Vulcan Materials Q1 2023 Earnings Report

Vulcan Materials EPS Results

• Actual EPS: $0.95
• Consensus EPS: $0.64
• Beat/Miss: Beat by +$0.31
• One Year Ago EPS: $0.73

Vulcan Materials Revenue Results

• Actual Revenue: $1.65 billion
• Expected Revenue: $1.57 billion
• Beat/Miss: Beat by +$78.66 million
• YoY Revenue Growth: +7.00%

Vulcan Materials Announcement Details

• Quarter: Q1 2023
• Date: 5/4/2023
• Time: Before Market Opens
• Conference Call Date: Thursday, May 4, 2023
• Conference Call Time: 11:00AM ET

Vulcan Materials (NYSE:VMC) (NYSE: VMC) is a U.S.-based producer of construction materials that supplies the building and infrastructure markets. The company’s primary products include construction aggregates such as crushed stone, sand and gravel, as well as asphalt mixes and ready-mixed concrete. These materials are used in a wide range of projects including highways, commercial and residential construction, and public infrastructure.

Vulcan operates an integrated network of quarries, asphalt plants and concrete facilities to produce and deliver materials to contractors, municipalities and private developers. Beyond raw aggregates and mix products, the company offers services related to materials handling and distribution to support large-scale paving and construction projects. Its operations emphasize logistics and regional production to meet local demand for roadway and infrastructure work.

Founded in the early 20th century and headquartered in Birmingham, Alabama, Vulcan has grown into one of the larger aggregates producers in the United States with operations across multiple states. The company serves a geographically diverse base of customers, primarily within the U.S., and participates in both public-sector infrastructure programs and private construction markets.

Vulcan’s corporate organization includes an executive management team and board of directors responsible for operational oversight, capital allocation and safety and environmental compliance. The company’s strategy historically has combined organic investment in production capacity with targeted acquisitions and asset optimization to support long-term demand for construction materials tied to transportation and development projects.

Vulcan Materials Q1 2023 Earnings Call Transcript

Key Takeaways

• Vulcan increased its 2023 adjusted EBITDA guidance to $1.85–$1.95 billion, representing 14–20% growth year-over-year, after generating $338 million in Q1 adjusted EBITDA (+15% yoy).
• Aggregate selling prices rose 19% yoy in Q1, with asphalt and concrete prices up 15% and 12% respectively, and full-year pricing is expected to improve approximately 15%.
• Q1 gross profit grew 12% despite a 2% volume decline, gross margins expanded by 90 bps, and cash gross profit per ton improved 23% on a trailing-12-month basis to over $8/ton.
• The company maintains a strong balance sheet with net debt/adjusted EBITDA at 2.2×, free cash flow conversion above 90%, Q1 capex of $113 million, and ROIC up to 13.7%.
• Demand remains mixed with modest public sector growth, continued declines in single-family housing, but robust non-residential activity driven by industrial, manufacturing, and infrastructure projects.

Presentation

[Operator]

Good morning, ladies and gentlemen, welcome to the Vulcan Materials Company's first quarter 2023 earnings call. My name is Travis, 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. 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.

[Mark Warren, VP of Investor Relations at Vulcan Materials Company]

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. Today's call is accompanied by a press release and a supplemental presentation posted to our website, vulcanmaterials.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.

[Mark Warren, VP of Investor Relations at Vulcan Materials Company]

This will allow for more questions during our time together. With that, I'll turn the call over to Tom.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Thank you, Mark, and thank all of you for joining our call this morning. Vulcan 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 $1.85 billion-$1.95 billion in Adjusted EBITDA this year, a 14%-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'm pleased with our team's execution as they remain focused on our Vulcan Way of Selling and Vulcan Way of Operating disciplines. The pricing environment is healthy.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Year-over-year adjusted aggregate 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 costs to expand our margins. In the aggregate 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 and Texas, were challenged by excessive rainfall. 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.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

In asphalt, gross margins improved by 220 basis points despite higher natural gas and liquid asphalt costs and 11% lower volumes. Significant rainfall negatively impacted shipments in California and Arizona, our largest asphalt markets. Prices improved by 15% and more than offset higher raw materials costs. Cash unit profitability in asphalt improved by 9% 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 resulting cost challenges. 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, but contraction in private demand.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

