Vulcan Materials Company
Q1 2017 Earnings Call Transcript

Published: 11 May 2017

[Operator:]

Please stand by. Welcome to the Vulcan Materials Company First Quarter Earnings Call. My name is Jessica, and I will be your conference call coordinator today. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode to prevent any background noise. A question-and-answer session will follow the company's prepared remarks. And now, I would like to turn the call over to your host, Mr. Mark Warren, Director of Investor Relations for Vulcan Materials. Mr. Warren, you may begin.

[Mark D. Warren:]

Thank you, operator. Good morning, everyone, and thank you for your interest in Vulcan Materials Company. Joining me today for this call are Tom Hill, Chairman and CEO; and John McPherson, Executive Vice President, Chief Financial and Strategy Officer. To facilitate our discussion today, we have made available on our website supplemental information for your review and use. Rather than walk through each slide on this call, we will focus on the highlights. Please be reminded that comments regarding the company's results and projections may include forward-looking statements, which are subject to risks and uncertainties. These risks are described in detail in the company's SEC reports, including our earnings release and our most recent Annual Report on Form 10-K. Additionally, management will refer to certain non-GAAP financial measures. You can find a reconciliation of these non-GAAP measures and other related information in both our earnings release and at the end of our supplemental presentation. Now, I'd like to turn the call over to Tom. Tom?

[J. Thomas Hill:]

