Dear Shareholders,
As I write this, Vulcan Materials Company has completed its 65th year as a publicly-traded company. Vulcan is the nation’s largest producer of an essential product that goes into nearly all construction projects: aggregates. The materials we produce—crushed stone, sand, and gravel, as well as asphalt and concrete—are used to build our nation’s highways and public infrastructure, single-family homes, multi-family communities, manufacturing facilities, and distribution centers. We operate over 400 aggregates facilities in 22 states as well as targeted downstream asphalt and concrete operations in strategic markets.
Our people are—and always have been—our greatest asset. Across the board, our Vulcan teams delivered another year of strong results and created value for our shareholders through their hard work, consistent execution, and dedication. In 2022, our teams once again showcased the durable growth capabilities of our aggregates-led business model against a challenging backdrop, which included generational inflationary pressures, energy cost increases, labor challenges, supply chain constraints, and other macroeconomic headwinds. I am proud of them and grateful for their loyalty to one another and to Vulcan.
2022 FINANCIAL OVERVIEW
Our momentum is strong as we enter 2023. In 2022, we delivered a 32% increase in total revenue and a gross profit improvement of 13% versus 2021. We also delivered net earnings attributable to Vulcan of $576 million and a record $1.626 billion in adjusted earnings before interest, taxes, depreciation, and amortization (Adjusted EBITDA, a non-GAAP measure), a 12% increase from the prior year. We improved our trailing-twelve month aggregates unit profitability in 18 of the last 20 quarters. In 2022, our aggregates gross profit per ton increased by 3%, and aggregates cash gross profit per ton (a non-GAAP measure) increased by 5% through disciplined cost control and widespread, double-digit pricing growth that outpaced inflationary cost pressures.
Vulcan’s balance sheet is strong. We maintained our disciplined capital stewardship, ending the year with a net debt to Adjusted EBITDA ratio of 2.3 times. Our investment grade balance sheet, significant cash generation capabilities, and disciplined approach to capital allocation give us the capacity and flexibility to continue investing in both organic and inorganic growth opportunities that will improve shareholder returns and returns on invested capital.
DELIVERING DURABLE GROWTH: THE RIGHT PEOPLE, PRODUCTS, MARKETS, AND FOCUS
Vulcan’s durable growth is supported by focusing on fundamentals, controlling what we can control, never being satisfied, and maintaining disciplined execution against our growth strategy.
The Foundation: People
At the heart of Vulcan’s success are our people. We focus on keeping them safe and healthy, attracting and retaining a diverse, skilled workforce, and providing opportunities for a long and fulfilling career.
The safety, health, and well-being of our employees is our top priority—as it always has been. Each day, our goal is to ensure everyone goes home safely and as healthy as they arrived at work. We are extremely proud of our world-class safety performance. We achieved an all-time company record Mine Safety and Health Administration (MSHA) injury rate of 0.88 for Legacy Vulcan operations in 2022. When combined with our other business segments (asphalt and concrete), the overall MSHA reportable and Occupational Safety and Health Administration (OSHA) recordable rate for our Legacy Vulcan Operations was 0.89.
Continuous improvement is vital to safety. Historically, safety in the aggregates industry has been primarily focused on backward-looking metrics and accident prevention strategies. We made a fundamental change in our safety programs in 2021 to focus on risk prevention: we use forward-looking metrics and strategies to mitigate risk and help prevent accidents from occurring. Vulcan’s systematic approach engages employees to help eliminate hazards and engineer risks out of tasks across 14 high-risk activities, includes quarterly assessments and executive reviews, and employs elimination and prevention tactics. As a result, incidents involving potentially serious injuries and fatalities decreased by 28% from the prior year.
Our commitment to the health and safety of our people goes beyond our operational safety efforts. We continued our COVID-19 paid leave program throughout 2022 to support employees who had or were living with or caring for loved ones with COVID-19. We emphasized the need to stay home when not feeling well, whether due to COVID-19, the flu, colds, or other illness. We continued to provide flexibility for our office-based employees to work from home, and we created a formal hybrid work program for individuals in qualified roles.