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 continue to dampen some of the impact of single-family weakness. Affordability is the fundamental driver of the declines in single-family activity. Low inventories, favorable demographic trends, and employment growth in our markets continue to support demand for new residential construction. While the pipeline of private non-residential projects remains supportive of near-term demand, starts have eased in recent months. A positive trend in non-residential construction activity is the increasingly broad-based composition of starts. Industrial and manufacturing projects now account for more than 60% of starts.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Recent trends in supply chain management, onshoring, and clean energy investment are among the catalysts for this shift in the drivers of non-residential 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-month highway starts now exceeding $100 billion. The Infrastructure Investment and Jobs Act dollars are flowing. The impact of these 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-month starts up 23%.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

In addition to significant IIJA funding for water, energy, ports, and airports, strong state and municipal revenues support non-highway infrastructure investment. Overall, 2023 demand for aggregates continues to be dependent upon the depth of the decline in residential construction activity and the timing of highway starts converting into aggregate shipments. Our durable aggregates 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 outlook. Mary Andrews?

[Mary Andrews Carlisle, SVP and CFO at Vulcan Materials Company]

Thanks, Tom. Good morning. In the first quarter, our Adjusted EBITDA margin expanded 140 basis points with solid operational execution and disciplined SAG cost management. Our SAG expenses as a percentage of revenue improved by 60 basis points in the quarter and moved below 7% on a trailing 12-month basis. We remain focused on continuing to leverage our SAG cost base while making strategic investments in talent and technology to support our business needs. Net debt to Adjusted EBITDA was 2.2x at quarter end, squarely within our stated target range of 2x to 2.5x. Our investment-grade balance sheet gives us flexibility and optionality to continue investing in both organic and inorganic opportunities.

[Mary Andrews Carlisle, SVP and CFO at Vulcan Materials Company]

During the quarter, we invested $113 million in capital expenditures and continue to expect to spend between $600 million-$650 million for the full year. As we allocate capital, we are focused on improving our return on invested capital. 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, in which Adjusted EBITDA improved by 12%, we now expect to exceed that growth in 2023, with 14%-20% improvement.

[Mary Andrews Carlisle, SVP and CFO at Vulcan Materials Company]

Based on the success of our aggregates pricing efforts in the first quarter, which yielded 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. I'll now turn the call back over to Tom for some closing remarks.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Thank you, Mary Andrews. In closing, I want to remind you of two things that we are focused on each and every day. First, keeping our people safe. 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 position us well for driving long-term sustainable value for all of our stakeholders. Now, Mary Andrews, now we'll be happy to take your questions.

[Operator]

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 will pause for a moment to allow questions to queue. Our first question comes from Trey Grooms, Stephens.

[Trey Grooms, Managing Director at Stephens]

Hey, good morning, Tom, Mary Andrews, and Mark. Hope everybody's well.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Hey, Trey.

[Mary Andrews Carlisle, SVP and CFO at Vulcan Materials Company]

Good morning, Trey.

[Trey Grooms, Managing Director at Stephens]

Nice work on the quarter and aggregates pricing particularly strong, so, you know, hats off to you and the team for such strong execution there. Tom, I was hoping maybe you could talk a little more specifically about, you know, the overall pricing environment and your thoughts on kind of the rest of the year as, you know, as we look through the balance of the year for pricing.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Sure, Trey. As you saw, prices up 19% mix adjusted for the quarter. Great start. Our January 1 price increases were successful, and they're really broad-based. I appreciate our, you know, our team's hard work on earning price. Based on that success, you saw us raise the guidance to 15% for the full year. Trey, as we said, the pricing comps will get a lot tougher in the second half of the year. A good start to the year, but as always, work to be done to earn price. We feel really good about the 15%. Remember, you still have to take that price to the bottom line, which is what happened in the first quarter, where we improved our unit margins by some 23%.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

That kind of unit margin expansion is generally consistent with what was in our guidance, and that's just the Vulcan Way of Operating and the Vulcan Way of Selling at work.

[Mary Andrews Carlisle, SVP and CFO at Vulcan Materials Company]

You know, Trey, one other thing on, you know, on that note, on the margin side. We were pleased for aggregates gross margin to expand 170 basis points in the first quarter after being, you know, compressed each quarter year-over-year last year, as we took those rapidly rising costs through the P&L. Our pricing efforts, you know, in 2022 that Tom talked about and have begun now into 2023, have returned us to gross margin growth. You know, we would expect the year-over-year improvement to continue to accelerate as the year progresses.

[Operator]

Our next question comes from Stanley Elliott, Stifel.

