through the year, then we will update the guidance.

Gotcha Gotcha. Thanks.

Thanks for that and then sure so on the EMEA non aggregates businesses you had a very strong performance in 2020.

With the increase in gross profit despite the lower revenues the mid single digit to high single digit continued increase so building upon that can you just walk us through I imagine you're assuming some some resumption of a of revenue growth.

You know some.

From the input costs like a less liquid asphalt might be at a little bit higher. So I'm. Just wondering if you could walk us through some other drivers on that mid to high single digit growth in AR and the gross profits sure that that mid to single high digit growth mid mid to high single digit growth is really driven primarily by asphalt and I would tell you. It's.

Really driven by volume and asphalt, which is improved D. O T work and what happens in those states, where we're producing asphalt at places like.

Texas, California, Arizona, Alabama, and Tennessee.

And it's it's just it's bigger jobs or more work simply that ready mix, we have it up slightly.

<unk> with its <unk>.

Really more unit margin driven than volume driven.

Great. Thank you so much sure.

Your next question comes from the line of Jerry Revich of Goldman Sachs merger, Hey, Jerry Hey, Hi, Good morning from Suzanne Park.

And the voices.

Thank you for taking the question I just wanted to ask really impressive outlook for aggregates gross profit growth of $70 million on flat volume, so essentially pricing dropping down from the bottom line, but I know, there's going to be facing headwind from diesel cost neutral inflation. So can you just talk about what's allowing you to offset.

Those are inflationary items.

$50 million to $60 million that.

That still allows you to drop their price it straight to the bottom line.

Yeah, I'm not sure I'd go ahead, whereas I think or it was less than that but if you look at our guidance for unit margins and the cost piece of unit margins it's underpinned.

Really by our focus on our operating disciplines and processes. We see if you look back we saw our aggregates operating efficiencies last year with U S throughput plant availability later efficiencies improve.

At the same time, we had you know if you look at yield and energy efficiencies they were mostly flat.

Flat to slightly down really due to production volumes being volatile in some product split issues on yield all of which were I would tell you a pandemic related so as we look forward to 'twenty 'twenty, one we'd expect a headwind of a diesel price that impact us with some I'd say some 10.

$20 million, but in spite of this we would expect our unit cash cost per agonist to be Oh flat, maybe up a little bit and that's really supported by our operating strategic disciplines that we've been working on and those processes that we've been putting in for the last two years I would tell you that I'm really proud of our <unk>.

Operators for first of all for keeping each other safe and healthy and a tough year and working through a tough year, but also their relentless quest for continuous improvement and those drivers of our operating efficiencies that drive cost savings there, they're making really are making an impact on what we're seeing or unit margins.

Okay I appreciate the color. Thanks.

You.

Your next question comes from the line of Mike Dahl of RBC capital markets day, like Hi, Mike.

Thanks for taking my question a couple a couple of things just answer it especially on the costs. So that was helpful color I guess just on the on the volume piece within acts.

You gave some good commentary on on kind of end markets, but if we're thinking about the cadence through the year.

And any any comments around kind of cadence that we should be thinking about first half versus second half from.

From a volume perspective and in eggs are within the guide.

Yeah, I would expect second half, where we'll be we'll be heavily will be heavily loaded but I would also tell you Mike that I would think as we progressed through your kind of month in month out weekend, a week out that we'll see improvements and what you're seeing there is improvements of the overall view of the world and so what.

It's non res projects that people have confidence in the starting to start back up or whether its highway projects that are maturing because they've been let and now they're kicking in I think youll see that sequential improvement as we March through 2021.

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.

Just to be clear in terms of sequential improvement and that's not a comment that we should expect volume up sequentially each quarter relative to <unk> right.

No I would I would I wouldn't what I'm comparing it to is the quarter in the prior year. So you know Q1 Q2, maybe up a little more than Q2 last year versus what Q1 was and so forth okay.

That makes more sense. So I just wanted to check thank you.

Hugh.

Your next question comes from the line of Bell EBITDA of Jefferies.

Hey, guys good morning.