Vulcan continues to recruit, develop, and grow the talent necessary to achieve long-term durable growth. This year, we intensified our recruiting efforts and leveraged mobile technologies, digital advertising, and social media engagement to bring diverse talent to the company. New hires now benefit from onboarding programs focused on our culture, which we call The Vulcan Way, and on what to expect in their roles. Then, through ongoing training and coaching, they are able to make significant contributions to the company earlier in their careers.
Diversity and inclusion are a key part of The Vulcan Way. We are making headway on our diversity, equity, and inclusion (DE&I) goals, further enhancing our reputation of being a great place to work. In addition to increasing the diversity of management, as well as entry level operations and sales trainees, we focus on valuing their unique contributions to the company. In 2022, we fulfilled our commitment to provide unconscious bias training to all new employees and to current employees so that the thoughts, perspectives, and backgrounds of our diverse talent would have a positive impact on our organization.
By ensuring that our employees are safe and healthy, making them feel part of the Vulcan family, and valuing their unique contributions to the company, we create a productive work environment and value for our shareholders.
Aggregates: Essential Products in Growing Markets
We are focused on supplying the right products in the right markets. Our leadership in aggregates is at the core of our business. Aggregates are an essential product, with high barriers to entry, limited substitutes, and very favorable pricing characteristics. While our durable growth is built on aggregates, we also offer aggregates-intensive downstream products like asphalt and concrete in select markets where these products enhance our aggregates-driven returns throughout the cycle.
We operate in the most attractive markets in the United States. Today, 60% of the population lives within 60 miles of a Vulcan facility. Population growth drives aggregates demand, and we are where the population growth is: in 35 of the 50 highest growth metropolitan statistical areas across the country.
Within these markets, we supply our products to highways and other public infrastructure, as well as residential and non-residential construction projects. In 2022, we saw all four end-uses experience growth. Our pipeline of projects remains healthy, and the fundamental drivers for both private and public construction still point to future growth.
Highway projects increased sharply in 2022 driven by improvement in state funding and COVID-19 related funding programs. An additional $70 billion in COVID-19 related public funding was made available for roads and bridges in the 2023 Omnibus Appropriations Act. We have just begun to see the impacts of the Infrastructure Investment and Jobs Act (IIJA): 41% of the $853 billion in this new federal funding is going to aggregates-intensive projects like highways, roads, streets, and bridges.
Of course, the remainder of the IIJA’s historic investment in public infrastructure also supports new construction that uses aggregates: drinking and wastewater systems; flood control; infrastructure resilience; navigable waterways, including locks, dams, and port infrastructure; rail ballast; airport and runway construction; and renewable energy generation facilities.
Private non-residential construction entered growth mode in 2022 as well. Starts in Vulcan markets were up 30%—three-times that of starts in non-Vulcan markets—emphasizing once again that we are where the growth is.
Although there are challenges, the underlying fundamentals of single-family construction in our markets are good: record low inventory, and higher population growth and household formation. In the next decade, it is estimated that 75% of population growth and 74% of household formations will occur in Vulcan-served states.
OUR FOCUS: DURABLE GROWTH
Our durable growth also comes from having the right strategic focus: a balance of organic growth, mergers and acquisitions, and greenfield developments. Together, this portfolio approach enables us to enhance our core and expand our reach. The result is an ability to grow our margins in tough times, not just in good times.
Enhancing Our Core
We drive organic growth and differentiate ourselves from other aggregates producers through our two strategic disciplines: the Vulcan Way of Selling (VWS) and the Vulcan Way of Operating (VWO).
With 22,000 customers delivering a wide variety of projects of all shapes, sizes, and end uses comes ample opportunity. The Vulcan Way of Selling uses technology, innovation, and process to seize that opportunity, win work, and capture value.
Custom, proprietary technology gives us real-time, forward-looking insight into all of our end markets. Coaching and development for our people, along with clear performance metrics and accountability, drive sales execution. Sales support teams take on the administrative and transactional work and allow our sales representatives to focus on customers.