[Stanley Elliott, Director of Equity Research at Stifel]

Hey, good morning, everyone. Thanks for the question and congratulations on the strong start. Tom, you mentioned kind of some nuances developing within the end market. I think that's one thing that's 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's, you know, seems to be more moving parts as we're looking forward.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Good morning, Stanley. Yeah, you're right. Non-res, you know, non-res construction to shipments continues to be really healthy, and we saw that evidenced in the first quarter. We would continue to expect the non-residential sector to maintain the really high levels that we came off of last year. It's really driven by warehouses, distribution, and now manufacturing and industrial. If I had to 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're watching it. The other question I would have is does light non-res that follows subdivision, does it start to slow? Again, haven't seen that yet, but watching it.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Now, the flip side, the potential upside to shipments and non-residential construction for me would include the number of massive industrial and manufacturing projects that are on the horizon or just starting to ship. To give you some color around that, we have now have some 12 major industrial projects, most of which are in our backlogs that total 8.5 million tons. Now, some of those are multi-year projects, so all of that's not going to go in 23. I would describe non-res right now as very healthy. So far so good, for a, you know, a healthy non-residential demand in 2023.

[Operator]

Our next question comes from Anthony Pettinari, Citi.

[Anthony Pettinari, Managing Director and Senior Equity Analyst at Citi]

Hi, good morning.

[Mary Andrews Carlisle, SVP and CFO at Vulcan Materials Company]

Morning, Anthony.

[Anthony Pettinari, Managing Director and Senior Equity Analyst at Citi]

Hey, you know, I think previously you talked about ag shipments to public projects expected to be up maybe low single digits in 2023 with IIJA maybe flowing through in the back half. 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 and the second half, you know, how we should think about the flow through, especially with IIJA projects.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Yeah, I would tell you back half loaded. Simple answer to that question. The highway sector is really the whole public sector, but particularly highways is set up for a really robust future. Funding is at all-time record levels. Importantly, all three areas of funding of government are at record levels. You got federal, state, and municipal all at all-time highs. All of that is starting to flow into lettings. Give you a little color around lettings, which are really healthy. In California in the fourth quarter of last year, first quarter of this year, combined, those lettings will be over $2 billion, which is an all-time high for two quarters in California. Moving to Texas is even better. In the first two quarters of 2023, the lettings will be at some almost $8 billion, again, all-time high.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Highway contract awards, as we said, are now over $100 billion. We still see 23 shipments we predict in low single-digit. That is indicative of how much time it takes for those big lettings to flow through to shipments. A solid 2023, but a much larger growth in 2024.

[Operator]

Our next question comes from Jerry Revich, Goldman Sachs.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Hi, Jerry.

[Mary Andrews Carlisle, SVP and CFO at Vulcan Materials Company]

Good morning.

[Jerry Revich, Managing Director and Senior Equity Research Analyst at Goldman Sachs]

Hi. Good morning, Tom, Mary Andrews, Mark. Nice quarter. I want to ask, you know, 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 suggests your volumes could actually be up year-over-year in the second quarter. I'm just wondering, is that consistent with the cadence that you're seeing in the business? Similar vein, really strong gross margins for aggregates in the quarter. You know, normally, your margins are up 10 points 2Q versus 1Q, I'm wondering is that the cadence we should be thinking about here as well. Thank you.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Yeah. I'll take the, I'll take the volume and let Mary Andrews handle the margin. I think, you know, 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. The weather in the East and Southeast were really positive. 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. You know, as far as our outlook, it really hasn't changed, the negative 2%-6%. We've got challenges in single family, which are gonna be more second-half loaded. Non-res, as you heard me say, is really solid. Highways, is coming on, but it takes a little time.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

I think for me, the timing is gonna be key of how fast those highway shipments, go from lettings to shipments. In all this, I think as a backdrop, we've got the Vulcan Way of Selling and the Vulcan Way of Operating, which gives me confidence that we'll continue to improve our performance regardless of demand challenges which you've seen us do quarter in and quarter out over the last few years.

[Mary Andrews Carlisle, SVP and CFO at Vulcan Materials Company]

Yeah. Jerry, in terms of margins, yeah, I think that a typical sequential improvement is what you should expect. As I said on the, you know, on a year-over-year basis, we'll see significant acceleration quarter to quarter as we progress off that 170 basis points from the first quarter.

[Operator]

Our next question comes from Mike Dahl, RBC Capital.