I guess two of your peers and are on the heavy side of reported actually they're expecting low to mid single digit growth. In 2021. Appreciate the range. You provided is quite wide, but would've thought just based on your footprint and just your comment on resin highway being up you could see a little more growth or are you baking in a little conservatism and then when should we expect volume.

Be up year over year or is that more back half or could we see that happen as soon as <unk> Tom.

I think you know as we said the variance in our range is is more timing of work and the key timing is number one on highways. We know what's gross getting has gotten better because the lettings. We've gotten better. The question is the timing of how fast those lettings go to shipments.

And you know we've seen projects go really fast and we've been seeing projects over the last two or three years get delayed hopefully the D. O T. A mature and we have less delays in it and it kicks in it goes faster in the year than than than we would've anticipated weather's always issue in the first quarter, but as the year progresses.

Q2, and QC things get better hopefully that lines up with that highway work on the non res side.

Again, we see the strength in the heavy light we know we've got some headwinds we think it stabilized how fast the private money has confidence in the economy. It goes back to work as is to be seen I think as we've watched the first you know where the seventh week of 2021 and you know it's better.

And weeks when week six than it was in week five than it was in week four so things seem to get better.

It's all a lot of this is pandemic related that that is getting better as that goes the private money go. So hopefully it'll go quicker than anyone anticipates, but to be seen and as we said with the visibility as best we could we made we tried to be thoughtful about how we plan for it okay.

Got it but to be clear, you're not seeing any incremental bottlenecks per se, you're saying, hey, we're giving us some cushion here just because we just don't know how quickly. This you know these D O T projects show up, but you're not seeing any incremental <unk> per se.

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

My question is you know you made the point that you have 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 some of this ore it's pretty steady life with what you've seen for no other.

I don't see any big bottlenecks delaying it and in fact, if anything from a D O T perspective there.

The dot's have matured over the last two or three years and to increase funding and so they have the firepower, whether it's engineering or permitting or letting work. So I don't see any bottlenecks holding up is really just needs to move through the process of the contracts go to work.

Okay, great. Thank you I appreciate the color. Thank you.

Your next question comes from the line of Garik <unk> of loop capital.

Great. Thanks, you highlighted some of the stripping cost expenses that you saw in the fourth quarter. Just curious if you quantified that.

Does that imply some pull forward of costs.

<unk>.

Net from next year from this year, if you will and how shall we think about incremental gross margins in aggregates from 'twenty 'twenty one yeah. So specifically the stripping costs was up about about $455 million.

But overall you know the cost was up about 30 per ton in Q4, and if we look back at this based on as we went into the fourth quarter based on the success that we've had for the full year and the pandemic getting better in markets getting better and you couple all that you put all that together and as we look forward to <unk>.

21, and the D O Ts getting better we made the decision to pursue some preventative maintenance projects on both fixed and mobile equipment.

At the same time, we decided to reengage, our larger stripping projects because we felt like that you know.

The debt longer term when I say that we'd also look a year. We look you know 24 36 months out because these are mines and you can't move very fast we decided it was time to reengage. The stripping projects. So based on the visibility of demand factors improving in the fourth quarter being smaller from a volume perspective, and us having to fire.

Power and the people to the time to do the work. It was it was time to pull the trigger on the projects.

Great and can you provide some color on how you're thinking about incremental margins.

2021, Yeah, you know incremental margins in times like this.

At this inflection point equal minerals margins are probably not as meaningful and I would encourage you to really turn to unit margins as a better metric and you know we saw mid single digit growth in 2020, even with volume is going down 3%.

And we should see that kind of growth you know mid singles day.

Mid single digit margin growth or growth in cash gross profit per ton 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 in a kind of continue on our March towards our non dollars per ton of cash gross profit per ton, regardless of what headwind or tailwind, we see out there.

Yeah, and I would just add to that Tom is right I mean, when there is volatility when volumes are flat and and or declining you you just get really strange math when you try to do these numbers. If you look back at 2020, you know we had quarters, where you know that the flow through number if you can.

<unk> a day it could be 40% or it could be 240 per cent and so as we said all through 2020 and until we get back to the point, where you know volumes are you know and you know fully positive end and moving forward. We're just going to continue to talk about.

