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Donald M. James - Chairman, Chief Executive Officer and Chairman of Executive Committee

Danny R. Shepherd - Chief Operating Officer and Executive Vice President


Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Jerry Revich - Goldman Sachs Group Inc., Research Division

Brent Thielman - D.A. Davidson & Co., Research Division

Keith Maher - Singular Research

Vulcan Materials (VMC) Q2 2013 Earnings Call August 1, 2013 10:00 AM ET


Good morning. My name is Shay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vulcan Materials Second Quarter Earnings Call. [Operator Instructions]

Mr. Don James, Chairman and CEO, you may begin your conference.

Donald M. James

Good morning. Thank you for joining us to discuss our second quarter 2013 results. I am Don James, Chairman and Chief Executive Officer of Vulcan Materials. Joining me today are Dan Sansone, our Executive Vice President and Chief Financial Officer; and Danny Shepherd, our Executive Vice President and Chief Operating Officer.

We have posted a short slide presentation to our website that we will reference during the call. These slides are also available to those of you on the webcast.

Before we begin, let me remind you that certain matters discussed in this conference call, as indicated on Slide 2 of our presentation, contain forward-looking statements, which are subject to risk and uncertainties. Descriptions of these risks and uncertainties are detailed in the company's SEC reports, including our most recent report on Form 10-K.

In addition, during this call, management will refer to certain non-GAAP financial measures. These measures are not prepared in accordance with U.S. Generally Accepted Accounting Principles. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures and other related information in Vulcan's second quarter 2013 earnings release.

Turning now to Slide 3, I want to begin by briefly discussing a few highlights from the quarter. Each of our business segments reported solid growth in second quarter earnings, contributing to consolidated gross margin expansion and significant earnings per share improvement as compared to the prior year. Earnings from continuing operations were $30 million, or $0.23 per diluted share, compared to a loss of $17 million or a loss of $0.13 per diluted share in the second quarter of last year. We achieved these results despite challenging wet weather conditions. Aggregate shipments increased 2% compared to last year, despite significantly wetter weather in all of our markets in the eastern half of the United States.

Our shipment levels in the first 2 months of the quarter were well above the same period last year. June shipments were sharply lower as wet weather blanketed many of the markets we serve. Assuming more normal weather conditions in the second half of the year, we anticipate the trend of improving shipments to continue, and to be driven primarily by growth in private construction activity.

We achieved broad-based improvement in aggregate pricing, which was up 4% overall with growth in virtually all of our markets. Over each of the past 4 quarters, our year-over-year quarterly price gains have been at least 4%, and the geographic breadth of pricing improvement has expanded. Our reported price improvement is adjusted for freight cost incurred to transport aggregates from a producing quarry to a sales yard. We believe measuring our price improvement in this way provides a clearer view of changes in actual realized prices. Without this freight adjustment, our year-over-year price improvement was even greater.

As we look ahead, we remain encouraged by improving trends in private sector construction. Vulcan-served states are among the fastest-growing in the country, accounting for more than 60% of all new construction in both housing starts and contract awards for private nonresidential buildings as measured by square feet. This trend bodes well for earnings growth both in our aggregates businesses and in our non-aggregates segments. We are also pleased to see contract awards for highways were up 10% through the first half of the year, an indication that highway funding stability is returning now that the federal highway bill is in place.

Moving now to Slide 4. This provides a summary of our second quarter financial results. Consolidated net sales increased $47 million or 7%. Gross profit increased $27 million as each segment reported year-over-year improvement in earnings. Accordingly, gross profit margin increased 280 basis points. Volume in ready-mixed concrete and cement increased 15% and 20%, respectively, due to improving levels of private construction. Texas and Florida delivered very strong improvements in ready mix volume, up 46% and 25%, respectively.

EBITDA was $164 million, an increase of $61 million from the prior year second quarter. During the second quarter, the company sold certain operating assets in lower-margin, lower-growth markets in the Midwest. These transactions generated a pretax gain of $21 million, or $0.10 per diluted share. Additionally, in the quarter, we increased our aggregate reserves and operations in attractive markets in Texas.

With that, I'd like to turn the call over to Danny Shepherd who will walk you through our segment results for the quarter.

Danny R. Shepherd

Thanks, Don. As Don mentioned in his opening remarks, wet weather was a major factor in the second quarter, affecting shipments and production efficiency. Slide 5 provides some context to the amount of precipitation in the second quarter. The amount ranks the amount of precipitation in every state relative to the last 119 years of data as captured by the National Oceanic and Atmospheric Administration.

