Vulcan Materials Company

Good morning, ladies and gentlemen, and welcome to Vulcan Materials Company's second quarter earnings conference call. My name is Christy, 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 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.

Thank you, Operator. Good morning to everyone and thank you for your interest in our company. With me today are Tom Hill, Chairman and CEO, and Suzanne Wood, Senior Vice President and Chief Financial Officer. Today's call is accompanied by a press release and a supplemental presentation posted to our website, bulkandmaterials.com. A recording of this call will be available for replay later today at our website. 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. Reconciliations of any non-GAAP financial measures and other information are available in both our earnings release and at the end of our supplemental presentations. As the operator indicated, please limit your Q&A participation to one question plus a follow-up. This will help maximize participation during our time together. With that, I will now turn the call over to Tom.

Thanks, Mark, and thanks to everyone for joining the call today. We appreciate your interest in Volcker Materials Company. As always, but particularly in today's world, we hope you and your families are safe and healthy. In spite of the difficulties caused by the pandemic, our company is thriving, which demonstrates the strength of our people and of our core business. I'll take some time to comment on three accomplishments. First, our employees have continued to shine. I'm proud of how quickly they've adapted to rapidly changing environments. Since the start of the pandemic, they've shown again and again their flexibility, their tenacity, and their commitment to everything from ensuring a safe workplace to taking care of our customers. Our workforce is second to none, and I appreciate everything they're doing to grow Volcan materials regardless of challenges. Second, our teams executed well on the operational and the financial contingency plans that we developed in the early days of the pandemic. Our approach was to identify, prioritize, and focus on what we can control, and then to take the appropriate and decisive actions. At times like these, the ability to have vision, to make decisions quickly and accurately, and to execute effectively is critical. We continually review our location-specific contingency plans and make the necessary adjustments all the while sharing best practices across our network. The combination of these proactive plans, solid execution, good communication, and the strength of our agris-focused model gives us confidence that we will continue to be successful. And third, our strong second quarter and year-to-date results clearly demonstrate our ability to grow our unit profitability and to improve our return on investment. We remain focused on what we can control, including maintaining our pricing disciplines and controlling our costs. Our success here is supported by our four strategic disciplines, particularly commercial excellence and operational excellence. You saw this in the second quarter. Despite a 2% decline in aggregate volume, we improved our adjusted EBITDA by 10%, our cash gross profit per ton by 9%, and on a trading 12-month basis, a return on investment by 100 basis points. Suzanne will review the quarter results in more detail shortly, but first, I want to describe some of the demand trends we're seeing. Certain leading indicators of construction activity appear to be showing signs of improvement, both sequentially and year-over-year. Housing has been the most resilient of our market segments, with June data showing improvement and single-family housing leading the way. Permits and starts have improved at a faster rate in our footprint than in other states. Private non-residential construction is the most variable in use, reflecting a wide range of building categories, each driven by different factors. At the end of 2019, the pipeline of new projects, measured by square feet of contract awards, had increased 10% from prior year in our markets compared to down 3% in other markets. This momentum reflected winners and losers both categorically and geographically. In April, this momentum was interrupted by the pandemic. However, Jews showed improvement over April and May. As a leading supplier in 90% of our markets, we are well positioned to supply all types of non-residential construction regardless of the category. As we think about current trends, it's important to keep in mind that unlike the Great Recession of 2008, private construction going into the pandemic was not overbuilt. Both residential and non-residential demand were below long-term averages. This suggests that a slowdown from the pandemic could be short in duration, assuming that the trajectory is not significantly interrupted by additional waves of new COVID cases. Highway construction was deemed an essential business at the onset of the pandemic, and so has pretty much been business as usual. Now, with shelter in place, gas consumption fell, and this affected state DOT revenues. But with reopenings, the revenues are recovering. The recovery, coupled with proposed COVID-19 relief, has the state DOT's outlooks improving. We are encouraged, as work continues in Congress, to backstop DOT revenues lost to COVID-19 and to reauthorize the FAST Act. The House has already passed backstop funding for DOTs, as well as a reauthorization bill. The Senate is working toward a COVID-19 recovery package now, and we expect they will address reauthorization in September. To summarize, the economic environment and certain leading indicators of construction activity showed improvement during the quarter. However, the evolving pandemic's effect on demand in our markets and the broader economy remains unclear. The volatility of new COVID cases restricts our visibility into the second half, and as a result, the pace and scope of recovery, and therefore, our shipments volume is uncertain. As a consequence, we are not reinstating earnings guidance at this time. We will continue to monitor all aspects of our markets, and as our visibility improves with respect to the economic effect of the pandemic, we will resume our usual practice of providing guidance. As we move forward, we will remain focused on the things that we can control, keeping our teams safe and healthy, servicing our customers, and executing on our operating disciplines. The maturing of our four strategic initiatives will continue to expand our margins. Our second quarter results clearly demonstrate that our strategic disciplines are working. The pandemic has not changed the underlying fundamentals of our agri-focused model. Our business is sound, resilient, and more easily adapted to the changing market conditions. We also have the solid foundation of a healthy balance sheet, strong liquidity, and the full support and engagement of our people. Despite near-term uncertainty, we remain confident about our long-term prospects for growth. Now I'll hand the call over to Suzanne for some additional comments.

