Vulcan Materials Company

and welcome to Vulcan Materials Company's fourth quarter earnings and I will be your conference call coordinator today. During the Q&A, your participation to one question. 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.

Good morning. Thank you for joining our fourth quarter. And with me today are Tom Hill, Chairman and CEO, and Suzanne Wood, Senior Vice President and Chief Financial Officer. Today's call is a supplemental presentation posted to our website, bulkmaterials.com. A recording of this call will be available for replay later today at our website. session 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 measure are defined and reconciled in our earnings release, our supplemental presentation, and other SEC. As the operator indicated, please limit your Q&A participation to one question. 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 Volcker Materials Company. We hope you and your families are and will continue to be safe and healthy. 2020 represented another year of strong earnings growth for Vulcan, despite the many challenges associated with the pandemic. Our results showed flexibility and resilience. But most of all, 2020 demonstrated as they faced uncertainty and had to make adjustments both in their professional and their personal lives. Teams stayed focused on operating safely, servicing our customers, and making progress on our four strategic disciplines. A job well done. In a few minutes, Suzanne will share some fourth quarter highlights with you to summarize our full year 2020 and discuss broad themes and where we are headed. Full year financial results were strong. Total company adjusted EBITDA increased 4% to $1.324 billion. And EBITDA margin expanded by 150 basis points. Cash generation continued to be strong with operating cash flows increasing by 9% to $1.1 billion. And finally, one of our principal measure capital improved by 40% . These results were particularly noteworthy, considering decline by 3% as compared to 2019. And effective cost control were key drivers of this performance. Agri's pricing improved by just over 3% on both the reported and mixed adjusted basis. Importantly, these pricing gains were widespread across our footprint. Our total cost of sales per ton increased by 2%, while our unit cash cost of sales, which is more controllable, this led to a 5.5% gain per ton. at $7.11 toward our longer-term goal of $9 per ton. This improvement in unit profitability was supported by our four strategic disciplines, commercial excellence, operations excellence, logistics innovation, and strategic sourcing. We also experienced improvements in each of our non-aggregate business segments collectively. Gross profit improved 12% across these three segments. Unit profitability increased in both asphalt and concrete. Asphalt gross profit increased $12 million, or 19% over the prior year, even though volumes declined 7%. This improvement in profitability resulted from stable sales prices and lower liquid asphalt costs. Concrete unit profitability increased 8%. Average selling prices increased by 2%, and volume declined by 5%, primarily as a result of the cement shortages in California. Profitability in each of our business segments and our improving overall EBITDA margin is 1. We are well positioned to take advantage of market opportunities in our geographic footprint. The demand environment is also improving, particularly in residential construction and highway construction. Let's take each market segment in turn. Residential continues to show strength, especially in single family. The market fundamentals of low interest rates and reduced the growth will continue. This represents a clear opportunity for us as both permits and starts are going faster in vault and serve markets. Highway lettings and awards return to growth in the fourth quarter. State DOT budgets have stabilized, with most of our states showing budgets flat to up from 2020. The caution in this market segment is that it will require time to turn awards into shipments given the mid-year 2020 Lowland Awards due to the pandemic. While timing of shipments is a variable, we will see improvement in highway shipments throughout 2021. As we said in the third quarter, the near-term outlook for the non-residential construction sector provides the least forward visibility. Dodge construction starts are still down year over year, but certainly indicators are beginning to improve, perhaps signaling that potential improvement is just around the corner. Weakness lingers in the office space and hospitality related sectors, but there is growth in the heavier non-residential categories like distribution facilities and data centers. In fact, warehouses are now the largest non-residential category as measured by square feet and represent approximately one-third of construction awards. These projects are typically more aggregate-intensive And 90% of the near-term growth in this sector will occur in vol-conserved states, according to Dodge. The administration and Congress are committed to an infrastructure-led economic recovery and have indicated that they will focus on an infrastructure bill next, after the COVID-19 relief package. Clearly, our leading market positions will mean broad participation in infrastructure-related spending. We believe demand for aggregates will continue to improve as we progress through 2021. That being said, the timing of shipments to highway projects and non-residential construction projects remains a variable. We considered these factors as we thought about our 2021 prospects and guidance. That said, we expect our adjusted EBITDA to be between $1.34 billion and $1.44 billion. We anticipate 2021 aggregate shipments could fall in a range of a 2% decline to a 2% increase as compared to 2020. Regardless of volume swings, we will improve our full year unit profitability in aggregates. We expect aggregates freight adjusted average selling prices to increase by 2% to 4% in 2021. And gross profit in our non-aggregate segments is forecast to improve by mid-single to mid-high single digits. To sum it up, 2021 will turn out to be a year of solid earnings growth. Now, I'll turn it over to Suzanne for further comments. Suzanne?