The darker-green color and higher number -- higher the number, the greater the precipitation. As you can see, all of our markets in the eastern half of the U.S. were significantly impacted by rain, and in some cases, historical levels of rain. To help illustrate how to interpret this data, I'll focus on Georgia. In 2012, the map on the left, the number 38 indicates that there were only 37 years over the past 118 years when the second quarter was drier than it was in 2012. In contrast, the map indicates that there were only 5 years when the second quarter was wetter than it was in 2013. Notwithstanding the extreme weather comparison, our second quarter shipments in Georgia increased 9% in 2013. And even though we were repeatedly challenged by weather events, you'll see on Slide 6 that each of our segments increased earnings due to strong demand in some markets, and effective cost management.

Our aggregate segment, which I'll cover in more detail in a minute, reported increased shipments, prices and earnings. Non-aggregates earnings increased $12 million due to improving private construction demand, which benefited concrete and cement volumes and increased material margins in asphalt due to lower liquid asphalt cost. The concrete earnings improvement reflects higher shipments and lower costs. The improvement in cement earnings is due to higher shipments, higher prices, and lower cost.

Now turning to Slide 7. You see that aggregates gross margins increased 130 basis points due to higher volumes and pricing. Aggregate shipments in a number of markets increased sharply versus the prior year, and furthermore, instead of a series of major storms leading to the wet weather, the consistent, steady rainfall meant that many locations never completely dried out.

Wet weather not only results in lower aggregate shipments, but it also leads to production inefficiencies which impacts cost. For the first 2 months of the quarter, aggregate shipments were trending nicely, up 5% setting us up for a strong June finish to the quarter. Typically, June shipments are greater than May shipments, as the construction season ramps up. However, June shipments were less than the prior year and were lower than May shipments, an outcome that has only happened once before in the last 10 years. Markets in the Midwest and Virginia reported year-over-year declines in shipments due to wet weather and the presence of some large project work in the prior year's second quarter.

Markets in Arizona, Texas and California reported 56%, 23% and 13% increases in shipments due primarily to growth in private construction. Additionally, we were pleased to see many markets achieve quarterly volume growth despite wet weather conditions. Aggregate shipments in Florida and along the Central Gulf Coast are examples of markets where we experienced strong volume growth despite wet weather conditions. Shipments in Florida increased more than 50% versus the prior year. This underscores the broader trend in demand growth we see in much of our geographic footprint as private construction activity continues to recover. I'll say that July shipments have rebounded nicely due to solid demand growth even with the continuation of wetter-than-normal weather.

Slide 8, aggregates prices continued to gain traction. The year-over-year improvement is broad-based across our markets, almost without exception. For the fourth quarter in a row, prices went up at least 4%, underscoring that markets are recovering, and that the attractive characteristics of the aggregates business remain intact. Because of our disciplined approach to pricing and cost management, the earnings leverage in our aggregates business continues to increase, as you see on Slide 9. On a trailing 12-month basis, our cash gross profit was $4.19 per ton, 25% higher than it was at the peak -- prior peak in shipments in the first quarter of 2006, and superior to our peers. This high unit profitability positions us well for greater earnings leverage from incremental tons that will come with future growth and demand.

With that, thank you, and I'll turn the call back over to Don.

Donald M. James

Thanks, Danny. If you'll turn with me now to Slide 10, you'll see that strengthening our balance sheet remained probable [ph], and we are just doing just that through debt reduction and improving EBITDA. During the past 12 months, we have reduced our total debt by $190 million, while also investing $111 million in strategic assets and reserves in Georgia and Texas. Debt-to-EBITDA has improved from 6.3x 1 year ago to 5.4x as of June 30 of this year, and we expect further improvement in the coming year.

Turning now to our end markets on Slide 11. As you all know, housing starts are up sharply versus last year, indicating a continuation of broad-based recovery in residential construction. In fact, most Vulcan-served states realized double-digit growth in housing starts for the trailing 12 months. More importantly, we are seeing significant growth in key Vulcan-served states including Florida, Texas, California, Georgia and Arizona. 7 of the top 10 states with the largest absolute growth in trailing 12-month housing starts at June 30 are Vulcan-served states, with Florida and Texas leading the way.

We also continue to be encouraged by leading indicators of future activity for private nonresidential construction. Contract awards, as measured by fee for private nonresidential construction, are up 11% in the U.S., with Texas and Florida leading the way here, too, up 51% and 43%, respectively. Growth in stores and office buildings, which for us includes all commercial, office and lodging, is the primary driver.

