Vulcan Materials Company

Good morning, ladies and gentlemen, and welcome to the Vulcan Materials Company third quarter earnings conference call. My name is Maria, and I'll be your conference call coordinator today. During the Q&A portion of this call, we ask that you please 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. 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 presentation. 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.

Thank you, Mark, and thanks to everyone for joining the call today. We appreciate your interest in Vulcan Materials Company. We hope you and your families are well and will continue to be safe and healthy. I want to begin today's call by thanking our employees for their ongoing flexibility in the face of uncertainty and change. and their commitment to our customers and their dedication to Vulcan and to each other. Despite the difficulties caused by the pandemic, our company continues to thrive as a direct result of their efforts. Turning now to the third quarter, our financial results can be summed up very simply. Our teams delivered another quarter of aggregate unit margin expansion through improved pricing, disciplined operating performances, and solid execution. Our aggregate cash gross profit per ton increased by 5% despite an 8% volume decline. Volume was obviously impacted by the pandemic, but also by severe wet weather across the Atlantic coast, the southeast in Texas, and wildfires on the west coast. We expanded our unit margins by remaining focused on what we could control and by making sure that we were well positioned to respond to a rapidly changing environment. We've talked about our four strategic disciplines for a number of quarters now, and we believe that they have been a critical part of our success this year. Our commercial excellence and our operational disciplines have been particularly helpful. On the commercial side, our aggregate mixed adjusted sales price increased by approximately 3% in the quarter. On a year-to-date basis, mixed adjusted pricing increased by 3.5% despite a 4% decline in volume. Operationally, year over year, our cash unit cost of sales was flat both for the quarter and year-to-date. Cost control, operating efficiencies, and a tailwind from diesel mitigated the impact of lower aggregate volume. Our four strategic disciplines continue to drive improvement in our unit margins. This is evidenced by our 7% year-to-date improvement in cash gross profit per ton. Suzanne will review the quarter and year-to-date results in more detail shortly, but first I want to address the demand trends that we're seeing. Certain leading indicators are showing signs of improvement, both sequentially and year over year. However, the pace of recovery and the timing of shipments is not certain. Residential construction continues to be the most resilient of our market segments. Starts and permits have rebounded, particularly in our footprint. Single-family housing is leading the way, and we are especially well-positioned in our markets to take advantage of this trend. Private non-residential construction continues to be the most variable in use. Following the drop in the spring, construction starts have remained weak as compared to last year. However, we are encouraged by improvement in certain leading indicators, which could point to future growth. Dodge data states that warehouses and distribution centers now the largest non-residential starts category, continue to see growth. As the leading supplier in the majority of our markets, we are well positioned to serve all types of non-residential business, regardless of the category. According to Dodge, Vulcan served states are expected to account for approximately 90% of the growth in warehouses and distribution centers over the next two years. In addition, non-residential demand for commercial buildings like gas stations and grocery stores has historically followed the build-out of new housing subdivisions. We could expect this type of traditional non-residential construction to follow the growth we're experiencing in residential demand. As we think about these current trends, it's important to keep in mind that unlike the Great Recession of 2008, Non-residential construction going into the pandemic was not overbuilt. The uncertainty surrounding the pandemic has weighed more heavily on this segment. With respect to public highway construction, most Volcanserved states have flat to increasing DOT budgets for their fiscal year 2021 versus 2020. This, coupled with a one-year extension of the FAST Act, bodes well for highway demand. Now that state DOTs have greater clarity around highway revenues, lettings are returning to higher pre-COVID levels and are projected to continue to be consistent with state DOT budgets in 2021. Timing of shipments to highway projects may start a little slow early in 2021 due to states' conservative approaches to lettings earlier this year. but will pick up as the year progresses. As a more recent data point, aggregate shipments in the month of October were down 5% due to one less shipping day. While one month doesn't constitute a trend, we were still pleased with the outcome and attribute this performance to better weather and pin up demand from the third quarter. As we consider the remainder of 2020, We now believe we have sufficient near-term visibility to provide guidance for the full year. We expect that our 2020 adjusted EBITDA will range between $1.285 billion to $1.315 billion. This guidance range is predicated on no major changes in COVID-19 shelter-in-place restrictions. It also assumes our normal weather pattern. With respect to 2021, we are in the midst of our budget season and still have work to do. Visibility continues to improve. Therefore, we expect to be able to provide 2021 guidance in February. The key point to remember here is, while the pandemic has created uncertainty, our view of the underlying fundamentals of our business remains unchanged. Our aggregate-focused business is sound, resilient, and adaptable to changing market conditions. We have a history of good operational execution, and this increases our confidence and our ability to compound unit margins. We're in the right geographies. Our balance sheet and liquidity position are a great source of strength and flexibility and will support our operational initiatives and our growth plans. Going forward, We will remain focused on the things that we can control, keeping our employees safe and healthy, taking good care of our customers, and ensuring strong execution on our operating disciplines. We have confidence in our future success. And now I'll hand the call over to Suzanne for additional comments. Suzanne?

