Vulcan Materials Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 16, 2023

There are 11 speakers on the call.

Operator

Morning, ladies and gentlemen, and welcome to Vulcan Materials Company's 4th Quarter Earnings Call. My name is Gretchen, and I will be your conference call coordinator today. Now I would like to turn the call over to your host, Mr. Mark Warren, Vice President of Investor Relations for Vulcan Materials. Mr.

Operator

Warren, you may begin.

Speaker 1

Good morning, Thank you for your interest in Vulcan Materials. With me today are Tom Hill, Chairman and CEO and Mary Andrews Carlisle, Senior Vice President and Chief Financial Officer. Before we begin, 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.

Speaker 1

In the interest of time, please limit your Q and A participation to one question. This will allow for more questions during our time together. A supplemental presentation has been posted to our website, bulkmaterials .com. Additionally, a recording of this call will be available for replay later today at our website. And with that, I'll turn the call over to Tom.

Speaker 2

Thank you, Mark, and thanks all of you for joining our call this morning. We appreciate your interest in Vulcan Materials Company. In 2022, our teams hands down excelled in confronting macro challenges And they demonstrated the resiliency of our aggregates led business. Let's start with the Q4, which really showcased Our commitment to controlling what we can control. We generated $375,000,000 of adjusted EBITDA in the quarter And I was particularly proud of our team for delivering 11% year over year growth in aggregate cash gross profit Despite a 6% decline in aggregate shipments, abnormally wet and cold weather across our footprint disrupted construction activity And shipments across all segments.

Speaker 2

And we also began feeling the impact of single family residential decline. Pricing momentum continued with 15% growth in aggregate's mix adjusted price in the 4th quarter. Our people continue to drive performance through good execution, which is grounded in our Vulcan way of selling And Vulcan, we have operating disciplines. Gross profit in both Aggregates and Asphalt segments increased versus The prior year's Q4 despite lower volumes and pricing momentum more than offset inflationary cost increases. In concrete, a 15% decline in volume driven mostly by extremely wet and cold weather Texas created operational challenges that eroded pricing gains in that segment.

Speaker 2

For the full year, adjusted EBITDA improved 12% with all segments posting year over year growth in gross profit. Aggregates segment gross profit improved 9%, a noteworthy performance with the headwinds of generationally high inflation And the unexpected and arbitrary shutdown of our valuable Mexico operations in May of 2022. Aggregates volume increased 6% and average selling prices improved 10%, accelerating as the year progressed. Importantly, our average cash gross profit per ton improved over 5% and also Accelerated throughout the year even in a challenging operating environment. In the Q1, we held our own While inflation ramped up more steadily than expected, then in the Q2, cash gross profit per ton grew modestly versus Q2 of 2020, 2021 as we responded quickly with additional pricing actions.

Speaker 2

In the Q3, cash gross profit per ton increased 9% as pricing momentum accelerated and operating efficiencies offset And as I mentioned earlier, in the Q4, cash gross profit per ton improved a notable 11% Even as volumes declined. In our Asphalt segment, the second half of twenty twenty two marked an inflection point On price and cost dynamics. In the Q3, robust pricing improvement began outpacing The sharply rising liquid asphalt costs. For the full year, pricing increased by 21% To more than offset the 36% increase in liquid asphalt costs and volumes grew by 7% With particular strength in Arizona and California, our 2 largest asphalt markets. Ultimately, Gross profit improved to $57,000,000 versus the prior year's $21,000,000 In the Concrete segment, full year gross profit of $89,000,000 increased 64% compared To the prior year due to a full year's contribution from the U.

Speaker 2

S. Concrete assets in addition to improved earnings And our legacy Northern Virginia and Northern California Concrete businesses. Inflationary pressures including diesel And the availability of both cement and drivers had a significant impact on performance in the Concrete segment. Now let's shift to the New Year. 1st, focusing on demand.

Speaker 2

The demand environment for 2023 is mixed, Both in terms of end uses and timing. We expect modest growth in overall public demand, but contraction in private demand. Now I'll comment briefly on each end use. Residential construction activity is showing the impact of rising construction costs, Home prices and mortgage rates on single family housing. Single family starts and permits have continued to decline, But to a lesser degree in Vulcan served states than the country as a whole.

