Q1 2023 Vulcan Materials Co Earnings Call
To all sides on hold we appreciate your patience and ask that you. Please continue to standby your call will begin momentarily.
[music].
Good morning, ladies and gentlemen, and welcome to the Vulcan materials Company's first quarter 2023 earnings call. My name is Travis and I will 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'd like to turn the call over to your host Mr. Mark Warren Vice President of Investor Relations for Vulcan materials. Mr. Warren you may begin Sir.
Good morning, and thank you for your interest in Vulcan materials with me today are Tom Hill, Chairman and CEO , and Barry 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 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 measures are defined and reconciled in our earnings release, our supplemental presentation and other SEC filings.
In the interest of time, please limit your Q&A participation to one question.
This will allow for more questions during our time together.
With that I'll turn the call over to Tom.
Thank you Mark and thank all of you for joining our call. This morning.
Balkan materials is well positioned to deliver attractive growth in 2023.
We got off to a solid start in the first quarter and now expect to deliver between 185 and $1 $95 billion in adjusted EBITDA. This year.
A 14% to 20% improvement versus the prior year.
In the quarter, we generated $338 million of adjusted EBITDA.
A 15% improvement over the prior year.
Despite lower volumes in each of our major product lines.
Total gross profit improved 12%.
And gross margin expanded by 90 basis points.
I am pleased with our team's execution as they remain focused on our volcker we are selling.
And Vulcan, we have operating disciplines.
The pricing environment is healthy.
Year over year, adjusted average price improved 19% in the quarter.
Prices also improved in our downstream products by 15% in asphalt.
And 12% in concrete.
As always we are focused on capitalizing on pricing momentum and controlling cost to expand our margins.
In the aggregates segment gross margin improved by 170 basis points.
Shipments declined 2% versus the prior year with wide variations across markets.
Some areas benefited from favorable weather and carryover shipments from the wet fourth quarter.
Others, like California, Texas, where challenge by excessive rainfall.
Yeah.
All geographies delivered double digit price improvement.
And importantly, our cash gross profit per ton improved by 23% in the quarter, surpassing $8 per ton on a trailing 12 month basis.
And asphalt gross margins improved by 220 basis points, despite higher natural gas and liquid asphalt cost.
And 11% lower volumes.
Significant rainfall negatively impacted shipments in California, Arizona, our largest asphalt markets.
Prices improved by 15% and more than offset higher raw materials costs.
Cash unit profitability in asphalt improved by 90% in the quarter.
The concrete segment's cash gross profit was negatively impacted by the 2022 divestiture of our New York, New Jersey, and Pennsylvania operations.
As well as weather impacted volume in Texas, and California, and the resulting cost challenges.
Now shifting to the dynamic demand environment, which remains mixed both in terms of end uses and timing.
We continue to expect modest growth in overall public demand.
The contraction in private demand.
While single family housing starts continue to fall some markets have begun to show early signs of decelerating declines.
Multifamily housing starts have recently turned negative however, they remained at high levels, particularly in Vulcan markets and continued to dampen some of the impact of single family weakness.
Affordability is the fundamental driver of the declines in single family activity.
Lower inventories favorable demographic trends and employment growth in our markets continue to support demand for new residential construction.
While the pipeline of private nonresidential projects remains supportive of near term demand starts have eased in recent months.
A positive trend in nonresidential construction activity is increasingly broad base composition of starts.
Industrial and manufacturing projects now account for more than 60% of stores.
Recent trends and supply chain management, onshoring and clean energy investment are among the catalyst for this shift in the drivers of nonresidential construction.
Our geography and service capabilities enable us to capitalize on these large projects.
We have booked and are currently shipping to a number of these projects in many of our key markets such as battery plants electric vehicle manufacturing facilities, LNG facilities and large warehouse parks.
On the public side.
Momentum is building with trailing 12 months, how we source now exceeding $100 billion.