Thanks, Tom. I'll cover a few financial highlights and then comment briefly on our balance sheet and liquidity position. Our adjusted EBITDA for the third quarter was $403 million. Adjusted EBITDA margins increased by 210 basis points as compared to the prior year, despite an 8% decline in total revenues. Significant contributors to our quarterly EBITDA margin improvement were, first, the aggregates unit margin expansion that Tom discussed earlier, and second, a 6% or $5 million year-over-year reduction in SAG expense. These metrics have improved on a year-to-date basis as well. Our aggregates cash gross profit per ton increased by 7% to $7.15, while aggregates volume decreased by 4%. SAG expense for the nine months declined by 5%, or $14 million, due to the execution of cost reduction initiatives and general cost control. Now, I'd like to provide a little color on our quarterly segment performance. Starting with aggregates, Volumes declined in most of our markets, reflecting weaker demand resulting from the pandemic. In addition, the key markets that Tom called out were particularly affected by severe weather as we experienced a record-setting number of named storms. California shipments were impacted by wildfires. and resulting power outages which interrupted the supply of cement or ready-mix concrete production. This limited construction activity. Aggregate sales price growth in the quarter of nearly 3% on a mix-adjusted basis was widespread across our footprint, reflecting a positive pricing environment. The combination of sales price growth and good cost control more than offset reduced volume, and as a result, virtually all of our markets improved their respective unit profitability. Moving to our non-aggregate segments, Asphalt's gross profit improved by $3 million as compared to last year's quarter. A 13% volume decline was more than offset by improved pricing and lower liquid asphalt costs. The concrete segments gross profit was $12 million, a reduction of $3 million versus the prior year. Shipments decreased by 11% due to wet weather, particularly in Virginia, our largest concrete market. California's volume was also less than last year's third quarter due to the factors previously mentioned. On a year-over-year basis, we were particularly pleased with our improving return on investment profile. For the trailing 12 months ended September 30, ROI was 14.2%. And consistent with past practice, this was calculated on an adjusted EBITDA basis. Turning now to the balance sheet and liquidity, we took further steps this quarter to enhance our position. We renewed our revolving credit facility for another five years and took the opportunity to increase its size from $750 million to $1 billion. All other terms were substantially similar to those contained in the previous facility. At the end of the quarter, our leverage ratio was 1.7 times on a net debt to EBITDA basis. reflecting $1.1 billion of cash on hand. Approximately $500 million of this cash on hand will be used to repay a debt maturity coming due in March 2021. And at September 30th, our available liquidity was a very healthy $2 billion. We also generated a robust $1.1 billion of operating cash flow in the trailing 12-month period. That represents a 23% increase as compared to the previous period. We have been and will continue to be disciplined about how we invest our cash, and therefore, our capital allocation priorities are unchanged. Capital expenditures for the nine months totaled $229 million. And we now expect to spend between $300 million and $350 million this year, a modest increase from our prior guidance of $275 million to $325 million. I'll turn the call back over to Tom now for closing comments.

Thanks, Suzanne. Before we go to Q&A, I want to thank the employees of Vulcan Materials Company for taking care of our customers and each other, for making marked progress toward our longer-term goal of $9 cash gross profit per ton, and for driving our improved results through our four strategic disciplines. And now we'll be happy to take your questions.

Thank you. The floor is now open for questions. If you wish to ask a question at this time, simply press star then the number one on your telephone keypad. If at any point your question has been answered and you wish to remove yourself from the queue, press the pound key. Again, we do ask that you please limit yourself to one question and one follow-up. Our first question comes from the line of Catherine Thompson of Thompson Research. Good morning.

Good morning. Hey, good morning. This is actually Brian Byros on for Catherine. Hey, Brian. I wanted to start, I guess, really just with the election results or what might be the election results. And I guess, really, what does the outcome mean for Vulcan in terms of outlook and real demand? And does one outcome in the election have a greater relative impact versus the other in terms of outlook and demand for future projects?

Yeah, well, you know, looking back, I think I've seen nine elections in my time in this industry. And kind of the one thing that is consistent is that highway funding is the issue that usually wins regardless of the election outcome. So I think that our next Congress will begin work on a new highway bill in 2021. And as it looks today, that the balance of power of both the House and And the Senate will probably pretty much remain unchanged. And I would think this probably plays in our favor as this House and Senate has already done substantial work on the next highway bill. So the fact that the balance of power doesn't change means that we start with a really good foundation with drafts of bills that are already in place and a lot of work that's been done on those bills. So it may help us actually get a new bill faster because you don't have to go back and completely start from scratch. And remember that with the balance of power as it is, the Congress that's in place right now passed the extension of the FAST Act with bipartisan support with the intent to come back in 2021 with a new, better funded highway bill. So I think there's probably two likely outcomes. both of which occur in 2021. One is early in 2021, a new Congress probably passes a stimulus package, which includes added infrastructure funding. And then two, and really importantly, Congress passes a new better highway funded, a new better funded highway bill in late 2021. So regardless, we believe we'll see improved federal funding for highways next year. Along those lines, Most of our key states have now settled their budgets and understand what their spend profile is going to look like from 2021. The vast majority of those have increased funding. A few are flat. I think the only one that we would see down somewhat would be probably Kentucky, which is not one of our top ten states. Overall, as we look at funding going into 21 and beyond, we should see it grow in 21 based on the state's DOTs, budgets, and outlooks. And then past that, we should see improved funding from stimulus and also from a new highway bill.

Got it. I guess it's a good segue to my next question. So you answered some of it. But I guess it's really with the COVID impact in 2020. I know all the stuff you just talked about. What does that mean, I guess, for visibility for infrastructure funding and future lettings? You know, really, our understanding is the outlook is, as you kind of said, pretty bright for a lot of the states, California, Georgia, Illinois, kind of going into even 2022. I guess, could you maybe give some color on those states specifically and maybe some of the other ones, Texas, Virginia, Florida?

Yes. So I think as we look at... Specifically, State Pacific, Georgia is budgeted up slightly in 2021, and then 22 will be an exciting year because they are planning on six major projects and lettings in 2022. Tennessee, 21 will be flat with 20, but that's up 10% in both years from 19. Illinois is budgeting up a billion dollars annually starting next year, and that's for six years now. 21, they plan on preparing that with most of that spending on engineering to prepare for the next five or six years, which I applaud them for doing that so they don't have the bottlenecks that we've seen in other states trying to put that money to work. Texas is up substantially from 20 to 21. And then Caltrans has announced that the keys related to highway construction and maintenance, which drive the aggregate demand, will be up 6%. So, you know, I think a bright future, I would, as I said in my opening comments, remember these DOTs slowed lettings in July, August, and September until they got confidence in revenues. Now they're starting to pick lettings back up. So, you know, you may have a little bit of catch-up tail end of this year and beginning of next year. But overall, I think we can see a path to demand growth in the highway segment.

Thank you. Our next question comes from the line of Trey Grooms of Stevens.

Good morning, Trey. Good morning. Trey, you may be muted.

Oh, yep. Thank you. Sorry about that.

We're all used to it.