Speaker 2

Currently, multifamily remains positive With a strong pipeline of projects under construction. Housing will certainly be the primary drag on private construction in 2023, But we expect it to quickly return to growth. It is important to remember that the demographics and employment growth in our markets continue to support household formation and the growing need for additional houses in the future. Overall, private non Residential demand remains at healthy levels. Manufacturing and other heavy industrial projects continue to provide opportunities, But we are monitoring leading indicators such as more recent ABI measures, moderation in the Dodge Momentum Index And survey data indicating declining loan demand and lending tightening.

Speaker 2

On the public side, We expect positive momentum throughout 2023 and beyond as states and municipalities move forward With much needed infrastructure investment. Highway and infrastructure starts are both positive. And highways Starts strengthened significantly in the second half of twenty twenty two, growing at 25% on a trailing 12 month basis at the end of the year. The Infrastructure Inflation and Jobs Act funding is now reflected in proposed Fiscal year 2023, 2024 budgets across our footprint. The multiyear outlook for public infrastructure is solid.

Speaker 2

We continue to believe that the increased Funding will begin impacting aggregate shipments modestly as we move through 2023 and more meaningfully in 2024. In addition to IIJA funding, state tax receipts in Vulcan states are the highest they've been in the past 10 years. Strong state and municipal revenues support non highway infrastructure investment as public entities Continue to play catch up from the last decade of housing growth that has driven a fundamental need for infrastructure investment. Also, the considerable funding from IIJA for investment in water, energy ports and airports We'll provide future demand growth. Overall, 2023 demand for Aggregates Will be dependent upon the depth and the duration of the declines in residential construction activity.

Speaker 2

The impact of rising interest rates on private non residential construction activity as the year progresses and the timing of highway starts Converting to aggregates demand. Considering these dynamics, we currently expect our aggregates shipments to decline between 2% 6% in 2023. Pricing momentum and operational execution will drive Our 2023 performance. We expect our pricing to increase between 11% 13%. Most importantly, we will continue to improve our industry leading aggregates cash gross profit per ton and deliver Solid earnings growth in 2023.

Speaker 2

Now I'll turn the call over to Mary Andrews for some additional commentary on our 2022 performance And some more details around our 2023 guidance. Mary Andrews?

Speaker 3

Thanks, Tom, and good morning. Our 2022 operating performance led to another year of solid cash generation and disciplined capital allocation. Over the last 4 years, Our free cash flow conversion has averaged over 90% with a 93% conversion ratio for 2022. After investing over $600,000,000 in capital expenditures for both maintenance and growth projects, we put additional capital to work By completing $529,000,000 in bolt on acquisition and also returned $213,000,000 to shareholders via our growing and importantly sustainable dividend. During 2022, we also reduced our leverage Back to within our stated target range of 2 to 2.5 times after completing the U.

Speaker 3

S. Concrete acquisition in August of 2021. Net debt to adjusted EBITDA was 2.3 times at year end. Our investment grade balance And significant cash generation capability give us the capacity to continue to invest in both organic And inorganic opportunities with a constant focus on improving shareholder return and return on invested capital as we grow and optimize our portfolio. During the Q4, we completed the previously announced sale of our ready mix asset in New York, New Jersey and Pennsylvania.

Speaker 3

On a trailing 12 month basis, our return on invested capital at year end was 13.5%, inclusive of the loss of earnings historically generated from the network of assets supporting our shutdown Mexico operation. We also remain focused on continuing to leverage our SAG cost base. SAG expenses as a percentage of revenue improved by 50 basis points versus the prior year to 7% of revenues. Having strategically managed our balance sheet, Our portfolio and our overhead cost structure, we enter 2023 from a position of strength. Tom shared with you our views on the macro demand environment and resulting aggregates expectations.

Speaker 3

Even with a challenging and uncertain macro backdrop, We expect to grow our adjusted EBITDA to between $1,725,000,000 $1,875,000,000 by capitalizing on the strengths of our aggregates led business and executing on our foundational strategic discipline. In our downstream businesses, we expect total cash gross profit dollars to approximate 2022 levels. Continued improvement in asphalt segment profitability and the benefit of improving highway demand should offset both the impact activity on our remaining concrete businesses. We expect SAG expenses of between $515,000,000 530,000,000 as we remain focused on driving efficiencies in our support functions, while delivering new capabilities for the business through investments in technology and talent. We also expect depreciation, depletion, amortization and accretion expenses of approximately $610,000,000 Interest expense of approximately $195,000,000 and an effective tax rate of approximately 22%.

