Vulcan Materials Co

NYSE:VMC

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to Vulcan Materials Company's Fourth Quarter Earnings Conference Call. My name is Laurie, 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.

[Mark Warren, VP, IR]

Good morning. Thank you for joining our fourth quarter and full year earnings call. With me today are Tom Hill, Chairman and CEO; and Suzanne Wood, Senior Vice President and Chief Financial Officer.

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 financial 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.

As the operator indicated, please limit your Q&A participation to one question. This will help maximize participation during our time together.

With that, I will now turn the call over to Tom.

[Tom Hill, Chairman, President & CEO]

Thank you, Mark, and thanks to everyone for joining the call today. We appreciate your interest in Vulcan Materials Company. We hope you and your families are and will continue to be safe and healthy. 2020 represented another year of strong earnings growth for Vulcan, despite the many challenges associated with the pandemic. Our results demonstrated the strength, flexibility and resilient nature of our aggregates business. But most of all, 2020 demonstrated the commitment of Vulcan employees as they face uncertainty and had to make adjustments both in their professional and their personal lives.

Our team stayed focused on operating safely, servicing our customers and making progress on our 4 strategic disciplines. Congratulations on a job well done. In a few minutes, Suzanne will share some fourth quarter highlights with you, but first, I'd like to summarize our full year 2020 accomplishments and discuss broad themes and where we are headed.

Our full year financial results were strong. Total company adjusted EBITDA increased 4% to $1.324 billion, and EBITDA margin expanded by 150 basis points. Cash generation continued to be strong with operating cash flows increasing by 9% to $1.1 billion. And finally, one of our principal measures, return on invested capital, improved by 40 basis points to 14.3%. These results were particularly noteworthy considering our annual aggregates volume declined by 3% as compared to 2019. Higher average selling prices and effective cost control were key drivers of this performance.

Aggregates pricing improved by just over 3% on both a reported and mixed adjusted basis. Importantly, these pricing gains were widespread across our footprint. Our total cost of sales per ton increased by 2%, while our unit cash cost of sales, which is more controllable, only grew by 1%. This led to a 5.5% gain in our aggregates cash gross profit per ton. At $7.11, we are making good progress toward our longer-term goal of $9 per ton. This improvement in unit profitability was supported by our 4 strategic disciplines: Commercial excellence; operations excellence; logistics innovation; and strategic sourcing. We also experienced improvements in each of our non-aggregates business segments. Collectively, gross profit improved 12% across these 3 segments. Europe profitability increased in both asphalt and concrete. Asphalt gross profit increased $12 million or 19% over the prior year, even though volumes declined 7%. This improvement in profitability resulted from stable sales prices and lower liquid asphalt cost. Our ready-mix concrete unit profitability increased 8%. Average selling prices increased by 2% and volume declined by 5%, primarily as a result of the cement shortages in California.

The higher profitability in each of our business segments and our improving overall EBITDA margin set us up well for 2021. We are well positioned to take advantage of market opportunities in our geographic footprint. The demand environment is also improving, particularly in residential construction and highway construction. Let's take each market segment in turn.

Residential continues to show strength, especially in single family. The market fundamentals of low interest rates and reduced supply suggests that the growth will continue. This represents a clear opportunity for us as both permits and starts are growing faster in Vulcan-served markets.

Highway lettings and awards returned to growth in the fourth quarter. State DOT budgets have stabilized, with most of our states showing budgets flat to up from 2020. The caution in this market segment is that it will require time to turn awards into shipments given the midyear 2020 loan awards due to the pandemic. While timing of shipments is a variable, we will see improvement in highway shipments throughout 2021. As we said in the third quarter, the near-term outlook for the nonresidential construction sector provides the least forward visibility.

Dodge construction starts are still down year-over-year, but certainly, indicators are beginning to improve, perhaps signaling that potential improvement is just around the corner. Weakness lingers in the office space and hospitality related sectors, but there is growth in the heavier nonresidential categories like distribution facilities and data centers. In fact, warehouses are now the largest nonresidential category as measured by square feet and represent approximately 1/3 of construction awards. These projects are typically more aggregate intensive, and 90% of the near-term growth in this sector will occur in Vulcan serviced states according to Dodge.