Thank you, Mark, and we appreciate you joining us for the call today. We had a good start to the year. Our first quarter aggregates volume and price were consistent with our expectations and we are reaffirming our guidance for the full year. Three points stand out. One, we are where we need to be to deliver on our plans and projections for the full year. Two, market conditions continue to improve nicely across our footprint, including California, and demand just keeps on building. Three, we're finding good opportunities to grow our asset base and further strengthen our customer service capabilities. These investments in growth reflect our strong confidence in the sustained recovery and continued acceleration in our profitability. Now, let me expand on these three points. Regarding our good start in the first quarter, I'm pleased with our operating results and with the quality of our execution. Aggregate shipment rates for the quarter were encouraging, particularly given weather in California and the comparison with Q1 2016 when we were up 17%. Excluding California, aggregate shipments were essentially flat with the prior year. California shipments were down 20% in January and February due to record rainfall before beginning to recover in March. The continued recovery in demand across our Mid-Atlantic and Southeast states helped offset the effect of the two-month decline in California. Taking into consideration the season and California floods, our first quarter shipments were in line with full-year expectations. Now, when the weather finally improved in California in March, business immediately improved. Aggregates pricing also continued to improve in the quarter, with an average freight-adjusted sales price up $0.57 despite modest headwinds from product mix. Our fixed plant price increases have been duly well accepted. Some of this went into effect January 1 and some April 1. We realized higher average prices across nearly all of our states. We completed the first quarter in line with our full-year plans on price and on volume. Aggregates segment total cost of sales increased $0.69 per ton. This included some $14 million of higher cost associated with diesel, stripping, the California floods, and the dry docking of one of our ships as we transition to new, more efficient vessels. From an operational perspective, our core unit profitability in Aggregates, which leads the industry, continue to improve again in line with our full-year plans. Our non-Aggregate segment also performed well in the quarter, beating last year's strong comparisons. I want to point out the quality of execution that creates results like these. We're serving our customers well, providing solutions as well as product so that they stay with us for the long haul and we keep growing our customer base. We're investing in the business and building new skills for our people, with particular focus right now in our sales teams, the same time we're controlling our operating costs. And most important, we are continuing to maintain a safe work environment. For example, last year, we had our second best safe deployments in the history of the company, and Vulcan has always been an industry leader with a strong safety culture, but that ain't good enough. This year, we're off to an even better start with a meaningful reduction in accidents. Hereto, we are keeping the focus on taking something that's good and making it better every day. The engagement, discipline, commitment and attention to detail that underpin our safety performance also say a lot about the strength and quality of our people and our overall company performance. Stepping back from the first quarter's results, let me expand on my second point. Market conditions continue to improve in very important fundamental ways. At a macro level, as the Dodge data clearly shows, the pre-construction project pipeline keeps getting bigger and bigger. Construction starts also have continued to recover from last year's weaknesses. Generally speaking, we're continuing to see solid recovery in private construction activity across many markets. As one indicator, you may want to note the 22% rise in our concrete shipments in the first quarter that was driven largely by higher levels of private construction in Northern Virginia and the District of Columbia. This is our largest concrete market and a major added position for us. On the public construction side, we are getting ready for multiple years of increasing demand in our key states. While the federal highway bill, the FAST Act brought stability, visibility and increased funds for the nation's highway systems, many of our key states and cities have stepped up to address their own needs. For example, last month, California and Tennessee passed major transportation funding legislation and South Carolina is on the brink of passing a new highway bill. California's $52.4 billion transportation bill, SB 1, is a game changer for that state. And remember, Vulcan is California's largest producer of aggregates and asphalt. On top of that, local ballot measures passed last November in California added another $1.2 billion annually for transportation projects for years to come. This was primarily in Los Angeles and San Francisco, where we have the most strategic aggregates and asphalt positions. Tennessee's new highway bill will bring in $350 million annually, helping tackle a backlog of more than 900 projects valued at $10.5 billion. And South Carolina is on track to ultimately add $630 million annually for roads and bridges. Vulcan is the number one producer of aggregates in Tennessee and South Carolina, and also the largest asphalt producer in Tennessee, with strategic locations throughout the growth quarters in both states. As you know, Texas, Florida and Georgia all have made significant increases to their funding programs in recent years, raising their highway programs to record levels. Other Vulcan states including Virginia, North Carolina and Maryland have also increased their highway programs. Altogether, key Vulcan states that make up 77% of our total revenue have significantly increased their highway funding. And more such legislation will pass in other Vulcan states, along with more local ballot initiatives. The need is just that great. Now, obviously, these funding measures add significant value to our business. They will extend and amplify this recovery. They improve long-term visibility and they foster additional economic growth across our footprint Our customers are getting ready for the next wave of large public transportation projects slated to start later this year. We will be the primary supplier for many of these large projects. Projects like the 202 Loop around Phoenix, Highway 281 expansion in San Antonio, the I-285/400 interchange in Atlanta, and the widening of I-20 in Atlanta and I-85 in North Carolina just to name a few. We will see significantly increasing public infrastructure demand in the coming years. The trend is clear and the laws are written. All of this further enhances the great value of our franchise. Now, let me touch specifically on California, given the importance of the changes that have occurred there. We've seen market conditions improve dramatically. Private demand in California continues to strengthen, driven by both housing and non-residential construction. And, of course, the outlook for public construction in California improved substantially with the passage of SB 1. Near term, this legislation removes recent uncertainty about public road funding and allows Caltrans to move ahead with planned work this year. In the intermediate and longer term, we should benefit from a much higher level of public construction activity. This is in a state where Vulcan is the largest supplier of aggregates and asphalt. Just as we've seen in Georgia, the improved visibility to future demand in California will also reinforce a pricing climate that is already much improved. California looks in many ways like Texas did four years ago. Overall, construction activity and materials consumption are still well below long-term trends. The private economy is growing, residential construction is rebounding, there's new legislation supporting strong public road construction and maintenance, and the conditions are in place to support significant price and margin improvements for years to come. We're excited about our prospects in California and we expect to continue investing there accordingly. This brings me to my third point, our acquisitions and growth investments reflect our confidence in overall market conditions. They also reflect our confidence in our local leadership and execution. Just in third quarter of 2016, we closed on six bolt-on acquisitions. These add to our strong positions in California, Tennessee, and New Mexico. Now, putting this together with the 14 other acquisitions and swaps we completed since 2013, these acquisitions expand our ability to serve our customers, bring important operational and commercial synergies, and strengthen our platform for sustained growth. We're excited to welcome these new operations to Vulcan. We will continue to pursue assets and operations that fit our strategy and our portfolio, and we will remain disciplined in our pursuit of the right acquisitions. Putting it all together, the quarter represented another good step forward toward our longer-term goals. With that, I'll hand it off to John, who will share a few more details regarding the quarter and outlook. Then I'll follow with some closing remarks. John?