Speaker 3

In 2023, we plan to consistently reinvest in our franchise with $600,000,000 to $650,000,000 of capital expenditures for both maintenance and growth projects. I'll now turn the call back over to Tom for some closing remarks.

Speaker 2

Thank you, Mary Andrews. Before we move to Q and A, I want to thank our entire Vulcan team for a successful year in 2022. And I have great confidence in their ability to continue to execute in 2023 even with the uncertainty in the macro environment. As always, we will be keenly focused on keeping our people safe, driving value for our customers And capitalizing on the profitability expansion opportunities supported by the Vulcan way of selling and the Vulcan way of operating disciplines. Vulcan is uniquely positioned to create long term sustainable value With the right products in the right markets with the right focus from the right people.

Speaker 2

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

Operator

At this time, we will open the floor for Our first question comes from Stanley Elliott from Stifel.

Speaker 2

Good morning, Stanley.

Speaker 4

Thanks. Good morning, everybody. Good morning.

Speaker 5

Thank you all for the question.

Speaker 4

I guess my question would be, I guess coming in maybe we would have thought maybe more flattish volumes in 2023 or maybe even modest volume growth. What changed

Speaker 5

if anything resulting in the 2% to 6%

Speaker 4

kind of Volume outlook declined now. And is there anything you

Speaker 5

could share with us about what

Speaker 6

you're seeing and maybe a

Speaker 4

little more depth across those end markets? Thank you.

Speaker 2

Yes, sure. If you're looking into 2023, we saw some pretty good bounce back in January From the bad weather we've had in the Q4, so solid shipments. That being said, with the exception of California, which everybody knows we had floods, But the markets look pretty good. The lead if you look at the lead indicators this year, maybe not as clear as they usually are. So we try to be As we look to demand throughout the year, and I think a lot of it boils down to timing.

Speaker 2

When do we see the decrease in single family Really good shipments. You probably saw a little bit of that in the Q4, but I think the full impact gets us we realized that kind of end of the Q1, beginning of the Q2. So single family probably gets hit about down 20%. And then for non res, it's really, again about Timing with while the leading indicators for non res look pretty good starts, longer term indicators Commercial loans and the ABI could lead to challenges in the second half of the year. So we would call that segment flat for 2023.

Speaker 2

And it is always timing for highway funding and lettings going to shipments will be critical. We think that Segment, the public segment is up low single digits. So as we step back and look at this, we try to be thoughtful about the dynamics that impact the shipments and the timing Of that demand. And while we can't control demand, we can't control how we run our business And our unit margins, and I think we've proven we're very good at that. We think we grow that mid teens.

Speaker 2

So regardless of the dynamics affecting shipments, we'll grow our earnings.

Speaker 4

Great guys and nice work on the profitability improvement and thanks. That's it for me. Best of luck.

Speaker 2

Thank you.

Speaker 3

Thanks.

Operator

Our next question comes from Trey Grooms from Stephens Inc.

Speaker 6

Hey, good morning everyone.

Speaker 2

Good morning, Trey. Good morning.

Speaker 6

Hey. So, yes, I want to echo good work on the profitability. And it looks like on the guide, it It implies an acceleration there on that improvement on cash gross profit per unit. And I guess the moving pieces there, Pete, could maybe cut into those a little bit. We've got Pricing is obviously playing a role.

Speaker 6

And as we kind of look at the cadence there through the year, maybe you could Talk about that as well with maybe what's baked in with the midyear increase and how we think about the cadence of that profitability improvement as we look I

Speaker 2

would call it pretty consistent. We carry really good pricing momentum into 2023. As we said, we got 11 to 13 for 2023. I'm really pleased with our team's performance and How they service our customers to earn that price and how they face the challenges that we've seen over the last 3 years and that they can adjust Price on the fly very quickly. Our pricing discussions for January 1, I thought went very well and they're in place.

Speaker 2

And you got to remember that as we progressed through last year, pricing accelerated As we went through 2022 driven by inflation, so the comps in the second half on price get harder. So, but I think we're confident in that while we're confident in that, there's still work to be done in pricing and earning that From our customers, importantly, as you talked about, our teams have been able to take price to the bottom line And we think we do that mid teens this year. I would call price, while pricing comps get tougher as we progress through the year, Cost comps get easier. So I would expect a pretty steady growth in that mid teen level of unit margin growth quarter after quarter.

