Good morning, ladies and gentlemen, and welcome to the Vulcan Materials Company's Third Quarter Earnings Call. My name is Gretchen, and I will be your conference call coordinator today. [Operator Instructions] 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, and thank you for your interest in Vulcan Materials. With me today are Tom Hill, Chairman and CEO; and Mary Andrews Carlisle, Senior Vice President and Chief Financial Officer. A couple of housekeeping items before I turn the call over to Tom.

First, please be reminded that today's discussion 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 are defined and reconciled in our earnings release, our supplemental presentation and other SEC filings. In the interest of time, please limit your Q&A participation to one question. This will allow for more questions during our time together.

Today's call is accompanied by a press release and a supplemental presentation posted to our website, vulcanmaterials.com. Additionally, a recording of this call will be available for replay later today at our website. And with that, I will turn the call over to Tom..

Thank you, Mark, and thanks to each of you for joining the call this morning. We appreciate your interest in Vulcan Materials Company. During the third quarter, our team showcased the durable growth capabilities of our aggregates-led business model.

Volumes, prices, gross profit, and importantly unit profitability improved in each of our operating segments. Widespread double-digit pricing growth across all segments outpaced continued cost pressures. Our momentum is strong.

Throughout our organization, we remain focused on our strategic disciplines, the Vulcan way of operating and the Vulcan way of selling, and the fundamental role they play as we continue to enhance our core business. We also continue to expand our reach and we've closed several strategic acquisitions this year.

Importantly, during the third quarter, we acquired strategic aggregates and downstream assets to complement our existing business in Northern California. In the third quarter, we generated $507 million of adjusted EBITDA, which is a 21% increase over the prior year.

Accelerating pricing growth and higher year-over-year shipments drove earnings improvement in each product line. In aggregates, gross profit improved 17% to $436 million. Volume improved 9% or 3% on a same-store basis, and it was geographically widespread.

Pricing momentum continued growing from mid single-digit in the first quarter to high single-digit in the second quarter to double digits in the third quarter. Average selling prices on both a reported and mix-adjusted basis increased over 12% from the prior year's third quarter.

Current pricing momentum and the visibility into future public demand growth will support a positive pricing environment for the remainder of 2022 and into 2023. As expected, our costs remained elevated in the quarter due to continued inflationary pressures.

The price per gallon of diesel was more than 60% higher than the prior year, and most parts and supplies also face significant inflationary increases. Our focus on driving efficiencies through the Vulcan way of operating is critical to continuing with inflationary pressures and continuing to expand our unit profitability.

In the third quarter, aggregates cash gross profit per ton improved 9% to $8.41 per ton. Our Asphalt segment also achieved significant improvement in the third quarter with a $22 million year-over-year increase in cash gross profit. The average price of liquid asphalt increased by over $200 per ton compared to the prior year's third quarter.

That said, continued pricing momentum and healthy volumes drove favorable results in spite of the ongoing energy-related cost pressures. Asphalt volumes increased 13% and asphalt pricing improved 26%. Both volume and pricing improvements were widespread with particular strength in Arizona and California, our two largest asphalt markets.

Concrete cash gross profit in the third quarter improved $25 million due to the contribution from acquired operations as well as strong volume and price growth in our legacy operations. Now that we have briefly reviewed the results from the third quarter, let's shift to the underlying demand environment and the outlook for construction activity.

We see both challenges and opportunities in the future demand environment with different dynamics impacting each end use. Single-family housing is facing considerable headwinds, but multifamily housing and private non-residential starts still show growth.

On the public side, leading indicators for highways and other infrastructure are reflecting strong tax revenues and increased funding from the infrastructure investment and Jobs Act. I'll share a few highlights on each end use.

Starting with residential, single-family demand is now showing the impact of rising construction inflation, home prices and mortgage rates. Permits and starts are declining albeit at slower rates in bulk-and-serve markets than the country as a whole. Multifamily permits and starts remain positive.

It's important to remember that residential construction activity remains at high levels. Also, household formations and limited inventories may dampen the magnitude and duration of weakness in residential demand.