Thanks, Tom, and good morning. I'll cover some highlights from the quarter and comment briefly on our balance sheet and liquidity position. As Tom mentioned, adjusted EBITDA for the second quarter increased by 10% to $408 million. In all three product lines, aggregates, asphalt, and concrete, we achieved improved profitability. This was particularly noteworthy in the aggregate segment in which cash gross profit per ton increased by 9% to $7.69. For the trailing 12 months, cash gross profit per ton was almost $7, thus continuing our progress toward our goal of $9 per ton that we shared with you at our last Investor Day. Our second quarter aggregate shipments declined by 2% from Q2 19's level. Shipping patterns varied widely across our geographic footprint, but were generally supported by healthy backlogs and our designation as an essential business. Key markets in the southeast and coastal Texas were negatively affected by wet weather, while shipments in California were impacted by shelter-in-place ordinances. Year over year, shipment activity improved in Georgia, Illinois, Tennessee, and the rest of Texas. In July, our aggregate shipments declined by mid single digits compared to a strong year over year comp. The decline reflected some project delays and reduced non-residential activity. During the quarter, our aggregate selling price improved by 3.3% on a mix adjusted basis with all key markets reporting improvement. Total unit cost of sales declined by 1% and 3% on a cash cost basis as compared to the same quarter last year. This was despite lower sales volumes and a reduction in inventory. We carefully managed our production schedules and prudently controlled inventory, particularly in areas like Northern California, which were more acutely affected by shelter in place orders. The associated cost of reducing inventory offset the majority of an approximate $14 million tailwind from lower diesel fuel costs. Moving to our non-aggregate segments, I'll start with asphalt. Our gross profit this quarter improved by $3 million as compared to last year's quarter. Although asphalt shipments declined by 5%, we captured the benefit of lower liquid asphalt costs. The concrete segment's gross profit grew by 10% to $14 million. Shipments decreased by 4%, while average selling prices rose by 1%. And in the quarter, SAG expenses declined 5%. as a result of the continued execution of earlier cost reductions, lower incentive compensation expense, and general cost control in response to the pandemic. As a percentage of revenue, the improvement was 31 basis points. We were particularly pleased, as Tom said, with our improving return on investments profile. For the trailing 12 months into June 30, it improved to 14.2%. And consistent with past practice, this has been calculated on an adjusted EBITDA basis. Turning now to the balance sheet and our liquidity, we took further steps this quarter to enhance our position. We issued $750 million of 10-year notes with a coupon of 3.5%. The purpose of this bond issuance was to retire a $250 million note that matured in June 2020. The remaining $500 million pre-funded the maturity of another note due March 2021. That note is not callable, so we will hold the cash on our balance sheet until then. Our weighted average maturity of debt is 14 years, and our weighted average interest rate is 4.1%. Our total gross debt to EBITDA leverage ratio is 2.5 times, but on a net debt to EBITDA basis, it's 1.9 times, reflecting the $817 million of cash on hand. At June 30, our available liquidity was a healthy $2 billion. Cash generation has been strong through the first half of the year. Operating cash flows were $426 million through June, an increase of 41%. Capital spending is slightly less than the prior year's first six months. We still anticipate spending between $275 million and $325 million this year, mainly on operating and maintenance CapEx. Most of our growth projects remain on hold, and we'll continue to evaluate our CapEx as we gain further visibility into the second half of 2020. Our capital allocation priorities remain the same. Operating and maintenance CapEx remain our first priority, followed by dividends. Looking at M&A, we will remain disciplined in the evaluation of opportunities. And as I mentioned last quarter, we have temporarily paused our share buybacks until visibility improves. I'll turn the call back over to Tom now for closing remarks.

Thanks, Suzanne. Before we go to Q&A, I want to again take this opportunity to thank the employees of Vulcan Materials Company for their efforts. Nowhere is their hard work and dedication more evident than our safety record. Our year-to-date MSHA OSHA injury rate is 0.82 accidents per 200,000 employee hours worked. That's a record safety performance, and we remain committed to keeping our employees' health and safety as our top priority. And now we'll be happy to take your questions.

Thank you. And at this time, if you would like to ask a question, press star, then the number one on your telephone keypad. And your first question comes from Trey Grooms of Stevens.

Good morning, Trey. Hey. Good morning, Tom and Suzanne. And nice quarter in a very challenging environment. Hats off to you and the team.

Thank you. Thank you.

So, you know, clearly there's still a lot of uncertainty out there in the face of the pandemic. But, Tom, can you talk about both, you know, what you feel good about and also what gives you some concern as we look ahead into the back half of the year?