Speaker 3

Yes. And Trey, We do expect solid unit profitability growth throughout the year. And of course, we don't give quarterly guidance, But I will try to give you some additional and hopefully helpful context maybe more related to volume. And if you think in terms of cadence, we definitely will have tougher seasonal comps in the first half. Looking back at 2022, 3 of the 6 months and the first half of twenty twenty two implied 12 months Shipments at a higher level than our full year 2022 and only 1 of 6 months in the back half Shows particularly seasonally strong shipments.

Speaker 3

And of course, Q4 with the weather impact, We'll provide an easier comp in 2023. So all in, I think more challenging year over year in the first half from a volume perspective and the At least moderate as you move through the second half.

Speaker 6

Got it. Thanks, Mary Andrew. That's super helpful. And I guess just to Make sure I'm clear on the comment, Tom, that you had around pricing. So 11% to 13%, I guess just Coming out and asking is, is there any what is the assumption around midyear price increases that are baked into that?

Speaker 6

I know you guys have been of the opinion and you said on On the last call, I think that you guys were going to be targeting pretty aggressively in the first half Excuse me, in the 1st of the year, but any kind of comment around what's in that for mid year?

Speaker 2

Sure. So let me just Step back and talk about pricing and aggregates. If you remember, about 40% of our work is fixed plant and we price that Once or twice a year, we had discussions in October, November for January 1 price increase. I thought those went very well. Those are in place.

Speaker 2

And we'll just have to see what happens as we progress through the year and What the market calls for in the individual markets and how that's priced, but the other 60% of your business is bid work And we're bidding jobs as we speak. That's something it's something you earn every day, and it's a continuous improvement effort. And so what we're bidding now will ship in the 3rd or Q4. So all in, we're very confident on our pricing guidance, but Some of that's got to be earned as we progress through the year and earned every day with our customers.

Speaker 6

Understood. Got it. Thanks for the Clarity there, Tom. Super helpful. Keep up the good work and I'll pass it on.

Speaker 6

Thanks. Thank you.

Operator

Our next Question comes from Kathryn Thompson from Thompson Research Group.

Speaker 2

Good morning, Kathryn.

Operator

Good morning. Good morning. Thanks for

Speaker 7

taking my question today. Tagging on just for the pricing question, but really pulling the string more in terms of the balance of price and cost, Given there's been so much volatility in 2021 2022, could you clarify the confidence that you have And unit margin growth into 2023 in light of the historic volatility just with that price cost. It would be helpful to if you focus in on the aggregate side, but also given The divestiture of your Northeast Concrete assets, giving any color for expectations for units, margins or just any type of profitability color on that segment would be helpful. Thank you.

Speaker 2

Yes. Great question. I think that as you looked at 2022, we set records in unit margins and we're Very pleased with our growth there. We'll grow those again in 'twenty three, as we said, mid teens. And what you're seeing there is the Vulcan way of sales and We'll open the operating disciplines at work.

Speaker 2

We saw you saw us set new goals for long term unit margin growth at our Investor Day in September. I think that over the last 4, 5 years, the team has done great work on this very important metric. They have shown that they are never satisfied, They're always hungry for continuous improvement, and I'm proud of their performance and the culture they developed and their commitment to excellence. That said, my confidence is very high on our target guidance on unit margin growth Because of our past performance and our consistency, Mary Andrews?

Speaker 3

Yes. Tom highlighted the And I think if we look over the last 3 years, we've grown our cash gross profit per ton in 11 of 12 quarters. And as we So expect to continue to do that in 2023 and to accelerate. And I think another important reminder about both The level of unit margin expansion in 2022 and also a contributing factor to the contraction in aggregate Gross margin percentage is that we had a considerable headwind year over year since we report inventory Using LIFO, as we believe it results in a better matching of costs with revenues. So in periods of Increasing costs like we saw in 2022, LIFO will result in higher cost of revenues than under FIFO.

Speaker 3

And pretax in 2022, we took an incremental $54,000,000 of costs through the P and L Instead of putting it on the balance sheet if we used a FIFO method in both periods. So I think we really showed strong unit margin in 2022 with some considerable cost Kathryn,

Speaker 2

I'd also expect to see unit margin growth in the other product lines.