Private non-residential demand and leading indicators are currently healthy and the trailing 12-month private non-residential starts are up 21% over the prior year. Additionally, leading indicators remain positive with the Architecture Billings Index, or ABI still greater than 50 and the Dodge Momentum Index at high levels.

On the public side, we are in growth mode. Trailing 12-month highway starts are up 14% and other infrastructure starts are up 18%. In fact, July and August were the two largest single months for highway awards in the last 10 years.

The timing of starts converting to aggregate shipments will be a critical variable impacting next year's demand for aggregates. As we look into 2023, we expect that the current strength in private non-residential construction activity and increased public funding will help to offset contracting residential demand.

We also carry strong pricing momentum into 2023. Our teams will be finalizing their annual planning over the next few weeks and we will share with you our full-year outlook on 2023 in February.

Even with uncertainty in the broader economy, we are confident that we are well positioned to capitalize on pricing opportunities, benefit from the generational increases in public funding, and continue to expand our unit profitability. I will now turn the call over to Mary Andrews to comment further on our results and full-year outlook.

Mary Andrews?.

Thanks, Tom, and good morning. Tom highlighted the strong operating results we achieved in the third quarter in both our Aggregates and Non-aggregates segments. So I'll focus on a few other items in the P&L, the balance sheet and our revised outlook for the full-year 2022.

Our SAG expenses as a percentage of revenue improved by 30 basis points versus the prior year quarter to 6.5% of revenue. Year-over-year increases in SAG were driven primarily by higher incentives consistent with improved earnings and elevated legal and professional fees related both to Mexico and business development activities.

Our support teams have been focused on integration activities for acquired businesses, and we expect to reap benefits from those activities into next year. During the quarter, we recognized a pretax gain of $24 million on the sale of real estate in California.

Also, as part of our ongoing focus on portfolio management, we are finalizing an agreement for the disposition of our ready-mix asset in New York, New Jersey, and Pennsylvania. And therefore, during the quarter, we adjusted the carrying value to fair value, resulting in a $68 million pretax charge. Now turning to the balance sheet.

At the end of the quarter, our net leverage was 2.5x adjusted EBITDA and within our stated target range of 2x to 2.5x. Disciplined capital management remains fundamental to our strategy and we will continue to deploy capital consistent with our longstanding stated priority.

Through the first nine months of this year, we've deployed $378 million in operating and growth capital to support and expand our valuable franchise, $528 million in M&A to grow and strengthen our market positions and $159 million in dividends to return cash to shareholders. Our balance sheet is strong.

And during the quarter, we added another source of flexible and cost-effective capital by initiating a commercial paper program. We issued $550 million of commercial paper and used the proceeds to repay half of the outstanding $1.1 billion term loan.

In conjunction with initiating the commercial paper program, we also upsized our revolving credit facility to $1.6 billion and extended its maturity to August of 2027.

Our investment-grade balance sheet and significant cash generation capabilities give us the capacity to continue to invest in both organic and inorganic opportunities with a focus on improving shareholder returns and return on invested capital.

On a trailing 12-month basis, our return on invested capital at quarter end was 13.6% inclusive of strategic acquisitions and ongoing investments and growth opportunities. We are focused on continuing to improve our returns. Now let me comment on the update to our full-year 2022 adjusted EBITDA guidance.

We now expect to generate between $1.64 billion and $1.68 billion. Continued strength and underlying demand and acquisition activity are driving aggregates shipment expectations above the upper end of our original expectations of 5% to 7%. We now expect full-year aggregates volume to improve between 7% and 8%.

We continue to expect mid single-digit growth and aggregates cash gross profit per ton for the full-year. As expected, pricing gains continue to grow in the third quarter and year-over-year improvement and unit profitability expanded sequentially and was in line with our second half expectations.

Other updates to our guidance include full-year SAG expenses of approximately $520 million. Depreciation, depletion, amortization, and accretion expenses of approximately $575 million and an effective tax rate of approximately 25%. We continue to expect to spend between $600 million and $650 million on capital expenditures in 2022.