[John R. McPherson:]

Thanks, Tom, and good morning, everyone. As you heard Tom note, first quarter results and market trends were very much in line with our beginning-of-year plans and we are reaffirming our full-year outlook for adjusted EBITDA of between $1.125 billion and $1.225 billion. I'll now comment on a few specific drivers in our core aggregates business. With respect to aggregate shipment volumes, we continue to see a sustained recovery in progress, with rising public demand gradually complementing private activity that has driven this recovery so far. The outlook for continued growth and shipments across our core southeastern markets remains positive and encouraging. And California shipments appear to be catching up on volumes lost due to weather early in the year. As you know, quarterly comparisons get easier as the year moves on. Ultimate shipment levels and growth rates for the balance of the year will depend in good part on the timing of deliveries to anticipated large projects, particularly large public transportation projects. Again, the question here is one of timing, not trend. Moving now to aggregates pricing. Again, we came out of Q1 with pricing in line with our full-year plans. Nearly all states realized price increases, with Georgia and California experiencing double-digit gains. Our reported average selling price for the full year may be pressured a bit, as it was in the first quarter, by product mix, but we currently expect the underlying like-for-like improvement to be in line with our beginning-of-year expectations. The overall pricing climate for aggregates clearly remains positive. Turning to Aggregates segment's profitability, I'll note that nothing has changed regarding our full-year outlook or for that matter, our longer-term goals for Aggregates segment unit margin improvement or flow-through rates. Most of the $14 million in costs incurred in Q1 that Tom mentioned were anticipated in our full-year plans. Looking ahead, we expect the lull in volume growth that we've experienced over the last 12 months to be behind us soon. And we think it's worth noting that both our business and the markets we serve have taken important steps forward during this time. I'll briefly run through a few examples starting with our core profitability. Average aggregate selling prices are $0.71 per ton or 6% ahead of where they were at this time last year. Our cash margin per ton in aggregates on a trailing 12-month basis reached a record for the first quarter despite the cost headwinds mentioned earlier. And our downstream asphalt and concrete operations generated $23 million more in trailing 12-month gross profit than they did a year ago. In addition to improving our core profitability, we've made important additions to our asset base. Since the third quarter of last year, we've invested approximately $230 million in six strategic bolt-on acquisitions and we expect the run rate EBITDA contribution from these operations post full integration to exceed $35 million. Our financial position is also stronger. We've returned to full investment grade ratings, we've begun to extend the duration of our debt portfolio while reducing our weighted average interest rate and we've maintained the flexibility to fund smart growth investments. And of course, our markets have moved forward also. California's transportation funding uncertainty has been resolved. Tennessee and South Carolina are joining other Southeastern states in matching a continuing private recovery with significantly higher levels of public investment. FAST Act funding and projects have moved that much closer to impacting our daily material shipments, and visibility and confidence have further improved especially when compared to the overhang of last year's election cycle. So to recap, we've seen significant steps forward in our core profitability, our asset base, our financial flexibility, our visibility to public construction demand and in the growth outlook for our California operations. For all these reasons, we feel good about reaffirming our expectations for 2017, about the continued recovery in materials demand beyond this year and develop Vulcan Materials' unique positioning for sustained long-term growth. Tom, back over to you.

[J. Thomas Hill:]

Thanks, John. I think it's pretty clear that we're excited about what we see ahead of us, and I can tell you we're ready for it. The clear trends we see in growing public and private demand align well with our unmatched strategic locations in our key states and with our recent acquisitions. I want to point out that we have been busy growing our company. We are stronger and better positioned now than we were a year ago. We have the best employees in the industry and our teams are just getting stronger. We are investing in them as they gear up to meet growing demand. We are set up extremely well for continued strong profitability, earnings growth and free cash flow. We are at a point where we should see meaningful period-over-period growth rates, particularly in the second half of this year. We are especially encouraged given the great and growing strength of our core Southeast franchise and the return to growth in California. As I travel around the country and met with our customers and local leadership teams over the last quarter, I found them more confident and upbeat than I've seen them in a long time. And I share their enthusiasm and their energy. As always, we remain focused on creating value for our customers and are running our operations with a relentless focus on safety and continuous improvement. We are also focused on creating superior shareholder value now and for the long term. That's our commitment. That's what we do. With that, we'll be happy to take your questions.

[Operator:]

Thank you. We'll go first to Bob Wetenhall with RBC Capital Markets.

[Marshall Mentz:]

Good morning, guys. This is actually Marshall Mentz on for Bob. Congrats on a strong quarter.

[John R. McPherson:]

Thank you.

[J. Thomas Hill:]

Thanks.