Speaker 7

Okay, great. All right. Thank you very much.

Speaker 4

Thank you.

Operator

Our next question comes from Anthony Pettinari from Citi.

Speaker 4

Good morning.

Speaker 2

Good morning.

Speaker 4

On the aggregates volume guidance, should we think of that as really an organic kind of apples to apples Change or is there any kind of impact from maybe downstream divestitures impacting upstream shipments or are there sort of supply agreements In place to take care of that or any volume impact from Mexico. Just wondering if there's any impact there and if you could bridge those?

Speaker 2

Yes. On the divestitures, I don't see any impact on volumes. As I think, we'll continue to service Those ready mix plants on Mexico or Acquisitions that we made partially in for partial year in 'twenty two, they're built into the guidance.

Speaker 4

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

Operator

Our next question comes from Jerry Revich from Goldman Sachs.

Speaker 2

Good morning, Jerry. Good morning.

Speaker 8

Hi, Tom, Mary Andrews. Good morning. A really interesting price cost spread for aggregates this year as you folks catch up And the inflation we essentially saw in 2022, I'm wondering as the exit rate heading into 2024 is going to show some pretty good Pricing momentum for you folks and I'm wondering as you look at other cycles in the past, Tom, is there a precedent

Speaker 2

Yes. I think that's built into our guidance in that mid teen, unit margin growth. And as I said a little bit earlier, I think the cadence of that is Your comps and pricing are easier in the first half than the second half and but the flip is true on costs. Your comps are going to be easier in the second half on cost. So I think we're pretty consistent And how we and our ability to grow your margin as we progress through the year.

Speaker 2

And I've also like I said, we've been very consistent Being able to do that, so I don't see that being choppy.

Speaker 8

Sorry, Tom, I was just asking the momentum heading into 'twenty 4. So is there prior points in time that could give you confidence that this period of outsized Price cost and unit profitability growth above trend can continue into 'twenty four.

Speaker 2

As always, visibility To growing public demand is a good thing for price. And I think we are our folks are quite disciplined on how they earn price. Let's get through 'twenty three, but we'll be ready to tackle our challenges and maximize unit profitability as

Speaker 4

we go

Speaker 5

into 'twenty

Speaker 4

four and make

Speaker 2

sure we fall back on those disciplines, As we go into 'twenty four and make sure we fall back on those disciplines of the bulk we're selling, the bulk we have operating.

Speaker 8

Sounds good. Thank you.

Speaker 2

Thank you. Thanks.

Operator

Our next question comes from Michael Fenner, Bank of America.

Speaker 4

Thanks guys for taking my questions. Can you just help us understand how much were costs like Energy, raw materials, diesel, how much was that up incrementally in 2022 versus 2023 2020 sorry, 2022 versus 2021. And what are you kind of baking in there for 2023?

Speaker 2

So Mary, why don't you take 22 and I'll take 23?

Speaker 3

Yes. So energy was a considerable headwind in 2020 And it costs us about $225,000,000 between diesel and liquid. And I think maybe important context and reflecting back on 2022 and thinking about how it will impact 2023 and Tom can give some more color on that, but it's the fact that diesel in the Q4 Of 2022 was almost 40% higher than the Q1 of 2022 and liquid Likewise, it was almost 20% higher in the Q4 versus the Q4. So I think that's the setup as we move into 2023 and Tom can comment more on sort of full year 2023.

Speaker 2

Yes. I think what we have in the plan right now is probably high single digit. It's Combination of inflation, fuel and labor, we'll feel as I said, we'll feel a bigger impact in the first half just due to the inflationary pressures that we felt Kind of escalates and went through the year. That being said, I think all of that is partially offset with operating efficiencies and improvements generated by the Vulcan, we have operations. I think our folks are all over that.

Speaker 2

And how we do that, many of the details we illustrated in our September Investor Day. But I do have Pretty good confidence that they can keep some of that at bay just by improving the key metrics The throughput and downtime and preventive maintenance that really drive your cost.

Speaker 3

Yes. And specific to the energy in 2023, our expectation is that It will be more stable, but it will remain at these high levels, which is what will result in a considerable headwind early in the year And then that will moderate as the year progresses.