The administration and Congress are committed to an infrastructure-led economic recovery and have indicated that they will focus on an infrastructure built next after the COVID-19 relief package. Clearly, our leading market positions will mean broad participation in infrastructure-related spending. We believe demand for aggregates will continue to improve as we progress through 2021. That being said, the timing of shipments to highway projects and nonresidential construction projects remains a variable. We consider these factors as we thought about our 2021 prospects and guidance. That said, we expect our adjusted EBITDA to be between $1.34 billion and $1.44 billion. We anticipate 2021 aggregate shipments could fall in a range of a 2% decline to a 2% increase as compared to 2020. Regardless of volume swings, we will improve our full year unit profitability in aggregates. We expect aggregates freight adjusted average selling prices to increase by 2% to 4% in 2021. And gross profit in our non-aggregate segments was forecast to improve by mid-single to mid-high single digits. To sum it up, 2021 will turn out to be a year of solid earnings growth.

Now I'll turn it over to Suzanne for further comments. Suzanne?

[Suzanne Wood, SVP & CFO]

Thanks, Tom, and good morning to everyone. Before I discuss fourth quarter 2020 highlights, I'll fill in some additional details on our 2021 guidance. We made significant reductions in our selling, general and administrative expenses in 2020. We expect to further leverage our overhead cost in 2021 and anticipate our SG&A expenses to be between $365 million and $375 million. We anticipate interest expense to approximate $130 million for the full year. Barring any changes to federal tax law, our effective tax rate will be about 21%. The category of depreciation, depletion, accretion and amortization expenses will be around $400 million.

Now with respect to capital expenditures, we invested $361 million in 2020. We expect to spend between $450 million and $475 million in 2021. This includes fully restarting and advancing growth projects that were delayed last spring, such as the opening of a new quarry in California, capacity expansion at other quarries and improvements to our logistics and distribution network. It also reflects a catch-up of operating CapEx that was postponed at the start of the pandemic. As always, we'll carefully monitor the economic environment and adjust our capital spending as necessary.

As you model, you'll note that the combination of our assumptions for 2021 leads to another healthy year of cash generation. I'll now give a little color on the fourth quarter of 2020.

Adjusted EBITDA was $311 million, up 4% from last year's fourth quarter. Aggregates volume declined by 1%, while reported pricing increased by 3% and mix adjusted pricing by 2%. Costs were slightly higher in the quarter due to additional stripping costs in advance of future shipping growth and the timing of repairs. There were 2 items that affected the comparability of our fully diluted earnings per share in both the fourth quarter and full year 2020 as compared to those same periods in 2019. First, we recorded a onetime noncash pension settlement charge of $23 million or $0.13 per diluted share in connection with a voluntary lump sum distribution of benefits to certain fully vested plan participants. This liability management action will benefit future pension expense and funding requirements. And second, the tax rate for fourth quarter and full year 2020 was higher than in the comparable periods in 2019. Last year, the tax benefits associated with share-based compensation and R&D credits were greater than the same benefits in 2020. The resulting EPS effect was $0.04 per diluted share in the fourth quarter and $0.18 per diluted share for the full year.

Moving on to the balance sheet. Our financial position remains very strong, with a weighted average debt maturity of 13 years and a weighted average interest rate of 4%. Our net debt-to-EBITDA leverage ratio was 1.6x as of December 31, reflecting $1.2 billion of cash on hand. Approximately $500 million of this cash will be used to repay a debt maturity coming due next month.

As Tom mentioned, our cash flow was robust in 2020 and contributed to year-over-year leverage reduction. Due to the uncertainty surrounding the pandemic and the resulting slowdown in economic activity, M&A was lighter than usual in 2020. We returned $206 million to shareholders through increased dividends and share repurchases. Our capital allocation priorities which have helped to drive an improvement of 220 basis points and our return on invested capital over the last 3 years remain unchanged.