Thanks, Tom, and good morning to everyone. Before I discuss fourth quarter 2020 highlights, I'll fill in some additional details on our 2021 guidance. We made significant reductions in our selling general and administrative expenses in 2020. We expect to further leverage our overhead costs in 2021 and anticipate our SG&A expenses to be between $365 and $375 million. We anticipate interest expense to approximate $130 million for the full year. Barring any changes to federal tax law, our effective tax rate will be about 21%. The category of depreciation, depletion, accretion, and amortization expenses will be around $400 million. Now, with respect to capital expenditures, we invested $361 million in 2020. We expect to spend between $450 and $475 million in 2021. This includes fully restarting and advancing growth projects that were delayed last spring, such as the opening of a new quarry in California, capacity expansion at other quarries, and improvements to our logistics and distribution network. It also reflects a catch-up of operating capex that was postponed at the start of the pandemic. As always, we'll carefully monitor the economic environment and adjust our capital spending as necessary. As you model, you'll note that the combination of our assumptions for 2021 leads to another healthy year of cash generation. I'll now give a little color on the fourth quarter of 2020. Adjusted EBITDA was $311 million, up 4% from last year's fourth quarter. Aggregates volume declined by 1%, while reported pricing increased by 3% and mixed adjusted pricing by 2%. Costs were slightly higher in the quarter due to additional stripping costs in advance of future shipping growth, and the timing of repairs. There were two items that affected the comparability of our fully diluted earnings per share in both the fourth quarter and full year 2020 as compared to those same periods in 2019. First, we recorded a one-time non-cash pension settlement charge of $23 million, or 13 cents per diluted share, in connection with a voluntary lump sum distribution of benefits to certain fully vested plan participants. This liability management action will benefit future pension expense and funding requirements. And second, the tax rate for fourth quarter and full year 2020 was higher than in the comparable periods in 2019. Last year, the tax benefits associated with share-based compensation and R&D credits were greater than the same benefits in 2020. The resulting EPS effect was $0.04 per diluted share in the fourth quarter and $0.18 per diluted share for the full year. Moving on to the balance sheet, our financial position remains very strong with a weighted average debt maturity of 13 years, and a weighted average interest rate of 4%. Our net debt to EBITDA leverage ratio was 1.6 times as of December 31, reflecting $1.2 billion of cash on hand. Approximately $500 million of this cash will be used to repay a debt maturity coming due next month. As Tom mentioned, our cash flow was robust in 2020, and contributed to year-over-year leverage reduction. Due to the uncertainty surrounding the pandemic and the resulting slowdown in economic activity, M&A was lighter than usual in 2020. We returned $206 million to shareholders through increased dividends and share repurchases. Our capital allocation priorities which have helped to drive an improvement of 220 basis points in our return on invested capital over the last three years remain unchanged. And now I'll turn the call back over to Tom for closing remarks.

Thanks, Suzanne. Before we go to Q&A, I would like to thank our investors, our customers, and our Vulcan family for their support during a challenging year. We will continue to operate Vulcan for the long-term and our focus on building an even stronger and more profitable business. We know that our leading market positions and our aggregate-focused business are strengths, along with our strong balance sheet. When combined with the execution capabilities that we demonstrated in 2020, as well as solid long-term fundamentals, we are excited about our future. While there may be challenges in 2021, We have confidence in its potential. Now we'll be happy to take your questions.

Thank you. At this time, I would like to inform everyone, if you would like to ask a question, please press star then the number one on your telephone keypad. If your question has been answered and you wish to remove yourself from the queue, press the pound key. Again, we ask that you please limit yourself to one question. Our first question comes from the line of Trey Grooms of Stevens Inc.

Morning, Trey. Hey, good morning, Tom, Suzanne, and Mark. Hope you're all doing well. Tom, I appreciate your comments in the prepared remarks there on the end markets, but maybe if you could walk us through some of the puts and takes around the aggregates volume outlook for this year of a 2% decline to a 2% increase and maybe how you can get to the low end versus the high end of that guide.