The infrastructure investment and jobs acts dollars are flowing.
The impact of the historic levels of public construction awards on 2023 aggregate shipments will depend upon how quickly starts.
Can turn into shipments.
Other infrastructure starts are also growing with trailing 12 months starts up 23%.
In addition to significant.
<unk> funding for water energy ports and airports.
Strong state and municipal revenue support non highway infrastructure investment.
<unk> 2023 demand for aggregates continues to be dependent upon the depth of the decline in residential construction activity and the timing of how we starts converting into aggregates shipments.
Our durable aggregate business and best in class execution position us well to successfully navigate any shifts in demand.
Now I'll turn the call over to Mary Andrews for some additional commentary on our first quarter performance and update 2023 out of the managers.
Thanks, Tom and good morning.
In the first quarter, our adjusted EBITDA margin expanded 140 basis points with solid operational execution and discipline.
Cost management.
<unk> expenses as a percentage of revenue improved 60 basis points in the quarter and is below 7% on a trailing 12 month basis.
We remain focused on continuing to leverage our cost base.
Making strategic investments in talent and technology to support our business needs.
Net debt to adjusted EBITDA was two two times at quarter end squarely within our stated target range of two to two and a half time.
Our investment grade balance sheet gives us flexibility and optionality to continue investing in both organic and inorganic opportunity.
During the quarter, we invested $113 million in capital expenditures and continue to expect to spend between 600 and $650 million for the full year.
As we allocate capital we are focused on improving our return on invested capital on.
On a trailing 12 month basis, our return on invested capital improved sequentially by 20 basis points from year end to 13, 7%.
Tom shared with you our increased adjusted EBITDA outlook for 2023.
On the heels of a strong 2022 and what your adjusted EBITDA improved by 12%, we now expect to exceed that growth in 2023 with 14% to 20% improvement.
Based on the success of our aggregates pricing efforts in the first quarter, which yielded a 10% sequential improvement and 19% mix adjusted year over year improvement, we now expect prices to improve approximately 15% for the full year.
Coupling the strong pricing momentum with our industry, leading operational execution, we expect to deliver even stronger year over year improvement in cash gross profit per ton than our original guidance.
All other aspects of the full year guidance, we communicated in February remain unchanged.
Now I'll turn the call back over to Tom for some closing remarks.
Thank you Mary Andrews in closing I want to remind you of two things that we're focused on each and every day first keeping our people safe or.
Our people are the lifeblood of our business and our culture.
Second improving unit profitability and growing earnings regardless of the demand environment.
Our aggregates led business and our best in class execution positioned us well for driving long term sustainable value for all of our stakeholders.
And now Andrew is now we'll be happy to take your questions.
Yes.
At this time, if you would like to ask a question. Please press the star and one on your Touchtone phone you may remove yourself from the queue at any time by pressing star two.
Once again that is star one to ask a question, we'll pause for a moment to allow questions to queue.
Our first question comes from Trey Grooms Stephens.
Hey, Good morning, Tom Andrews, and Mark Hope everybody is well thanks Ross.
That's work on the quarter and aggregates pricing, particularly strong so hats off to you and the team for such strong execution, there and Tom I was hoping maybe you could talk a little more specifically about the overall pricing environment and your thoughts on kind of the rest of the year.
As we look through the balance of the year for pricing.
Sure Trey.
<unk>.
As you saw prices up 19% mix adjusted for the quarter. So a great start.
Our January one price increases were successful and they are really broad based so I appreciate.
<unk> hard work on earning price and based on that success you saw us raise the guidance to 15% for the full year.
As Trey as we've said the pricing comps will get a lot tougher in the second half of the year.
So a good start to the year, but as always work to be done to earn price and we feel really good about the 15%, but remember you still have to take that price to the bottom line, which is what's happened in the first quarter, we improved our unit margins by some 23% and that kind of unit margin expansion is generally consistent where it was in our <unk>.
