Vulcan Materials Company

Good morning ladies and gentlemen and welcome to Vulcan Materials Company's fourth quarter and full year earnings conference call. My name is Kevin and I will be your conference call coordinator today. As a reminder, today's call is being recorded. During the Q&A portion of this call, we ask that you limit your participation to one question plus a follow-up. This will allow everyone who wishes the opportunity to participate. Now, I will turn the call over to your host, Mr. Mark Warren, Vice President of Investor Relations for Vulcan Materials. Mr. Warren, you may begin.

Welcome, everyone, to the Volcker Materials fourth quarter and full year earnings call. With me today are Tom Hill, Chairman and CEO, and Suzanne Wood, Senior Vice President and Chief Financial Officer. Today's call is accompanied by a press release issued this morning and a supplemental presentation posted to our website. Additionally, a recording of this call will be available for replay later today. Before we begin, please be reminded that comments regarding the company's results and projections 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. You can find a reconciliation of non-GAAP financial measures and other information in both our earnings release and at the end of our supplemental presentations. I will now turn the call over to Tom.

Thank you, Mark, and thanks to everyone for joining the call today. We appreciate your interest in Vulcan Materials Company. 2019 represented another year of strong earnings growth and demonstrated the strength of our aggregate-centric business model. But before we talk about our accomplishments for the year, I want to spend a few minutes telling you about the good progress we made again in the fourth quarter. Aggregate's gross profit was $274 million, a 7% improvement versus the prior year fourth quarter. Aggregate shipments increased by 4%, with markets in the southeast and southwest reporting strong growth. For the quarter, Freight-adjusted average sales prices increased by 5.5%. All key markets reported year-over-year price growth. And the 70 basis point benefit from MIPS was due in part to above-average growth in Gulf Coast markets that are served by our unparalleled logistics network. This growth is noteworthy. The fourth quarter of 2018 made for a tough comparison with a 24% increase in average gross profit, 8% growth in volume, and 5% mixed adjusted price growth over 2017. Gross profit per ton in the quarter improved to $5.32 and was negatively impacted by three things, most of which are timing and mix related. First, repair and maintenance costs were higher in the quarter. As we said before, certain types of repairs and maintenance are routine and scheduled. Therefore, the associated costs are more predictable. Other repair and maintenance activities are planned annually, but the exact timing is more difficult to predict with precision. You monitor the situation throughout the year to determine the optimal time to do the work. and as a result, the cost can be lumpier. This quarter included several of these types of repairs. In addition, the rigorous inspection and maintenance protocol that we rolled out as part of our Operational Excellence Initiative in early 2019 drove some of our costs higher in the second half of the year. We expect to continue to see additional repair and maintenance costs in 2020 and have incorporated them in our guidance. Setting high standards is the right thing to do for the long-term health of our business. Our employees are highly engaged and they are focused intently on the mobile equipment and fixed plant inspection and maintenance aspects of this initiative. In doing so, we can preempt or avoid equipment failures which could result in much more expensive repair costs. The second factor that impacted our gross profit and aggregates was actual geographic mix versus our expectations. Our fourth quarter shipments were robust in markets along the Gulf Coast, which are served by rail and water. Remote serve markets carry higher selling prices, but also carry higher costs. particularly if the tons are shipped by rail versus blue water. In the fourth quarter, higher volumes from rail distribution negatively affected margins. The third factor was lower revenue and earnings from certain aggregate locations, which also generate tipping fees on clean fill. This result was mainly a matter of timing of projects expected to contribute to the fourth quarter instead of The projects were delayed but will benefit 2020. Finally, I'll also highlight our fourth quarter asphalt results, where gross profit increased by $4 million compared to the fourth quarter last year. This was driven by a 10% improvement in shipments and a 3% improvement in average selling prices. In addition, we experienced volume growth in California in spite of wet weather in the fourth quarter. These volume and price improvements, in addition to a 12% reduction in the average unit cost for liquid asphalt, drove a 52% improvement in unit profitability in asphalt. Suzanne will share with you the detailed numbers in a moment. But first, I'd like to summarize our full year 2019 accomplishments and talk about why we're excited about 2020. Let's start with the most important aspect of our business, safety. In 2019, our people led us to another year of world-class safety performance despite being busier than ever. We also completed the rollout of all of our strategic initiatives, commercial excellence, operational excellence, logistics innovation, and strategic sourcing. We believe these initiatives will help us accelerate growth towards our long-term goals. On the financial side, aggregate shipments grew by 7%, and average freight-adjusted sales price was 5.6% better than 2018. Aggregates gross profit increased by 16%, and unit profitability grew by 8%. Cash gross profit per ton was $6.74, another step forward on the path to our longer-term goal of $9 per ton. And while our non-aggregate segment gross profit was flat year over year, the second half showed signs of improving trends in the asphalt business. Our adjusted EBITDA for the year grew by 12%, and importantly, our return on invested capital increased to 13.9%. As a whole, we were pleased with our annual results, but we aren't satisfied with just setting records. Our focus is on getting better every day and reaching our potential. As we enter 2020, we are well positioned to take advantage of supportive markets and deliver another year of double-digit earnings growth. Our markets will continue to benefit from both public construction demand led by highways and a resurgence in demand on the private side, particularly residential. The public highway demand is there, as are the revenues to support the investment. As we said before, it's not a matter of if. but rather when the projects are finally started and shipments begin. To be fair, we've been a little bit disappointed over the last couple of months with the speed with which the states are letting work. However, we remain confident that these projects are a go in the near to medium term. With respect to residential demand, which We've been a bit cautious, but now we're seeing a very positive turn in leading indicators, with Vulcan markets outpacing the rest of the country. Underlying demand fundamentals, including population and employment growth, remain firmly in place and underpin our expectations of growth in private residential and non-residential construction. These demand characteristics are catalysts for a positive pricing environment in 2020. And demand visibility is also an important contributor. With our geographic footprint focused on the higher growth markets, we are in the best position to capitalize on public and private demand. So what does all of this mean for 2020? We anticipate a 2% to 4% growth rate in aggregate shipments. Aggregate freight adjusted sales prices are expected to increase between 4% and 6%. Additionally, we maintain our longer term view of approximately 60% same store flow through rate to gross profit on a trading 12 month basis. Overall, we are looking at double-digit growth in aggregate segment earnings. Moving to our construction product segment, we expect 10% to 15% growth in gross profit collectively. This contemplates relatively stable liquid cost in asphalt. I'll now turn it over to Suzanne for further comments on our 2019 full-year performance and 2020 guidance.