Sure. I think I would frame that in what we know and what we don't know. And starting with the unknowns, you know, it's really driven by the pandemic. The trajectory of new cases is just dramatically changing from month to month. making it really difficult to us to accurately evaluate the impact on our business. And I would break that into three buckets. Number one, the severity of shelter-in-place with the spike in new cases. Will it slow jobs? Will it postpone jobs? Number two, non-residential construction. We've seen a bit of slowing in non-res construction. We saw jobs postponed in April, picked back up in May. And now with spikes, we've seen some other jobs postponed. We think the jobs are going to go. The work's going to happen, but the timing is going to be tricky of when they start back up. And then the third bucket would be highway work. The state DOPs, they've been impacted with, you know, lost and lost revenues. Right now, it's much better than we would have expected 90 days ago. Most DOTs, state DOTs, are on the road to recovery, but further shelter-in-place orders could set this back. Most of our states are giving pretty good signs right now, and many just released their budgets, which they say they'll reassess mid-fiscal year based on growing revenues in states and based on acts of Congress or what we get to backstop in the COVID pandemic. Phase 4 Act. Going into the third quarter, I would remember three things. First, third quarter is our largest quarter. It also can be our most volatile quarter with, because it's hurricane season. We're also comping over 2019 third quarter, which had no storms for the first time, no impactful storms for the first time in four years, and volumes were up 8%. So, you know, a little bit of a tough comp going into the quarter. Turn into things we do know. I think what we do know gives me confidence. We come at this in a real position of strength, regardless of what happens. You know, our aggregates business is advantaged, particularly if demand should fall. Our, you know, our footprint is also advantaged, and it's broad and it's diverse. Our people are really engaged. You saw that in their health and safety performance. They've done an excellent job being nimble, being quick, being responsive to a rapidly changing environment. They, you know, they went into this earning the highest margins and then they improved that by 9% in the second quarter with volumes down. That improvement is not an accident. They've done the pre-work over the last three years to earn this. What you're seeing is our four strategic initiatives enhance our execution. We always said that those would help us in good times and protect us in challenging times, and you've seen that in the first half of the year. A balance sheet, liquidity is strong. So we're going to control what we can control, and I have a lot of confidence that our people will be successful whatever the world throws at them.

All right. Thanks for that. And that actually leads me to my next question, you know, controlling what you can control. And I'm Looking at your cash gross profit per ton here, increased 9% on volume that was actually down a little bit. Clearly, diesel was your friend, but more impressive is you pulled that off while reducing your inventory. Can you talk about some of the puts and takes of that unit profitability improvement, reduced cash spending and operating efficiencies that you put in place and you mentioned, and how we should be thinking about that in the near to medium term?

Yeah, well, I think hats off to our operating teams and our sales teams. They're the ones that need to be congratulating on that performance. You saw solid price, and we'll talk more about that later. But from an operating side, it was just good execution with unit margins down 3%. We had the tailwind of diesel. offset by inventory reduction. And the inventory reduction is just the prudent thing to do in places like San Francisco, where we had just a lot of unknowns of what the shipment was going to look like. I wouldn't expect us to see that in the second half. But the real driver was, you know, in the cost reductions, was driven by operators' performance. It was things like plant throughput, plant availability, labor productivity, all of which improved. And what you're seeing there is just, you know, experienced operators and engaged teams executing on those operating disciplines, which I'm very proud of. So, you know, just a really good performance and just good disciplines throughout the organization.

And I just add to that, I think this is where having, you know, those operational contingency plans in place at the plant level that we talk so much about, in the first quarter having put those in place. I think this is where they really pay off. If you know going in based on certain conditions and certain trigger points what you plan to do at the time, then it can all be executed in a very consistent and controlled manner and you're not scrambling around trying to figure out what actions to take. When you have those in place, there's just a built-in flexibility there because The conditions, they, you know, they are changing. Jobs are postponed. Jobs are back on. And so, you know, I really think that having the plans in place helped and also our folks having the daily flexibility of changing to meet whatever the situation was, you know, helped as well.

Yeah, it sounds like those plans are really paying off for you in a pretty challenging environment for sure. Well, okay. I just want to say take care, and thanks for taking my questions. I'll pass it on. Thank you. Thank you.

Thank you. Your next question is from Anthony Pettinari of Citi.

Good morning. Good morning.

Good morning.

You know, regarding the stimulus that's currently being negotiated, you know, when you talk to customers and going back to the DOT, is it possible to talk a little bit more about what folks are ultimately expecting to see or need to see with regard to aid to states and infrastructure, your remark, you know, to feel comfortable about, you know, going forward with projects? Sure.

Yeah, I think if you look at just highways in general, overall, the highway funding situation is improving. As I said, it's a lot better than what we had expected, you know, 90, 60, 90 days ago. With the shelter-in-place lifting, you're seeing those gas tax revenues up in May and June. And also, you've got to remember, in nine of our 10 states, of our top 10 states, the They've all gone into this increasing user fees. So that also will help offset any setback that we saw from fallen usage. Hopefully we'll get progress out of Congress on COVID for relief. The AASHTO Act is $37 billion, which is down from the $50 billion, which we talked about 90 days ago. There's a lot of work going on in that. That will happen. But as I said earlier, we're hearing better signals as we continue to go through this from state DOTs, and I think they're getting themselves in a better place. And all of them are saying they're going to reassess the situation as we get to midyear, and hopefully funds have grown. Okay, that's helpful.

And then on aggregates pricing, I'm just wondering, did you see any changes in pricing as you moved through the quarter and into July and August? You know, one of your competitors has spoken about maybe minor delays to price initiatives in the early days of COVID when there were some disruptions. Just curious if you saw anything similar.

Yeah, you know, I would take it in pieces of this. The reported price we had was three. We talked about... unfavorable geographic mix, which cost us about 30 basis points. And that was really North Carolina volumes being down and the Mississippi River in Illinois being up. That was really the basis of those 30 points. Then if you remember in our last call, we talked about some of our markets where we normally have a April 1 price increase to fixed ready mix plants, that that may push 30 to 60 days. but it would come through. And all those increases did come through. A number of them did push 30 to 60 days. And if you step back and look at that delay in pricing in the quarter, it cost us about 40 basis points. So that was the outlier, I would say, in the quarter. That won't have any further impact as those are all in place. And I don't see any, you know, the pricing characteristics we see right now are aggregates as normal, they're resilient, and I don't see anything that would change that environment at this point.