These expenditures include both maintenance and growth projects, and the higher fourth quarter pace of expenditures is reflective of expected deliveries on ordered equipment. I'll now turn the call back over to Tom for some closing remarks..

Thank you, Mary Andrews. Before we go to Q&A, I want to thank our entire Vulcan team for their hard work and consistent execution. I'm proud of the results they delivered in the third quarter, and I'm excited about the operations we added through acquisitions in the quarter.

I'm particularly proud of the Vulcan family members who helped to rebuild Sanibel Causeway while at the same time coping with the hurricane impacts on their lives. Thank all of you for your dedication, to your community and to one another. We are always focused on keeping our people safe.

We will continue empowering and developing our talented people and executing at a local level. We'll take advantage of the positive momentum and be nimble in addressing new challenges.

I'm confident in our ability to continue driving improvement in our core business through the further development of our Vulcan way of selling and Vulcan way of operating strategic disciplines. They allow us to both take advantage of opportunities and confront challenges.

Vulcan's long-term growth and value are durable because we have the right people focused on the right disciplines, offering the right products in the right markets. And now, Mary Andrews and I will be happy to take your questions..

[Operator Instructions] We'll take our first question from Stanley Elliott from Stifel..

Good morning, everyone. Thank you all for taking the question. Could you guys talk about – I mean, you had some momentum kind of exiting the year.

Kind of how does this position you all kind of thinking about into next year, whether – I mean you mentioned a little bit on the – some of the end market side, but just curious to get your thoughts, high level?.

Yes. Good morning, first of all. And I think I'll take the fourth quarter first and then next year. If you look at the numbers in the fourth quarter, it would really show flat volumes compared to last year. And that's really not a reflection on demand. It's more about comps and fourth quarter weather. So we tried to be thoughtful about this.

Last year's November, December shipping rates were the highest in 10 years. In fact, November was the highest month of last year. And then you always got weather in the fourth quarter. In fact, we've seen some of that already.

The hurricane that hit Florida actually impacted us the first week of the fourth quarter when it blew up through the East Coast with a lot of rain. And then we've been impacted with low water on the Mississippi. If you step back and look at the fundamentals, our leading indicators are still very positive.

Bookings and backlogs are up meaningful year-over-year and quote activity is still robust. So I think we're just trying to weigh puts and takes in the fourth quarter. Looking to 2023, we're actually doing those budgets right now as we speak and appreciate our operators' hard work on that.

At a high level, I think 2023 will depend on the magnitude of decline in single-family residential construction, that being offset by the timing and growth of infrastructure and private non-res construction. If you look at the leading indicators in private non-res and in public infrastructure, they're very positive, particularly in Vulcan markets.

The starts in Vulcan markets are outpacing other markets. The non-residential indicators, the ABI and the DMI, they both point to growth. On highways IIJA, we're seeing – we're starting to see that impact on DOT planning. It's really a question of the timing from starts to shipments.

Quote activity in both non-res and highways is very good and customer sentiment is positive, and you've got to believe the fundamental of construction employment growth. So I think for next year, it's a matter of positives in non-res and highways being offset by single-family.

What I do know about 2023, I think that I have confidence that we'll be able to grow our unit margins. And what gives me confidence in that is the hard work that we talked about at Investor Day, we were like done and that we're doing on our strategic disciplines, the Vulcan way of selling, the Vulcan way of operations.

And I think we've proved that we could do that. And even with significant headwinds, we were consistent in growing unit margins at a pandemic. We were consistent in growing unit margins when we saw volumes fall. And we've been pretty consistent about growing them even in the face of dramatic inflationary pressures.

So I'm confident we'll improve regardless – improve unit margins in 2023, regardless of outside forces, and that's because we just want to control our own destiny..

Tom, that’s great color. Thanks very much and best of luck..

Thank you..

Our next question comes from Trey Grooms from Stephens..

Good morning, Trey..

Good morning..

Hey. Good morning, Tom, Mary Andrews. Thank you for taking my question. Tom, you touched on this on the prior question answer, but if we could get more color. You guys put up impressive improvement in aggregates unit margins.