And now I'll turn the call back over to Tom for closing remarks.

[Tom Hill, Chairman, President & CEO]

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

Now we'll be happy to take your questions.

[Operator]

[Operator Instructions]. Our first question comes from the line of Trey Grooms of Stephens Inc.

[Trey Grooms, Stephens Inc.]

Tom, I appreciate your comments in the prepared remarks there on the end markets. But maybe if you could walk us through some of the puts and takes around the aggregates volume outlook for this year of a 2% decline to a 2% increase and maybe how you can get to the low end versus the high end of that guide?

[Tom Hill, Chairman, President & CEO]

Yes. I'll start with just kind of stepping back and looking at the year 2021. As you saw, our guidance was negative 2% to positive 2% on volume. I would tell you that the aggregate demand outlook is improving and it seems to get brighter kind of week in and week out. And we would expect shipments to continue to improve sequentially as we march through 2021.

Residential construction is very good and continues to grow. At the same time, heavy nonresidential construction is good, and it's important because of its aggregate intensity. At the same time, light nonresidential construction has been a challenge, and I think will be a headwind for us in the first half of 2021 probably getting better later in the year. And then highway lettings are much better. They were much better in the fourth quarter, and we think they'll continue to be strong throughout 2021. So this all adds up to starts and demand picture improving and will continue to prove as we march through the year.

But as you know, the demand outlook environment due to the pandemic has been quite volatile. So as we set our guidance to you, for 2021, we try to be both transparent and thoughtful about 2 really important things with a given that we know residential is strong and growing. So the first one of those is nonresidential construction shipments. We know warehouses and distribution centers are good. They're growing. They're intensive. They're aggregate intensive. We believe that overall, non-res has stabilized from the fall we saw throughout 2020. Now how fast that returns, we don't know. The other thing that we're seeing now, which is a bright spot is we're seeing the LNG projects start to pop up on the Gulf Coast that were postponed from last year.

So we'll just have to see what transpires with the rest of nonresidential construction. And then the second thing we try to be thoughtful about was the timing of highway work. Lettings were -- if you remember, were light in Q3 of last year's DOTs tried to assess their funds or what was going to happen to their budgets. As once that stabilized, Q4 saw great lettings as should Q1 and the rest of 2021 as most DOTs have verified that their budgets will be up to flat to up. And so the question is, how fast are those lettings and those projects go to work. As I said, we think it will be back half loaded.

All said, in all markets, our outlook is improving kind of week-over-week as the pandemic improves, so getting better, but still some things we got to watch.

[Operator]

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

[Anthony Pettinari, Citigroup]

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

[Tom Hill, Chairman, President & CEO]

Yes. So we believe that Congress is going to pass a new highway bill with an increase in funding in 2021. And I would probably give you that in 3 buckets. One that the Biden administration, their agenda has infrastructure next on the list after the COVID-19 build. So it is a priority.

Second, if you go to the House and Senate, Senator Carper, who is Chair of the EPW Committee and then Congressman DeFazio, who's Chair of the House T&I Committee, both have said they want draft bills out of committee before August -- before the August recess. And the reason they want to do that is they want to target passing a bill before the expiration of the FAST Act at the end of September. So the administration is on it. The Congress and House is on it.

And then third, remember that funding should increase as highway funding right now is starting from a position of strength. So in 2021, the funding is up $12 billion year-over-year to $59 billion. $2 billion of that is an increase from appropriations, $10 billion of that is from COVID relief. This starts the highway funding baseline from a higher point and no one on the hill wants to reduce funding for highways. So we believe that we'll see it before the end of the year, hopefully before the expiration of the FAST Act, and we'll think it will be at higher levels.

[Anthony Pettinari, Citigroup]

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

[Tom Hill, Chairman, President & CEO]

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

[Operator]

Your next question comes from the line of Kathryn Thompson of Thompson Research Group.

[Kathryn Thompson, Thompson Research Group]

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

[Tom Hill, Chairman, President & CEO]

I'm sorry, I missed the last part, are planning what?