And Thats, just the Balkan way of ops in the bulk we are selling at work.
One other thing.
On the margin side, we were pleased to for aggregates gross margin to expand 170 basis points in the first quarter after being compressed each quarter year over year last year.
And as we took those rapidly rising costs through the P&L and our pricing efforts in 2022 that Tom talked about.
The gone now into 2023 returned us to gross margin growth and.
We would expect the year over year improvement to continue to accelerate as the year progresses.
Sure.
Our next question comes from Stanley Elliott Stifel.
Hey, good morning, everyone. Thank you for the question and congratulations on the strong start.
Tom you mentioned kind of some nuances developing within the end markets I think thats one thing thats different this year versus maybe some other cycles in the past would love to get your kind of thoughts around what's happening on the private non res side.
Since there seems to be more moving parts as well as we're looking forward.
Good morning, Stanley Youre right nonresidential non res construction as shipments continues to be really healthy and we saw that evidenced in the first quarter.
We would continue to expect the nonresidential sector to maintain really high levels that we came off of last year, and it's really driven by warehouses distribution and now manufacturing and industrial.
The risk and reward that sector I would put the risk in that sector would include maybe some slowing in warehouses, we have not seen that yet, but we'll watch it and the other question I would have is does light non res.
It follows subdivision does it start to slow again haven't seen that yet but watching it now.
Now the flip side the potential upside to shipments in nonresidential construction for me would include the number of massive.
Industrial and manufacturing projects that are on the horizon are just starting to ship.
To give you some color around that we have now have some 20.
It gives me some 12 major industrial projects.
Most of which are in our backlogs that total $8 5 million tonnes now some of those are multiyear projects. So all of that's not going to go in 'twenty three.
So I would describe non res right now is very healthy so so far so good.
Europe helped.
A healthy nonresidential demand.
In 2023.
Our next question comes from Anthony Pettinari Citi.
Hi, good morning.
Okay.
I think previously you talked about AG shipments to public projects expected to be up maybe low single digits.
In 2023 with IHA, maybe flowing through in the back half and I was wondering if you had any sort of updated thoughts on the cadence of those public volumes over the remaining quarters of the year or maybe between the first half in the second half.
How we should think about the flow through especially with IHA projects, Yes, I would tell you back half loaded simple answer to that question.
Sector Highway sector is really the poll public sector, but particularly highways.
Set up for a really robust future funding is at all time record levels and importantly, all three areas of funding of government are at record levels, you've got federal state and municipal all at all time highs and all of that is starting to flow into Lettings give.
To give you a little color around Lettings, which are really healthy and California in the fourth quarter of last year first quarter of this year combined those legs will be over $2 billion.
Which is an all time high for two quarters in California move into Texas is even better than the first two quarters of 2023, the lettings will be it's.
Almost $8 billion again, all time high So highway contract awards, as we said or now over $100 billion.
And we still we will still see.
We will see 23 shipments.
We predict and low single digit and that is just that is indicative of how much time. It takes for those big lettings to flow through shipments. So a solid 'twenty three but a much larger growth in 'twenty four.
Our next question comes from Jerry Revich Goldman.
Goldman Sachs.
Good morning.
Hi, Good morning, Tom maybe interest Mark.
Quarter.
I wanted to ask.
A couple of things stood out in the quarter.
On the volume side, if we just think about normal seasonality off of your first quarter run rate that suggest your volumes could actually be up year over year in the second quarter and Im just wondering is that consistent with the cadence that you are seeing in the business.
Similar vein really strong gross margins for aggregates in the quarter.
Normally.
Your margins are up 10 points versus <unk> and I'm wondering is that.
Cadence, we should be thinking about here as well. Thank you I'll take the I'll take the volume of veterinarian drews handle the margin I think the.
The volumes were in the quarter, we were down 2% and weather had a big play on that weather in California, and Texas, and Arizona were a drag on us.