Yeah, I'll start with just kind of stepping back and looking at the year 2021. As you saw, our guidance was negative two to positive two on volume. I would tell you that the aggregate demand outlook is improving and it seems to get brighter kind of week in and week out. And we would expect shipments to continue to improve sequentially as we march through 2021. You know, residential construction is very good and continues to grow. At the same time, heavy non-residential construction is good and it's important because of its aggregate intensity. At the same time, light non-residential construction has been a challenge and I think will be a headwind for us in the first half of 2021, probably getting better later in the year. And then highway lettings are much better. They were much better in the fourth quarter and we think they'll continue to be strong throughout 2021. This all adds up to starts and demand picture improving and will continue to improve as we march through the year. But as you know, the demand outlook environment due to the pandemic has been quite volatile. So as we set our guidance to you for 2021, we try to be both transparent and thoughtful about two really important things with a given that we know residential is strong and growing. So the first one of those is Non-residential construction shipments, we know warehouses and distribution centers are good. They're growing. They're intensive. They're aggregate intensive. We believe that overall non-res has stabilized from the fall we saw, you know, throughout 2020. Now, how fast that returns, we don't know. The other thing that we're seeing now, which is a bright spot, is we're seeing the LNG projects start to pop up on the Gulf Coast that were postponed from last year. So we'll just have to see what transpires with the rest of non-residential construction. And then the second thing we try to be thoughtful about was the timing of highway work. Lettings, if you remember, were light in Q3 of last year as DOTs tried to assess their funds or what was going to happen to their budgets. Once that stabilized, Q4 saw great lettings, as should Q1 and the rest of 2021 as most DOTs have verify that their budgets will be flat to up. And so the question is, how fast do those lettings and those projects go to work? As I said, we think it will be back half loaded. All said, in all markets, our outlook is improving kind of week over week as the pandemic improves. So getting better, but still some things we got to watch.

Got it. Okay, that all makes sense. Thanks for taking my question, and I'll pass it on. Thank you.

Our next question comes from the line of Anthony Pettinari of Citi.

Good morning. Good morning. Tom, could you talk about maybe expectations for a replacement of the FAST Act in terms of, you know, potential timing, magnitude, and when that, you know, could ultimately impact, you know, your volumes?

Yeah, so we believe that Congress is going to pass a new highway bill with an increase in funding in 2021, and I would probably give you that in three buckets. One, that the Biden administration, their agenda has infrastructure next on the list after the COVID-19 bill, so it is a priority. Second, if you go to the House and Senate, Senator Carper, who is chair of of the EPW Committee and then Congressman DeFazio, who's chair of the House T&I Committee, both have said they want draft bills at a committee before August, before the August recess. And the reason they want to do that is they want to target passing a bill before the expiration of the FAST Act at the end of September. So the administration's on it, the Congress and the House is on it, and then third, got to remember that funding uh should increase as highway funding right now is starting from a position of strength so in 2021 the funding is up 12 billion dollars year over year to 59 billion dollars 2 billion of that is an increase from appropriations 10 billion of that is from kobe relief this starts the highway funding baseline from a higher point and no one on the hill wants to reduce funding for highways so We believe it. We'll see it before the end of the year, hopefully before the expiration of the FAST Act, and we'll think it'll be at higher levels.

Great, great. That's very helpful. And then just maybe switching gears, we're obviously seeing historically cold weather in the U.S. South and some middle parts of the country, as well as some power outages in states like Texas and some other places that you operate. You know, understanding the situation is very dynamic. I'm just wondering if you could, you know, help us understand what you're seeing on the ground and maybe potential impact if, you know, this could be more along the way.

Well, in Central Alabama, it's snowing this morning. But, you know, look, it's the first quarter. It's January, February, March. It's the smallest quarter. You're going to have weather. I would tell you that this is not a lot different from a big week of rain. You know, you have an interruption. The demand doesn't go away. It is interrupted in the first part of the year, and we'll catch it up. So I chalk it up to the first quarter and would not read a lot into it.

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

Thanks.

Our next question comes from the line of Catherine Thompson of Thompson Research Group.

Good morning, Catherine.

Hi, Catherine.

Good morning. Thank you guys for taking my question today. Really focusing a little bit more on the state DOT side, our state revenue report, which focuses on many of your states, are showing much better general fund collections. You also noted in your prepared commentary the better DOT trends. From our perspective, California, Georgia, Illinois are looking pretty good going into 22. We wanted to get your thoughts on that, and could you give color on these states, other states that are important for you, like Texas, Virginia, and Florida, And layering on top of that, what, if any, impact does the current administration's green focus have on how state DOTs are planning their future projects? Thank you.

I'm sorry, I missed the last part. Planning what?

Their future projects. So just with the Biden administration's focus on green.

You know, as we said, you know, we've got a little bit of a gap with lettings down in Q3. They came storming back in Q4. You know, if you look at the trailing six-month and trailing three-month starts, they're up double digits, so that's really good news. Based on the state DOT budgets, which you pointed out, improvements in those budgets, we should see growth. We should see improvement in highway work and should grow as we march through 2021, particularly as we see those lettings in the fourth quarter start to mature in the shipments. The majority of our 20 states will see funding and lettings up for the fiscal year 2021, particularly as you pointed out, important states like Texas and California, and really importantly, our southeastern states, which are either up year over year or they're flat from 19, which was, excuse me, flat from 20, which saw a big jump from 19. So really good solid funding. We're past the interruption of the pandemic. And then You've got the $10 billion of COVID-19 relief funds for highways. More than half of that $10 billion will be spent in bulk conserved states and support growth. Some of that in 2021, although it presently appears that the majority of those funds will support shipments in 2022, maybe going a little bit into 2023. So all of this, I'd tell you, is good news, and we still have to let the shipments catch up with the recently improved lettings. So we could see this, I would tell you, probably a little better in Q3 and Q4 maybe than Q1, but good news and it is stabilized and now we're starting, the funding is growing and we think the feds will support that later in the year.