I know you spend a lot of time on the Analyst Day talking about that, and we saw that come through in the quarter, especially given the cost headwinds.

But could you talk about maybe in a little bit more detail how we should be thinking about the puts and takes as we look into the 4Q and into 2023 on the cash gross profit per ton improvement? I know you mentioned the confidence there and growing, but any further color would be great..

Sure. I think as I look at the fourth quarter, much like the third quarter, I think we'll continue that momentum. And I think I would look at it pretty much consistent with Q3. Again, we carry good pricing momentum into 2023, and we'll get into that in more detail, but work to be done there. It's not – we don't have that in the bag yet.

And then from a operating efficiencies, you saw that when we talked about that in September. It's really more throughput, less downtime and being efficient with your labor and your inspections on your equipment to catch it before it breaks. And I think those disciplines are in place. We're improving. We've got the automation in place now.

Still work to be done on it, but it's about consistent, continuous improvement..

Okay. I'll leave it there. Thank you very much for the color..

Thank you..

Your next question comes from Jerry Revich from Goldman Sachs..

Good morning, Jerry..

Hi. Good morning, everyone.

Can we just talk about the really strong acceleration in your aggregates organic volumes and margin improvement within the context of the headwinds that you're facing from the Mexican operations? What extent have you been able to hit the same markets from rail lines versus the prior transportation method? And can you just bridge for us the year-over-year margin improvement given the drag having those operations down year-over-year had in the quarter? Thanks..

Yes. I think if you just step back and look at Mexico, nothing's changed there. We'll still shut down. The impact is still going to be that $80 million to $100 million for the full-year, and that's built into our guidance. If you look at volumes, the volume growth was really widespread. It's not – it's in every market we had.

And so it was very widespread. We were – have not been able to make up the volumes on the coast and – just because the railroads can't – we can't mitigate it with – because the railroads can't pull the volume. In fact, they couldn't pull the volume we wanted to ship prior to Mexico being shut down.

So that has just been a loss for us and one that you've seen us made up kind of throughout our markets..

And Tom, can you comment on the margin piece because that $80 million to $100 million run rate, that's a big headwind that you folks overcame in the quarter.

Any additional context you can provide?.

Yes. I mean, it's just a matter of those strategic disciplines at work. You've got price up 12.5%, and you've got – our operating efficiencies are in place and working and continue to improve. We're at $8.41 per ton in the third quarter. So we're barreling towards that $9.

This is why we placed another target of 11 to 12, but I think it's just fundamental solid operations and execution..

Well done. Thank you..

Thank you..

Our next question comes from Philip Ng from Jefferies..

Hey, guys. Congrats on a really strong quarter and a really good execution across the board..

Thank you..

Thanks, Phil..

Tom, I guess, you gave us some qualitative color on how to think about 2023. One of your competitors guide to be flat volumes for next year. I know you guys are still kind of working through that. But can you kind of help unpack how you're thinking about some of these end markets where it's housing, non-res and infrastructure.

Are some of the good guys enough to offset that? And on the DOT side, what do you start anticipating that inflection kind of pop? Just wanted to get some color in terms of the cadence and that flow through next year?.

I think you asked the right question about when does a highways pop. If you look at starts and highways on a trailing six-month basis, it's up 17% on a three-month basis, it's up 27%. So the fundamentals for multiyear growth in highways and infrastructure are very good. You've got substantial funding, both state, county city.

You add to that the COVID funds. For example, highways funding went up in Florida, $1.5 billion from COVID funds. So there's substantial funding everywhere and you're starting to see that flow into lettings. In fact, we booked substantial highway work in the last 90 days.

So biddings and bookings growth should continue through the fourth quarter and through 2023 and probably for another five or six years. At this point, it's not if, but when. It's a matter of timing. And the speed to get funding to lettings, which you're starting to see, lettings to aggregate shipments.

Admittedly, the DOTs have struggled – continue to struggle a little bit to get money out, but they're obviously making progress with those trailing three-month starts at the 27%. And for example, Caltrans, the 2021, 2022 lettings were target was $4.9 billion.