[Kathryn Thompson, Thompson Research Group]

Their future projects. So just with the Biden administration folks on green.

[Tom Hill, Chairman, President & CEO]

As we said, we've got a little bit of a gap with lettings down in Q3. They came storming back in Q4. If you look at the trailing 6-month and trailing 3-month starts, they're up double digits. So that's really good news. Based on the state DOT budgets, which you pointed out, improvements in those budgets, we should see growth, we should see improvement in highway work and should grow as we march through 2021, particularly as we see those lettings in the fourth quarter talk to mature the shipments.

The majority of our 20 states will see funding and lettings up for fiscal year 2021, particularly as you pointed out, important states like Texas and California, and really importantly, our southeastern states, which are either up year-over-year or they're flat from '19, which was -- excuse me, flat from '20 which saw a big jump from '19. So really good solid funding. We're past the interruption of the pandemic. And then you've got the $10 billion of COVID-19 relief funds for highways. More than half of that $10 billion will be spent in Vulcan served states and support growth. Some of that in 2021, although it presently appears that the majority of those funds will support shipments in '22, maybe going a little bit into '23. So all of this, I'd tell you, is good news, and we still have to let the shipments catch up with the recently improved lettings. So we could see this, I would tell you, probably a little better in Q3 and Q4 maybe within Q1. But good news, and it has stabilized, and now we're starting -- the funding is growing, and we think the Feds will support that later in the year.

[Operator]

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

[Nishchal Sood, UBS Investment Bank]

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

[Suzanne Wood, SVP & CFO]

Yes. We are definitely not expecting a return to the prior cost structure. I mean, for the year, we reduced our SAG costs by $11 million or 3%. And we talked about that previously. I mean, basically, we benefited from some cost reduction actions that we took right at the end of 2019 as well as some ongoing initiatives that we put in place during the pandemic in 2020 and certainly contributing to some of that certainly not all of it was lower T&E. And as we talked about in the third quarter, I mean that's really an area where this year, depending on what happens with vaccine distribution, et cetera. I mean, we may see a little bit of an increase, but we certainly are not going to return to the old normal there.

We've learned a lot during this time as have a lot of other companies about different, more efficient ways of communicating and accomplishing what we need to do. So we are always looking for ways to leverage SAG. I suspect we will continue to find some more of those as we go through. The range that we set if you look at the midpoint of the range in terms of SAG as a percentage of revenue, that's 7.3%, just a tick under 7.4%. So we'll see where we get to in the year. But certainly, as we did last year, we continue to look for ways to reduce that, and that improvement really sort of accelerated through the year. And if we find that we're doing a little better-than-expected as we go through the year, then we'll update the guidance.

[Nishchal Sood, UBS Investment Bank]

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

[Tom Hill, Chairman, President & CEO]

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

[Operator]

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

[Jerry Revich, Goldman Sachs Group]

I just wanted to ask, really impressive outlook for aggregates gross profit growth of $70 million on flat volumes, so essentially pricing dropping down to the bottom line. But I know you're going to be facing a headwind from diesel costs, labor inflation. So can you just talk about what's allowing you to offset those inflationary items of, call it, $50 million, $60 million that still allows you to drop down the pricing straight to the bottom line?

[Tom Hill, Chairman, President & CEO]

Yes, I'm not sure I'd go headwinds. I think our headwinds are less than that. But if you look at our guidance for unit margins and the cost piece of unit margins, it's underpinned really by our focus on our operating disciplines and processes. We -- if you look back, we saw our aggregates operating efficiencies last year, whether that's throughput, plant availability, later efficiencies improve. At the same time, we had -- if you look at yield and energy efficiencies, they were mostly flat to slightly down, really due to production volumes being volatile and some product split issues on yield all of which were, I would tell you, pandemic related.

So as we look forward to 2021, we'd expect a headwind of the diesel prices that impact us in some -- I'd tell you some $10 million to $20 million. But in spite of this, we would expect our unit cash cost for aggregates to be flat to maybe up a little bit. And it's really supported by our operating strategic disciplines that we've been working on in those processes that we've been putting in for the last 2 years. I would tell you that I'm really proud of our operators, first of all, for keeping each other safe and healthy in a tough year and working through a tough year, but also their relentless quest for continuous improvement in those drivers of our operating efficiencies that drive your cost savings. They make -- really are making an impact on what we're seeing on our unit margins.

[Operator]

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

[Michael Dahl, RBC Capital Markets]

A couple of things you just answered, especially on the cost. So that was helpful color. I guess just on the volume piece within aggs, you gave some good commentary on kind of end markets. But if we're thinking about cadence through the year, any comments around kind of cadence that we should be thinking about first half versus second half from a volume perspective in aggs within the guide?

[Tom Hill, Chairman, President & CEO]

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

[Michael Dahl, RBC Capital Markets]

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

[Tom Hill, Chairman, President & CEO]

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

[Operator]

Your next question comes from the line of Phil Ng of Jefferies.

[Philip Ng, Jefferies]

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

[Tom Hill, Chairman, President & CEO]

I think, as we said, the variance in our range is more timing of work. And the key timing is, number one, on highways, we know it's gotten better because the lettings have gotten better. The question is the timing of how fast are those lettings go to shipments. And we've seen projects go really fast, and we've seen projects over the last 2 or 3 years get delayed. Hopefully, the DOTs are mature, and we have less delays and it kicks in and goes faster in the year than we would anticipate. Weather is always an issue in the first quarter. But as the year progresses, in Q2 and Q3, things get better. Hopefully, that lines up with that highway work.

On the nonres side, again, we see the strengths in the heavy, the light. We know we've got some headwinds. We think it's stabilized. How fast the private money has confidence in the economy goes back to work is to be seen. I think as we watched the first -- we're in the seventh week of 2021. And it's better in week 6 than it was -- in week 5 than it was in week 4. So things seem to get better. A lot of this is pandemic related that, that is getting better as that goes, the private money goes. So hopefully, it will go quicker than anyone anticipates. But to be seen, and as we said, with the visibility as best we could, we may -- we try to be thoughtful about how we plan for it.

[Philip Ng, Jefferies]

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

[Tom Hill, Chairman, President & CEO]

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

[Philip Ng, Jefferies]

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

[Tom Hill, Chairman, President & CEO]

No. I don't see any big bottlenecks delaying it. In fact, if anything, from the DOT perspective, the DOTs have matured over the last 2 or 3 years, into increased funding. And so they have the firepower, whether that's engineering or permitting or letting work. So I don't see any bottlenecks holding up. It's really just -- it needs to move through the process and the contractors go to work.

[Operator]

Your next question comes from the line of Garik Shmois of Loop Capital.

[Garik Shmois, Loop Capital Markets]

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

[Tom Hill, Chairman, President & CEO]

Yes. So specifically, the stripping cost was up about $4.5 million, $5 million. But overall, the cost was up about $0.30 a ton in Q4. And if we look back at this, based on -- as we went into the fourth quarter, based on the success that we had for the full year and the pandemic getting better and markets getting better, and you couple all that -- you put all that together, and as we look forward to 2021 and the DOTs getting better, we made a decision to pursue some preventive maintenance projects on both fixed and mobile equipment. At the same time, we decided to reengage our larger stripping projects because we felt like that longer term, when I say that, we just don't look a year, we look 24, 36 months out because these are mines and you can't move very fast. We decided it was time to reengage the stripping project. So based on the visibility to demand factors improving and the fourth quarter being smaller from a volume perspective and us having the firepower and the people in the time to do the work, it was time to pull the trigger on the projects.

[Garik Shmois, Loop Capital Markets]

Great. And can you provide some color on how you're thinking about incremental margins in 2021?

[Tom Hill, Chairman, President & CEO]

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

[Suzanne Wood, SVP & CFO]

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

[Operator]

Your next question comes from the line of Timna Tanners of Bank of America.

[Timna Tanners, Bank of America Merrill Lynch]

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

[Tom Hill, Chairman, President & CEO]

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

[Timna Tanners, Bank of America Merrill Lynch]

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

[Tom Hill, Chairman, President & CEO]

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

[Operator]

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

[Michael Dudas, Vertical Research Partners]

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

[Suzanne Wood, SVP & CFO]

Yes. Sure. I'll address the CapEx question first. You're right. These are internal growth projects that have a good return and are important to us that we did defer when the pandemic hit last spring. You saw that we spent a bit more money in the fourth quarter than initially guided on CapEx, and that related to the restarting of a couple of these growth projects that we just wanted to get the jump on before we went into the new year. But really, they are principally the projects that we had in place last year, we'd like to go ahead and finish those as soon as we can since we lost a year on them and start reaping the benefit of that. And you're right. I mean, with respect to M&A, as we've talked about many times, 2020 was just a year of inactivity because things sort of shut down as a result of the pandemic. We are beginning to see some deals come to market. We're beginning to see a bit of a pickup there.

Certainly, given our position in the industry, if anything is coming to market, I mean, we're going to know about it, get contacted, and we're going to have a look at it, and we will continue to use the same disciplines that we've used in the past as we think about those deals. They've got to fit us strategically, they need to be returns enhancing, they need to be accretive. And look, when you look at our balance sheet, we have the firepower to do about anything we'd like to do. But we're going to be sensible about what we do and do deals that, as I said, fit the strategy and the returns criteria and don't lose all of the financial advantage that we've worked hard to create from a balance sheet position over the last few years.

[Tom Hill, Chairman, President & CEO]

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

[Operator]

Your next question comes from the lane of Courtney Yakavonis of Morgan Stanley.

[Courtney Yakavonis, Morgan Stanley]

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

[Tom Hill, Chairman, President & CEO]

Yes, good question. I think that -- first of all, fundamentally, the conditions for price increases continues to improve. The market is able to have visibility to improving demand really helps this. As we said, res is very healthy, continues to improve. Nonres, while it's seen its challenges also with doing the light side, that seems to have stabilized and it's got the -- you've got the heavy side that's doing very well. And you're laid on top of that. We're starting to see bubbling of LNG work. That's helpful. The lettings and visibility to lettings picking up is really good because everybody knows that work is coming. So I would -- all of this is good for pricing. I would expect price increases to build as we progress through 2021.

But remember, and I would -- that will also, I would tell you, you'll see that -- you'll see prices start to accelerate starting in Q2. We have some -- that's when the majority of our fixed plant prices go into impact. And so I would -- as you start kind of into Q2, I would see it accelerate throughout the year. And remember, while pricing is really important, the most important component of this is unit margins. And along with cost, we saw those grow almost 6% last year, with volumes being down. And I think we have confidence that we'll grow both price and unit margin again in 2021 regardless of what happens with outside volume forces.

[Operator]

Your next question comes from the line of David MacGregor of Longbow Research.

[David MacGregor, Longbow Research]

I just wondering if you can talk about the sort of the regional disparities and the 1% decline in fourth quarter aggregate volumes, and maybe how you're thinking about regional disparities within that -- the shipment guidance for 2021?

[Tom Hill, Chairman, President & CEO]

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

[David MacGregor, Longbow Research]

Right. Maybe you can talk about kind of just to build on the pricing question prior to me. Just help us understand the nonres pricing situation right now. And is pricing up in that segment? Is it close to comparable with the average? How are you thinking about '21?

[Tom Hill, Chairman, President & CEO]

There's really not a lot of different pricing variance by market segment. It's really more geographic and if you look at our footprint, we're planning on price increases across all of our footprint. So I wouldn't call out, it's hard -- really hard to call out pricing between res or nonres or highways because it's more along product line by geographic area. But I would point to it being fairly widespread both geographically and across all product lines, for us, as we look out to 2021.

[Operator]

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

[Joshua Wilson, Raymond James & Associates]

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

[Suzanne Wood, SVP & CFO]

Yes, sure. It's a good question. And I think as we went into the pandemic, there were certainly no intention or desire on our part per se to build a war chest. Because I think that's just having your cash sitting around on the balance sheet is not -- certainly not the best use of it in the long term. But given the uncertainty we faced as we took some of those decisions to delay CapEx, et cetera, I certainly think that having a bit of cash there for safety is certainly the right thing to do.

You're right, the first use of the $1.2 billion will be to pay down the $500 million maturity in March. I mean, that's been long-planned and taken care of. I think as we think about the capital allocation priorities we've had in place for a long time that have really, I think, served us well. And are well understood by the market. If you think about the waterfall of those priorities and the order of them, the sort of other than maintaining and improving our dividend, which is critically important for us.

We want to make sure that, that can absolutely be sustained through the cycle. We are beginning to open up and spend a bit more cash on growth. That's the second priority in that capital allocation policy. And so we're going to be spending more on those internal growth projects. And look, as I said on M&A, we'll be looking at opportunities as they come down the path. I would say that, again, going back to that waterfall, those growth projects and dividends are of a higher priority to us than share repurchase. So I think we just need to wait a bit and see what materializes on the growth front. And then as we go through the year and see how the cash plays out and what other opportunities arise, then we've got plenty of time to consider the share repurchase.

[Joshua Wilson, Raymond James & Associates]

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

[Tom Hill, Chairman, President & CEO]

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

[Suzanne Wood, SVP & CFO]

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

[Tom Hill, Chairman, President & CEO]

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

[Operator]

Your next question comes from the line of Adam Thalhimer of Thompson Davis.

[Adam Thalhimer, Thompson, Davis & Company]

A quick question for you, Tom. The states that you saw some weak volumes in Q4. So California, Arizona, Illinois. What's the outlook for those states specifically this year?

[Tom Hill, Chairman, President & CEO]

So California wasn't actually -- as it wasn't weak. It was actually -- it was flat. And flat with some pretty good headwinds. If you really kind of step back, California is an import state for us. So if you step back and look at that -- and look at California, the fires are out and the cement shortage is over. So already, things are better in California. And the 2021 demand is improving. Northern Cal -- is really kind of -- you got to separate northern California, Southern California, Northern Cal is recovering. But remember, it had the longest -- it has the longest recovery because it had the most severe shelter in place on top of that, you had the fires and cement shortages, which really hurt us that whole market in 2020. So we'll see improvement in 2021, but a little slower.

Now if you look at the highway piece, which affects the whole market, SB1 lettings are going to increase -- or increasing this year by 14%. So we'll see growth, both growth in -- both improvement in aggregates and asphalt. And then in Southern California, we're going to see single -- excuse me, high single-digit to double-digit growth in residential and nonres is recovering with the warehouses and distribution center and even the like. So -- and I think if you step back and look at -- remember, look at California from last year's perspective, in spite of all the demand challenges and the pandemic and the fires and cement shortages. In 2020, we were still more profitable year-over-year than we were in 2019. So that unit profitability sets us up well in 2021 as we start to see -- now we're starting to see volumes improving along with unit margins. So California will be a better place without the challenges they had in 2020.

Arizona, I believe that, again, the residential fee sector is good. I think it is -- the highway is solid, nonres improving. So Arizona is a pocket of population growth, which supports that. If you look at Illinois, it has its challenges, highway work will probably be -- if you pull in toll work, will be solid, but the other sectors and res is okay, but the other sectors still see challenges as does non-highway infrastructure. So somewhat of a challenged market for us.

[Operator]

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

[Stanley Elliott, Stifel, Nicolaus & Company]

A question for you guys. Nice job again on the inventories. As we sit here today, kind of right on tracking towards kind of 2018 levels. You're talking about the highway business potentially picking up in the back part of the year. Do you anticipate any sort of mix issues from a production standpoint? Or should -- kind of where you're sitting here would be a good sign from the flow-through on that side?

[Tom Hill, Chairman, President & CEO]

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

[Operator]

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

[Tom Hill, Chairman, President & CEO]

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

[Suzanne Wood, SVP & CFO]

Yes. Goodbye.

[Operator]

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