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

Thank you.

Thank you. Your next question is from Catherine Thompson of Thompson Research Group.

Good morning, Catherine. Good morning. Good morning. Thank you for taking my questions today. First, on the policy side, we've heard some very positive feedback from Caltrans on the fiscal 21 budget and lettings. Could you give a similar update for Illinois and has the state been able to move forward with the Rebuild Illinois Act in terms of funding and lettings in the face of COVID and lighter traffic volumes?

It's steady. You know, they have a big goal to be a logistics center. It is a priority for them. We don't think we'll see any fall in funding in Illinois. As you know, they raised... They had legislation to raise gas taxes a year ago, and that is in place. We think Illinois will come through. And they have big ambition to come through. But like you said about California, we heard really good things out of Caltrans. As you know, it's actually in very good shape because their gas tax, remember, its index went up July 1, and it's increased over last year. So despite... you know, issues with shelter in place and usage going down. They're quite ambitious in 2021, which their fiscal year 2020 just started. So, to put that in perspective, their revenues for SB1 in 2020 were around $3 billion. They're expected to be $4.4 billion in 2021. Now, that's an increase in But, you know, as ambitious as California's is, that's down from the five to seven, but, again, an over 50% increase from last year. So they'll see a good year in fiscal year 20 and lettings in 21 in California.

And just to clarify before moving to my second question, was the increase in volumes in Illinois a function of higher infrastructure funding?

I believe that's correct.

Okay. Then looking at cost, you know, that's definitely been the theme this quarter for so many companies, not just in heavy materials, but other construction-related companies. When you look at some of the changes that are more structural versus transitory, could you maybe go through those and then also think about how this experience changed, how has it changed how you think about cost structure? Thank you very much.

Yeah, the fundamentals of what drive costs haven't changed, and it's really the operating efficiencies and disciplines that are fundamental to our business. It's based on what I talked about earlier, which is, you know, maximizing your throughput and matching what you're producing to what you're selling, having the disciplines to where you do the pre-inspections of equipment so you don't run it to failure, and making sure that you get most, and also so that you have the plant availability and lack of downtime, and then just making sure all of that matches with labor productivity. Those are hard to do in good times. They're even harder to do when you have volatile volumes or falling volumes. So, you know, I think our folks did an excellent job on those, and they stayed focused on their plans and their execution and taking care of themselves. So, again, you know, it helps us make progress towards our longer-term cash gross profit per ton of $9.

Yeah, and while we're on that, Catherine, I'll just comment on, you know, SAG, you know, our administrative costs. You know, in the quarter, they improved 31 basis points as a percentage of revenue. That keeps pushing us toward our goal because we're always looking for ways to try to leverage that overhead structure. And we had, you know, several things operating in our favor. You know, we... We took a pretty good look at the cost structure at the end of the year, last year, beginning of this year, and so we have a number of those that are continuing to play through until that comps over, you know, a little bit in the fourth quarter, but certainly in the first quarter of next year. A little bit lower incentive comp in the quarter, but also just general cost control along the way, and some of those things we're finding as people work from home. You know, some are perhaps a bit transitory, but not all of them are. You find ways to be more efficient, and that's really, you automate things, and that's really what we're looking for because those are structural in that arena and things that can play forward. And I would say if you think about probably what's the most transitory, you know, kind of cost of all and the one that people would typically think about rising when we, you know, hopefully all get to the point where we can all be back in the office working together. You know, everyone always points to, you know, travel expense and those sorts of things. But I think, you know, Vulcan, you know, has learned something, you know, over this, you know, time of the, of the pandemic, and I think other companies will as well, that there are, you know, certain ways and times to communicate using, you know, video or other technology where your communication, you know, is actually, I think, you know, more succinct and more clear because everyone's managing their time. And, you know, while you need to be out front and in front of your employees, and I'm not implying that we would ever step away from that, I think there are you know, ways that you can utilize that technology to even manage those costs when things get more back to normal.

Great. Thank you, Tom and Suzanne. Have a good one and best of luck. Yeah, thanks, Catherine.

Thank you. Your next question is from Jerry Revick of Goldman Sachs.

Yes, hi. Good morning, everyone. Hi. Good morning. I'm wondering if you could comment on how much visibility you have in the near term, you know, Tom, I understand the comments about the tough comps, but are you seeing the normal sequential build in activity heading into the third quarter? You know, the concern is we've seen some camera-level data on construction sites that suggests that activity slowed in the back half of July specifically, so I'm wondering if you just comment on that relative to the visibility comments that you spoke to earlier, please.

You know, July I don't think surprised us. July was also impacted by wet weather, really across our foot. We were wet across our footprint with the exception of California, and I'm sure that had an impact on us. But the volatility is really, for me, it's not if the jobs are going to go, it's when they're going to go. And I think that that timing is hard to call, but the fact is I don't see many jobs that are that were counsel as opposed to being postponed.

Okay, thank you. And I'm wondering, can you talk about what you've seen in California, Florida, and Texas since we've seen the lockdown steps kicking back in, any meaningful impact on activity levels as a result from what you can tell?