Speaker 4

Great. And when you look at the portfolio, Tom, you divested some concrete Assets in the Northeast. I'm just curious, is there any further portfolio moves we could see going forward? How do you kind of view these Dowgent assets after kind of a couple of challenging quarters with a lot of moving parts that That impacted the year. Appreciate your kind of comment on how you feel the health of those that part of your portfolio for Q3 in the long term.

Speaker 4

Thank you.

Speaker 2

I think that as always, we look at our assets as a group of assets that have to stand on their own. And if it's worth something, it's worth something to more about somebody to us, Then we'll divest of it and put that money back in our aggregates business, which you've seen us do in the past. Right now, The markets that we have concrete businesses in are privileged concrete markets and we're pleased with them. Obviously, inflationary pressures, you had Price chasing costs and like we did in asphalt, we'll catch that and bypass it and get back to growing margins. But I think the markets where we bought into, we like them.

Speaker 2

We kept our aggregates business in New York and New Jersey, But so far so good, and we think we can continue to improve our returns as we march through 2023.

Operator

Our next question comes from Mike Dahl from RBC Capital Markets.

Speaker 2

Good morning, Mike. Good morning.

Speaker 4

Good morning. Thanks for taking my question. Just a quick one on the public side. I don't know, maybe sensing a little bit of nuance here, we've been hearing about how strong backlogs and What are recently in terms of the growth, now you're saying kind of some modest impacts more as we get through the year and more meaningful in 'twenty four. I think if we We wound back 3 or 6 months.

Speaker 4

The thought was that the tailwinds might come a little bit Sooner than that, so in the context of your low single digit expectations for public, maybe you Help us understand that there's something different in the market that you've seen in terms of timing or level of distribution of Sean, is there something related to just labor constraints? How would you characterize what seems to be maybe a little delay And

Speaker 8

some of

Speaker 4

the infrastructure tailwinds.

Speaker 2

Look, I think this is as good of an infrastructure tailwind as we've ever seen in decades. That being said, as you've heard me say before, highway work comes slower than anybody anticipates it to, but it's coming. So overall, highway funding is way up. The sector is in great shape as is the entire public sector. State DOT funding is extremely healthy.

Speaker 2

And then you've got IIJA revenues that are going to be reflected in fiscal year 'twenty three, 'twenty four proposed budgets. Our top states are sustaining robust lettings. And that IIJ funding hits We'll hit lettings in 2023, and it will really impact, 20twenty three-twenty four as we move forward. I'll give you a couple of examples. If you think about Arizona, they'll let 45 projects in the first half of this year.

Speaker 2

If you go to move to California, The total dollars, project dollars in 23 will be a record coupled with record highway lettings that we saw in November, December. Texas is at a $10,000,000,000 budget, and they all have $7,400,000,000 of lettings in the second half Of their fiscal year, which is March through August. And then on the more to come list, that's what's there, we know is coming. But on the more to come list, In Florida, you got Governor DeSantis has posed a 33% increase in the FDOT program that would Impact Lettings in the second potentially the second half of the year or first half of next year. He's also there's initial $7,000,000,000 that he's wanting To accelerate for some 20 projects, congestion projects, Tennessee's government proposed to double the 2023, 2024 budget, the TDOT budget.

Speaker 2

So for this year, it's a matter of timing and how fast do lettings get to project shipping. But I want to step back and say it's nothing but timing. This sector is in very good shape and as good shape as we've ever seen it and growing.

Speaker 4

Got it. Okay. Thanks for that. Very helpful, Tom. Sure.

Operator

Our next question comes from Tyler Brown from Raymond James.

Speaker 9

Good morning. Hey, good morning. Hey, Tom, I actually wanted to go back to the Analyst Day and talk about the progress on your logistics excellence, I think the June plant operations. I'm just kind of curious how those initiatives are rolling out and are they expected to be a material driver in expanding margins in 2023 Well, are those more on the come in, say, beyond 'twenty three into 'twenty four?

Speaker 2

I think what you'll see in 'twenty three is maybe a little bit of incremental impact. It'll be more of a 'twenty four play. And that's a little bit of what we said in the Investor Day about the operating piece. We were really Rolling it out in 'twenty two, but more of an impact in 'twenty three. But for logistics, we're doing more roll Development in 'twenty three probably bigger impacts than 'twenty four.