[Mike Dahl, Managing Director and Senior Analyst at RBC Capital]

Morning. Thanks for taking my questions. Mary Andrews, with respect to the other parts of the guidance, I think last quarter, I'm not sure if it's this formal guide, but you talked about cost inflation being up high single digits, and the release said that, you know, cost in ag is tracking consistent with expectations. I'm wondering kind of if that's still the expectation. If it is it right to think about from a gross profit per ton standpoint, you know, the new price on top of that might suggest something in kind of like a low 20s year-on-year increase percentage wise for gross profit per ton?

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Yeah. Quickly, you're correct on your assumption on gross profit per ton improvements. If I step back and look at cost, we're still, you know, 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. Remember, as we progress through the year, our comps on costs get a whole lot easier. We're still guiding to the high single-digit cost inflation, and I would describe that as probably higher than expected parts and services. Also delays in delivery is costing us just because it keeps equipment down. That's offset some by probably better than expected diesel costs.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

You know, all that being said, we'll continue to work on our operating efficiencies through the Vulcan Way of Operating. At this point, I think we're still very comfortable with that high single digit guide.

[Mary Andrews Carlisle, SVP and CFO at Vulcan Materials Company]

Yeah. Mike, just on the, you know, on the gross profit per ton and cash gross profit per ton improvement, you know, from the, from the beginning, we thought that'd be much more consistent this year. So that 23% you saw in the first quarter, and the low 20s for the rest is a good assumption.

[Operator]

Our next question comes from Kathryn Thompson, Thompson Research Group.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Morning, Katherine.

[Kathryn Thompson, Founding Partner, CEO, and Director of Research at Thompson Research Group]

Morning. Great quarter. Just have a clarification. You know, based on our channel checks, we're seeing as you already described, pretty robust demand in your and even possibly some tightness in materials in some key markets, or multiple markets throughout the U.S., as we enter the construction season. In light of the strong pricing commentary you had in quarter, does this open up the possibility for additional pricing actions mid-year? Also along with that, more of a mid- to long-term view when you look at reshoring population shift and, you know, government supported funding for IIJA, Inflation Reduction Act and the CHIPS Act, how does this play into your mid- to long-term view on pricing? Thanks so much.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Yeah. I think that you Well, so as far as pricing the rest of the year, we did not assume a second half price increase in our 15% guide. That said, we have announced mid-year price increases in the vast majority of our markets. We feel like you got to earn that first. We'll report on our progress on those mid-year efforts in August. As far as bid work, you know, we're pushing price day in and day out on our bid work, that's just part of our Vulcan Way of Selling. As far as the you're spot on the large projects, both on the public side, highways and non-highway, we're gonna see a lot more large projects and a lot more money flowing.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

We're also, as you said, starting to see the big manufacturing industrial projects which we think continue well into the future. All of that bodes extremely well for pricing because that gives us and our customers visibility to coming demand. Those large projects, both public and the big industrial ones, tend to be there's more surety to those projects that once they announce them, they're gonna happen. That also gives surety to demand, which is a very good backdrop for pricing.

[Operator]

Our next question comes from Keith Hughes, Truist Securities.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Hi, Keith.

[Operator]

Hi.

[Keith Hughes, Managing Director and Senior Equity Analyst at Truist Securities]

Hey, thank you very much. I guess switching to the into the discussion on on non-residential, specifically on heavy, there's a lot of positives out there right now. How far a visibility do you have on that business? In other words, could we be seeing several years of really strong, heavy, work to be done?

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Yes. That you are gonna 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 either their budgeting, their bidding, or their engineering. Like you said, I believe we'll see years of this, and I think it will really bode well both for volumes and price.

[Keith Hughes, Managing Director and Senior Equity Analyst at Truist Securities]

On that, your light business, that give a shorter cycle. Your visibility is not nearly that long on light. Is that correct?

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

That's correct.

[Keith Hughes, Managing Director and Senior Equity Analyst at Truist Securities]

Okay.

[Operator]

Our next question comes from Brent Thielman, D.A. Davidson.

[Brent Thielman, Managing Director and Senior Research Analyst at D.A. Davidson]

Hey, good morning.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Morning.

[Brent Thielman, Managing Director and Senior Research Analyst at D.A. Davidson]

Hey, good morning. Hey, Tom, I was just curious on the balance. What was the hit from the residential sector this quarter? With volume only down 2%, including weather, just on the surface, it doesn't look like that much.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

You know, if you look at it, about half of our markets took a hit in res, and about half were positive. I'd tell you probably mid-single digit. As we said, you know, we'll feel the impact of the fall in starts, permits and starts in single family. We'll really feel that in the second half of the year. Pretty much as expected right now, I think it's a, it's a, it's a. Plus with weather in Arizona, Texas and California masked some of that, so it's harder to see. We think that is more of a second-half play as those starts have to go through the pipeline.