To short answer that question, there's nothing meaningful at this point with the exception of some volatility in mainly commercial jobs, which we've talked a lot about already. You know, California was the toughest hit. I talked about Caltrans, which looks good. The res and non-res in California were hit hard just because of more severe shelter in place but are rebounding. I'll give you some examples. In residential, there's two megaprojects. residential projects, one in LA and one in San Diego that we're supplying. The developers, even though the res seemed to be a little slow, decided to go ahead and accelerate putting the infrastructure in because they feel like the house market will come back quickly, and that allows them to build out faster. So they go ahead and took the investment to put the infrastructure in So while California is the hardest hit, it's a little behind everybody to recover, but the fundamentals for the private side are still in place, and we know we're going to see substantial growth because of the funding, the substantial increase in funding in Caltrans in fiscal year 2021. So overall, so far, so good. Texas, we've not seen any impact of the spikes at this point. So, you know, hopefully they'll get that under control, and I think it's trending in the right direction. Florida, same answer. I don't think we've seen any impacts in the second half of July, the first few days of August, because of spikes in new cases at this point.

Yeah, and I would just add to that, and this is more a comment on your first question, you know, where we operate today, Our geographic footprint is important in this, too, as Tom was just pointing out. And, you know, certainly when you look at res in terms of permits and starts, you know, trailing six-month, you know, data, trailing three-month data, and even the most recent month of June, you're seeing some sequential improvement there on res. And, you know, even on non-res, which is the one that is 50%, you know, most often talked about, you know, it certainly, you know, took a big step backward in April when the pandemic really hit and there was a heightened sense of uncertainty. And, you know, we try not to overread this, but as you can imagine, we do study all these, you know, indicators very, very carefully. And you've heard me say before, I'm a big fan of DODGE data, but even there from that low you know, point of April, we've begun to see some little, you know, bits of sequential improvement as we've moved through, you know, April, May, and June. So, you know, I think we, you know, we are encouraged by that. I think it shows that the economy, you know, wants to recover. And as Tom said, there's lots of work out there to be done. But I think it really does just come to what happens with the, you know, surges in case. But, you know, as we said, you know, earlier, we'll be ready when it goes because we are in the right places. Okay.

And lastly, you know, from a margin standpoint, congratulations to your team from us as well. You know, as I hear you step through the drivers of the cost reduction, both SG&A and COGS, it sounds like none of those are one-time customers. So as we think about the third quarter and layer on the additional pricing that you spoke to earlier, Tom, it sounds like margins could actually expand on volumes that are down mid to high single digits. And, you know, I just want to make sure that we're not missing any potential headwinds for us to think about whether it's further headwinds from inventory reductions or other pieces as we think about what the better margin performance this quarter means about to go forward.

Yeah, so as we said, solid performance by our folks in the first half, both in price and in their operating disciplines. As I said, I don't see anything changing our price cadence. As we look forward at the operations and costs, there's always some headwinds out there for repair and maintenance. The tailwinds from diesel were a big advantage in Q2, may not be as quite as advantaged in the second half, but we think there will be tailwinds there. I would not see us have, again, the inventory hit that we took. We're back in the game, so to speak, and those plants are back operating. So I don't see that happening again. I believe our operating efficiencies, you saw them improve in Q2. We're working hard on that to keep those. Remember, third quarter is hurricane season. We've already seen two. Don't think it was a big impact, but, you know, those storms can have an impact on costs. I don't think they will at this point from those two. We've got our, you know, strategic initiatives that are working for us. So, right now, it's too many variables to call out a specific number, but I think we have the right people. We have the right plans. We have the right execution, and I would expect our unit margins to grow in the second half, and so that we'll make progress towards that longer-term goal that we talked about of $9 a ton, cash goes proper per ton. We will see it grow. Again, a little bit too hard to call out that number, just the variables, but I have confidence in growth.

I appreciate the discussion. Thank you.

Thank you.

Thanks. Thank you. Your next question is from Mike Dahl of RBC Capital Markets. Hi, good morning.

Morning. Thanks. Morning.

Hope you guys are doing well. Thanks for taking the questions. Thank you. Sure. First question, obviously, 3Q is a tough quarter overall from a comp standpoint in ags, but looking at the monthly comps, could you give a sense of how your July comp stacks up relative to what growth you saw in August and September last year?

I don't remember if I remember exactly, though, that sequentially. It was kind of a steady growth quarter. It wasn't choppy, if memory serves me right. And so I don't know that there was a lot of volatility last year between months within the quarter because the weather was pretty consistent. As I talked about, we didn't have the storms that we see in prior years. As I said, July this year was, in all of our markets except for, I think, except for California and Arizona, was quite a bit wetter. So that had some impact on that mid-single-digit decline in volume, as did, we talked about, the volatility in the markets with jobs postponing. But I don't see a lot of volatility month-to-month in last year's quarter.

Got it.

Okay.

Second question, just on kind of the state DOTs, and Tom, I think in your opening remarks, you Talked about, you know, potential for stimulus to shape up in a way that backstops some of the states. That's obviously been one of the more controversial parts of the different stimulus bills and debates in Washington right now. So I guess a couple questions related to that. What are you hearing on the ground in terms of the likelihood of that happening? getting through in a final negotiation? And to what extent are your conversations with the state DOTs and the, I guess, the encouragement that they've had lately, how much of that is tied to an expectation that there's some state backstop in one of these COVID stimulus bills versus their specific funding that's been in place?