I know. Thank you, and good morning. Good morning. So on the margin front, you know, you guys are doing a great job in a very challenging environment. Aggregates cash gross profit per ton being up 5%, even with volume being down 8%. And, of course, you had the wet weather and forest fires. I mean, it's pretty impressive. But as we look at it, you know, you've got – diesel was your friend. But you guys have been focusing on cost control and operational efficiencies for some time now. Suzanne, I appreciate them and the color there, but could you walk us through some of the successes you're having on that front outside of diesel and maybe the sustainability there as well as that improvement in SAG expenses, the thoughts on SAG leverage going forward would be helpful.

Sure. And thank you for recognizing that. I think our teams have done an excellent job in the third quarter, but also this year. And we saw really solid margin growth in both. And in spite of, as you said, in spite of volume challenges and hurricanes and fires and COVID-19, year-to-date, our cash gross profit per ton has grown from $6.71 last year to $7.15 last This year, so that's a year to date, we've turned in 7% unit margin improvement.

And the face of volume is going down 4%.

And to me, it's proof that our people are really hard at work implementing our four strategic disciplines.

that that's working.

So we've seen solid pricing gains earned by our sales folks and our logistics teams. You couple that with a disciplined operating performance by our quarry and procurement teams, and they're really improving those unit metrics that drive cost. We do have the tailwind of diesel, but that doesn't make up for what they've done, particularly in the face of some real challenges. With that wet of weather, it's just tough to crush rock. And all of this continues to create value for our shareholders. And this is really important to remember that as demand returns, we'll be able to compound these gains in unit margins over time. So we're going to put it in our pocket and not let it go. I think that this year we've shown marked progress towards our longer-term goal of $9 cash gross profit per ton, really trailing 12 months. We're at $7.15. So this points to we've got the right strategy, and I think our people have done a good job executing it and a good job executing it in tough times. So my hat's off to them, and I thank them.

Yeah, and I'll just add to that, Trey. You know, if you go back to our investor day last year, We had a slide that showed what our cash gross profit had done since 2013, which we kind of mark as when we reached an inflection point and returned to growth after the Great Recession. And if you look at that compound annual growth rate in cash gross profit per ton over time, it's up about 7%. And, you know, we were... particularly pleased with that performance, but really pleased with the fact that, as we've talked about, we've been able to move that forward, you know, in three of the quarters this year.

And, you know, I think it's also important to note, you know, diesel was a tailwind. And it helped. But even if you strip the diesel tailwind out of that impact.

Both in the second quarter and in the third quarter, we still moved cash gross profit per ton forward, and I think that's really, as Tom said, a testament to the folks in the field who are working very hard hard. It's not an easy job to keep your cash costs flat year over year. So again, we appreciate everything that they've done. I think the other thing that is pleasing about that march forward is that we're kind of getting ever closer quarter by quarter to the $9 per ton cash gross profit goal that we also talked about. And Just to illustrate that progression for people who want to be reminded of that or are new on the call here, we've included a slide in the slide pack that accompanied the press release that actually shows that progression over time and where we stand now in relation to that longer-term goal. You also ask about SAG expense, and, you know, again, we had another quarter of improvement there with the decline being about $5 million or 6% year over year. That really resulted, as it has all year, from some cost reduction things that we did right at the end of fourth quarter, right at the beginning of the year in 2020, and we are continuing to benefit from those cost reduction actions that we took, as well as, you know, as I said on the last call, you know, we've got some other ongoing initiatives. We're always looking for ways to be more efficient, improve use technology, et cetera. And I think the important thing, you know, to think about as we talk about SAG is that, you know, that the question you know, we sometimes get and other companies get is, look, you know, how much of that is temporary? Well, based on what we did, you know, at the start of the year, those, you know, those are, you know, more permanent cost reductions. I think in terms of whether or not something is temporary, you look at T&E, and I think that for ourselves and for other people, we've learned a lot about managing through the pandemic. And so I don't think for us or lots of other companies out there, we will see a return to a level of T&E that existed before. So I think that's going to be some money that we put in our pocket as we continue to use Zoom technologies and other communication technologies to our advantage.

Great. Well, thanks for all that. And you guys and the team are doing a great job. So hats off from me as well. As my follow-up, Tom, you mentioned that your expectation for highway demand in your markets might start a little slower in 21, but then pick up as we go through the year. And understanding there's maybe more uncertainty today than normal, but you know, could you give us any high-level thoughts around your other end markets looking into next year? Maybe, you know, and maybe the first half versus the second half there. So just any color you're willing to share with us there would be helpful as well. Thank you.

Yeah, thank you. To answer your question, really about 2021, too early to predict. We're doing the work right now. I think the most encouraging sector is residential. We think it was doing great right now. It will do very well in 2021. It's to the point where now we're building new subdivisions, which are more aggregate intensive, so very encouraging. Highways, as we said, the budgets are now set, and now we're seeing highway lettings start to catch up to those budgets. The lettings were a little conservative in July, August, September, but October, November, December, and the first quarter of next year looks much better, so looking better and a lot more clarity to the highway segment. The big unknown is non-res. While it dropped, you know, leading indicators dropped, as we talked about in the second quarter, they've started improving, albeit not back to pre-COVID levels. I think as we watch these projects and watch COVID, it's going to be a matter of the market's confidence, both in the economy and most importantly in the pandemic. The non-res sector wants to start. We see a lot of green shoots. We're actually seeing bidding activity up, which is a good sign. Now, we're quoting activity where that's not booking yet, and there's a time delay, so we'll see if that continues. But we are encouraged by it, and it is encouraging, but we've still got work to do and still have some indicators and some need some more science to really understand what's going to happen in 2021. But much better visibility today than three or six months ago, and that visibility is much more encouraging.

All right. Thanks for that. I'll leave it there, pass it on, and good luck as we go through the fourth quarter.

Thank you. Thanks, Trey.

Our next question.

question comes from Ronna Stanley-Elliott of Stifel.

Good morning, Stanley. Good morning, everybody. Thank you all for taking the question. Kind of stick on the outlook piece. You know, the increase on the CapEx, certainly to us, is kind of a positive indicator in terms of the views.