Speaker 2

Okay. Thank you.

Operator

The next question comes from Phil Ng from Jefferies.

Speaker 5

Hey, Tom. Just piggybacking on Mike's question earlier on the public side of things. The low single digit growth does seem a little more muted than your 2 public peers are guiding for this year. Curious if it's a function of maybe you guys are a little more levered to bigger projects, so that's And I guess it'd be really helpful to kind of give us a perspective into how you think Public will grow as we exit 20 'twenty three and perhaps more importantly 2024 when you get the full impact of IHA?

Speaker 2

Well, I think that it's I'll take the second part of that question first. 2024, I think we'll see a lot more maturing of the DOTs getting work to shipments. And If you look at the level of lettings that we'll see throughout the year, that sets us up extremely well for 2024 because they get them left, they get the jobs out there, get them And so we entered 'twenty four with a higher level of starts and starts that have gone to aggregate shipments. So I think that obviously you got to wait and we'll see how that progresses, and are the DOTs able to get the work let and out for The projections they have. On big work, it's hard for me to really judge what some of my peers are doing because I don't get to look at their backlogs and Look at their work, so a little bit hard to judge.

Speaker 2

Now you are insightful in the fact that very large jobs take longer to get from letting to start because they're complicated And there's a lot that goes into it from procuring land and permits and just more detailed larger engineering things that have to happen and Pre work that has to go into it. So we do have a number of large jobs, in our backlogs. And as I said, they do take longer, but comparing it to my peers, it's just tough to

Speaker 5

do. I mean, would it be fair, Tom, looking out to 2024, see like mid single digit plus growth in public? Or is that still too Optimistic at this point.

Speaker 2

Well, obviously, too early to call because you've got to see what's happening in these lettings, but let's all be hopeful on that one.

Speaker 10

Okay. Appreciate the color.

Operator

Our next question comes from Derek Chamois from Loop Capital.

Speaker 4

Hi. Thanks for taking my question. I wanted to ask on the non res side of the ledger, the outlook for flat volumes this year. I'm just wondering if you can maybe Break out what you're seeing in your markets and your backlogs on the heavier non res side, so things like LNG, manufacturing, warehouses, Things of that nature versus the leg or commercial?

Speaker 2

Yes. I think the very large projects is Really, it's really encouraging. We're seeing a number of them. I mean, I'll give you some examples. You got aluminum plant here in Alabama, 100 plant in Savannah, Georgia, the GM battery plant that we'll be shipping in Tennessee, the Ford F-one hundred and fifty plant in Kentucky and a big solar Plan in North Alabama, all those are 100 of 1000 of tons per job and so very good work.

Speaker 2

We have some concerns on does the light non res follow home construction. That's one piece. And while On heavier res, the starts look good right now. It's really the question is and what we're trying to See and can't see yet is what's behind those because you've got commercial loans that have been challenged for 4 quarters. So right now, the leading indicators look good.

Speaker 2

And we'll just have to wait and see on the other, and see how it starts trend. Think in all in all, we try to be thoughtful as we assume flat. But remember, that flat is at extremely high levels And this sector is not overbuilt. So those set us up good for the future, even if there is some of the lighter stuff follows. Homebuilding, you've got a lot of heavy behind that too.

Speaker 2

Understood. Thank you. Thank you.

Operator

Our next question comes from Keith Hughes from Truist.

Speaker 4

Thank you. I have some questions on the cost that was referred to earlier on the high single digit increases in cost. Could you just say again on energy? Are you seeing energy just kind of rolls forward at current prices? Or is there any change up or down in the

Speaker 2

A little bit of the first half of the year, energy costs will be up because of costs. We think it remains at elevated levels, but in the first Part of the year, there's no question that everything, including energy, will be up because we saw such a quick rise of inflation throughout the year. So Costs get easier in costs as we go through the year just because the cost rose last year. But for Energy in the first half, Yes, it will be a headwind for us.

Speaker 4

And if you strip out the energy, what does year over year cost growth look like and Other in lighting items, kind of percentage?

Speaker 2

I would take it in pieces. I think that most of it is up Mid to high single digits, and that's everything from electricity to parts to labor, All of it is up. It's just going to get hit harder in the 1st 6 months and the 2nd 6 months.

Speaker 4

Okay. Thank you.

Speaker 2

Thank you.