Great, thank you very much. Thank you.

Your next question comes from the line of Nishu Sood of UBS.

Thank you. So I wanted to ask first about the SAG, the guidance for roughly $370 million. So returning to 2019 levels, can you just talk about some of the dynamics there? Are you assuming a full return to pre-pandemic cost structures? I'm sure there was some unusual reduction in expenses last year. Or Do you think there are some expenses that you're anticipating will be sustainably lower going forward?

Yeah, we are definitely not expecting a return to the prior cost structure. I mean, for the year, we reduced our SAG costs by $11 million or 3%. And we talked about that previously. I mean, basically, we benefited from some cost reduction actions that we took right at the end of 2019. as well as some ongoing initiatives that we put in place during the pandemic in 2020. And certainly contributing to some of that, certainly not all of it was lower T and E. And as we talked about in the third quarter, I mean, that's really an area where this year, depending on, you know, what happens with vaccine distribution, et cetera, I mean, we may see a little bit of an increase, but we certainly, are not going to return to the old normal there. We've learned a lot during this time, as have a lot of other companies, about different, more efficient ways of communicating and accomplishing what we need to do. So we are always looking for ways to leverage SAG. I suspect we will continue to find some more of those as we go through. The range that we set If you look at the midpoint of the range in terms of SAG as a percentage of revenue, that's 7.3%, just a tick under 7.4%. So we'll see where we get to in the year, but certainly, you know, as we did last year, we continue to look for ways to reduce that, and that improvement really, you know, sort of accelerated through the year. And if we find you know, that we're doing a little better than, you know, expected as we go through the year, then we'll update the guidance.

Gotcha. Gotcha. Thanks for that. And then also on the non-aggregates businesses, you had a very strong performance in 2020 with the increase in gross profit despite the lower revenues. The mid-single digit to high single digit continued to increase. So building upon that, can you just walk us through I imagine you're assuming some resumption of revenue growth. You know, some of the input costs like liquid asphalt might be a little bit higher. So just wondering if you could walk us through some of the drivers on that mid to high single-digit growth in the gross profits.

Sure. That mid to high single-digit growth is really driven primarily by asphalt, and I would tell you it's really driven by volume in asphalt. which is improved DOT work, and what happens in those states where we're producing asphalt, places like Texas, California, Arizona, Alabama, and Tennessee. And it's bigger jobs and more work, simply that. Ready Mix, we have it up slightly, and it's really more unit margin-driven than volume-driven.

Great. Thank you so much. Sure.

Your next question comes from the line of Jerry Revich of Goldman Sachs.

Good morning, Jerry.

Hey, Jerry.

Hey. Hi. Good morning, Tom, Suzanne, Mark. Nice to hear your voices. Thank you for taking the question. I just wanted to ask, really impressive outlook for aggregates, gross profit, growth of $70 million on flat volume, so essentially pricing dropping down to the bottom line, but I know you're going to be facing a headwind from diesel costs, labor inflation. Can you just talk about What's allowing you to offset those inflationary items of, I don't know, about $50 million, $60 million that still allows you to drop down the pricing straight to the bottom line?

Yeah, I'm not sure I'd go with headwinds. I think our headwinds are a little less than that. But if you look at our guidance for unit margins and the cost piece of unit margins, it's underpinned really by our focus on our operating disciplines and processes and If you look back, we saw our aggregate operating efficiencies last year, whether that's throughput, plant availability, later efficiencies improve. At the same time, if you look at yield and energy efficiencies, they were mostly flat to slightly down, really due to production volumes being volatile and some product split issues on yield, all of which were, I would tell you, pandemic-related. So as we look forward to 2021, we'd expect a headwind of the diesel prices to impact us with some, I'd tell you, some $10 to $20 million. But in spite of this, we would expect our unit cash costs for aggregates to be flat to maybe up a little bit. And it's really supported by our operating strategic disciplines that we've been working on and those processes that we've been putting in for the last two years. I would tell you that I'm really proud of our operators and First of all, for keeping each other safe and healthy in a tough year and working through a tough year, but also their relentless quest for continuous improvement in those drivers of our operating efficiencies that drive your cost savings. They really are making an impact on what we're seeing on our unit margins. Okay. Appreciate the color. Thanks. Thank you.

Our next question comes from the line of Mike Dahl of RBC Capital Markets.

Hi, Mike.

Hi, Mike. Thanks.