The drivers in the cash gross profit because I, just think that that's more meaningful than the flow through numbers just because it's it's just volatile and they're just strange numbers that really don't necessarily mean a lot.

Yeah.

Makes sense. Thank you.

Thank you.

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

Hey, good morning, everyone hope you're staying warm.

We're trying.

I wanted to just probe a little bit and the infrastructure opportunity and just a little bit more detail on if we do see this new infrastructure focus manifest 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.

Yeah, I think if you kind of just step back and really simplify this you know Vulcan is going to participate in all new construction you just have to rock has to go and the foundations that go into infrastructure. So as we see new green construction.

Aggregates demand will benefit, particularly and if it's green projects, where their 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 will benefit from that demand growth.

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 how to how to think about the three I would point out the three I would point out there are quite a intensive we're gonna be water sewer well.

And wind energy and then on top of that if you look at it.

Obviously ports and airports that are you know.

How you consider those green or not but the green ones I would say, our water sewer and and and.

Wind energy Okay, great. Thanks, guys. Thank you.

Your next question comes from the line of Michael Dudas of vertical research partners.

Good morning, gentlemen, Suzanne.

Oh good morning.

I'm encouraged to see your guide for cap spending this year. It looks like you just to clarify are you.

Growth capital, you're allocating as projects were deferred in 2020 pre pandemic are there any new or expanded ones in that mix.

And I guess a follow on to that how time are you seeing your business development team working in 'twenty.

<unk> 'twenty 'twenty, one and opportunity given where your balance sheet is to.

Look a little bit more carefully at some opportunities relative to other years.

So towards organic growth yeah, sure I'll I'll address the Capex question first you're right. These are you know.

Internal growth projects that you'll have a good return and are important to us that we did defer them when the pandemic hit last spring you you saw that we spent a bit more money in the fourth quarter and then initially guided on capex and and that related to.

The restarting of a couple of these are growth projects that we just wanted to get the jump on before we went into the new year, and but 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 that.

I'm in and start.

Reaping the benefit of that and and you're right I mean with respect to M&A as we've talked about many times 'twenty 'twenty was was just a year of inactivity, because things sort of shut down and as a result of the pandemic. You know we are beginning to see them.

You know some some deals and you know come to market, we're beginning to see a bit of a pick up there you know certainly you know given our position in the industry. If if anything is coming to market. I mean, we're going to know about it get contacted and where 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 as we think about those deals they've got to fit strategically they need to be returns enhancing them they need to be accretive and look you know when you look at our balance sheet, we have the firepower to do about anything we'd like.

To do but.

We're gonna be sensible about them you know what we do and you know do deals that as I said fit the strategy and the returns criteria and you know don't 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.

As will says is that I think that you know as Suzanne said there was it was just a desert for M&A in 2020, nothing happened and you would expect it to come Roaring back in 2021, and it's busy and as well.

As always we'll be involved on those and we'll do the deals that make sense to us make sure we understand the markets, we want to be in and what product lines those markets.

Make attractive in the ones, where it'll be in and you know as always we will we'll be picky about them, but will also find the ones that fit us.

Your next question comes from I'll ask Courtney I from bonus of Morgan Stanley.

Hi, Good morning, guys. Thanks for the question I. Appreciate I. Appreciate the comments you guys gave about how the first half versus second half cadence you know really depends on.

How those lettings turning into shipments.

But can you give us any insight into how youre thinking about the cadence for pricing through the year will that be more consistent or is that also going to trend them with how shipments trend.

Also any insight into your pricing for your non aggregates a fitness yeah. Good question I think that you know first of all fundamentally the conditions for price increases continues to improve.

The market's visibility able to have visibility to improving demand really helps this you know as.

As we said Roes is very healthy continues to improve non res well it's seen its its challenges are also you know.

During the light side that seems to have stabilized and who's got the you know you've got the the herbicide is doing very well and I know you like you layer on top of that we're starting to see Bubbling of LNG work that's helpful.

The lettings and visibility to our lettings picking up.

He's really good because everybody knows no those that work is coming so I would all of this is good for pricing I would expect price increases to build as we as we progress through 2021.

But remember and I would and you know that.