But the weather the east and southeast were really positive and in the east and southeast we probably had some volume that pushed from the fourth quarter last year, which had really wet weather into the first quarter of this year.
As far as our outlook.
It really hasnt changed.
The two negative 2% to six we've got challenges in single family, which are going to be more second half loaded.
<unk> as you heard me say is really solid and highways is coming along but it takes a little time I think for me the timing is going to be key of how fast those highway shipments.
Go from Lettings to shipments.
But in all of this I think as a backdrop, we've got the Vulcan with selling of the bulk was operated which gives me confidence.
And that will continue to improve our performance regardless of demand challenges, which you've seen us do quarter in quarter out over the last few years and Jerry in terms of margins.
I think that the.
A typical sequential improvement is what you should expect and as I said on that on a year over year basis, we'll see significant.
Acceleration.
Our third quarter as they progress up that 170 basis points from the first quarter.
Yes.
Our next question comes from Mike Dahl.
RBC capital.
Good morning, Thanks for taking my questions.
Mary engines with respect to the other parts of the guidance I think last quarter I'm not sure. If this is formal guide, but you talked about cost inflation being up.
High single digit.
And he.
He said that yes cost in AG.
Is tracking consistent with expectations, so I am wondering kind of it.
So the expectation and then if it is is it right to think about.
Gross profit per ton standpoint.
Price.
On top of that might suggest something in kind of like low 20% year on year increase percentage wise for the gross profit per ton.
Quickly youre correct on your assumption on.
Gross profit per ton improvements.
If I step back and look at cost we're still.
Facing the impact of stubborn inflation in parts and services.
If you looked in the first quarter weather on the west had negatively impacted the first quarter cost.
As you remember as we progressed through the year, our comps on cost get a whole lot easier. So we're still guiding to the high single digit cost inflation and I would I would describe that is probably higher than expected parts and services and also delays in delivery is costing us just because of the <unk>.
Equipment down.
That's offset some by probably better than expected diesel cost.
But all that being said, we will continue to work on our operating efficiencies through bulk we are operating.
But at this point I think we're still very comfortable with that high single digit guide, yes, Mike on that.
Gross profit per ton cash gross profit per ton improvement from the beginning we thought that would be much more consistent this year and said that 23% in Utah and the first quarter and then I'll, let twenties for their assets I think that assumption.
Our next question comes from Kathryn Thompson Thompson Research group Good morning, Catherine.
Good morning.
Great quarter.
Clarification.
And based on our channel checks.
We're seeing.
As you described pretty robust demand in the year.
And even possibly.
And materials.
<unk> market.
Multiple markets throughout the U S. As the end of the construction season.
In light of the strong.
I think commentary headquarter.
The possibility for additional pricing actions.
Year.
And then also along with that more of a mid to long term view when you look at the shoring population shift than government supported funding for IAG.
Inflation Protection Act the choked back.
How does this play into your mid to long term view on pricing. Thanks, So much yes.
Yes, I think that.
So as far as pricing the rest of the year.
We did not assume second half price increase and our 15% guide.
That said, we are have announced midyear price increases.
Most of the vast majority of our markets.
We feel like you've got to earn that first so we will report on our progress on those on those mid year efforts in in August as far as bid work.
Pushing price in a day out on our bid work and Thats, just part of our Vulcan way of selling.
As far as the Youre spot on on the large on the large projects.
Both on the public side highways and on highway we're going to see a lot more large projects and a lot more money flowing.
We're also as you said starting to see the big manufacturing industrial projects, which we think continue.
Well well into the future all of that bodes extremely well for pricing because that gives us and our customers visibility to coming demand.
And those large projects, both public and the big industrial ones tend to be there is more surety of those projects once they announce them theyre going to happen.
And so that also give surety to demand, which is a very good backdrop for pricing.
Our next.
Comes from Keith Hughes true Securities.
Okay.
Thank you very much.
Switching.
CV.
The discussion on nonresidential.