Hey, Tom. This is Dan. Thanks for taking my question. A couple things just answered, especially on the cost, so that was helpful color. I guess just on the volume piece within ags, you gave some good commentary on kind of end markets, but if we're thinking about cadence through the year, any comments around kind of cadence that we should be thinking about first half versus second half from from a volume perspective in ags within the guide?

Yeah, I would expect second half will be heavily loaded. But I would also tell you, Mike, that I would think as we progress through the year, kind of month in and month out, week in and week out, that we'll see improvements. And what you're seeing there is improvements of the overall view of the world. And so whether it's non-res projects that people have confidence in that are starting to start back up or whether it's highway projects that are maturing because they've been let and now they're kicking in. I think you'll see that sequential improvement as we march through 2021.

OK, and just a quick follow up on that sequential improvement. You know, obviously there is still some seasonality, right? And I think there was a question earlier around the weather, but just to be clear in terms of sequential improvement, that's not a comment that we should expect. volumes up sequentially each quarter relative to 4Q, right?

No. What I'm comparing it to is the quarter in the prior year. So, you know, Q1, Q2 may be up a little more than Q2 last year versus what Q1 was and so forth.

Okay. That makes more sense. I just wanted to check. Thank you. Thank you.

Our next question comes from the line of Bill Ng of Jefferies.

Hey guys, good morning. I guess a few of your peers on the heavy side have reported actually they're expecting low to mid-single digit growth in 2021. You know, appreciating the range you've provided is quite wide, but would have thought just based on your footprint and just your comments on resi and highway being up, you know, you could see a little more growth. Are you baking in a little conservatism? And then when should we expect volumes to be up year over year? Is that more back half or could we see that happen as soon as 2Q, Tom?

I think, you know, as we said, the variance in our range is more timing of work. And the key timing is, number one, on highways, we know it's gotten better because the lettings have gotten better. The question is the timing of how fast do those lettings go to shipments. And, you know, we've seen projects go really fast, and we've seen projects over the last two or three years get delayed. Hopefully the DOTs are mature and we have less delays in it. and it kicks in and goes faster in the year than we would have anticipated. Weather's always an issue in the first quarter, but as the year progresses in Q2 and Q3, things get better. Hopefully that lines up with that highway work. On the non-res side, you know, again, we see the strengths in the heavy, the light. We know we've got some headwinds. We think it's stabilized. How fast the private money has confidence in the economy and goes back to work. is to be seen. I think as we've watched the first, you know, we're in the seventh week of 2021, and, you know, it's better in week six than it was in week five than it was in week four. So things seem to get better. You know, a lot of this is pandemic-related, that that is getting better, and as that goes, the private money goes. So hopefully it'll go quicker than anyone anticipates, but to be seen, and as we said earlier, With the visibility as best we could, we try to be thoughtful about how we plan for it.

Got it. But, Tom, to be clear, you're not seeing any incremental bottlenecks per se. You're saying, hey, we're giving us some cushion here just because we just don't know how quickly these DOT projects show up, but you're not seeing any incremental bottlenecks per se.

I'm not quite sure I understand your question. I'm sorry.

Okay. My question is, you know, you made the point that you have visibility in terms of bidding activity, but, you know, how quickly this stuff ramps up, you know, is unclear. My question is, you know, are you seeing any incremental bottlenecks that could delay some of this, or it's pretty steady like what you've seen for some time now?

I don't see any big bottlenecks delaying it. In fact, if anything, from a DOT perspective, you know, the DOTs have matured over the last two or three years into increased funding, and so they have the firepower, whether that's engineering or permitting, or letting work. So I don't see any bottlenecks holding up. It's really just needs to move through the process and the contractors go to work.

Okay, great. Thank you. Appreciate the call. Thank you.

Our next question comes from the line of Garrick Schmoy of Loop Capital.

Great, thanks. You highlighted some of the stripping cost expenses that you saw in the fourth quarter. Just curious if you can quantify that. Does that imply some pull forward of costs into contracts from next year or from this year, if you will? And how should we think about incremental gross margins and aggregates in 2021?

Yeah, so specifically the stripping cost was up about $4.5 million. But overall, the cost was up about $0.30 a ton in Q4. And if we look back at this, as we went into the fourth quarter, based on the success that we had had for the full year, and the pandemic getting better, and markets getting better, and you couple all that, you put all that together, and as we look forward to 2021 and the DOTs getting better, we made a decision to pursue some preventive maintenance projects on both fixed and mobile equipment. At the same time, we decided to re-engage our larger stripping projects because we felt like that, you know, that longer term, when I say that, we don't look a year, we look you know, 24, 36 months out because these are mines and you can't move very fast, we decided it was time to re-engage the stripping projects. So based on the visibility to demand factors improving and the fourth quarter being, you know, smaller from a volume perspective and us having the firepower and the people to the time to do the work, it was time to pull the trigger on the projects.