[Marshall Mentz:]

So, clarifying question on your guidance. Given the California public spending tailwind and the $198 million of acquisition spend year-to-date, were either of those benefits included in your original guidance? You obviously had some headwinds in California that you needed to overcome, but how should we think about that range in the context of those two tailwinds then? You had a comment about $35 million of contribution from spend over the last several quarters for the acquisitions.

[John R. McPherson:]

Right. This is John. I'll take it to start. Of course, we're reaffirming full-year guidance. But within that, on California, we expect we'll be able to catch up on the shortfalls we've had earlier in the year. California, as a business, is performing well. The shipments are beginning to recover quite quickly and we think we can make up for some of those cost impacts elsewhere in the business throughout the year. On the M&A front, the new acquisitions we've talked about today for the current year, for the 2017 year, probably have a fairly marginal impact on the order of $10 million to $15 million above what we've already included in our guidance. The $35 million number I mentioned would really be at full integration, full run rate. You might think of that as more of an 2018 number. We'll obviously talk about that more as we hit closer to 2018. So not a big adjustment from either of those factors to our current guidance. Certainly in the context of our total EBITDA expectations for the year.

[Marshall Mentz:]

And then, if I could give one more in. Just on California, you guys have obviously spent a lot of time on it. I know it's an important market for you in spite of the historical funding situation. How much does the state currently contribute to your top line and how high do you think that contribution level could move given the spending tailwind? And any bolt-ons that you may – you added one this year, it sounds like, and maybe that increases the emphasis on bolt-ons in that state.

[John R. McPherson:]

I'll start again, and Tom will probably chime in. California, as I think many on the call know, has always been one of our most important states. I think it's running about 16% of our revenue. One thing that Tom mentioned that worth emphasizing, of course, is we're the state's largest aggregates producer as well as the state's largest asphalt producer. And so, a good bit of our asphalt segment is focused in California also. So the changes that we've seen in state funding in California, very important to us long term. In the short term, we hope they'll free up Caltrans to release some work, both new construction and maintenance, that's been held up a bit due to funding uncertainty over the past 18-plus months. But it's really a positive story as we look to 2018, 2019, 2020 and beyond.

[J. Thomas Hill:]

Yeah. I think on the short term on the private side, we've seen the non-res pick up. We predicted that the second half of last year and it's coming true. As you travel in California, you can see the confidence in both the contractors' eyes and in the ready-mix producers on the – so – and the res has been healthy. On the private side, I think last year was a matter of timing and location of jobs. We're seeing those jobs kick off this year and more jobs in our footprint. So, both of those will play well for us in 2017. And as John said, I think Caltrans was just frozen because of funding issues and that's been broken and they'll be freed up to let jobs. So despite the rain in California, when the sun came out in March, shipments picked up immediately. Actually, the flooding – well, it postponed demand, it didn't do away with it, but also really created some demand. There are some washouts in some roads and still some road maintenance that's got to be fixed from the flooding, which will help both aggregates and asphalt.

[Marshall Mentz:]

Thank you. Very helpful. Congrats on the excellent quarter and good luck.

[J. Thomas Hill:]

Thank you.

[Operator:]

We'll go next to Kathryn Thompson with Thompson Research Group.

[J. Thomas Hill:]

Morning, Kathryn.

[Kathryn Ingram Thompson:]

Morning. Thank you for taking my questions today. First is more asphalt-related, you picked up the LoJac assets in Tennessee, an asphalt construction firm. How does Vulcan think about asphalt acquisitions as part of its longer term strategy? And following along with that, knowing that California and Tennessee – you have the largest asphalt and aggregate positions in those state, what is the breakout of highway construction as a percentage of your total sales in each of those states if you are willing to share that today? Thank you.

[J. Thomas Hill:]

Yeah. The first part of your question, I think whether it's asphalt or concrete in an acquisition, it's really not about vertical integration; it's about how do we look at the strategic position in an individual market and also how does it fit with our aggregates business. So, both of those, it's really an extension of our aggregates business in a market where it fits us. So we have the leading position in aggregates in Middle Tennessee. We have done business with this asphalt customer for 20-plus years. We knew them well, they knew us well, and it was a very good strategic fit for us. So, again, it's about the individual markets and the strategy in those markets and how does it fit our aggregates-focused strategy, which is – as always, our business is grounded in aggregates. As far as the second part of your question, that is a significant increase in Tennessee. Tennessee's roads are asphalt-driven and in places like Nashville, the biggest city in Tennessee, we all have the most strategic positions and the largest positions. So we're looking forward to paving more roads in Tennessee.