They fell short by $500 million when they shifted into 2023 plans, which is now $5.4 billion and the next year is $7.2 billion. So highways is growing. I think it's just – it's really just a matter of speed and how fast they can get to work. I think, again, what I'm encouraged that is – last 90 days at 27% improvements on starts.

That's a big deal, and we're seeing in lettings. And you can see that start to flow as people are making plans for calendar year 2023. On non-res, it's remarkably strong and growing and starts are way up, and it's widespread..

Okay. Thank you. I appreciate the color..

Sure..

Our next question comes from Mike Dahl from RBC Capital Markets..

Thanks for taking my questions.

Can we talk about inflation a little bit and maybe give us a little more color on how you're seeing that evolve into the fourth quarter, where you've seen an easing if you have seen easing? And conversely, if there are any incremental pressures you're seeing? Any thoughts on if things stay the way they are, what that means for carryover inflation into the beginning of next year?.

Yes. I would call the fourth quarter similar to third quarter. The cost inflation just remains stubbornly high. We're obviously offsetting that with price and operating efficiencies or some of it. The parts and service costs are and will probably stay high. I would think that will be for sure in the fourth quarter, and I would expect it into 2023.

Obviously, energy headwinds have been – particularly diesel has been extremely tough year-to-date. That's just under $100 million headwind for us. So I think we should expect most of the cost inflation to remain elevated for sure in the fourth quarter, and I would expect it into 2023..

Okay. That helps. Thanks. And my second question is just on the sale of the ready-mix assets in the tri-state area and Pennsylvania. Can you just walk us through that a little bit more kind of rationale and any comments on as you've evaluated the portfolio post the U.S.

Concrete deal? Is this kind of the last chunky thing? Or are there other things potentially on the horizon?.

When we bought this, we said we would value – we take a year to evaluate and look at our hand. And us selling the ready-mix business is – well, we're selling the ready-mix business up there. We're keeping the aggregate business. And this is us just optimizing our portfolio.

We felt like that after looking at it, the ready-mix business up there fit others better than it did us. We had plenty of suitors. Again, we like the aggregates business. That's a good infrastructure play. It's a well-structured aggregate market, which we think is a platform for growth. And all you're seeing there is us optimizing our portfolio..

Got it. Okay, thank you..

Sure..

Our next question comes from Michael Feniger from Bank of America..

Good morning..

Good morning, Tom. Thanks for taking my questions. Obviously, the concern on demand has been around housing and implications there. So Tom, I believe your shipments peaked last cycle in 2005 with housing, yet you were able to really grow strongly in 2006 and 2007. I believe since you are still kind of flat to down in that period.

So could we see a similar playbook here for 2023, 2024, with housing down, the resi down yet infrastructure is strong and pricing. Maybe kind of just talk through the similarities from what we're seeing now compared to that 2005 period when housing started to turn..

Yes. Housing has turned. We know that. I think that the starts point to it, as do permits. I think what you got to step back and remember, what's very different this time is it's – the fundamentals for single-family residential growth in our market still – they're still there.

You've got extremely low inventories, you've got good employment and you've got population growth. So the underlying fundamentals were not overbuilt like we were – when housing went down the last time. So I would expect it to have less depth and less length of time. That being said, I think what really is different for me is the non-res side.

It is very strong. All end uses are up, that's office in stores, warehouses, manufacturing, industrial and institutional and the leading indicators show growth.

For example, if you look at square footage, which is how we have to look at it, trailing 12-month starts are up 29% in our markets versus 11% in others and trailing three-month is up 47% in our markets versus 9% in non-Vulcan market. So again, it's widespread. It's across all end users.

And what stands out for me also is the manufacturing growth in the Southeast, and these are big jobs that we've built on. And let's see if I can just take a few of those. You've got, for example, Big River Steel in Arkansas, it's probably 0.5 million tons. You've got Universal Epic Park in Orlando, Smith Farms, Industrial Park in South Carolina.