Great. And can you provide some color to how you think about incremental margins in 2021?

Yeah, you know, incremental margins in times like this, at this inflection point, incremental margins are probably not as meaningful. And I would encourage you to really turn to unit margins as a better metric. And, you know, we saw mid-single-digit growth in 2020, even with volumes going down 3%. And we should see that kind of growth, you know, mid-single-digit, margin growth or growth in cash gross profit per ton in 2021. And I think as you look at the factors of this and what we have in the plan, that's what we expect and kind of continue on our march towards our $9 per ton of cash gross profit per ton, regardless of what headwinds or tailwinds we see out there.

Yeah, and I would just add to that Tom's right. I mean, when there's volatility, when volumes are flat or declining, You just get really strange math when you try to do these numbers. If you look back at 2020, you know, we had quarters where, you know, the flow-through number, if you calculated it, could be 40% or it could be 240%. And so, as we said all through 2020 and until we get back to the point where, you know, volumes are, you know, fully positive and moving forward, We're just going to continue to talk about the drivers and the cash gross profit because I just think that's more meaningful than the flow-through numbers just because it's just volatile and they're just strange numbers that really don't necessarily mean a lot.

Makes sense. Thank you. Sure. Thank you.

Our next question comes from the line of Temna Tanners of Bank of America. Hey, good morning, everyone. Hope you're staying warm.

Good morning. We're trying.

I wanted to just probe a little bit the infrastructure opportunity, just a little bit more detail on if we do see this new infrastructure focus manifest itself in kind of more green energy or green projects. Can you kind of give us more detail on how that can affect your product mix and what the opportunity can look like?

Yeah, I think if you kind of just step back and really simplify this, you know, Vulcan is going to participate in all new construction. You just have to. A rock has to go in the foundations. It has to go in the infrastructure. So as we see new green construction, aggregate demand will benefit, particularly if it's green projects that are aggregate-intensive construction projects, so things like water, sewer, alternative energy sources, all of which are going to be supported by this administration. Those are pretty agri-intensive and will benefit from that demand growth.

Okay, are there any that are more or less? I'm just trying to get a flavor of if we get an announcement, how to think about it.

Yeah, the three I would point out that are quite agri-intensive are going to be water, sewer, and wind energy. And then on top of that, if you look at, you know, obviously ports and airports that are, you know, how you consider those green or not, but the green ones, I would say, are water, sewer, and wind energy.

Okay, great. Thanks, guys.

Thank you.

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

Good morning, gentlemen. Suzanne?

Good morning. Good morning.

I encourage you to see your guide for cap spending this year. Looks like you, just to qualify, the growth capital you're allocating is projects you deferred in 2020 pre-pandemic. Are there any new or expanded ones in that mix? And I guess to follow on to that, how, Tom, are you seeing your business development team working? And is 2021 an opportunity, given where your balance sheet is, to look a little bit more carefully at some opportunities relative towards organic growth?

Yeah, sure. I'll address the CapEx question first. You're right. These are you know, internal growth projects that, you know, have a good return and are important to us that we did defer when the pandemic hit last spring. You saw that we spent, you know, a bit more money in the fourth quarter than initially guided on CapEx, and that related to the restarting of a couple of these growth projects that we just wanted to get the jump on before we went into the new year. But really, they are principally the projects that we had in place last year. We'd like to go ahead and finish those as soon as we can since we lost a year on them and start reaping the benefit of that. And you're right. I mean, with respect to M&A, as we've talked about many times, 2020 was just a year of inactivity because things sort of shut down. as a result of the pandemic, you know, we are beginning to see, you know, some deals, you know, come to market. We're beginning to see a bit of a pickup there. You know, certainly, you know, given our position in the industry, if anything is coming to market, I mean, we're going to know about it, get contacted, and we're going to have a look at it and we will continue to use the same disciplines that we've used in the past as we think about those deals. They've got to fit us strategically. They need to be returns enhancing. They need to be accretive. And look, when you look at our balance sheet, we have the firepower to do about anything we'd like to do. But we're going to be sensible about what we do and you know, do deals that, as I said, fit the strategy and the returns criteria and, you know, don't lose all of the financial advantage that we've worked hard to create from a balance sheet position over the last few years.

I think that was well said, Suzanne. I think that, you know, as Suzanne said, there was just a desert for M&A and in 2020, nothing happened and you would expect it to come roaring back in 2021 and And it's busy. And as always, we'll be involved on those and we'll do the deals that make sense to us, make sure we understand the markets we want to be in and what product lines those markets make attractive and the ones we want to be in. And, you know, as always, we'll be picky about them, but we'll also find the ones that fit us.

Your next question comes from the line of Courtney Yacobonis of Morgan Stanley.