What are you all looking to put that money to work on? Is it the green fields? Is it other production plans? Just curious for some color around that.

Thank you. So you saw we raised our CapEx slightly from a range of $275 million to $325 million. It goes up to $300 to $350 million. So a modest increase of both ends for $25 million. Most of this at this point is going to go towards replacement capital. That said, we are now starting up the growth projects that we had paused on until we had clarity. I think that the team feels like now that we have the appropriate visibility to demand in our markets that gives us the confidence to restart those growth projects. Now, we'll spend a little bit of that increase this year, but most of that you'll see in as we march and as we really get into those projects in 2021. But we're excited about that, and I think that the market would tell us it's time to get going so we can finish them at the appropriate time. And that's the beauty about Greenfield is you can control the timing and you can speed it up or slow it down as you have market visibility. But I think the whole team is glad that we're cranking those back up and glad that we have the visibility to be able to do that.

Great. Switch gears a little bit. In terms of pricing, last year I believe you all had put out pricing letters maybe a little bit earlier. The commentary on the release and on the call sound pretty encouraging in terms of the outlook for price. With that sort of outlook potentially for demand into next year, we shouldn't really assume much of a cadence difference or difference in cadence in terms of pricing. Any context you could talk about some of the early letters would be great.

Yeah, so I think let's look back and then look forward. As always, the most challenging environment for pricing is unknowns or the lack of visibility to demand. And COVID-19 created a lot of those unknowns. And while there's still some questions about timing and future demand growth, really mainly in the non-res segment, Many of those unknowns that we were struggling with three or six months ago are much better defined and are improving, primarily in residential construction and highway demand, where we're seeing a growth or a clear path to growth. As always, aggregate pricing is resilient. It's just more resilient when you have visibility to demand growth, which, as I said, is a lot better today than it was a few months ago. And obviously, you know, price is a very important metric, but it's the most important metric for us or the most important controllable metric for us is unit margin where, you know, price is a big component, but cost is too. And, you know, as you've heard me say, we've done a good job growing that unit margin metric. We're having, we're right now having the price conversations with our customers and Our letters have already been sent out. I think those communications and those conversations are going very well. Visibility to demand growth in residential construction, you couple that with the DOT's outlook for growing revenues in their budgets for 2021 is encouraging to all parts of the construction materials industry and the construction industry period. I would tell you at this juncture, it would appear based on conversation I think that all parts of the construction sector will be able to improve pricing in 2021. And so that's encouraging, and I would tell you that it's driven by improvement in visibility and confidence in the markets.

Perfect. Tom, Stan, thank you very much for the time. Best of luck. Thank you.

Our next question comes from one of Anthony Pettinari of Citi.

Good morning.

Good morning.

Tom, given the visibility you just talked about and I guess October volumes down five versus down eight in the quarter, is it appropriate to think 3Q could sort of represent a year-over-year kind of trough in demand? And then given the strength that you've seen in gross margins despite volume declines, You know, how should we think about, you know, when you do return to growth, you know, your ability to maybe outperform the 60% kind of long-term target that you've laid out for incremental margins?

So let's talk about October 1st, and then we'll kind of get into those other pieces of this. You know, October volume was down 5%, but it was really driven by one less workday. So on a daily run rate basis, volumes were virtually flat. And if you look at October... I would tell you that I think shipments were aided by better weather in October than October of 2019, so an easier comp. But you probably also had demand push from the third quarter in October. I mean, weather was rough. We saw markets that had 17, 18, 19, 20-plus more rain days in the third quarter in 20 than 21. I mean, excuse me, 20 than 19. Remember, 19 was an abnormally dry third quarter, so... It's a little bit of a difference in comps, and so you're seeing some of that work catch up in October. I think that leads us into a solid start, a good start to a solid fourth quarter. It gives us confidence in our full-year guidance and makes us feel a lot better about it. I would hope that that is the trough. It was just a tough quarter, not just COVID, but And, you know, as we talked about wet weather, we talked about just losing so many days. But in California, it wasn't just the fires. The fires caused daily outages of power, which curtail cement production. So us and our concrete customers just had to shut down. We couldn't supply the market even when we had days that would allow us to do it. Those cement problems are solved and we're back shipping more normal in California. So that and that again, that volume doesn't go away. and we'll catch it up over the coming months. So I think that as we look forward, as I said, based on visibility in res and the settling of state budgets with increased funding, that coupled with the encouraging news, albeit still below levels in non-res, I think that the future looks very encouraging for us.

Okay, that's very helpful. And then just on highway spending, I mean, I think most or almost all of your major states that spending is in a lockbox. And you talked about state budgets being a bit better than expected, maybe three months ago, six months ago. Have you seen any efforts within your major states to break the lockbox or, you know, other state needs, you know, maybe trumping DOT needs or being able to maybe claw some of that funds away or just Have you seen anything like that?

We've seen nothing like that. I would be very surprised if we saw it. And remember, the state DOTs and the states also recognize that, like everybody else does, that highway construction is a very good economic stimulus. And so it is a good way to put people to work, help the economy in those states. And that work is needed, as are those roads and highways. I wouldn't expect to see an effort to rob the highway coffers.

Great.

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

Our next question comes from one of Jerry Revick of Goldman Sachs. Good morning.

Nice to hear your voices. I'm wondering if you can talk about the pricing cadence on the spot market over the course of the quarter. You folks have spoken about essentially training folks for consistent price increase on the spot market, but obviously this was not a great environment for it. So any update on how that tracked over the course of the quarter here?

You know, it's pretty easy to sum that up. It's been volatile, but then again, the world has been volatile. and big swings on good news and questionable news. I would expect us going forward, which I think is more important, that as you see clarity to the future and an encouraging future from a demand perspective, and as we can kind of march along with that, keep improving a little bit at a time, which I think is going to happen, that will take some of the volatility out. You couple that with what we've done very consistently quarter in and quarter out of improving our unit margin, our cash gross profit per ton, you know, 7% for the year, and that we have confidence that our strategic disciplines will allow us to do that kind of as we've been trying to do, and we talked about doing it in September, regardless of what happens to the outside world and controlling our destiny. So I think that we internally... have the confidence and the ability to turn consistent unit margins, you couple that with that there's encouraging news about demand and shipments near-term and longer-term continue to look better, I think will help us out.

