Vulcan Materials Company Earnings Call Nuggets: Pricing and Construction Cycles

Vulcan Materials Company (NYSE:VMC) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.


Kathryn Thompson – Thompson Research Group: Nice job with pricing in the quarter and I wanted to get a better sense of what was mix versus price increases and also given overall improvement in volumes and we see more consistency could you maybe discuss where pricing potentially could go over the next couple of years based on your past experience?

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Donald M. James – Chairman and CEO: Kathryn we got some favorable mix but also a lot of just absolute price increases on same products. So a blend of the two to get to 4% we had in the quarter.

Danny R. Shepherd – EVP and COO: Probably three-quarters of the improvement or more was pure price.

Donald M. James – Chairman and CEO: If you look at the history of this industry clearly when there is volume recovery and visibility of future volume recovery there are more opportunities for price improvement and we certainly see that in our guidance for 2013 and certainly as we look beyond 2013, we continue to see opportunities for improved pricing and margin particularly as we continue to get the benefit of our cost initiatives.

Kathryn Thompson – Thompson Research Group: Could you give what are your highest per unit price states for Aggregate product?

Donald M. James – Chairman and CEO: It tends to be Carolinas, Georgia, Florida, California, the lowest price markets tend to be the Midwest.

Kathryn Thompson – Thompson Research Group: So all areas or at least a portion of the areas where you have seen some good strength?

Donald M. James – Chairman and CEO: Yes.

Kathryn Thompson – Thompson Research Group: Is it safe to say that these price increases will be more than enough to offset increases in cost? Maybe, if you could talk a little bit more on the cost side and what you’re seeing in terms of increases there?

Donald M. James – Chairman and CEO: The answer to the first part of your question is, yes; we certainly believe we will get price increases in excess of cost increases. Cost increases in our business are materials and supplies in ’13 and wages. We expect to continue with competitive wage increases for our employees and that will have an impact on our cost in 2013. Other costs that have been significant in prior years, cost increases, diesel fuel, liquid asphalt, we expect some modest increase in 2013, but at a lower percentage rate than we’ve seen over the last two or three years. So, we think those are within reasonable ranges. So we don’t see a tremendous amount of cost pressure in 2013 in the Aggregates business.

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Kathryn Thompson – Thompson Research Group: Finally, hopefully the color that you gave on the public end-market, given your past experience with the increasing obligations which you’ve seen, maybe excluding the stimulus timeline but say, going back further, what’s the typical lag that you’ve seen between obligations and really seeing a more meaningful increase in obligations in that realistically flowing through the market; and maybe talk because it is a little bit different this time because it does appear at least based on our work, that you’re getting a greater percentage of longer-term projects in this cycle versus in prior cycles, your opinion on that also.

Donald M. James – Chairman and CEO: I agree with you, we are seeing largely because of the TIFIA work, but there is likely to be a larger portion of, particularly highway spending and perhaps some other surface transportation infrastructure spending like rail, high-speed rail in big projects over the next probably construction time over the next three, four years, as these TIFIA project rollout. If you study our charts, you will see that while the obligations of Federal Highway dollars are up sharply we’re not yet seeing the increase in contract awards. So, there is a lag there, a lot of states are holding relatively large bid lettings this spring, and once that we go through that cycle, we will expect to see contract awards moving up significantly, as they have in all of the prior Highway Bill times in which federal highway Bills have passed, early in that Highway Bill cycle the state DoT’s want to go out and get their projects obligated and then contract awards and we will see any reason why that cycle will not repeat itself.

Kathryn Thompson – Thompson Research Group: In terms of you alluded to, some in your prepared comments, but in general you don’t expect to see any meaningful volume to flow through at least till the back half of this share, but more likely into 2014?