You'll see prices.

Start to accelerate starting in Q2, we have some you know that's when the majority of our fixed plant price is going to impact and so I would as you start kind of into Q2 hours six accelerate throughout the year.

And remember while pricing is really important the most important component of this as unit margins.

And along with cost we saw those growth almost 6% last year with volumes being down and I think we have confidence that will growth both price and unit margin again in 'twenty 'twenty, one regardless of what happens with with you know outside volume forces.

Great. Thanks that was helpful.

Thank you.

Our next question comes from the line of David Macgregor of Longbow Research.

Wondering if yes. Good morning, everyone. Yeah. Good morning, Todd Good morning.

Just wondering if you could talk about the sort of the regional disparities in the one per cent decline in fourth quarter aggregate volumes in there.

Maybe how youre thinking about regional disparities within that the shipment guidance for 'twenty 'twenty one.

Yeah. So if you if you look at the fourth quarter I would tell you that the southeast was a strength for us.

Kind of all the states from the southeast I would tell you that Arizona, Illinois, where on the weak side I would tell you that.

Even though we had the challenges from fires and pandemic and cement shortages in California.

It matched prior year, so improving things in California, as we look forward.

Two.

The volumes in 'twenty 'twenty, one I would tell you that you know most of our markets, we're seeing kind of more we're seeing improvements.

Again, the South East is gonna be a strength I would tell you that Texas will be strong and I would tell you that California is improving.

You know, California has so many headwinds last year that now a lot of those will go on so we will see an improvement there, but those will be strength for us.

Alright.

Maybe you can talk about kind of just to build on the pricing question pardon me.

Just help us understand the non res pricing situation right now and is pricing up in that segment is it close to comparable with the average how are you thinking about 'twenty one.

Really not a lot of different pricing variance by market segment is really more geographic and if you look at our footprint. We're planning on price increases across all of our footprint. So I wouldn't call out it's hard to really hard to call out pricing between res and non res our highways because it's more of a long product line.

By geographic area, but I would I would I would point to it being fairly widespread both geographically and across all product lines force as we look out to 2021.

Good thanks, very much and good luck. Thank you.

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

Good morning, Tom Suzanne Mark Thanks for that.

Sure Josh.

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 yeah sure. It's a it's a good question and I I think.

As we as we went into the pandemic you know there was certainly no intention or desire on our part per se to to build a war chest and because I think that's you know just having your cash sitting around on the balance sheet as is not certainly not the best use of it in the.

A long term, but given the uncertainty we faced I'm you know as we took some of those decisions to delay capex it etcetera.

I certainly you know think that you know having a bit of of cash there for safety is certainly the right thing to do Youre right to you know the first use of the 1.2 billion will be to pay down to 500 million dollar maturity in March I mean, that's been a long planned in and taken care of.

You know I I think as we as we think about the capital allocation priorities. We've had in place for a long time.

That have really I think served us well and are well understood by the market.

If you think about the waterfall of of those priorities and the order of them you know the the sort of other than maintaining and improving our dividend, which is critically important for US you know we want to make sure that you know that can absolutely be sustained.

Through the cycle you know we are beginning to to open up and spend a bit more cash on on growth. That's the second.

You know.

Priority and that capital allocation policy and so you know we're going to be spending more on those internal growth projects and look you know as I said on M&A, we'll be looking at opportunities as they come down the path.

Say that again going back to that waterfall.

And those growth projects and dividends or other higher priority to us and then share repurchase. So I think we just need to wait a bit and see what materializes on the on the growth front and then you know as we go through the year and see them are you know.

How the how.

The cash plays out and what other opportunities arise then we've got plenty of time to consider that the share repurchase.

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 ish is there some catch up in 'twenty, one that makes it an unusually high year or how should we think about the long term.

FX is great.

First of all there is some catch up and I think Suzanne pointed that out the catch up is.

Yeah, we.

Again, if you go back to the beginning and maybe this is the easiest way to talk about it. If you go back to the beginning of 'twenty 'twenty our guidance Dan was to spend $475 million, we wound up only spending $361 million in 2020 as a result of the day.