The big Ford electric vehicle center in Tennessee and the Samsung chip plant in Texas. And the list keeps going. So I guess, a little bit surprised, but very pleased with the rate of growth we're seeing in non-res..

Yes. And I think one other thing as we think about kind of 2005 era versus now more internally. I think we're in a different place with the focus that we've put on our strategic disciplines and the Vulcan way of selling and the Vulcan way of operating, which we're confident will be helpful regardless of the macro environment..

Helpful. Thank you. And just my second question, on the aggregate side, you reported an incremental margin of 21%, 31% ex-freight.

Just bigger picture, I know we're not guiding here, but if we turn to next year and you're getting double-digit growth, which is all price or price-led, you don't have another $100 million headwind from energy, let's say, you don't have a headwind there.

What's the right incremental operating margin, which you could kind of expect on that aggregate side if we don't have that cost or inflationary headwind? Thank you..

Yes. On the incrementals, as we always do, we'll guide you back to over the long-term and on a same-store basis to that kind of 60%. Obviously, the dynamics in these volatile inflationary times make those numbers jump all over the place. But we always take you back to that 60% over the long-term..

Thank you..

Our next question comes from Garik Shmois from Loop Capital..

Hi. Thanks for taking my question.

I was wondering if you could talk a bit about how much pricing you expect to carry over into 2023 from some of the mid-year actions you took this year in aggregates and just how to think about pricing broadly moving forward, given some of the demand uncertainty? And if you could maybe give us some color on how the discussions are going around early next year price increases at this point, that would be helpful..

Sure. The pricing environment continues to be very good and really driven by visibility to growth in infrastructure and inflation. As we said last quarter, we saw – we're going to see prices sequentially grow. We saw it grow from Q1 to Q2, and then it really jumped from Q2 to Q3 I would say Q4 similar to Q3.

And that growth has really supported the big jump from two to three by the July price increases and higher price bid work. And that pricing is widespread across all of our markets. And importantly, we're able to take it to the bottom line through the Vulcan way of selling and Vulcan way of ops.

If you look at next year, we carry a lot of that momentum into 2023 as do our ready-mix asphalt and contractor customers. The work we're bidding now will ship in 2023. So we're setting the table right now. And we've had our – we're having our January pricing conversations for fixed plants, and I think those have gone well. But remember, work to be done.

The second half comps are going to be a lot tougher. And so while we got good momentum and have a good start to 2023, we still got to be worked – we still have to do work to earn that price, particularly in the second half..

Got it. Thanks for that..

Our next question comes from Kathryn Thompson from Thompson Research Group..

Thank you for taking my question today. You've been spending time cleaning up portfolio with the assets in the Northeast. But as we look forward, you've also mentioned focusing on M&A and growth particularly in a market that is a bit uncertain right now.

How do you focus on – how where do you focus on growing your portfolio in light of the current dynamic? Thank you..

Yes. I mean you saw us do some of that this year. We bought some very strategic assets in Northern California and coastal Texas that fit us well and fit our network and expanded our network. I think that as we look at acquisitions, you probably see a little bit – maybe a little bit of slowing, which usually happens in times of uncertainty.

And I think our position here is to be opportunistic and disciplined as always, particularly what markets you want to be in. To your point, you got to be very disciplined about what markets you want to be in, and what you don't and what product lines you want to be in in those markets. So we'll continue that.

I think this was a typical year with a number of strategic aggregate bolt-ons, and I think you'll continue to see us do that..

Okay. Great. Thank you very much..

Thank you..

Our next question comes from Anthony Pettinari from Citi..

Good morning..

Good morning..

Good morning..

Over the past year, we've heard about tight cement and RMC markets being a bottleneck for ag volumes. As the housing market has softened, have you seen that start to loosen? Or is that something that you anticipate to see in 2023? Just wondering if you could talk a little bit about those downstream markets..

Yes, it has been tight. I mean maybe a little bit of a headwind on aggregates. I'm not sure drivers and trucks wouldn't have been a headwind anyway with that. We've really not seen a lot of the housing market tighten in our markets yet, maybe a little bit in Northern California and North Texas, but really, we've not seen it yet.