Operator

Your next question comes from Michael Dudas from Vertical Research.

Speaker 4

Good morning, gentlemen, Mary Andrews.

Speaker 2

Good

Speaker 4

morning. Tom, just maybe you could share a little bit about a couple of your What are some of the surprises you may see given the dynamics you just put forth, whether it's regional, whether it's California, the weather was very hard, obviously, From the end of the quarter beginning of this year, what are some of

Speaker 2

the areas you think there could

Speaker 4

be some upside surprises in a couple of areas where There needs to be a little bit more concern about some of the project flows that you're anticipating.

Speaker 2

I think the big question for All of this is timing of highway projects. And that's in every DOT we have. All of them have great funding. All of them have great plans. All of them have really good lettings.

Speaker 2

It's half assed that they get that work to shipping aggregates. And I think that's the biggest question that we will have to watch as we go through the year. Now the good part about that question, if it goes faster, that's great. But as I've said, how we work, It just takes longer to get there than we think it than anybody ever thinks it does, but it gets there. So is that the delta between minus 2 and minus 6 on your volume expectations?

Speaker 2

I would tell you that I think that's probably The biggest factor in the range. Yes. Thank you, Tom. Thank you.

Operator

The next question comes from Adam Thalhimer from Thompson Davis.

Speaker 10

Thanks. Good morning, guys. Good morning. Can I get your help with your margin guidance because you're giving us aggregates cash gross profit per ton? I want to convert that back to you just your reported aggregates gross margin.

Speaker 10

I think you're guiding to Call it 100 to 200 basis points of aggregates gross margin improvement this year, but I'm just not sure.

Speaker 3

Yes, that's right. We do expect aggregates gross margin expansion and I'd say at least at those levels. And also on EBITDA margins too, this will be a year where we can call back to some of our more historical

Speaker 10

And do you see a lot of variability between quarters or is that a pretty evenly throughout the year? Yes.

Speaker 3

I think from a margin standpoint, we expect consistent improvements throughout the year. As Tom said, it'll be First half will be more price, more cost and second half will be more moderate price and more moderate cost. But I think on the margin side, we should see good growth all throughout the year.

Speaker 10

Okay, very helpful. Thanks.

Speaker 2

Thank you.

Operator

Our last question comes from Rohit Seth from Seaport Research Partners.

Speaker 4

Good morning. Hey, good morning. Good morning. Thanks for taking the question. Just to Clear up on the non resi, you talked about light and heavy non resi.

Speaker 4

What is the mix between the 2 and your

Speaker 2

I think it's probably right now, we're probably a lot heavier on the heavy non res As we saw the light catch up had to catch up with residential growth, and it fell behind a little bit. So I think you still got Some runway with light res as it has as it lags single family, But the heavier piece of this will be in much heavier piece of this will majority of ours will be in heavy res.

Speaker 4

Okay. So non res is what 30% of your sales, your volumes?

Speaker 2

Yes. That's a pretty good round number.

Speaker 4

Okay. And then just on capital allocation, can you maybe comment on what the dealer market looks like at the moment?

Speaker 3

Yes. I think we still see good activity. We have our teams are always out Looking for opportunities, I think typically in these kind of environments, I mean, sometimes there may become a disconnect between Sellers' expectations and buyers' valuations, but as we talked about, we have A great ability to generate a lot of cash and we're always looking for ways to put that to work growing the franchise, particularly through the bolt on acquisitions and those I think are more about timing on the seller side than anything else.

Speaker 2

Yes. You saw us complete several of those, really strategic ones in 2022, very important, particularly to our California, our critical California and Texas markets. We always have a few of those that we're working on. We're very picky about it. We're very disciplined about it.

Speaker 2

But and while Years in which the maybe the future is not as clear, sometimes they get harder, I wouldn't expect a big turn off or turn on With acquisitions kind of a steady flow like we've seen. So I think there will be some out there. Timing of that will to be seen, But we'll keep plugging at that and be disciplined about it.

Speaker 4

Understood. Thank you for taking my questions.

Speaker 2

Thank you. Thank you for your time this morning. Thank you for your interest in Vulcan Materials. We look forward to talking to you throughout the quarter and throughout the year. Please stay safe and we look forward to seeing you soon.

Speaker 2

Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.

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Earnings Conference Call
Vulcan Materials Q4 2022
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