Hi, good morning, guys. Thanks for the question. Appreciate the comments you guys gave about how the first half versus second half cadence really depends on how those lettings turn into shipments. But can you give us any insight into how you're thinking about the cadence for pricing through the year? Will that be more consistent or Is that also going to trend with how shipments trend? Also, any insight into pricing for your non-aggregates business?

Yeah, good question. I think that, you know, first of all, fundamentally, the conditions for price increases continues to improve. The market's able to have visibility to improving demand really helps this. You know, as we said, res is very healthy, continues to improve. Non-REVs, while it's seen its challenges, also, you know, with doing the light side, that seems to have stabilized. And then it's got the, you know, you've got the heavy side that's doing very well. And, you know, you lay it on top of that. We're starting to see bubbling of LNG work. That's helpful. The lettings and visibility to do lettings, picking up is really good because everybody knows that work is coming. So I would, all of this is good for pricing. I would expect price increases to build as we progress through 2021. But remember, and I would, and, you know, that will also, I would tell you, you'll see that, you'll see prices start to accelerate starting in Q2. We have some, you know, that's when the majority of our fixed plant prices go into impact. And so I would As you start kind of into Q2, I would say accelerate throughout the year. And remember, while pricing is really important, the most important component of this is unit margins. And along with cost, we saw those grow almost 6% last year with volumes being down. And I think we have confidence that we'll grow both price and unit margin again in 2021, regardless of what happens with prices. you know, outside volume forces.

Great, thanks. That was helpful.

Thank you.

Our next question comes from the line of David McGregor of Longbow Research.

Morning. Yes, good morning, everyone. Yeah, good morning, Tom. Good morning. Just wondering if you could talk about sort of the regional disparities in the 1% decline in fourth quarter aggregate volumes and maybe how you're thinking about regional disparities within the shipment guidance for 2021.

Yeah, so if you look at the fourth quarter, I would tell you that the southeast was a strength for us. Kind of all the states in the southeast, I would tell you that Arizona, Illinois were on the weak side. I would tell you that even though we had the challenges from fires and pandemic and cement shortages in California, it matched prior years, so improving things in California. As we look forward to to volumes in 2021, I would tell you that most of our markets, we're seeing improvements. Again, the southeast is going to be a strength. I would tell you that Texas will be strong, and I would tell you that California is improving. California had so many headwinds last year that now a lot of those are gone, so we will see improvement there, but those will be strengths for us.

Great. Maybe you can talk about kind of just to build on the pricing question prior to me. Just helps understand the non-res pricing situation right now. And is pricing up in that segment? Is it close to comparable with the average? How are you thinking about 21?

You know, there's really not a lot of different pricing variants by market segment. It's really more geographic. And if you look at our footprint, we're planning on price increases across all of our footprint. So I wouldn't call out – it's really hard to call out pricing between res or non-res or highways because it's more along product line by geographic area. But I would point to it being fairly widespread both geographically and across all product lines for us as we look out to 2021. Good. Thanks very much, and good luck. Thank you.

Our next question comes from the line of Josh Wilson of Raymond James.

Good morning, Tom, Suzanne, Mark. Thanks for taking my questions. Morning, Josh.

Morning.

I wanted to ask some cash questions as well. Given your plans for CapEx, and we know you're going to pay down the $500 million maturity, but you're still carrying quite a bit more cash on your balance sheet than you did pre-pandemic. So, Suzanne, can you give us your thoughts on how much of a war chest you want to maintain versus when you might consider restarting share repurchases or something like that?

Yeah, sure. It's a good question. And I think as we went into the pandemic, you know, there was certainly no intention or desire on our part, per se, to build a war chest, because I think that's, you know, just having your cash sitting around on the balance sheet is certainly not the best use of it in the long term. But given the uncertainty we faced You know, as we took some of those decisions to delay CapEx, et cetera, you know, I certainly, you know, think that, you know, having a bit of cash there for safety is certainly the right thing to do. You're right, you know, the first use of the $1.2 billion will be to pay down the $500 million maturity in March. I mean, that's been long planned and taken care of. You know, I think as we think about the capital allocation priorities we've had in place for a long time that have really, I think, served us well and are well understood by the market, you know, if you think about the waterfall of those priorities and the order of them, you know, the sort of other than maintaining and, you know, improving our dividend, which is critically important for us. You know, we want to make sure that, you know, that can absolutely be sustained through the cycle. You know, we are beginning to open up and spend a bit more cash on growth. That's the second, you know, priority in that capital allocation policy. And so, you know, we're going to be spending more on those internal growth projects. And look, you know, as I said on M&A, we'll be looking at opportunities as they come down the path. I would say that, again, going back to that waterfall, those growth projects and dividends are of a higher priority to us than share repurchase. So I think we just need to wait a bit and see what materializes on the on the growth front, and then, you know, as we go through the year and see, you know, how the cash plays out and what other opportunities arise, then, you know, we've got plenty of time to consider the share repurchase.