With leading indicators, we know it's going to come. I would expect most markets to continue to be somewhat tight on cement even with the loosening of residential starts..

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

Thank you..

Our next question comes from Adam Thalhimer from Thompson Davis..

Hey. Good morning, guys. Congrats on a great quarter..

Thank you. Good morning..

I wanted to zero in on the Northeast concrete sale. What was the impact to that in terms of Q3 gross profit? Because I guess you put that into assets held for sale. So you took that out of the Concrete segment before Q3.

And then what would be the total impact to the back half of the year vis-à-vis taking that out versus your guidance?.

Yes. Adam, you're right, we did reclassified the assets. That's held for sale on the balance sheet. We continue – those operations are still reflected in the P&L in continuing ops. And in terms of the rest of the year, we've taken that into account in the updated guidance that we provided.

And once it closes, we can comment more on the details of that transaction..

Okay.

But for Q3, Northeast is in the concrete gross profit numbers?.

That's correct..

Okay. Thank you very much..

Thank you..

Our next question comes from Timna Tanners from Wolfe Research..

Hey. Good morning, guys..

Good morning..

Good morning..

Just wanted to follow-up, and I know this is tricky, but on the Mexican quarry, if you were in our shoes, how would you think about, one, the timing of any restart or ability to restart? And two, any compensation for lost revenue? Any updated thoughts there or any progress would be great? Thanks..

I wouldn't count on a restart. I would count on that the $80 million to $100 million is built into our guidance. It's the volumes and our volumes and has all the earnings. We filed an application with the NAFTA arbitration to seek additional claims because of the closure.

And in July, we were very pleased the Tribunal granted our application to seek further claims. We're pleased with that decision. We hope to know a lot more in 2023, but these things take time. We've not made the claim public, mainly because we're still working on the magnitude of the ancillary claims.

So work to be done on that one, but we do feel like we'll be compensated. We do feel like we have a good case, and we felt like the Tribunal recognize that with letting us open that back up in July..

Okay.

Any things to watch for, like any upcoming court dates or time frames to watch for that could be further progress?.

It will be next year. And again, it takes time. I would say – well, as things come – as we know, we'll let you know, but no hard dates at this point..

Okay. Appreciate the update. Thanks..

Thank you..

Our next question comes from Dillon Cumming from Morgan Stanley..

Great. Good morning. Thanks for the question. Sorry to ask another one on Mexico, but just you kind of noted in your release that you had acquired a quarry in Honduras, I believe, which I think was serving some of those same Gulf Coast markets.

Just kind of wanted to ask if there were any kind of like less obvious ways, South America and otherwise that you might be able to actually fill in those volumes that we should be watching for into next year as well?.

No. I mean that was a business we had already been associated with it. We had a distribution agreement in place for that quarry for four years. So we've been selling those materials as a complementary product to our blue water network since 2019. So it's not added to volume. It will be – its lower mark substantially lower large margins than Mexico.

We've gotten the question, well, can you expand it? And it would be logistically really difficult considerably increase the volumes from where they are today because of where that quarry is and some of the shipping constraints. It was – we had it in business for the last few years, really is a complementary source to supply those coastal markets.

So it's really not a replacement for tons in Mexico or profitability in Mexico..

Great. Thank you..

Thank you..

Our next question comes from Keith Hughes from Truist..

Thank you.

Just within the fourth quarter kind of implied guide, do you think in the aggregate segment, will you be able to grow margins, in other words, get kind of ahead of the cost curve? Is there still going to be a drag?.

On the fourth quarter, I would expect a very similar performance to what you saw in Q3. So we've gotten our price out ahead of cost. Where I don't expect cost to – the inflationary pressures to go down, either in Q4 or 2023. So that's kind of how I look at.

Mary Andrews?.

Yes. And Keith, I think on a gross margin basis, kind of what we discussed at the second quarter was we expected in the back half that the margins would squeeze closer to the prior year. You saw that in the third quarter.