[Kathryn Ingram Thompson:]

Would it be fair to say that the highway construction post acquisition in Tennessee and in particular Southern California is 50% to 60% of your total mix in those respective markets?

[J. Thomas Hill:]

That's probably a little bit on the high side.

[Kathryn Ingram Thompson:]

Okay.

[J. Thomas Hill:]

High for current. But it could grow to that, Kathryn, conceivably.

[Kathryn Ingram Thompson:]

Okay. It could grow. Yeah.

[J. Thomas Hill:]

I think what we'd say is that – because, obviously, we're set to preserve the full market. But the acquisitions we've made – it's not accidental that we've made these acquisitions to end markets that have had significant step-ups in public funding. And as you well know, some of the asphalt post-aggregate positions, in particular, match very well with public road construction, whereas sometimes concrete can be a bit more private construction-driven. So, we think it's a really good fit and it's a really attractive deployment of capital for us when you're starting with a really attractive strong aggregates position.

[Kathryn Ingram Thompson:]

Okay. Helpful. Tom, you had mentioned California looks like Texas four years ago. You've also mentioned in prior calls primarily last year that Texas is the only state where volumes are back to normalized levels. Where do you think California is compared to normalized level given that SB 1 and how long will it take to get back to normal levels based on your prior experience in that state?

[J. Thomas Hill:]

Right now, California is probably 20% below normalized levels. As I said earlier, the private side is – continues to pick up steam. We're really pleased with the non-res. SB 1, it's phased in over – about a four-year timeframe, but it takes that road spending from $3.75 billion to average of about $9 billion, so over a doubling effect. And it will much accelerate the road to normalized demand, but it also will probably up the average aggregate consumption in California over time because it's such a big deal and such a big impact.

[Kathryn Ingram Thompson:]

Right. Thank you very much.

[J. Thomas Hill:]

Thank you.

[Operator:]

We'll take our next question from Rohit Seth with SunTrust.

[Rohit Seth:]

Hey. Thanks for taking my question. Just to build on that California highway bill impact. So, you said the doubling of highway and road spend. So, is it fair to assume that your business could double over there?

[J. Thomas Hill:]

Well, it would double. It would go on long ways to double the public side of it. Now, the private side continues to be grower and we think it, too, is still well below normalized demand. But the highway piece of the public side, it very well may double that.

[Rohit Seth:]

Got you. Okay. And then, on the...

[J. Thomas Hill:]

Now, you've also got to remember where that money will be spent is in the very high population areas of California. And Vulcan, both in aggregates and in asphalt, has the most strategic positions in the big cities like San Francisco or LA or San Diego.

[Rohit Seth:]

Got you. Okay. And then on Texas, last year, is pretty weak. You're expecting growth in 2017. Can you just provide us some update on what you're seeing so far in the year?

[J. Thomas Hill:]

Sure. I think North Texas continues to be healthy both – in all sectors and you still got population growth in Texas. Now, we did say it's the one state that's probably a little at or above normalized demand, but you've also got population coming into Texas. So, North Texas is very healthy. South Texas, we're seeing good growth in all sectors, particularly in San Antonio in asphalt, concrete and in aggregates. Houston and coastal Texas really had a tough time in 2016. We think we'd hit bottom and/or coming up out of that. So we expect to see some growth in coastal Texas. Summing it up, I think Texas is – continues to chug along and be healthy.

[John R. McPherson:]

Rohit, just to add one thing just because it's topical. San Antonio just passed, I think, its largest ever bond offering for public infrastructure investment this last week, I want to say, $800 million worth. And that's just another good example of the kind of very local funding activity that's also happening. It doesn't get the same attention, but it's very important to the kind of local operations that aggregates players and asphalt players like us tend to have.

[Rohit Seth:]

Yeah.

[John R. McPherson:]

So very good news. And the visibility that you've seen in Texas over time, you saw pricing there, we think the visibility that we now have in California should over time help reinforce the pricing climate there also.

[Rohit Seth:]

Okay. Fantastic. And just another topical question. Atlanta market, the I-85 bridge collapse resulted in a freeze in non-emergency-related construction. Georgia has obviously been a good grower for you guys. How do you think about the second quarter in that regard? Construction is frozen and could be unfrozen by June. And is that enough time to make up for – within the current April and May...