A lay of of those those projects. So you know where we're guiding to that $4 50 to 475 million number. The intent there is to catch up a bit on operating capex and the growth project. So you know there is a bit of catch up there I wouldn't necessarily say it's.

You know, it's a material amount, but you know we do intend to restart those growth projects as far as the timing through the year I would tell you pretty evenly spend it usually is more in.

You know.

The heart.

Summer months, where you can build for the construction projects, where some of the builders the rest of the repair.

The replacement capital is evenly spent the the growth capital will probably be a little heavier in Q2 and Q3.

Thanks, so much.

Thank you.

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

Hey, Good morning, a quick question for you Tom.

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

So, California wasn't actually as it wasn't weak it was actually it was flat and flat with some with some pretty good.

So I'm pretty good headwinds if you really kind of stepped that Cowboys reports day for us. So if you step back and look at it look at California. The fires are out in the cement shortages over so already things are better in California, and the 'twenty 'twenty one demand is improving.

Northern Cal so it really kind of you've got a separate northern California, Southern California, Northern Cal is recovering, but remember it had the longest.

It has the longest recovery because it had the most severe shelter in place on top of that you had the fires and cement shortages, which which really hurt us or hurt that whole market and in 2020. So.

You know, we will see improvement in 2021, but a little slower now if you look at the highway piece, which affects the whole market SB. One lettings are going to increase our increasing this year about 14%. So we will see growth both growth in both.

<unk> and aggregates and asphalt and then a soap in southern California, We're gonna see single.

Excuse me high single digit to double digit growth in residential and nonresidential recovering with warehouses and distribution center or even the white so.

And I think if you step back and look at it remember look at California from last year's perspective in spite of all the demand challenges and the pandemic and the fires in summit charges. In 2020, we were still more profitable year over year than we were and 19019th so that unit profitability sets us up well.

In 'twenty and 'twenty, one as we start to see now we're starting to see volumes improving along with unit margin, So, California will be a better place without the challenges they had in 2020.

Arizona I believe that you know again the residential piece sector is good I think you know it is the highway is solid non rose improving so you know, Arizona is a pocket of population growth, which supports that if you look at Illinois It.

Has this challenges highway work will probably be.

Pulling toll work will be solid, but the other sectors and raises okay, but the other sectors still see challenges as does non highway infrastructure saw somewhat of a challenge market force. Good color. Thank you. Thank you.

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

Hey, good morning, everybody. Thank you all for.

For squeezing me in I appreciate it sure Sterling free guys nice job again on the inventories you know as we sit here today kind of rather tracking towards.

2018 levels you.

You were talking about the highway business potentially picking up in the back part of the year do you anticipate any sort of mix issues from a production standpoint of or should I kind of where you're sitting here would be a good sign from a flow through on that side.

Yeah, I think I think you'll see somewhat improved but you heard me talk a little bit in our cost comment about mix with with yields and with new construction you get more base and finds with helps your yields granted it's at a lower price, but you need that for the overall unit margin improvement. So if anything I would tell you that I think the mix will be.

Improved and 'twenty 'twenty, one over 'twenty 'twenty, just because you have a better flow of Av.

<unk>, new construction and remember on the residential side Youre going now you are new subdivisions not just build out of sub divisions, which is number one is more aggregate intensive because you've now got to put it in the roads and the utilities, but it's also a better mix because you've got the substructure of base and finds under all of those roads and utilities and other those.

Slabs. So I think we will see improvements, which will help unit, which will help pushing the margins as we as we look at 2021.

Perfect. That's great news, thanks, guys I appreciate it thank you.

Thank you I would now like turn the call to Tom Hill for any additional or closing comments.

So thank you for everyone for joining the call today. Thank you for your continuing support of Vulcan.

We're proud of our 2020 performance. So we made good progress in 2020 to our longer term goals. We believe we're going to take that momentum into 'twenty 'twenty, one and we look forward to sharing that news with you over the next few quarters I Hope all of you stay healthy keep your families safe and healthy and we'll talk forward to talking to you.

You soon thanks and goodbye.

Thank you for participating in the Vulcan materials Company Q4, 2020 earnings Conference call you May now disconnect.

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