Okay. And then, Tom, as you pointed out, I think in your prepared remarks, we've seen lettings slow in the early part this year off of I'm wondering in your business, can you talk about the length of your public construction backlog today compared to a year ago? Just put that into context for us, if you could, in terms of what has that meant for visibility in your business.

Yeah, so I think as the states were watching their revenues and they felt like they were coming back fast, but they couldn't count on it. So while they said, look, we think our budgets are going to be okay for 2021, they didn't have the freedom just to keep the same letting schedule that I think they had originally thought they were going to have. So they were conservative in lettings in July and August and September. And, you know, so now they're playing catch up. I think you'll see lettings go up in a number of our states substantially in October, November, December. I think their schedules that I'm seeing now in the first and second quarter will be up. And that's consistent with their schedule. spend profile and their budgets for 2021. So while there was some conservative in the third quarter, you'll see lettings go up fourth quarter and first couple of quarters for 2021. So I don't think that changes a lot, maybe some timing, but that's it.

And sorry, Tom, can you just comment on the backlog part of the question? So what's the length of backlog today? Can you just quantify for us for the public side of business?

I think what we're seeing is that backlogs are good in res. The backlogs in highways are solid, and I think our backlogs in non-res have taken a hit, which you would expect. As I said earlier, I think one of the things that's encouraging to me is on the private side, you're seeing quote activity improve. Now, once you quote it, you've got to book it and There has been some longer delays in booking as people were waiting to see, have confidence in the pandemic and the economy. But I think we're starting to see shoots where that's starting to improve also. So, encouraging. Thank you. Thank you.

Our next question comes from one of Mike Bell of RBC Capital Markets.

Good morning. Morning. Thanks for taking my questions. Sure, Mike. I want to follow up on some of the pricing and maybe just get some relative comments because I think in the current state of play, I think in the slide deck you put, you've seen like-for-like pricing in most major markets. Could you just give us kind of a rundown of where you're seeing the most price strength? And conversely, it sounds like some markets are still weaker. Can you just give us a sense of which markets may not be seeing growth right now?

Actually, we saw pricing pretty consistent across our footprint for the year. And I think if you look at the vast majority of markets, we've seen price increases if you mix-adjust it. I think that where it's been a little weaker of recent on a mix-adjusted basis would be California. You expect that with clean stone of concrete aggregate not shipping and, you know, base still going. But that, as I said, will correct itself. And I think that's really a mix issue, not a price issue. But our pricing was pretty consistent across our footprint of what we implemented in January and then what was implemented really from between April 1st and June 1st. You know, we talked about that in the second quarter. We had a little bit of catch-up, but that was in January. It all went through, and I think as we look forward in the conversations we're having, it gets easier to have those conversations now and over the last month and to get those letters out because everybody across the segment has visibility in the pricing. But it's been pretty consistent across our footprint, and I don't see any places that really have had a lot of pricing headwinds or that would affect us as we move forward to as those conversations go into 21.

And I think as an important add-on to that, if we look across the footprint, we've also, as we said in the earlier comments, we've also seen unit profitability improvement in virtually every single one of those markets as well. So what you're looking at there is the combined effect of increases in price and good cost controls since our cash costs were flat year over year.

Mike, one thing to point out, I think that is, and I've talked to most of our division presidents over the last few weeks, the conversations, and this is really important for 2021, are pretty consistent. And I think that across our footprint, I think the market is encouraged that, you know, 2021, we start to see, you know, res is doing great. Again, we start to see confidence in highway revenue growth, and we're starting to see green shoots in the non-res, which has been the weakest, and the fact that the non-res just wants to start. The economy wants to get going, and we've got election, you know, almost behind us, the pandemic. Hopefully, there will be an end in sight. And I think people are getting confidence that, you know, the world's in a better place.

Yeah, and I think with respect to non-res, and we talked about this on the last call, and it still, you know, holds true today. It's sort of the, you know, sector of some haves and have-nots, and I won't go through all of those, you know, what's kind of what's up and what's down, because it's relatively unchanged. But, you know, as we look You know, across our business, you know, I've got a list of, you know, a dozen or so projects here that are, you know, data center related. For example, we spoke to the, you know, strength in warehouses and distribution centers in our earlier remarks, but we're, you know, we continue to see it in data centers from, you know, Amazon, Facebook, Google, Microsoft. I mean, all those big names are represented in work that we're doing right now.

Okay, that's good to hear. Thank you for all the details. The second question, I guess, just a quick one shifting gears to asphalt and concrete. I think both were called out as having some regional issues associated with wildfires, but also just overall weather. I know it's tough to pinpoint numbers like this, but could you give a sense of, you know, your best guess on how much of those impacts were wildfires or weather and how those businesses were shaping up in October?

Okay, so remember, asphalt is going to be more public-driven and concrete is going to be more private-driven, but I'll take them one at a time. You know, our volumes were down 13% in asphalt. It was, you know, wet weather and our big asphalt markets didn't help us there and fires in Northern California didn't help us. but, you know, and we had some jobs that didn't repeat, some big jobs in Nashville that didn't repeat. That being said, you know, our gross profit was up 9%, or, you know, over $2.5 million, and that was driven by, I think, good cost control, solid pricing, and liquid AC savings. I think looking forward, we continue to be encouraged by asphalt, so it's a combination of fires, rain, and just timing on some big highway work. If you look at concrete, we really did get hit. There's obviously a COVID-19 impact because of non-residential construction. That being said, our volumes were down 11%, and we had extremely wet weather in D.C., and then we had cement shortages in Northern California. So I think as we look forward, I would definitely be encouraged about Northern California as we've got work to make up, and I think that, you know, as the residential construction in Northern Virginia will help us in that, and, you know, non-res will continue to march forward. So some challenges from a non-res perspective on concrete, but I think the next couple quarters we should see better volume performance.