Well, obviously, the DOTs want that. They need that. They were negatively impacted by the pandemic, and those falls in revenues are absolutely caused by the pandemic, so it's the right thing to do to backstop those. I think that, and they're all hopeful they will, I think that, you know, state-level funding is likely to be part of the final package as a result of the House and Senate negotiations, and state governments will have flexibility to how to use that. We're hopeful that the COVID-4 package is going to provide dollars targeted at state DOTs. I think, you know, when AASHTO wants that, they just reel the $37 billion. As far as the conversation with the DOTs, I don't think they are putting their eggs all in the basket of getting that backstop, although they need it. But I think what they're looking at is twofold. One is, as I said earlier, they've all increased Most states in our footprint had already increased funding for highways, so that's helpful in the recovery. And then the lift of shelter in place is dramatically improving usage. And so that's something else they're watching, how fast does that come back and how that will, if it continues, will positively impact funding for the rest of fiscal year 2021. Those are the two buckets I think that they're looking at when they want to reassess their mid-year budgets.

Okay. That's helpful. Thank you.

Thank you. Your next question is from Phil Ng of Jefferies.

Hey, good morning, everyone.

Good morning.

Congrats on a pretty solid quarter here and a tough backdrop.

Thank you.

And really good to hear that trends are picking up sequentially on the non-res side. But curious if you can provide a little more color on the bidding activity, you know, how extended are your backlogs? And while there's not a lot of cancellation, you know, we're just trying to gauge, you know, new work that's being put up for bid perhaps for next year for non-buyers.

So if you just look at backlogs, we were down a little bit, but we've seen improvement in the last, in the 23 months in our backlog. So, you know, things are getting better and improving. And so I think that that's looking better.

Yeah. Let me just walk through a few of these things to see if I can give a little bit of color around that. I mean, clearly, as we were going into the start of the year, you know, all three of the primary areas, res, non-res, and highways were moving along very well and had some positive momentum. And we talked about that on the call in February. You know, COVID-19 was the big disruptive force. And as I said earlier, you know, all of those areas took a pretty sharp decline in April. I think, you know, being in the states we're in, that's shown some, you know, resiliency and certainly as the states began to reopen, that helped as well. If we just sort of take them one by one, and we talk about residential, clearly that one's been the most resilient. It's bounced back the most quickly, and we really have the most visibility around that area. You know, when we look at a couple of things, certainly look at, you know, starts, but we also look at pre-leading indicators, if you will, to that. You know, in terms of permits on a trailing six-month basis, a trailing one-month basis, particularly the trailing one-month basis, you know, and look at June, you know, year over year, we're up, you know, double digits in our states, and that compares to kind of a mid-single digits in other states. So that one appears to be you know, moving along very well. We saw a couple of postponements there early on, and those within about three weeks flipped and are back, you know, on track and have begun. On the non-risk side, you know, again, the new project pipeline was positive coming into the year, you know, at the end of the year, actually, if you looked at the trailing 12-month starts, they were up about, you know, 10% in our markets, which were, you know, a fair bit ahead of other markets. You know, again, we saw, you know, some, you know, non-res is a broad category, but, you know, even then, and certainly now, we see, you know, winners and losers both by category and geographically. And we do, we have seen these you know, small sequential, you know, improvements that are just these little, what I refer to as baby steps in the right direction. So it's encouraging, but, you know, we are watchful and we are, you know, trying not to overread that. And Tom has talked about, you know, highways there. The awards activity is certainly up in our markets. And so we are... you know, we are feeling, you know, pretty good about where we stand relative to that.

Yes, specifically on non-res, we saw the monthly private non-res square foot starts, you know, drop dramatically in April. They stayed down in May. And then in June, we made up about half of that drop. So one of the questions, I guess, going forward is, again, timing on those projects and when they start going. Well, how does that trend look in July and August and what's going to happen? So, you know, it fell, but we've made progress back in non-res and hopefully that'll continue over the next few months.

Got it. That's super helpful. And on the public side, it sounds like the bidding activity and backlogs remain pretty strong. Any particular states that we should have a more watchful eye when we think about activity going into next year? The reason why I'm partly asking is your backlog in bidding activity sounds pretty good, but one of your competitors kind of signaled maybe, you know, a modest deceleration of trends in the coming quarters. You know, appreciating, you know, footprint does matter, but any cover on that front would be really helpful. Next slide.

Yeah, the state I would be most watchful for in our footprint would be Kentucky, who has just been hard hit and, you know, basically shut down their DOT. South Carolina has had some challenges, and obviously North Carolina, which everybody's talked about, has had its share of challenges. But if you look at our top five states, which Virginia DOT looks pretty good, Georgia at this point, they're saying that until they see more, you know, they're maybe down 11%. But you've got to remember that's coming off of an all-time record 2020. Right. DOT year for Georgia. And our starts are up 15% there and our backlogs are very good going into this. Tennessee had no impact in 2020. A little bit of a wait and see on 2021. But at this point, they don't see any high level change from 2020 and 2021. And kind of same story for TxDOT. 2020 health legs were very good. You know, their fiscal year 21 doesn't start until September, so they got some time. But at this point, they think they're in pretty good shape. So for our big states, I think the DOTs, as we said, we're getting good signals, and hopefully we'll get improving signals as we travel through their fiscal year. Thanks a lot. That's a really great fellow.

Thank you. Your next question is from Stanley Elliott of Stiefel.

Good morning, everybody. Thank you all for taking the question. In terms of the debt due next year, so the $500 that you all are going to pay down, are you all thinking about the leverage ratio that you all want to carry any differently at this point? I mean, you think about by 2021, you should be down below kind of the one and a half to two and a half sort of target. Just curious to see how you all were thinking about that with that commentary.