Growth in private construction activity in key Vulcan-served states like Florida, Texas, California, Georgia and Arizona, is important, because not only will we realize the attractive incremental margins that Danny referred to, from higher aggregates volumes, but our non-aggregates businesses in these markets will benefit as well.

Our year-to-date concrete shipments are indicative of this expanding recovery in residential and private nonresidential construction. Through the first 6 months of this year, our concrete shipments were up over 11% compared to the same period last year, again led by Texas and Florida which are up 36% and 23%, respectively. This growth in new private construction activity underpins our expectations for volumes and earnings improvements in 2013.

Looking now to Slide 12. Highways comprised the largest end market for aggregates demand within public construction. New highway projects, as measured by trailing 12-month contract awards, were up 1% versus the prior year's level, the second consecutive quarter with an increase.

This table on Slide 12 shows the positive contribution of recent awards to the current year, up 10% year-to-date versus the prior year, reflecting the impact of the stability brought to the state DOTs by the new federal highway bill passed by Congress in September of 2012.

More significant to us is the fact that contract awards for highways in our served markets are up 14% year-to-date, driven by contract awards for new road projects, which are more aggregates-intensive than any other type of construction. This recent growth provides some evidence that a more stable and predictable highway funding environment leads to improving construction activity.

The large increase in TIFIA funding contained in the new highway bill should also positively impact future demand. Contract awards for TIFIA projects are projected to add $30 billion to $50 billion to highway and infrastructure construction, substantially exceeding the contract awards for highways from the 2009 stimulus bill. Some TIFIA projects have already begun in 2013, but 2014 and '15 will be much more significant years in shipments to TIFIA projects.

The growth in new highway projects should help offset recent weakness in other public infrastructure, as shown here on this table. Last year, highways comprised approximately 30% of full year aggregates shipments while other public infrastructure accounted for less than half that amount.

Turning to our outlook on Slide 13. Our outlook for another year of operating earnings improvements remains on track, and is supported by improved pricing, continued growth in private construction activity, which should drive volume growth, and by disciplined cost management. U.S. construction employment through the first half of 2013 is up 2.8% from the prior year, an indication that construction activity is again growing, albeit from a low base.

Aggregates demand from private construction is expected to grow mid- to high-single digits overall, led by the residential segment.

Public construction in the second half of 2013 should begin benefiting from recent growth in contract awards for new highway projects, as well as from TIFIA funding, and these 2 items should create positive momentum in that sector going into 2014.

As we look specifically to the remainder of 2013, the projects that could materially impact our second half aggregates volumes continue to include a disproportionately greater number of large highway and industrial projects. The timing of shipments to these projects remains outside our control, and in some cases, has been delayed due to project considerations. Additionally, the wet weather experienced in the first half of this year could cause some project work to slow, resulting in backlog carryovers into 2014. As a result, we expect second half aggregate shipments to increase 2% to 4% from the prior year. This volume outlook assumes more normal weather patterns throughout the remainder of the year, and includes the effects of sales volumes associated with acquisitions and divestitures this year.

On a same-store basis, second half aggregate shipments are expected to increase 3% to 5%. In keeping with our successful efforts to offset the earnings effect of lower volumes in recent quarters, we continue our focus on reducing controllable cost and achieving improved pricing.

The geographic breadth of pricing gains achieved in 2012, and so far this year, reinforces our expectations for continued price growth for the second half. We expect full year freight-adjusted price growth of approximately 4% for full year 2013.

Additionally, earnings in each of our non-aggregate segments should improve compared to last year. Asphalt materials margins increased throughout 2012, and we expect material margins to continue to increase throughout 2013 and contribute to earnings growth in this segment.

Full year concrete volumes and material margins are expected to improve in 2013 as housing starts continue recovering in key states. Concrete volumes year-to-date have increased 11% overall versus the prior year due in part to increased private construction activity in Florida. We expect the increased private construction activity to continue to lead to improved unit profitability in the concrete segment.

Cement earnings should improve in 2013 due to higher shipments, improved pricing and lower production costs. As a result, collectively, full year earnings from these segments are expected to contribute significantly to earnings growth in 2013 as they have in the second quarter of this year.

Our full year outlook for 2013 reflects our continued progress toward achieving our Profit Enhancement Plan goals. Through the first half of 2013, we remain on track to meet our target of $100 million in improvement from the 2011 base year. Finally, we will continue to work on additional asset-related transactions that will allow us to strengthen our balance sheet and credit metrics, as well as redeploy capital and assets in markets with higher future returns to increase our ability to improve earnings as construction activity grows.