Okay, great. Thanks, Tom, Suzanne.

Thank you.

Our next question comes from the line of Sheldon Clark of Deutsche Bank.

Good morning. Hey, good morning. Thanks. Just given all the moving parts as it relates to pricing in the third quarter and some of the seemingly transitory headwinds you talked about, could you just give us a sense of maybe how pricing has trended in October and maybe just what's assumed in your four-year guidance?

So I would answer that question this way. I wouldn't expect a lot of variation in the cadence of pricing of what we've seen this year versus what we're going to see in the fourth quarter. I don't see anything to really change the direction we've been going.

So you're talking through the first three quarters, not three quarters?

Yeah, I don't see a lot of change in what we've done for the year versus what's going to happen in the fourth quarter.

Okay, got it. And then so, you know, you talked about cash gross profit per ton, you know, sort of growing in line with that historical rate of 7% per year. And it looks like, you know, OPEX per ton is also growing in line with your historical rate at, you know, just under 1% per year. you know, obviously some help from diesel, but, you know, volume is a little bit tougher. So if things do stabilize from here on the non-resi side, meaning, you know, don't get significantly worse and, you know, start to show some improvement in the back half of 2021, is it fair to expect this sort of same relationship then in 2021, you know, assuming diesel is flat or are there some potential offsets that, might just cause this relationship to differ from either a cash gross profit or OPEX per ton perspective?

You know, if you look at the slide that Suzanne referenced, it's in the deck. I think it's probably the last slide in the deck. You can see over time what's going on with our cash gross profit per ton. And you can particularly look at it over the last three or four years as we've been implementing our strategic disciplines and maturing those strategic disciplines together. which I would tell you they're still in fairly early stages of maturing but working. The reason we put those in was those disciplines in place and have worked so hard on them is that we felt like in good times, always it allowed us to live up to our potential. And in good times when volumes were growing, we would get all we could get. And in tough times with what we're seeing right now, it allows us, to make the most out of whatever the world deals us. And, you know, so you see consistent growth. What's impressive to me is you see that growth in unit margins in the last, you know, three months or year to 12 months of this year, and now volumes have gone down. And that's just hard to do. That's just good work. And I think that, you know, to answer the question about 2021, we've got work to do. We're going through those plans and those budgets, whether it's price or volume or cost or operating disciplines and what we have to do right now. So too early to call, but I think you can look back at history and you can look at consistency and you can look at what's been accomplished over the last three quarters with really some tough headwinds. And regardless of that, we've been able to improve unit margins. And I've got to tell you, I'm proud of our teams and I My hat's off to them that they've done an excellent job with that. That's tough to do. It's tough to do with fall. It's particularly tough to do when you've got a pandemic and extreme weather. So, you know, the goal here is month in, month out, quarter in, quarter out, year in, year out, to improve those margins regardless of what happens to outside forces. It's obviously easier when things are improving outside. But we'll give you a lot of clarity of that in February about where we think we can go. To give you a number right now would be premature as we're doing the planning.

Okay. I appreciate that. Thank you. Thank you.

Our next question comes from one of Phil Ng of Jefferies.

Hey, good morning, everyone.

Good morning.

Hey, good morning. Hey, Tom, it's really encouraging to hear, you know, lending starting to pick back up on the public side in September, October, and bidding activity picking up a little bit in non-res. Can you help us understand the lag when you see that actually start to flow through your volumes? And when we start thinking about 2021 in terms of the shape of the year, could you be in a position to grow in the back half of next year?

I think that I would preface that, first of all, next year too early to tell. I think that, you know, if you're talking about the back half, it's a lot more possible than the front half. But, you know, a lot for seed growth in 2021 in volumes, there's a lot of stars got to line up, particularly with timing of work in big highway work and, even more importantly, the timing of getting big non-res work, you know, bid and booked jobs. and started. I think it's tough. It would be difficult to have all those stars line up to see volume growth in 2021. Not impossible, but I think it's difficult. And I think that, you know, again, we don't know. We've got to, we're working on getting all those answers, and so we'll put that together. I think, as we said, I think based on the highway letting sequencing of lettings not being as strong in July, August, September, but picking up in October, November, December, and then scheduled to pick up in the first half. You know, those jobs are anywhere from, you know, four months to nine months usually. I would tell you that, but, you know, if they've got to work and they can get to work, particularly with overlays, it can go faster. If you look at non-residential, historically I would have told you six to 12 months, although 2020 has been the great exception to that because we've seen work move all over the place. Again, as the private sector gets confidence in the pandemic and in the market, I think we'll see the timing of quote to books to shipping improve. I think we've always seen some improvement in that, but work to be done and But as I said, I think what we're seeing so far is encouraging and all of the above. And then REZ is going. I mean, there's no question it's going, and it's going well.

Got it. And then from a pricing standpoint, I mean, we can all appreciate the pricing power in your aggregates business, even if demand is weak. We saw a great financial crisis. What about your downstream business? I mean, they're certainly in great markets, but if demand is a little softer to start next year and we got muted inflation, How do you think about pricing, whether it's asphalt or your ready-mix concrete business?

So, you know, I'll take asphalt first, and I would point you to unit margins and asphalt as opposed to price, just because pricing can move around with indexing, with liquid AC. As we called, as we talked about a year ago, you know, the liquid numbers have come way down, and we've been able to put that savings to unit margins, and I think that Again, we're doing the plannings. I have not seen the plannings on liquid AC. I think that the fact that you've got the DOTs with better clarity and improved visibility to growing revenues, that helps because that gives everybody some headroom to be able to take risk on price and asphalt and on aggregates and just on construction work. Encouraged there. We've The markets we're in in concrete are D.C. and, you know, the D.C. market and the Napa Valley market have pretty consistent unit margins throughout because they're unique concrete markets because of abnormally high barriers to entry. And so I think that, you know, as we see res improve and as we see non-res continue hopefully to improve, It will also help unit margins and volumes in the concrete sector. Okay. Thanks a lot, Todd. Thank you.

Our next question comes from one of Garrick Schmoes of Loop Capital.