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Donald M. James – Chairman and CEO: I would agree with that statement. There is, depending upon the timing of when some of these large projects actually start, both TIFIA projects and industrial projects and I’m sure you’re aware that particularly along the Gulf Coast there are a large number of big industrial projects that could begin sometime in 2013, including the Airbus plant in Mobile, several refinery and LNG projects along the Gulf Coast, some chemical plant expansions or greenfield developments on the Gulf Coast. So there’re a lot of big projects out there, both publicly funded and privately funded that are going to use significant volumes of heavy construction materials, we believe we’re well-positioned to participate in many of those projects, but for us to tell you that shipments will begin in the third quarter or the fourth quarter of 2013 or the first or second quarter of 2014, is not terribly clear at this point.

Construction Cycles

Ted Grace – Susquehanna Financial Group: Don, I was wondering, if you take a step back and you think about, let’s just say the next three years, for the sake of argument and it looks like the private non-res cycle is intact and you talked about some of the opportunities in the relatively near term and residential certainly looks like it’s intact. You’ve got a two year (mini bell) and hopefully you’ll get something bigger on the back end, we’ve got TIFIA to look forward to and it certainly looks like a bunch of state initiatives. So as much as you had say look there’s concerns about kind of broader public spending as it pertains to roads and highways, I think people are appropriately optimistic. Do you think there is any reason why the first three years of an up cycle would look much different than what we have seen historically when on average you had seen mid-single digit or better growth per year and again this is over a three year basis? So I am not asking you to say for 2013 necessarily, but is it unusual to think that this cycle was not different than prior cycles?

Donald M. James – Chairman and CEO: We have gone back and looked at the last five or six construction cycles in the U.S. You always see very robust recovery. This cycle is different in a couple of ways. It has been both longer and deeper than anything we have seen going all the way to the depression. So an argument can be made if the slope and length of the downturn is proportional to the slope and length of the upturn which you can see in all the last five recessions, we could have a very long and very robust recovery. We are seeing it in housing. We are beginning to see it in private non-res and as you know the vast majority of cyclicality in the heavy construction materials business is in the private sector and there remains relative stability throughout the downturns on publicly funded projects although there is some cyclicality there as well due to tax revenue changes. But I think we are cautiously optimistic that we’ve got a very good run in front of us. It’s harder to say when the big turn occurs than that it will occur. But we believe there is a tremendous upside. If you look at where we are in relation to peak volumes, Concrete is 35% of peak in 2012, Asphalt’s a little over 50% of peak, Aggregates are less than half of peak and our improved profitability gives us tremendous opportunity to, as we’ve said publicly, to certainly get back to peak earnings long before we get back to peak volume. That’s all encouraging for us.

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Ted Grace – Susquehanna Financial Group: The second thing I was hoping to run through and I don’t know if it’s you Don or Dan or John McPherson is on the line, but just hoping to square up kind of the impact we saw from the Profit Enhancement Plan in 2012 and if we still think you get $75 million in2013, as I think was the last kind of target and where we should look for those benefits.

Donald M. James – Chairman and CEO: I will let Danny and Dan if you would like to comment on that.

Danny R. Shepherd – EVP and COO: As Don commented earlier Ted; our reduced SAG cost of roughly $31 million was a huge step in our overall Profit Enhancement program. We remain committed not to have expense creep in that category, and our budget shows a further reduction in 2013. But we are on track. As you look at sourcing and some of our transportation initiatives, we are very confident that we can deliver the numbers that we’d given you in the past. I mean, our run rates tell us that we will achieve what we’ve committed.

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Donald M. James – Chairman and CEO: And Ted, just to remind you and the other participants in the call how we framed that objective last year. We said that we would enhance profitability at current volume levels, i.e., 2011 volume levels by $100 million through a series of initiatives that affected both cost and revenue, and as we triangulate our outlook for 2013 against that stated objective, we come back and can point to the achievement of that 2013 run – that 2013 amount of $75 million that was supposed to hit the P&L in that year, and as Danny said, we have the full $100 million run rate in the second half of 2013. So, again, the important measuring point is, enhance profitability by $100 million at current volumes. We stated that on the heels of 2011, so that’s how we benchmarked and measure it ourselves.

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