[Operator]

Our next question comes from Philip Ng, Jefferies.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Hi, Phil.

[Operator]

Morning, Phil.

[Colin Campbell, Equity Research Associate at Jefferies]

Hi, good morning. This is actually, Colin 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.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

I don't think that's a big play on gross margin. It was only 1% on price. It really didn't have much impact on price or on margins.

[Operator]

Our next question comes from Timna Tanners, Wolfe Research.

[Mary Andrews Carlisle, SVP and CFO at Vulcan Materials Company]

Morning, Timna.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Hey, Timna. Hey.

[Timna Tanners, Managing Director at Wolfe Research]

Two things I haven't heard you address that I'd like to hear from, please. One is, just the labor markets broadly. I know it's been a bigger issue for your customers, but would, you know, appreciate an updated thought there. It's been, I think May will be a year anniversary since, the Mexican operations were shut, and there's been some noise down there, so would love your take on that as well. Thanks.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Yeah. I would describe the labor market as 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, done a lot of work on that. 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, and the proceedings with the NAFTA tribunal continue. We would hope to get a ruling on that sometime in 2024.

[Operator]

Our next question comes from Adam Thalhimer, Thompson Davis.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Hey, Adam.

[Mary Andrews Carlisle, SVP and CFO at Vulcan Materials Company]

Good morning.

[Adam Thalhimer, Director of Research and Partner at Thompson Davis]

Hey, good morning, guys. Great quarter.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Thanks.

[Adam Thalhimer, Director of Research and Partner at Thompson Davis]

I am starting to get questions from clients on the debt ceiling. If we don't get an increase, do you think there's a risk to federal infrastructure support?

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Well, I mean, that would be a first time that's happened. I would doubt that while everybody's wringing their hands over it, I think we'll solve this problem, and we'll continue with our infrastructure spending.

[Adam Thalhimer, Director of Research and Partner at Thompson Davis]

Yeah. I mean, prior government shutdowns haven't been a big deal, have they?

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Well, I don't wanna see one, but I don't think it's gonna impact our infrastructure projects.

[Operator]

Our next question comes from Michael Dudas, Vertical Research.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Hi, Michael.

[Mary Andrews Carlisle, SVP and CFO at Vulcan Materials Company]

Good morning.

[Michael Dudas, Partner and Senior Equity Research Analyst at Vertical Research]

Good morning, gentlemen. Mary Andrews. Mary Andrews, I just can share your thoughts on how operating free cash went through Q1 and how it looks for the rest of the year. Then maybe, Tom, you could discuss the M&A pipeline. Will we best guess, do we see any visible activity by year-end with what's happening in the marketplace? Thank you.

[Mary Andrews Carlisle, SVP and CFO at Vulcan Materials Company]

We were, you know, pleased with our free cash flow. It's obviously a very cash-generative business. Over the trailing 12 months, you know, our free cash flow conversion has stayed over 90%. We, you know, are pleased with that result. You know, we'll take our consistent disciplined approach as we think about how to allocate that capital along our waterfall priorities.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

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 we're working on, I would tell you kind of normal from the smaller, both owned and greenfield perspective. As far as large projects or large M&A, those tend to be lumpy. When they come along, we'll be in the game, and we'll take advantage. As always, we'll be disciplined in all of this about what markets we're in, what synergies are unique to us and what we pay for it. We look forward to reporting that as they come about.

[Operator]

Our next question comes from Garik Shmois, Loop Capital.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Hey, Garik.

[Operator]

Morning, Garik.

[Garik Shmois, Managing Director and Senior Equity Analyst at Loop Capital]

Hey, good morning. Nice quarter. Wanted to ask on the highway outlook, you're counting on demand showing up later this year. Curious, just has the lag between project starts and when volumes occur, has that changed at all, just given the size of the projects in the pipeline?

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

I think it's a little bit. You know, we would always call that 9 to 12 months. Larger projects can take longer just because of more complex engineering, more complex permitting, and more complex planning around those. When they run into a snag, it stops a big chunk of work or pushes it back. I would not change the nine to 12 rule of thumb, except for every once in a while now you'll come across a multimillion-ton highway project that can get pushed out past that limit. I think the nine to 12 is still a good rule of thumb.

[Operator]

Our next question comes from David MacGregor, Longbow Research.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Hey, David.

[Mary Andrews Carlisle, SVP and CFO at Vulcan Materials Company]

Good morning.