Hey, this is Jeff Stevenson.

Hi, Jeff.

This is Jeff Stevenson on for Garrick. I appreciate you taking my questions. Sure. The first one is just on... Could you provide an update on what you're seeing regarding the M&A environment? I'm just wondering if there's been any changes and what your expectations are in 2021.

Yeah, I mean, I think as far as the world freezing, the worst I think is behind us. It's still pretty early stages, and, you know, we're seeing, we're looking, as always, we're looking at some projects out there. I think that, you know, all the unknowns with the pandemic has just been do a wet blanket on that. I think as that gets clear, this will pick back up. As always, sellers are going to sell when the time is right, whether that is for personal reasons, for family planning, for succession planning, or strategic moves. We'll be in the game. As you hear me talk about all the time, we'll be disciplined about how we look at those acquisitions. But We've seen some pick up, but not maybe back to pre-pandemic levels yet.

Got it. That's helpful. And then, Tom, unless I missed it, I don't think you mentioned what you're seeing in Florida and Virginia from a DOT budget perspective. I was just wondering if you could provide any update on those states.

Yeah. Florida, I would tell you, has been a really good story and kind of flat to slightly up. I don't think we see any change in Florida. And so good news from a far perspective. And Virginia is a very good story. Virginia's budget is budgeted to be up 13%. Now, and that's where we had an increase in gas taxes this year in Virginia. Now, it has not been approved by the Virginia Congress yet. They're supposed to do that in January. But so lettings will hopefully continue along that path, even though they haven't approved the budget. But so far, so good, and I would expect us to see growth in revenues and budgets in Virginia from 20 to 21 based on the proposed budget at 13%, and I think the revenues are going to be okay. Great. Thank you.

Our next question comes from one of Adam Follinger of Thomas Davis.

Good afternoon, guys. Good morning. Did the FAST Act, Tom, what's the post-mortem on that? Was that actually helpful for you guys, the extension?

Oh, yeah, for sure. That's what we talked about, that we need an extension, and we needed a decent term in that extension, and what we had wanted was 12 months. So what that allows to happen is it allows the state DOTs to have clarity on through their fiscal year 2021, which is what they all need, and they can't be going quarter to quarter, month to month, because it chops up big jobs because they don't know what's going to happen. I think that, as we talked about earlier, it's important to note that the new Congress, the new House, and the new Senate will pretty much have the same balance of power as what we saw when we passed the extension of the FAST Act. Remember, that extension was passed with bipartisan support. And with bipartisan support, what we heard from both parties was this was allow them time, get through the election, come back and pass a better funded new highway bill in 2021. So that's why we said that, you know, that maybe the fact that the balance of power doesn't change plays in our favor because there's already been substantial work done by the subcommittees, both in the House and the Senate towards a new bill that some of that bipartisan, some of that not bipartisan, but that we've got a draft and we've got drafts, and so now it's a matter of negotiating and tweaking as opposed to having to start over with a new PIN. So we're thinking at this point we start with a solid foundation of potential highway bills, and we get it pretty quick because that was the bipartisan support and the intent when they passed the extension of the FAST Act. Okay.

And then on non-res, when did you guys actually start seeing volume declines in non-res? Because the way that the indicators have been going, I would think that the real non-res downturn is actually in 21 before recovery in 22.

So what we saw was it go down like immediately, March, April, and it sunk like a rock. What we've seen coming since then is we've seen some sequential growth in leading indicators of non-res somewhat choppy, and it obviously gets impacted by spikes in COVID-19. You also see, as we talked about, we saw a lot of jobs push way back in the second quarter. Some of those came back in the third quarter. Some got pushed again. So it's quite choppy, and it's been – Yeah, volumes have gotten hit this year, and the majority of that volume drop, I think, is going to be in the non-res sector. Residential, if you remember, it dropped kind of in April, and then it came zooming back May, June, and has never stopped. So as you're on the street, non-res is still way down. Shipments are still down. but hopefully we've got some of the worst behind us.

Yeah, I'll just add a little color to that. If you go back to the beginning of the year and sort of really year-to-date through the end of February, our starts were up on the non-res side kind of 9% to 10%, so going into the year, it looked like a pretty good performance ahead from a starts perspective, and then when we got to the month of April after it was clear that, you know, COVID-19 was, you know, going to be here for a while and was a big issue, those starts dropped by about 50%. And, you know, by the time we got to May and June, we had seen a little bit of improvement. Actually, in June, we got about half of April's decline back. And since June, as Tom said, you know, July, August, September, you know, we've seen, you know, little bits of sequential improvement. It seems that it moves, you know, somewhat similar to what you see in the number of COVID cases and the number of, you know, the level of surge that it's been out there. So that's why we said last quarter, and we still stand by this, you know, when You know, COVID, the number of cases and the surge dies down a bit. You see those starts begin to pop back up. So I think we just need, you know, a few months of some certainty there because I think it, you know, there's a lot of interest in non-res construction. I think people just want a little bit more certainty.

Great color. Thank you. Thank you.

Our next question comes from the line of Michael Dudas of Vertical Research.

Yes, good afternoon, all. Hi, good afternoon. Yeah, good afternoon. Following up on the non-res side, you know, certainly you called out and others have been calling out data center, warehousing, distribution centers as a positive towards the mix. And certainly like in the state of Virginia, certainly that's a big investment that we're seeing from the big tech and distribution guys. How has that changed as a percent of your backlog in your business, maybe from what it was prior to pandemic? And is it quicker to market type opportunities? And is the size or the intensity of the aggregate use helpful with that end of the market relative to some of the other ones that have been somewhat muted in 2020?