Yeah, no, it's a very good question. I mean, we, you know, the market was pretty choppy in that sort of March, April, and even early May time period when we would have normally been out in the market to take out the $250 million bond that was due in June. And so when we had a decent window to go in, we just decided, you know, kind of as the abundance of caution to to go ahead and issue the long-term bonds. Three and a half percent is a very good long-term coupon rate. And so we decided to go ahead and just pre-fund, if you will, that maturity of the $500 million bond in March 2021. And you're right to point out that our leverage on a net debt basis is now down at 1.9 times, just slightly below our often stated range of two to two and a half. And so, you know, with that as sort of the backdrop, the answer to your question is, look, you know, the board and management take a through-the-cycle approach to our leverage and our strategic planning, and we are absolutely comfortable within that two to two and a half times range. Certainly, we prefer to be, you know, at the lower end of it, you know, during, you know, times of a bit of uncertainty like now. And so that's really the reason that you have seen us drift toward the lower end of the range because we just like to have a little bit more visibility around the depth and the duration of the pandemic. So I'm a conservative at heart, but I wouldn't read us sitting at 1.9 times as necessarily any long-term indicator that we're going to move to one and a half times, for example. We're going to be prudent, and we're going to do the right thing for the business, and we're going to make sure in our debt structure and in our leverage ratio that we maintain maximum flexibility and optionality for the company. That's the main goal.

No, that's perfect, right, because I think going into next year, there's just additional flexibility with the cash flows you guys should generate. I'll stop there and pass it on to somebody else. Thank you. Thank you.

Thank you. Your next question is from Adam Thalimar of Thompson Davis.

Hey, good morning. Nice quarter. Thank you. Hi, thank you. So most of my questions have been answered. I was curious, though, on the downstream side, So for asphalt and concrete, kind of what your high-level thoughts are for both for volumes and for margins in H2.

I would tell you that both – well, let me take asphalt first. You know, our volumes really got hit in two places. California with shelter in place, and then Tennessee. We had a very large paving project last year that didn't repeat. So I would expect our volume, I don't see a big change in the volume trends as we go through, as we look at our backlogs and the projects that are out there. I would, you know, right now I would expect liquid to stay down. It can be volatile. So I would expect a similar type of unit margin improvement as we march through the year on asphalt. To ReadyMix, the volumes there were impacted in the second quarter by shelter-in-place in Northern California. With the jobs, we see the pushback timing may be a little tricky. Volume is going to be hard to guess on that one at this point just because there's so many variables there. but I think our unit margins will hold on to. Okay.

And then, Tom, you've walked geographically. I think you did that walk on the public side and on the resi side. Just curious on the non-resi side, kind of which markets would be a watch?

California, as we talked about, while the fundamentals there are very good, it's just behind the rest of the country and I think it will continue to heal itself as shelter-in-places lift, but that one is going to be the most tricky one. As you look at going back to the east in Virginia, non-res construction is good. Georgia non-res is actually quite good driven by warehouse and distribution construction, which is no surprise to anybody. And I would tell you the same story in Tennessee, non-res and res are both shipping strong. Texas, res is good. Non-res, good again, and like everywhere else, warehouse and distribution. What's interesting about the coast with non-res will be an interesting, will be to see what happens with LNG projects. And these are so important because they're such large projects. The projects we said, nothing's changed there with the exception of the outlook. We said at the end of the last quarter was the projects that had started are going to go. The projects that had not started were pushed. That's still the case today. However, we're starting to have conversations about those projects, those future projects. We're starting to have the conversations about a restarting. back up in 2021. So that could be some tailwinds for us as we go into 21, but too early to tell.

Okay.

Good call. Thank you. Thank you.

Thank you. Your next question is for Michael Dudas of Vertical Research.

Good morning, gentlemen. Suzanne? Good morning. Following up on the question before about capital allocations and the balance sheet, you've deferred your growth capital spending prudently for 2020, at least to date. Any thoughts on are there changes into where that growth capital spending or level could be given? how things are emerging given the uncertainty and where some of your important states are benefiting or not benefiting from COVID restarts? And is that something that we could see once there's more visibility maybe later this year to maybe have a catch-up on that spending in 2021?

I think we need to see more visibility before I would be comfortable releasing growth capital again. And that's not a statement about – And anything about the markets is more a statement. As we said all along, there's a lot of volatility and too many variables to make a call. So we just want to see more before we would be comfortable going back and restarting some of those growth projects. Now, if you look at replacement capital, that's one that we'll be watching throughout the year. And, you know, at this point, we're comfortable where we are. But, again, depending on how the year goes, we might – we would flex off of that one faster than we would the growth capital.

I appreciate that. Thanks. Thank you.

Thank you. Your next question is from Seldon Clark of Deutsche Bank.

Morning.

Good morning.

Okay. Of SG&A costs going forward is...

you know, that $91 million is on 2Q, sort of the right run rate to think about for the rest of the year?

The first half of your question was cut off. If you could repeat it, it would be helpful.

Oh, apologies. I'm just asking what the right run rate is for SG&A costs.

Sure. Yeah, that falls into the, you know, category of, you know, not giving guidance for the rest of the, you know, the second half. So I will decline to comment on a very specific number, but look. We've said that we're going to leverage our overhead costs. That has been a long-term goal. The company has been at that a long time, and I think we made a lot of progress in the first half. So I would certainly expect us to continue to do that in the second half, but you know, with respect to what the precise, you know, number or decrease is. We'll, you know, we'll see when we get there, but continue to monitor it.