[J. Thomas Hill:]

I don't think we're worried about the freezing of funds. You had the highway falls in and you had the buckling of I-20 also in Atlanta. Now, the Georgia DOT is in really good shape. We've got six jobs that will kick off this year or have kicked off already. The total tonnage on those jobs is probably over 5 million tons over a two- or three-year period. So, Georgia and Atlanta, the public side is very healthy, a lot of jobs is kicking off and you're just now sort of starting to see both the FAST Act and the increase in Georgia DOT funds turning to aggregate shipments. So, we're not worried about that. It's a short-term issue. This is a long-term game with the Georgia DOT and the private side continues to be very healthy. Our position in Atlanta is second to none; in fact, by far the best. And so, we're really looking forward to good things in Georgia.

[Rohit Seth:]

Thanks. Thanks, that's all I have.

[J. Thomas Hill:]

Thank you.

[Operator:]

We'll go to our next question from Garik Shmois with Longbow Research.

[Garik S. Shmois:]

Hi. Thanks and congratulations on the quarter. Had a question just on your comments around mix in pricing and some of the headwind experienced in the first quarter and perhaps to temper expectations for the full year. Can you provide some color as to what the mix impact was? Was it more product or was it more geographic?

[J. Thomas Hill:]

Yeah. The mix that I think really stood out was more product. It was more fines. It was more fines in the Southeast with new construction. Which we always say we'll take every day of the week. It's volume that in the past, when the downturn hit, we wouldn't have had. It serves our product mix and production mix out of our plants and just adds to our profitability. So, while it may appear to be headwinds on price from a profitability standpoint, we'll take it every time. John?

[John R. McPherson:]

I'd just say, Garik, I think it's marginal. It's just – and I don't know that we'd want to temper expectations and certainly don't want to unintentionally communicate that the pricing climate is anything but positive. But as we see more new construction, more new large construction in the mix, it could, just from a product mix point of view, have a little bit of a negative impact on total reported average selling price. Now, as we've discussed many times, on a profitability perspective, it should be quite positive. So, more a heads-up than anything where we're trying temper expectations too much.

[Garik S. Shmois:]

Okay. Thanks. And would there be any mix impact from geography as California accelerates in the second half of this year? And as it sounds like coastal Texas is trying to come back against relatively easy comparisons, recognizing that these are two high price markets.

[J. Thomas Hill:]

Well, I'd tell you. I think that when you look at that, maybe a little bit, I'm not sure it will have a big impact. I think one of things we've seen in California, which we're very pleased with, and we said this, we saw marked price movement last year in California. And the demand improving on both the public side and the private side will only continue to move prices in California both in hot mix and in aggregates. So, we're pleased with the pricing environment in California. Same thing with Texas. It continues to have a healthy environment. But as far as mix is concerned, maybe a little bit. I would more look at margin and I think we will continue to grow our margins in both of those states.

[John R. McPherson:]

And, Garik, in California on a price and margin basis action, this is part of why it's kind of parallel to Texas from three, four, five years ago is that's a set of markets where margins have some room to grow. It is not one of our highest margin markets at the moment and it really, for a lot of reasons, ought to be one of the higher ones. So, we think there's some room to go over time in that and the visibility on the public side will help.

[J. Thomas Hill:]

Yeah. Which I would tell you four or five years ago, Texas had a long way to go.

[Garik S. Shmois:]

Got it. Wonder, just to switch to the $14 million in higher costs in the first quarter, recognizing that this was according to plan, but should we think about it as a pull forward of costs from the rest of the year and what would this mean for the implied incremental margin performance as we get into peak construction season?

[John R. McPherson:]

I'll start and maybe Tom will chime in. The first thing I would say is that, again, full-year guidance unchanged. And what I'd emphasize on that, Garik, is that the implied gross margin percent improvement from our guidance, both in the Aggregate segment and as a total company, we still expect. We still see that in our internal projections. So again, nothing's changed and we'd expect on a full-year basis to have gross margin as a percent of price-adjusted sales increase in the Aggregate segment and increase on the total company basis. The cost items are the ones we mentioned and called out. They're real costs, not things that we would adjust out of EBITDA. But the impact is transitory. And particularly the impact on reported unit margin or reported margin as a percent sales. So the timing of those costs relative to the timing of associated revenue is what gives you kind of obviously a decline in first quarter margins when what we still very much expect is on a full-year basis and increase in margins. So, a little bit of a pull forward, but mostly what you're seeing is the timing of those costs somewhat distorting the view on our margin trajectory, which on a full-year basis we still expect to be improving. Again, that includes the Aggregate segment and the total company.