With that, I'll turn the program over to our operator to begin your questions. Thank you for your interest, and we look forward to responding to your questions.

Is the operator available? Well, bear with us a moment as we get the line open for your questions.

Question-and-Answer Session


[Operator Instructions] And your first question comes from the line of Adam Rudiger.

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

You mentioned some pretty strong shipments in some of your key states and it suggests that in some other states you had probably a proportionate decline. So I was wondering, what do you think the disparity among the different regions says about the recovery and says about the outlook?

Donald M. James

Well, I think in the second quarter, it has, perhaps, more to do with the absence of large projects in Virginia and in Illinois and with bad weather. As Danny Shepherd says, those 2 markets were down significantly compared to prior year. Obviously, though, the states that were hit hardest in the downturn are the ones that are coming back very strong. Clearly, Florida, Arizona, California are doing very well now. Texas is doing extremely well. As you know, it didn't have quite the downturn that some of the other states have had. But clearly, as we've indicated, our business in Florida is coming back very strongly. It's coming back very strongly in Arizona. And California's coming back nicely, and Texas is very strong. The middle part of the country is still not as strong, even though we had a lot of wet weather in the east, particularly up the East Coast, as you can see from the map that's in the slides, we actually had volume growth in several of those states. But we know that we lost a lot of volume, particularly in those markets at high-margin volume in the quarter, which we're looking forward to capturing through the remainder of the year.

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Okay. And then my second question was on -- in your -- the prepared statement and the press release, you talked about the historical relationship between nonresidential and how that follows residential construction. I was wondering how tight that is? And what -- based upon your experience, what the typical timing lag is for when you see -- you think the improvement in non-res after residential improvement?

Donald M. James

Well, we are students of economic cycles, and certainly, there is a cycle-after-cycle-after-cycle trend that residential leads nonresidential out of recession, usually with a 9-month, plus or minus, lag. As we look at the relationship now about housing starts contrasted to private non-res contract awards, we're seeing the same pattern develop. Housing starts have started up earlier, are more robust today, but private non-res is certainly recovering strongly based on contract awards. So we're, I think, cautiously optimistic that the pattern of prior recoveries in private construction led by residential, followed by private non-res is repeating itself.


[Operator Instructions] And your next question comes from the line of Jerry Revich from Goldman Sachs.

Jerry Revich - Goldman Sachs Group Inc., Research Division

Don, can you talk about how you see the public construction cycle playing out, just to continue the discussion on your last point. I guess in prior cycles, this is about the time we would see public construction start to bottom and turn the other way? And wondering if you'd just add some context based on tax receipts or other metrics that you look at for your key states on how you think that plays out?

Donald M. James

The relationship between public construction, particularly highways and private non-res, is certainly not as consistent. It's driven by different factors, largely by public spending. We're not looking for a substantial increase this year, in 2013, in shipments into public construction, we are looking for somewhat some growth in the highway sector, but then there's some offsetting weakness in other public infrastructure, water and sewer projects, things like that, which ought to, overtime, follow housing and private non-res construction. But the linkage is not nearly as consistent or as highly correlated as the relationship historically between housing construction and private non-res. That being said, the real wildcard here -- and we said that highway contract awards are up 10% the first half of this year compared to last year, which is clearly understandable. We didn't have a highway bill in the first half of 2012. We do have a federal highway bill, that's given stability and predictability to the states. And they started much bigger bid lettings in the first of the year based on the security of having a federal highway bill in place. But the big wildcard here of these TIFIA projects, I know you're tired of hearing us talk about those, but we're tracking about 50 or 55 big TIFIA projects in our markets. Some of those, as we said in our prepared text, have begun shipping in 2013, or will be shipping in 2013. But there's a big backlog of these projects. The Federal Highway Administration has been a little slower than anybody wanted in getting them approved and out, but they are beginning to show up. And they are going to have a very significant impact all across our footprint. I mean, I'm looking down my list, there's Illinois, Georgia, North Carolina, a lot in Virginia and Maryland and Florida, in Texas and in California. In addition to those, there are a lot of industrial projects, big industrial projects, primarily along the Gulf Coast, including refineries for Exxon and Chevron, LNG, the whole energy sector has got a big construction plan underway. And all of those things rolled up, give us lot of optimism -- give a lot of uncertainty as to the absolute level of volume in the second half of '13, but a tremendous amount of optimism about volume growth in '14 and '15.

Jerry Revich - Goldman Sachs Group Inc., Research Division

And Don, when you add up all the TIFIA projects that you're tracking, what's the aggregate dollar amount, how significant is that?