Yeah, as Suzanne mentioned earlier, we've got over a dozen markets projects that were in some of warehouses and distribution centers that we either booked or in the process of booking across our footprint. And those are just ones that I can think of off the top of my head. I'm sure there's more. So it's had an impact on our backlogs, a very positive impact on our backlogs. And as we said, you know, the future of that will look very good because of where we are and where those are. Dodge predicts that 90% of all of the new constructional warehouses and distribution centers, that construction over the next two years will be in our market. So this will be great demand to come for the next couple of years. So we're encouraged by it. It's also, as you pointed out, it is wide and flat. So it is more aggregate intensive. If you think about what has to go into those. It is not high. It's more intensive in the parking lots for base and asphalt and in the foundations of those warehouses where you pour concrete. So it is somewhat more aggregate intensive than the total, on the high end of aggregate intensity for the total non-construction, excuse me, non-residential construction mix.

Yeah, that makes sense. Appreciate that. And just to follow up, Just generally, Tom, in California, looking out to 2021 and maybe 2022 and certainly the pandemic and the issues in California relative to some other major states, do you think there's a better opportunity overall from all your businesses and what you serve? Is there a better opportunity in 2021 to surprise to the upside or maybe surprise to maybe the downside relative to what the expectations might be?

Well, I think, as I said earlier, I think you're going to see some volume push from 20 into 21, based on the rough, terrible third quarter and into the fourth quarter that we experienced in California with wildfires. And while the wildfires curtail business and were tragic, it also, from our business, we got the double hit because it caused the power outages, it controlled cement production. So Everybody was – nobody could get enough cement to supply the market. That demand doesn't go away. It just gets pushed back. So I think we do have some catch-up in the last – and that cement production or availability is just now coming back. So you're going to have some of the shipments push into the last couple months of this year and the first couple quarters of 2021. And while that hurt in 2020, it will help in 2021. Residential construction, while it also got paused by all the reasons I just talked about, has come roaring back and starts are up, I think, one month over between 20% and 30%. You couple that with the news from Caltrans, the revenues will be up 6% and the things that control stone. That will help aggregates and asphalt. As like many other places, non-res has taken a hit, and it's gone up. And we're feeling that hit, and so we've got to recover from that hit. And that's really the unknown for us in California in 2021. And we'll give you a lot clearer view of that when we get to giving you our projections in February.

Thanks very much, Tom.

Thank you.

Our next question comes from one of David McGregor of Longbow Research.

Yes, good afternoon now and thanks for taking questions. I guess I want to start by just asking about an infrastructure bill is distinct from the highway bill and the answer you gave to previous question just talking about the likelihood of growth and volume and in 2021 and maybe second half better than first half. But if we get an infrastructure bill early in the in the stage of the new administration, how does that change your perspective on that volume profile through 2021? And maybe as part of that question, just to the extent you could address just what you think is out there in terms of shovel-ready projects and just how quickly that could come through into VMC revenues.

So I think our focus really is not to get lost in a major infrastructure bill. The important thing is a highway bill. Now, that may be part of a larger infrastructure bill, but the piece of this that's really important is infrastructure is a broad category. What I'm talking to is really about the federal highway bill and the extension of the FAST Act, the work that's been done on a federal highway bill in both the House and the Senate, and it's got bipartisan support. And then we have a foundation moving forward. Now, could that be rolled into a broader infrastructure package? Yes. I think it's more likely that it's addressed as a specific highway bill. Now, separate from that is You know, there's been a lot of talk about stimulus and the stimulus analysis discussions before the end of the year, beginning of 2021, whether that's the Congress is in now or the new Congress. I think somewhere over the next few months you do get a stimulus package. Hopefully it will include some infrastructure funding, and that will be added to anything we're talking about.

Any sense you could share your expectations around that? Is there any way to size that?

I don't think we can at this point. If you look at the – from a stimulus perspective, that's hard to do, and there's a lot of conversations. Timing and magnitude I think is tough to call. If you look at a highway bill, I would look back at history and look back at drafts of bills that came out of the Senate and drafts of bills that came out of the House that showed funding up 30% to 40%. And that gives you some kind of idea of how the authors of those bills were thinking about it. And many of those authors are still in place in those subcommittees and staff, which is a good thing because we don't start from zero. We don't start with a new piece of paper and a new pen so that we have some momentum with this. Now, that being said, a highway bill that passes in 2021 will not impact shipments in 2021. It takes time. a year to two years to get funding to work, and that's what we've seen as we saw the dramatic increase in states funding. Many of those have matured into it or are maturing into it. I would tell you that I would hope that because the states, at least our states, have broadened their capabilities and expanded their capabilities to handle new funding, hopefully they can put it to work quicker than what we saw with the improvement of the FAST Act and the new federal bill versus what we saw with the dig jump in and state revenues.

Right, right. Okay, long call. I'll leave it there. Thanks, Tom. Thank you.

Our final question comes from the line of Shintong Ouyang of On Field Investment.

Good afternoon.

We can't hear you.

I think you may be muted.

Hello. Hello. Good afternoon. Thank you for taking my question. Sure. I have a question.

I'm sorry, you cut out on us.

Can you hear me now?

Yes.

Hello?

Yes, we can hear you.

Yes, but can you hear me now?

Yes, we can.

Great, thank you. So I have a question on Thank you for taking my question. So my question is that, yes, the European Cement Association president suggested recently that the replacement of virgin aggregates by recycled concrete can take up to 20% of the aggregate content in concrete. So we're thinking in an environment where recycling is getting more important and especially in Europe, probably in the US as well in the future. I just wanted to know, what do you think of it? Do you think of it as a threat for agribusiness, or you actually think of it as an opportunity?

Well, I mean, today and for years, recycle has been an integral part of the construction. Can you hear me okay? Okay. For years, recycle has been a part of construction materials. both whether that is in asphalt or whether that is in concrete. And, you know, it does have limitations from a quality perspective and in uses, but it's a part of the business today. We are in that business, and it's just an integral part of overall construction. But I don't see it as a threat. I just think it's reality today and part of the business, and we're in that business.

So it's part of the core of construction materials today. Okay. Okay, great.

Thank you. Thank you.

And that was our final question. I'd like to turn the floor back over to Tom Hill for any additional closing remarks.

Thank you, Operator, and thank all of you very much for taking the time to listen to our call today. We appreciate your interest and your continued support of Vulcan Materials. As we look forward, please stay healthy, keep your families safe, and we really look forward to talking to you in the coming weeks. Thanks.

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