Specifically on heavy.
It's a lot of positives out there right now how far of visibility do you have on that business in the woods.
Several years really strong heavy.
What can be done.
Yes.
You are going to see a number of years, both in manufacturing industrial and in the Big energy projects along the coast. There is a healthy pipeline of that both in there.
We're budgeting, they're bidding or their engineering and so.
You said I believe we will see years of this and I think it will really bode well both for volume and price.
And you are on that Youll light business.
Recycle your visibility or not.
That's correct that's correct.
Yeah.
Our next question comes from Brent Thielman D. A davidson.
Hey, good morning.
Hey, Good morning, Hey, Tom just curious on the balance well what was the hit from the residential sector this quarter.
Volume only down 2%, including whether it's just on the surface. It does that it doesn't look like that much.
So if you look at it about half of our markets.
Hit in <unk> and about half.
Were positive so I would tell you that mid single digit, but as we've said.
The we will feel the impact of the fall and starts permits and starts and single family, we'll really feel that in the second half of the year, so pretty much as expected right now I think.
And plus with weather in Arizona, Texas, and California, math some of that so it's hard to see but I.
We think that is more of a second half play as those stores have to go through the pipeline.
Our next question comes from Phil Inc.
Jefferies.
Hi, Good morning, this is actually calling on for Phil.
I just wanted to touch on the geographic mix I know pricing was aided by that favorable mix, but could you talk about how that mix might have helped gross margins and how we should think about that mix benefit going forward. Thank you.
I don't think its going to I don't think Thats, a big play on gross margin there was only 1% on on price.
So it really it really did not.
It did have an impact on much impact on price or on margins.
Our next question comes from Timna Tanners Wolfe research.
Good morning, gentlemen.
Okay.
Thank you.
So I would like to hear from phase one is just.
The labor market is broadly I know, it's been a bigger issue for your customers that would appreciate an updated thoughts there and then it's been I think may will be a year anniversary.
Our Mexican operations, which that and there's been some noise down there. So I would love your take on that as well.
Yes, I would describe the labor market is easing I think it's a combination of the labor market's easing and I think we've gotten better with retention over the last year that a lot of work on that.
So it is still an issue probably still a bigger issue for our customers, but not like it was 12 months ago or 18 months ago on Mexico really not a lot of change.
We remain illegally shut down.
The proceedings with the naphtha <unk> Vito continue we would hope to get.
Ruling on that sometime in 2024.
Our next question comes from Adam Thalheimer.
Thompson Davis.
Good morning, Hey, good morning, guys great quarter.
Ed.
I am starting to get questions from clients on the debt ceiling. If we don't get an increase do you think there is a risk to federal infrastructure support.
Well I mean that would be a first time that's happened. So I would I would doubt that while everybody is wringing their hands over it I think we will solve this problem and we will continue with our infrastructure spending.
And then prior government shutdowns haven't been a big deal Heather.
Well I don't want to see one but ill take it is going to is going to impact our infrastructure projects.
Our next question comes from Michael Dudas vertical research.
Hi, Margaret.
Hey, good morning, gentlemen, very entries.
Yeah.
Andrew interest can share your thoughts.
Operating free cash went through Q1 and how it looks for the rest of the year and then maybe.
Tom you can discuss.
The M&A pipeline and we.
Yes, yes, do we see any.
Visible activity by year end with what's happening in the marketplace. Thank you.
Yes, so we were pleased.
Pleased with our free cash flow is obviously very cash generative business over the trailing 12 months free cash flow conversion.
State over 90% so we.
I'm pleased with that result, and it will be take our consistent disciplined approach as we think about.
How to allocate that capital.
Along our <unk> priority.
On M&A.
It remains I guess, we have a number of smaller bolt ons in the pipeline along with.
A number of Greenfields that were working on I would tell you kind of normal from the from the smaller bolt on and Greenfield perspective, as far as large projects or large M&A those tend to be lumpy when they come along we will be in the game and we will take advantage and as always we'll be disciplined and all of this about what markets. We're in.