The Vulcan Way of Selling also enables us to capture the economic benefits of aggregates’ outstanding pricing characteristics. In the first quarter, inflation hit hard. We went straight to work on price increases, reacting nimbly and offsetting inflationary impacts. Since rolling out VWS in 2017, our cumulative pricing growth has significantly outpaced our peers.
Vulcan also leads the industry in customer experience, which is reflected in our pricing growth. We deliver increased value to our customers through technology-enabled and solution-oriented selling. Our VWS logistics innovation capabilities use technologies to make our customers—and the truckers who service them—more productive.
Of course, pricing is only as good as what you take to the bottom line. That is where VWO shines. The Vulcan Way of Operating is the combination of tools, processes, and approaches used by our teams to drive value in our operations every day. By focusing on consistent execution, production efficiency, and controlling costs, Vulcan provides the highest quality material and the best service to our customers, and we can grow regardless of headwinds.
Technology plays a significant role in VWO. We have deployed production tracking technology tools that provide minute-to-minute visibility into our plants. That technology enables on-site plant managers and enterprise subject matter experts, who may be working in a different geography, to spot problems and opportunities and, in real time, combine their knowledge and experience to address challenges.
We are also delivering proprietary VWO training. This library of training includes insight and knowledge from our most experienced employees and information for how to inspect, maintain, and fine-tune our equipment. Our employees can access it anytime, anywhere on mobile devices.
Our VWO strategic sourcing capabilities paid dividends for Vulcan during the COVID-19 pandemic as we dealt with supply chain issues in 2022 and confronted generational inflation. Our strategic disciplines, VWO and VWS, are about equipping our people with the knowledge and skills, and the right tools, technology, and processes, to stay safe, to produce more of the right tons at the right time, to service our customers, and to create value for our shareholders.
Expanding Our Reach
We also drive growth by expanding our reach through mergers and acquisitions. In an industry of over 5,000 companies that manage over 10,000 operations, there is ample opportunity for acquisition. We also continue to pursue greenfield development in anticipation of future growth. This is a challenging process, but one that allows us to control the timing of our investments. Our disciplined approach focuses on aggregates, aims to achieve a number one or number two position in the markets we serve, and strategically pursues downstream asphalt and concrete businesses complementary to our aggregates position in select markets.
It was our pleasure to welcome several new members to the Vulcan family this year. We made acquisitions in Texas, Virginia, California, and Honduras, adding 14 new aggregates operations to our footprint and nearly 260 million tons to our unparalleled reserves. Additionally, we took steps to optimize our asset portfolio consistent with our aggregates-focused business model. We divested of ready-mixed concrete assets in New York, New Jersey, and Pennsylvania, while retaining the aggregates operations in those states to serve as the foundation of our business in the northeastern United States.
RAISING THE BAR
Our disciplined approach to enhancing our core though VWO and VWS and expanding our reach through mergers and acquisitions and greenfield development has yielded consistent results and growth throughout the cycle.
Since the launch of our strategic disciplines in 2017—and during a time when construction activity faced the headwinds of a pandemic, labor shortages, supply chain constraints, elevated inflation, and numerous other disruptions—we have improved our Adjusted EBITDA at a compound annual growth rate of 11%. Consistent operational execution, cash generation, and disciplined capital allocation continued to drive our durable growth.
We are fiercely dedicated to continuous improvement, and we are confident in our ability to continue to grow our unit margins regardless of the challenges we may face. We set high expectations at our Investor Day last September: raising the bar from $9 cash gross profit per ton at 230−240 million tons of aggregates to $11−12 cash gross profit per ton when we reach 260−270 million tons.
Our momentum coming into 2023 is outstanding. With the right people, the right products, the right markets, and the right focus, Vulcan is the most compelling investment in the aggregates industry.
Once again, thank you to our employees. Our strong teams are keeping each other safe, harnessing the power of technology and innovation, servicing our customers, and enhancing our core business each and every day.
To our shareholders, we appreciate your confidence and investment in Vulcan Materials Company and look forward to delivering durable growth for years to come.
J. Thomas Hill
Chairman, President and Chief Executive Officer
Read the original letter here.