Donald M. James

We don't have -- well, the project value of the 56 projects we are tracking in our markets is $65 billion. And that -- I'm sorry, that's not all TIFIA, that's all large projects. Some of those are not TIFIA and some of them are private industrial. But our tracking sheet -- and we won't get every one of these projects and we won't get all the material in every one of these projects, but there is a pretty good backlog of big projects in our footprint.

Jerry Revich - Goldman Sachs Group Inc., Research Division

And you spoke about the weather element. Can you just step us through to what extent is that keeping you from being more aggressive on price increases, if at all? Does that impact what otherwise would have been stronger price increases into 3Q?

Donald M. James

I don't think so. I don't think weather -- weather has had an impact on volume, it's had an impact, as Danny Shepherd said, on our production cost. I don't think we can say it's had any impact at all on pricing.


[Operator Instructions] And your next question comes from the line of Brent Thielman from Davidson.

Brent Thielman - D.A. Davidson & Co., Research Division

Yes, just losses in the concrete segment narrowing at a pretty nice pace here. Are you getting some confidence you'll start to see some profitability in that business next year as you look into the various markets you're exposed to? And sort of second part to that, are you actually profiting in some specific markets and maybe that's just being offset elsewhere?

Donald M. James

Yes and yes. We're -- volume growth is the key to -- one of the keys to profitability in the concrete business, and we are profitable in a number of our concrete markets. And we're unprofitable in some others. So it's -- but we will, overall, with particularly recovery in the private sector construction where a lot of our concrete goes, we are -- we're very happy with that. And concrete, the improvement in our profitability of our cement segment also has been very substantial. And those are clearly related because our concrete is pulling aggregates through our system as well as cement through our system.

Brent Thielman - D.A. Davidson & Co., Research Division

That's encouraging. And as these larger public jobs eventually come through for you, I guess, everything else equal, should that have positive implications for your price mix?

Donald M. James

Absolutely. A little volume momentum in this industry has very significant pricing and margin leverage. Danny Shepherd had a slide in the presentation which I think would indicate that. If you look at the margin expansion, we experienced driven -- while it's not 1 for 1 in timing, it certainly is an indicator of opportunities for margin expansion. Both in pricing, but also in terms of our cost of production. Being able to run our plants at efficient volume levels really does move the needle on cost.


And your next question comes from the line of Keith Maher from Singular Research.

Keith Maher - Singular Research

Question about -- would you ever consider doing an equity offering to improve your capital structure by paying down some of the debt?

Donald M. James


Keith Maher - Singular Research

Okay. Any thoughts on when that may occur or how serious you are about doing that?

Donald M. James

We continue to look at various options for improving our balance sheet. The options we have are improving our EBITDA, which we clearly are doing and are very focused on doing. Assets, sales of nonstrategic assets is another way, and equity offering is yet another way. So we -- everything is on the table for us in terms of improving our balance sheet.

Keith Maher - Singular Research

Okay, great. And on CapEx, I think your guidance for the year was $150 million. It looks like you spent $60 million. Do you think you'll come in under that number, and is that mainly just for maintenance and not capacity expansions?

Donald M. James

Most of that $150 million would be for replacement CapEx. We have spent, as I indicated, over the last 12 months, we have made acquisitions totaling about $111 [ph] million. So we're in the -- continue to do bolt-on transactions. We are also very interested, as part of our asset sales, in continuing to improve our portfolio of businesses and geographies. The -- however you measure it, cash margin per ton may be one way to measure. But the assets we've sold have a dramatically lower cash margin per ton than the assets we're buying. So we are very focused on being in the right markets with the right set of assets. And that's part of our ongoing strategy, which you will be -- you've seen played out over the last 12 months and I think you'll continue to see being played out over the next 12.

Keith Maher - Singular Research

Okay, do you have any target level for acquisitions and divestitures this year, just in terms of dollars or capacity?

Donald M. James

No. We did announce that our goal was to achieve $500 million of after-tax proceeds, pretax proceeds from divestitures. We continue to look at opportunities. We're not going to sell good assets cheaply, but we may have some assets that are more valuable to other players than they are to us. If we can find those opportunities to withdraw our capital from those non-strategic assets and reinvest them either in debt reduction or in other bolt-on acquisitions, primarily aggregates-focused, we'll continue to do that.


We will now turn the conference back over to Mr. Don James.

Donald M. James

Well, thank you, all, for being with us today. Given the weather, we are very pleased with the second quarter. I hope you are. We look forward to a positive report at the end of the third quarter, and we will talk to you then. Thank you so much.


And this concludes today's conference. You may now disconnect.

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