What synergies are unique to us and what we pay for it so.
And we look forward to reporting that as they come about.
Our next question comes from Gary Morris <unk>.
<unk> capital Hey, Good morning, Hey, good morning, Nice quarter I wanted to ask on the highway outlook Youre counting on demand showing up later this year curious just.
Total lag between project starts and when when volumes occurred.
Changes in.
At all just given the size of the projects.
And the pipeline I think it is.
A little bit we would always call that nine to 12 months.
But larger projects can take longer just because with more complex engineering more complex permitting and more complex planning around those and when they run into a snag it stops a big chunk of work.
Pushes it back.
Would not change the.
The nine to 12 rule of thumb, except for every once in a while now youll come across a multimillion ton highway project that can get pushed out past that limit, but I think the amount of 12 is still is still a good rule of thumb.
Our next question comes from David Macgregor Longbow Research Hi.
Good morning, Hey, Tom.
Congratulations on a strong quarter phenomenal. Thank you.
Yes.
I guess.
The interest and just any update you go on transportation I know you've got some long haul tonnage there youre talking about strength along the coast.
How does that change any of that changing for the better do you view that as a potential risk and have you been able to walk up capacity and if so for how far forward.
So.
As.
We talk about rock is still short on all coast and it's driven primarily by bottlenecks on railroads I think the railroads are working hard to improve and they are making progress, but theres still gaps there.
And I don't know that I see it is as risk for 2023 it has its challenges.
But I think we will work to us with our partners. The roto worked through those challenges and be fine in 2023.
Our next question comes from Michael Feniger Bank of America.
Good morning.
Morning, guys. Thanks for taking my questions just two so the first one the pricing obviously very strong at 18, 5%.
And your full year range of 15, so just pricing kind of finish the year exit the year below that range do you think we're still in that double digit territory and just trying to think about pricing cadence and then the second question just the operating leverage in aggregate I think you typically target 60% flow through.
Are there periods, where that can be above that level I guess I'm just trying to think out mid year price increases potentially sticking diesel rolling over could we see flow through above that target range for certain periods. Thank you you can first of all on the flow through piece of this you can see that above and you can see it below.
Just in your big inflationary jumps put pressure on that as we said as does as those fuel.
I think if you look at this year I would be a little bit cautious because you're still going to have some really sticky.
Inflationary pressures on parts and services.
I think what we've said is that.
As we progress through the year the percentage price increase.
Pay up at the 20% range, because you're comping over such a sequentially higher marks through 2022 and price.
The flipside of that is in cost as we've said youre seeing really.
Year over year cost at this point they should ease as we go through the year because the inflationary comps ease as we go that all of that put all that together, we think we're pretty consistent in that 20% range improvement in unit margins.
Our final question comes from Delek coming Morgan Stanley .
Hey, good morning. Thanks for the question just wanted to ask if you could put a finer point on some of them address commentary I think there is some concerns out there what sort of is the tighter financing environment, how that can impact both the light and heavy non res kind of side of the equation. That's curious if youre hearing some better on that from customers and what the kind of latest update on the thinking there is.
I would put it this way so far what we're seeing in non res is really solid.
Some shifting towards heavy industrial and and in manufacturing, but we've not seen any impact on our markets yet.
Nonresidential now that being said, we're watchful and we're watching it but so far so good in non res for 2023, but to your point I think everybody is watching that but we haven't seen any any impact at this point.
I would now like to turn the call back over to Tom Hill for any closing remarks.
We appreciate your interest and your time. This morning, we appreciate your interest in bulk of materials and we look forward to seeing you throughout the quarter.
Update you on our progress we hope that you and your families remain healthy and safe and we'll talk to you throughout the quarter. Thanks.
This does conclude today's program. Thank you for your participation you may disconnect at anytime.
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