[David MacGregor, President, CEO, and Senior Analyst at Longbow Research]

Hey, Tom, Mary, and Andrews. Congratulations on a strong quarter. Phenomenal performance.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Thank you.

[David MacGregor, President, CEO, and Senior Analyst at Longbow Research]

Yeah. I guess, interested in just any update you've got on transportation. I know you've got some long-haul tonnage there. You're talking about the strength down along the coast. How's that changing? Is it changing for the better? Do you view that as a potential risk? Have you been able to lock up capacity? If so, for how far forward?

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

I think, you know, I think as we talk about rock is still short on all coasts, and it's driven primarily by bottlenecks on railroads. I think the railroads are working hard to improve, they're making progress, but there's still gaps there. I don't know that I see it as risk for 2023. It has its challenges, I think we'll work with our partners at the railroad, work through those challenges and be fine in 2023.

[Operator]

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

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

Hi, Michael.

[Operator]

Morning.

[Michael Feniger, Managing Director and Senior Equity Research Analyst at Bank of America]

Morning, guys. Thanks for taking my questions too. The first one, the pricing obviously very strong at 18.5%, and your full year range of 15%. Does pricing kind of finish the year, exit the year below that range? Do you think we still are in that double-digit territory? I'm just trying to think of that pricing cadence. The second question, just the operating leverage in aggregate. I think you typically target like a 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.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

First of all, on the flow through piece of this, you can see that above and you can see it below. Inflation, your big inflationary jumps put pressure on that, as we said, as does 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 as what we've said is that, as we progress through the year, the percentage price increase won't stay up at the 20% range because you're comping over such a sequentially high March through 2022 in price. The flip side of that is in cost. As we've said, you're seeing really high year-over-year cost at this point.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

They should ease as we go through the year because the inflationary comps ease as we go. Put all that together, we think we're pretty consistent in that 20% range improvement in unit margins.

[Operator]

Our final question comes from Dillon Cumming, Morgan Stanley.

[Dillon Cumming, VP and Head of North American Machinery and Construction at Morgan Stanley]

Hey, good morning. Thanks for the question. Just wanted to ask if you could put a finer point in some of the non-res commentary. I think there are just some concerns out there with regards to the entire financing environment, you know, how that could impact both the light and heavy non-res kind of side of the equation. Just curious if you're hearing something around that from customers and what the kind of latest update in the thinking there is.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

You know, I would put it this way. So far what we're seeing in non-res is really solid. Some shifting towards heavy industrial and manufacturing. We've not seen any impact on our markets yet on non-residential. Now, that being said, we're watchful, and we're watching it, but so far so good in non-res for 2023. To your point, I think everybody's watching that, but we haven't seen any impact at this point.

[Operator]

I would now like to turn the call back over to Tom Hill for any closing remarks.

[Tom Hill, Chairman and CEO at Vulcan Materials Company]

We appreciate your interest and your time this morning. We appreciate your interest in Vulcan Materials, and we look forward to seeing you throughout the quarter to 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.

[Operator]

This does conclude today's program. Thank you for your participation. You may disconnect at any time.

Participants

Executives

• Mark Warren, VP of Investor Relations
• Mary Andrews Carlisle, SVP and CFO
• Tom Hill, Chairman and CEO

Analysts

• Adam Thalhimer, Director of Research and Partner at Thompson Davis
• Anthony Pettinari, Managing Director and Senior Equity Analyst at Citi
• Brent Thielman, Managing Director and Senior Research Analyst at D.A. Davidson
• Colin Campbell, Equity Research Associate at Jefferies
• David MacGregor, President, CEO, and Senior Analyst at Longbow Research
• Dillon Cumming, VP and Head of North American Machinery and Construction at Morgan Stanley
• Garik Shmois, Managing Director and Senior Equity Analyst at Loop Capital
• Jerry Revich, Managing Director and Senior Equity Research Analyst at Goldman Sachs
• Kathryn Thompson, Founding Partner, CEO, and Director of Research at Thompson Research Group
• Keith Hughes, Managing Director and Senior Equity Analyst at Truist Securities
• Michael Dudas, Partner and Senior Equity Research Analyst at Vertical Research
• Michael Feniger, Managing Director and Senior Equity Research Analyst at Bank of America
• Mike Dahl, Managing Director and Senior Analyst at RBC Capital
• Stanley Elliott, Director of Equity Research at Stifel
• Timna Tanners, Managing Director at Wolfe Research
• Trey Grooms, Managing Director at Stephens