Okay. And just switching gears, did you have to furlough any employees in the quarter, or do you expect to have to do so in the back half? And if so, are you having or seeing any issues on the the hiring side in regions that might be a little bit stronger than others. And, you know, if you do have to rehire, should we expect any, you know, temporary cost inflation from, you know, either hiring costs or just a lag to get employees more productive?

So, to answer your question, in the second quarter, we did furlough some temporary furloughs from employees. And that was an effort to make sure that we had the appropriate control on inventories going into unknown times. As we said, we're past that. The vast majority of those employees are back to work or scheduled to be back to work. I don't see us doing a lot of that in the second half as we see work coming on and our shipments hopefully stabilize. Again, there's a lot of unknowns to that. At this point, if we did that, it would be minimal in a few select places. But off the top of my head, I can't name any right now. So as far as hiring, you know, we're able to find employees when we fill positions. I think, you know, again, I'm very pleased with our workforce, which is very experienced and very disciplined. And you saw that in the quarter. But, you know, new hires have been a little bit of actually there's not just very many right now, but we're able to find people when we need to.

Got it. Okay. That's it for me. Thanks, guys. Thank you.

Thank you. Your next question is from Garrick Chemoise of Loop Capital.

Hey, thanks.

Good morning.

Hi, thanks for squeezing me in. So as far as the volume exists on the quarter, you know, I think the rate of declines weren't as bad as first feared. Do you think you're taking market share and, you know, can you talk a little bit about how you're thinking about volume versus price moving forward in a bit of an uncertain market? You know, does the relationship between the two change right now just given, you know, kind of the uncertainties that you've talked about moving forward?

No, I don't think you took any kind of market share, and you don't do that when you're disciplined on price. This is the wrong thing to do. I think what you heard me talk about is the volatility geographically in the quarter on volumes. We had those states where we lost substantial volume, North Carolina being one, California being another one, and then we had states where you know, Tennessee and the Mississippi River. So you're comparing apples to oranges when you look at other companies because all of our footprints are different. And going forward, the balance between price and volume is, in my world, is discipline on price. And we plan on having that discipline. And that's what you heard me talk about, about the cadence looking out. I don't see any change in that. And that is servicing our customers and being disciplined.

Okay. Follow-up question. You talked about geographic mix impacting pricing on the quarter. Just curious if you look out, is there anything that we should be thinking about as it relates to product mix, whether it's a ramp and residential construction, does that impact pricing materially, anything like that?

Yeah, I'm sorry. I don't see any particular volatility in product mix. Now, you're always going to have it with geographies, and that's weather and timing of projects, but Product mix, I don't see any big changes between the different market segments, and I sure don't see any pricing changes between the different market segments. Great. Thank you very much. Thank you.

Thank you. Your next question is from Adrian Huerta of J.P. Morgan.

Good morning. Good morning. Good morning.

Good morning.

Most of my questions have been answered, so just congrats on the nice results on margins, which I think, I mean, even the comments that you made, it seems that they will continue to trend upwards at least on a year-on-year basis. So congrats again. And the only question that I may ask on the – Capital deployment, you did mention that you're going to wait to restart the growth projects, but as you mentioned, it is already, your leverage, it is below the range that you expect. What else can we see over the next couple of quarters, or can we see the company for a couple of quarters, and even probably all the year, next year, with a leverage in the 1.5%, etc.? ?

Yeah, you know, as I said, our range is two to two and a half times, and we're comfortable in that range. Just mathematically, we've dropped a bit below that, but I'm perfectly comfortable with that right now for the reasons I stated earlier. You know, there are those growth projects that we have postponed. Look, we evaluate all those on a returns basis. They're high yielding. They're very good projects. And so, you know, at the appropriate time, you know, I would fully expect to see those start back up. But I think we just want to get a little bit more visibility on, you know, what happens over, you know, the next couple of quarters. And, you know, hopefully we'll get that visibility and, you know, things can, you know, continue on.

And what is the size, Sam, of those growth projects that you could start over the next couple of quarters?

Well, if you go back to the guidance that we gave at the beginning of the year in terms of CapEx, the growth CapEx element of that, I'm doing this from memory, but I believe it was $200 million. And so, you know, we certainly spent, you know, a bit on that and on some things that were already started in the first half. But, you know, that's the – That was the expectation at the beginning of the year, and we will just, you know, continue to watch that as we go forward and gain visibility and decide, you know, which ones we, you know, we start back up or, you know, if we start all of them up again. It's just, you know, prudent, get some visibility, make sure that we, you know, keep our flexibility and optionality of leverage and cash flows and, you know, That's the way that we'll continue to look at it. The beauty of this, and we've said this before, is that those projects are such that they can be easily stopped and started. And so we're really not, you know, other than wanting to get on with them and do them because we think they're good projects, we're really not, you know, missing very much at this point.

Understood. Thank you so much for coming.

Thank you. Sure, thank you.

Thank you. We have no further questions at this time. I will hand the floor back over to Tom for any additional or closing remarks.

Well, thank all of you for taking the time to listen to our call today. We appreciate your interest and your continued support of Vulcan. Please stay healthy, and we look forward to talking to you in the weeks and months to come. Have a good day.

Thank you. This does conclude today's conference call. You may now disconnect.