The delta was about half of what it was in the second quarter, and I think that, that will continue to improve in the fourth quarter..

Okay.

You had a really nice improvement in concrete and the third, would we expect a similar type of improvement in the fourth?.

I think I would expect a similar performance in the quarter. I'd expect it to start going up again in the first quarter of next year as we have price increases in the first year in concrete..

All right. Thank you..

Thank you..

Our next question comes from Tyler Brown from Raymond James..

Hey, good morning..

Good morning..

Good morning..

Hey, Mary Andrews. I know it's a bit early, but I want to start thinking about the building blocks on the free cash flow side for next year. I think that bonus depreciation actually steps down in 2023. That may put some pressure on cash taxes. I think cash interest is probably a headwind.

But just any color on those two items specifically and the magnitude and what that might mean for free cash?.

We'll give – obviously give more guidance on that when we get to February. I think you're thinking about the interest components correctly. Our conversion ratios have remained at really, really healthy levels, and I don't think we'd expect that to change materially in 2023..

Okay. All right. Perfect. Thanks..

The next question comes from David MacGregor from Longbow Research..

Yes. Good morning, everyone..

Good morning..

Good morning. Great quarter. Congratulations on the results..

Thank you..

I wanted to ask you about the revised shipment guidance, and going from 5% to 7% up to 7% to 8%.

And how much of this would you relate to improving demand versus maybe easing constraints? And I guess with respect to some of those constraints, are they evolving in a favorable way is economic growth eases in this country and will 2023 be any different?.

Yes. I think you've seen a little bit of easing and constraints in construction, but they're still substantial. The railroad constraints we're still – while they've improved a little bit. We still got bottlenecks. On a good shipping day, you still have trucking constraints, albeit both of them are a little bit better than maybe they were a year ago.

Same thing with builders. They're still having problems getting supplies and getting parts to get them in a timely manner and they're holding up construction, again, maybe a little better.

We said at the beginning of the year that the underlying demand was better than what we had predicted and we continue to see that underlying demand to be pretty good, albeit starting to see some softness in leading indicators in single-family.

I think it's a combination of demand remains very good and some easing of bottlenecks, although they're still there..

And thoughts with respect to whether it gets any better in 2023?.

Yes. I think it continues to improve. I think it's slow. I think the railroads are adding people. Obviously, we're getting more efficient with our trucking to the Vulcan way of selling. And I think in supplies for construction, I think, continue to slowly improve as we go through 2023..

Yes. And another impact on the full-year volume guide was the acquisition activity and just the healthy underlying demand held up..

Got it. Thank you very much..

Thank you..

Our last question comes from Michael Dudas from Vertical Research..

Hi, Mike..

Good morning..

Thanks for getting me in. Good morning, Mark, Tom and Mary Andrews. Maybe to follow-up on the previous questions back on free cash.

As you're looking at your plans for 2023, not to put out the exact guidance, but relative to CapEx spending levels next year versus this year, are you caught up from some of the delays from the pandemic relative to some of the maintenance or growth opportunities? And since you implied that potentially because of the uncertainty and acquisitions maybe a little bit more tricky or maybe deferred, how does that impact relative to allocation towards the balance sheet or capital return to shareholders? Thank you..

So I think on CapEx, like our operating plans, we're in the middle of finalizing our 2023 needs right now. I don't think I would expect anything substantially different. We have hopefully been able to catch up some of the lack of spending in 2020 and 2021.

You'll note that our pace of spending in Q4 will accelerate from what it has been, and that's dependent upon receiving equipment. So we'll just kind of see how that shakes out and that will somewhat impact 2023 as well. But over the longer term, I think about CapEx as the – vary with volume more than anything else, more and more than time.

And so we wouldn't see anything meaningfully different..

And that appears to be our last question. I will now turn the program back to management for any additional or closing remarks..

Thank you. I want to take a minute and thank the entire Vulcan team for their tireless efforts to ensure continuous improvement regardless of what the world throws at them. We appreciate your interest in Vulcan Materials, and we look forward to talking to you through the quarter. Thank you, and have a safe day..

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect..