Vulcan

2017 Annual Report

one vulcan, locally led

Letter

from our chairman

Dear Shareholders & Friends

The past year was one of solid performance by our employees, as they worked together to leverage the size and strengths of Vulcan as a whole, while running their operations with a strong entrepreneurial spirit and sense of ownership. This One Vulcan, Locally Led approach characterizes each of our 375 locally-led aggregates facilities. It allows us to deliver growth and market-leading service, while supporting our unwavering commitment to safety and the communities in which we operate.

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Tom Hill

Chairman and Chief Executive Officer

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The backbone of our One Vulcan, Locally Led approach is our people. The exceptional character of the Vulcan family was evident in our people’s response to the 2017 Gulf Coast hurricanes, California fires, and earthquakes in Mexico. Vulcan employees worked long, hard hours helping our communities regain their footing after these devastating natural disasters. We responded quickly to evacuations, extended power outages, huge logistical challenges and repair costs. I am deeply proud of how our people responded to these emergencies and am honored to lead such an exceptional team.

Vulcan employees are active supporters of our communities.

I am also immensely proud of the safety focus of our people as they work together to ensure one another’s health, safety and security on the job. Our safety culture defines us. We put our people first. Their success, and that of our Company, follows directly from that ethic.

Our collective safety performance in 2017 was the best in the Company’s 60-year history. Our injury rates were reduced by one third from the previous year, to a world-class level of 0.97 injury incidents per 200,000 hours worked. Our goal remains zero. In fact, 70 percent of our facilities have experienced zero injuries over the past several years.

Of nature’s challenges that our business faced in 2017, the hurricanes had a major and prolonged impact. Hurricanes Harvey and Irma and Tropical Storm Nate, which hammered the Gulf Coast states, affected businesses throughout the building materials industry in the second half of 2017. Construction projects and quarry operations from Texas across the Southeast and up to North Carolina were disrupted. Our product shipments were reduced with corresponding margin loss as a result of the extreme weather and its effects: loss of production efficiency, labor shortages, haul truck disruptions and power outages.

But the results our people were able to achieve in the face of such challenges was a testament to the durability of our business and our One Vulcan approach. For the year we increased total revenues, net earnings, and adjusted earnings before interest, taxes, depreciation and amortization. Our earnings from continuing operations rose to $4.40 per diluted share, compared to $3.11 per diluted share in the previous year.

Even with the operating challenges we encountered in 2017, we saw solid performance and incremental improvement in key areas of the business. The challenges we encountered only reinforced our commitment to get better. And we know that we can and will keep improving in all that we do. In particular, our people are focused on applying the strategic and operational strengths of our market-leading company in each of our local markets, to further separate us from the competition.

While we are focused on getting better in the present moment, we also take a long-term view of the business. We think about our strategic opportunities and performance in the same way we look at the life of our quarries — over decades, with an emphasis on continuous, compounding improvement. This long-term view also underscores our engagement in our communities, where we have developed strong, lasting relationships and take an active role in helping support the civic life and health in the regions where we operate.

We look to leverage our presence in high-growth markets while at the same time bolstering our market position with strategic additions.

Further, this long-term approach enables us to plan our market position for the future — carefully targeting bolt-on acquisitions and key greenfield sites where we see significant growth potential over the long-term. We already operate in 19 of the 25 highest-growth metropolitan areas of the U.S. We look to leverage our presence in these regions while at the same time bolstering our market position with strategic additions, such as the 2017 acquisition of Aggregates USA, which occupies key locations across numerous important markets in the southeastern United States.

This strategic growth strategy and our One Vulcan, Locally Led approach have helped shape who we are today:

  • The leader and top performer for an essential building material, aggregates, and uniquely positioned in the best, fastest growing U.S. markets.
  • Home to the best team in the industry — talented people actively engaged in safety, serving customers, doing the right thing and looking out for each other, as they grow professionally.
  • The most profitable public company in our industry,1 reflecting a relentless focus
on operational efficiency so we can best serve our customers and generate value
for our investors.
  • A leader in our industry in safety, health and environmental performance, with a safety record twice as good as the industry average, and environmental programs resulting in 99 percent citation-free operations out of all federal and state inspections.

Leading community relations programs that serve our neighbors, while ensuring that we grow and thrive in the communities where we operate. This year we achieved a record 44 certified wildlife habitat sites at our operations, the second largest number of sites in the nation, as certified by the Wildlife Habitat Council. We conducted tours for approximately 30,000 students and neighbors at our operations, partnered with 245 adopted schools, and provided scholarships to more than 100 students nationwide.

We have delivered substantial growth and profitability in the past several years as the construction market has expanded and operational improvements we initiated have taken hold — and we are confident that there is much more upside to come.

Current economic indicators and market fundamentals point toward continued market expansion. And, with our pro forma operating capacity at only about 60 percent today, Vulcan is extremely well positioned to further benefit from economies of scale as this growth continues.

Our confidence is underpinned by the tremendous pent-up demand for aggregates in our country. A vivid example of this can be seen in our 2017 shipments of 183 million tons of aggregates. We shipped at nearly that same level in 1998, well before the Great Recession. With nearly 20 years of economic and population growth in our markets, clearly our recovery in shipments has much further to go.

It’s also important to note that, while shipment levels have remained well below normalized demand levels, we have the benefit today of an unrivaled margin structure, which continues to strengthen. For example, in 1998 our gross profit per ton of aggregates was $2.11. In 2017, that figure was $4.69, representing about a 4.3% compounded annual improvement in unit profitability over that nearly 20-year period.

The recovery in private construction activity remains strong across much of our portfolio. And — after two years of project delays — public construction demand appears to be firming up, with many public markets poised for growth in 2018.

For public construction, a key will be the pace at which state transportation departments and contractors can start and complete planned work and work deferred from 2017. Our backlogs relating to public construction work, particularly highways, continue to increase, suggesting the possibility for stronger growth. Notably, in the last several years, nine of the states we serve, representing more than 75 percent of our revenue, have passed transportation legislation that meaningfully raises long-term road construction funding — including California, Tennessee and South Carolina in 2017.

Our investments improve the longer-term efficiency, capacity and flexibility of our production, and support strong customer service.

We expect the pricing climate to stay positive in 2018 and beyond. The business should also benefit moving forward from our long-term strategy around capital allocation, giving us the ability to leverage decisions we’ve made over the past few years. During 2017, we reinvested $464 million into core operating, internal growth and maintenance capex. This was in addition to $345 million reinvested in 2016. These investments are fundamental actions that strengthen the business. They improve the longer-term efficiency, capacity and flexibility of our production, and they support our strong commitment to superior customer service.

In addition, our growth capital investments have performed well, and the Company remains active in the pursuit of bolt-on acquisitions and other value-creating growth investments. In late December, we closed the acquisition of Aggregates USA for $610 million, net of proceeds from divestitures required by federal regulations. This transaction complements and expands Vulcan’s service offerings with three granite quarries in Georgia, and 16 rail distribution yards in Georgia, South Carolina and Florida. Vulcan closed seven additional acquisitions in 2017 that complement our existing positions in Arizona, California, Illinois, New Mexico, Tennessee, and Virginia. Over the last three years, the Company has invested over $1.2 billion in acquisitions and internal projects for long-term growth, while further strengthening our portfolio through divestitures and swaps.

While making these investments, we’ve maintained an investment grade credit position — consistent with our stated goals — while extending the weighted-average duration of our debt, lowering our weighted-average interest rate, and retaining excellent liquidity.

This performance and progress demonstrate that by harnessing the power of One Vulcan, Locally Led we can continue to maintain our leadership position, deliver substantial growth and profitability, improve the efficiency and flexibility of our production, support strong customer service, and enhance our portfolio.

In closing, I would like to reflect on an important topic to us and to many shareholders. It concerns a company’s obligation to have a “sense of purpose” and not just deliver on profits, but also to make “a positive contribution to society.”

For us, this has never been an “either-or” proposition. In our view, earning a superior return for our shareholders is predicated on doing the right thing. A strategy for sustainable, long-term value creation must include doing right by your employees, your neighbors and the environment in which you operate. From its very beginning, our Company has lived by the creed that doing good for our host communities and our employees is a vital obligation that is essential to our long-term success. Both our business strategy and our shared cultural values have sustained our growth as a company over many years.

Our shared cultural values serve us well in the hundreds of communities where we operate.

When Vulcan began business as a publicly traded company in 1957 to supply the new Interstate Highway system, we became virtually overnight the nation’s largest supplier of construction aggregates. We have retained that position, and we have grown dramatically and strategically in the years since. Our strategy for long-term value creation is built on solid ground: an aggregates-focused business; selective investments in downstream products that drive local market profitability; a keen focus on markets with high levels of population and employment growth and related infrastructure investment; and a relentless commitment to continuous improvement, as reflected in our record of margin expansion.

At the same time, we have maintained our commitments to our stakeholders. Our shared cultural values, which we call the Vulcan Way, serve us well in the hundreds of communities where we operate: Do the right thing, the right way, at the right time. Put our people first. Protect safety, health and the environment. Engage constructively with our neighbors and help them build stronger communities. Create value and deep, long-lasting relationships with our customers. And engage our people — create joy in the workplace and new opportunities for them.

This ethic led us decades ago to become the industry leader in our industrial hygiene programs, regularly monitoring our employees’ health to make sure that we have in fact eliminated workplace hazards. It is the motivation driving our primary, and relentless, focus on safety. A well-run company is a safe company. Its employees go home from work each day just as safe as when they went to work. It also leads us to focus on our environmental stewardship programs with the same intensity that we bring to our health and safety initiatives.

And this ethic means that we understand that the infrastructure materials mining that we do is an interim use of the land. Our land and water assets will be converted to other valuable uses at the end of mining. These include drinking water reservoirs, aquifer recharge basins, public parks, residential and commercial developments, and more. This is the embodiment of delivering sustainable value for both our shareholders and our communities at the same time.

Our belief in doing the right thing is also reflected in our diversity and inclusion initiative, where we are working to ensure that all of our people have a seat at the table and have every opportunity to bring the value that their diverse experiences, backgrounds and cultures provide. It is also reflected in our continuing emphasis on Board diversity, in gender, race and experience. Diversity and inclusion are essential to our One Vulcan approach to running the business.

Finally, our commitment to our people is reflected in our compensation and benefits programs. Our well-funded pensions for our legacy employees have been supplemented by award-winning 401(k) plans and financial planning tools that will enable our employees to retire with security. Our compensation continues to be highly competitive and responsive, with an hourly wage well above the average. We continually seek new ways to reward and incentivize our employees. Last December, we provided bonuses to more than 5,000 of our employees, recognizing their many contributions to a year of outstanding safety performance. We will continue to explore ways to further reinvest in our Company and our employees.

At our Company, we are excited to pull together as One Vulcan, leveraging our strengths, and we are pleased to give our people across all of our geographies the opportunity and obligation to lead, building value for our customers, our communities, and our shareholders. It’s a powerful combination — and a good one.

Thank you for your continuing support.

Tom Hill

Chairman and Chief Executive Officer

(1) As measured by cash gross profit per ton.
ceo

lake edit

exceptional performance

Vulcan has continued to deliver strong financial performance year in and year out. Through our aggregates-led strategy focused on continuous operational improvement; disciplined investment in organic and acquisition-led growth; and an ongoing emphasis on capital returns and controlling costs, we have created long-term shareholder value. Importantly, we are poised to continue this substantial growth and profitability into the future.

Aggregates Gross Profit Per Ton Growth

2017
183M
tons of aggregates sold
$4.69
gross profit per ton
16.0B
tons reserves in
234 aggregates mining facilities
1998
180M
tons of aggregates sold
$2.11
gross profit per ton
8.3B
tons reserves in
145 aggregates mining facilities
4.3% Compound Annual Growth

5-Year Revenue

$ in millions

$2,771
2013
$2,994
2014
$3,422
2015
$3,593
2016
$3,890
2017
(2) Adjusted EBITDA is a non-GAAP financial measure. See Page 35 in the 10K for a reconciliation of this non-GAAP financial measure to our results reported under GAAP.

5-Year Net Earnings

$ in millions

$24
2013
$205
2014
$221
2015
$419
2016
$601
2017

5-Year Adjusted EBITDA2

$ in millions

$470
2013
$600
2014
$835
2015
$966
2016
$982
2017

passion for customer service

More than an aggregates supplier, we are a business dedicated to customer service and finding creative solutions to meet our customers’ needs. Our “never satisfied” approach can clearly be felt when it comes to our passion for serving customers — we’re always looking for a way to improve. Being a valued partner and trusted supplier means that we’re providing the right product, with the right specifications, that’s the right quality, delivered the right way — on time and safely. It also means we’re always investing, not only in our reserves, but in our service capabilities to address our customers’ evolving needs and solve their problems.

vulcan - employee
city edit
house
100M+
square feet of commercial and public building space used materials supplied by Vulcan during 2017.

prioritizing safety

Vulcan’s culture is built on putting people first. Nowhere is that ethic better exemplified than in our relentless focus on safety. We apply the shared experiences, expertise and resources of One Vulcan at each of our locally led sites, with an emphasis on taking care of one another. The result is a record of safety excellence consistently outperforming the industry average — and achieving a world-class level of 0.97 injury incidents per 200,000 hours worked during 2017.

worker

VMC Injury Rate Compared to Aggregates Industry3

Industry Vulcan

2.24
1.25
2010
2.22
1.26
2011
2.12
1.41
2012
2.09
1.01
2013
2.05
1.42
2014
1.97
1.32
2015
1.91
1.27
2016
1.69
0.90
2017
(3) Stone, Sand & Gravel Operators, Source: MSHA & Internal Vulcan Data.

VMC Recordable Injury Rate4

VMC MSHA Reportable and OSHA Recordable Injury Rate

2010 2011 2012 2013 2014 2015 2016 2017
(4) Source: Internal Vulcan Data.

adding value through logistics

Aggregates logistics are an important part of our business. Having the most extensive distribution network of any aggregates producer truly sets Vulcan apart. Whether it’s our trucking, rail, barge or shipping network, no company in the industry has better logistics capabilities to provide customer solutions and create the seamless customer experience at a competitive price.

tracks
ship
beach
~80%
of our total aggregates shipments are delivered from the producing location to the customer by truck.

well positioned for the future

Over time, Vulcan has strategically and systematically built the most valuable aggregates franchise in the world. We have a footprint that is impossible to replicate — well positioned to serve our customers and benefit from the expected population growth in key regions. As state and federal spending increases, Vulcan is poised to benefit greatly from growing private and public demand for aggregates, thereby delivering significant value for shareholders.

bridge
blurred - tracks edit

We Are In 19 of the 25 Highest Growth
Metro Areas5

States Served by Vulcan Markets Served by Vulcan

(5) Source: Woods & Poole People Added 2017 – 2027.

Recent Increases in State Funding

2013 – 2017

+75% of VMC Revenue
140
CA
130
TX
18
VA
41
TN
79
GA
37
FL
33
NC
75
SC
38
MD

management update

Thompson S. “Tom” Baker II was appointed Senior Vice President of the Company in March of last year. Tom serves as a key member of Vulcan’s senior leadership team while also providing support and guidance to Vulcan’s Mountain West, Southwest, Southern & Gulf Coast, Southeast and Mideast Divisions. Tom had previously served as Chief Executive Officer of FRP Holdings, Inc. (“FRP”) and Patriot Transportation Holding, Inc. (“Patriot”). Prior to joining FRP and Patriot in 2010, he served as President of Vulcan’s then Florida Rock Division. Tom’s extensive knowledge of our industry and his significant senior leadership experience are of great value to the Company.

In October 2017, Kathleen L. Quirk joined Vulcan’s Board of Directors. Ms. Quirk currently serves as executive vice president, chief financial officer and treasurer of Freeport-McMoRan, Inc., a leading international mining company and the world’s largest publicly traded copper producer. A proven leader with extensive financial and senior management experience in the complex and dynamic global mining industry, Kathleen has already brought significant expertise, insights and perspective to the Board. She serves on the Board’s Audit and Finance Committees.

dam