And if I could follow up, in terms of the CapEx guidance, is that pretty evenly spread through the year, or is that back-end weighted and For, like, 2022, is there some catch-up in 21 that makes it an unusually high year, or how should we think about the long-term FX rate?

First of all, there is some catch-up, and I think Suzanne pointed that out.

The catch-up is... Yeah, I mean, again, if you go back to the beginning, and maybe this is the easiest way to talk about it, if you go back to the beginning of 2020, Our guidance then was to spend $475 million. We wound up only spending $361 million in 2020 as a result of the delay of those projects. So we're guiding to that $450 million to $475 million number. The intent there is to catch up a bit on operating CapEx and the growth projects. So, you know, there is a bit of catch-up there. I wouldn't necessarily say it's, you know, it's a material amount, but, you know, we do intend to restart those growth projects.

As far as the timing through the year, I'd tell you pretty evenly spend. It usually is more in, you know, the hot, you know, summer months where you can build for the construction projects where some of the build is. The rest of it, the repair, the The replacement capital is evenly spent. The growth capital will probably be a little heavier in Q2 and Q3. Thanks so much. Thank you.

Our next question comes from the line of Adam Thalheimer of Thompson Davis.

Hey, good morning. Quick question for you, Tom. The states that you saw some weak volumes in Q4, so California, Arizona, Illinois, what's the outlook for those states specifically this year?

So, um, California wasn't actually, as it wasn't weak, it was actually, um, it was flat and flat was some, some pretty good, um, some pretty good headwinds. If you really kind of step back, California is an important state for us. So if you step back and look at it and look at California, the fires are out and the cement shortage is over. So already things are better in California and the 2021 demand is improving. Northern Cal is really kind of, you've got to separate Northern California and Southern California. Northern Cal is recovering, but remember, it had the longest recovery because it had the most severe shelter in place. On top of that, you had the fires and cement shortages, which really hurt us or hurt that whole market in 2020. So, you know, we'll see improvement in 2021, but a little slower. Now, if you look at The highway piece, which affects the whole market, SB1 lettings are going to increase or increasing this year by 14%. So we'll see growth, both growth in both improvement in aggregates and asphalt. And then in Southern California, we're going to see single, excuse me, high single-digit to double-digit growth in residential and non-res is recovering with warehouses and distribution center and even the like. Okay. I think if you step back and look at California from last year's perspective, in spite of all the demand challenges and the pandemic and the fires and cement shortages, in 2020, we were still more profitable year over year than we were in 2019. That unit profitability sets us up well in 2021 as we start to see volumes improving along with unit margins. California will be a better place without the challenges they had in 2020. Arizona, I believe that, again, the residential piece sector is good. I think the highway is solid, non-res improving. So Arizona is a pocket of population growth which supports that. If you look at Illinois, it has its challenges. Highway work will probably be, if you pull in toll work, will be solid. But the other sectors, and res is okay, but the other sectors still see challenges, as does non-highway infrastructure. So somewhat of a challenge market for us. Good color. Thank you. Thank you.

Our final question today will come from the line of Stanley Elliott of Stiefel.

Good morning, everybody. Thank you all for squeezing me in. I appreciate it. Sure, Stanley. Question for you guys. Nice job, again, on the inventories. You know, as we sit here today, kind of running our track towards kind of like 2018 levels, you're talking about the highway business potentially picking up in the back part of the year. Do you anticipate any sort of mix issues from a production standpoint, or should kind of where you're sitting here be a good sign from a flow through on that side?

Yeah, I think you'll see somewhat improvement. You heard me talk a little bit in our cost comment about mix with with yields um and with new construction you get more basin fines with helps your yields granted it's at lower price but you need that for the overall unit margin improvement so if anything i would tell you that i think that mix will be improved in 2021 over 2020 just because you have a better flow of of of new construction and remember on the residential side You're going now, you are at new subdivisions, not just built out of subdivisions, which is number one is more agri-intensive because you've now got to put in the roads and the utilities, but it's also a better mix because you've got the substructure of basin fines under all those roads and utilities and under those slabs. So I think we'll see improvements, which will help push unit margins as we look at 2021. Perfect.

That's great news. Thanks, guys. Appreciate it. Thank you.

Thank you. I would now like to return the call to Tom Hill for any additional or closing comments.

So thank you for everyone for joining the call today. Thank you for your continuing support of Vulcan. I think we're proud of our 2020 performance and we make good progress in 2020 to our longer term goals. We believe we're going to take that momentum into 2021 and we look forward to sharing that news with you over the next few quarters. I hope all of you stay healthy, keep your family safe and healthy, and we look forward to talking to you soon. Thanks. Yeah, goodbye.

Thank you for participating in the Vulcan Materials Company Q4 2020 Earnings Conference Call. You may now disconnect.