[J. Thomas Hill:]

I think as important as the cost is what did the things we spent the money on set us up for. We're going to see some big projects with high lumpy demand kick off in 2017 and then you'll follow up in 2018 and 2019 as these FAST Act and state DOT dollars flow through. When you do that, you got to be ready. I think that our folks, both in the fourth quarter and the first quarter, have worked really hard to get our plants in good shape. We got the people on board. I think that they're ready. We are also, I think, working hard on the efficiencies in the plants to things that really drive cost, things like throughput through a plant or downtime or scheduling. So, I feel really good about the position we are and the firepower we have and our plants being ready both in aggregates and in asphalt and ready-mix to handle some big work that's going to come out of FAST. And this is also real high-spec work so you got to be not only have the firepower, you got to be accurate. But I think our folks have done a really good job over the winter to get us ready to come out of the gate strong.

[John R. McPherson:]

And, Garik, if I can, just one more comment on diesel in particular because it's a significant drag in the quarter. But our average diesel cost in the quarter was roughly in line with what we expected. I think it was about $1.79. We expect it to go up in terms of our projections a little bit more in the balance of the year. I think we're expecting a full-year cost for diesel of around $2, let's say. But in terms of being a drag, that would be kind of weighted to first quarter. Last year, diesel price in the first quarter was really at its low point. So we took, if you will, more of that hit in Q1 that we'd expect to take in the balance of the year. But on diesel, as we've said before, higher diesel prices generally support higher aggregates prices, albeit with a bit of a lag. And they tend to widen, Garik, because you know the kind of natural economic moat around individual quarries just because the transportation cost goes up. So, with the – even in intermediate term view, we don't see that as a threat to our business and one could argue it's actually an advantage to our business.

[Garik S. Shmois:]

Makes sense. Thanks again.

[Operator:]

We'll go next to Adam Thalhimer with Thompson Davis.

[Adam Robert Thalhimer:]

Good morning, guys. Congrats on a great quarter.

[J. Thomas Hill:]

Thanks, Adam.

[Adam Robert Thalhimer:]

On aggregates pricing, your pricing guidance for the year, are you contemplating any mid-year price increases and are there any markets where that could be possible?

[J. Thomas Hill:]

Yeah. So we saw the 5% in Q1. We've had price increases that, as I said, kicked in January. We'll have some more – we had some more that kicked in April 1 and probably a little more this year that kicked in April than we had last year. And then on bid work, we'll bid projects throughout the year and you'll see those prices continue to rise as the year goes along. As always, pricing momentum is a function of visibility and confidence. As I said in my comments, as I travel around, people are excited. People are confident and you can see it. They talk a lot about the jobs that are coming. Let me give you a little bit of geographic flavor on that. If you've started on east with the Mid-Atlantic, last year, Virginia was pretty flat particularly on the private side. We've seen the private work in the fourth quarter pick up dramatically. You saw it. You heard it in my comments and saw it in our numbers on our ready-mix business up there, which is really a good sign going forward that the non-res and res is kicking in. And we just had that election lull in the Mid-Atlantic and we've got the good highway work up there. Virginia, those dollars that they passed a few ago were kicking in. We've got big widenings up on I-95. The Southeast is really humming right now. We see the private construction work continue to gain momentum, particularly in the Carolinas and Georgia border, and Tennessee. And now, we're seeing the big highway work kick in. We talked a lot about the Georgia work, the Carolinas. We see big work and again, this is the FAST Act coming through and this is the states increases and funding start to flow in the shipments of stones. So, our private work in the Southeast is really ramping up. Now, you're seeing the public dollars flow through. And this is really good for us because, remember, we are the largest producer in the Southeast and we have the most strategic positions in those growth quarters. We talked about Texas, it's healthy. The coastal piece we think has bottomed out. Now, as I said earlier, California looks like Texas did four years ago. You've got the private work ramping up. The non-res we saw lull last year and it is coming back, and we saw it come back in March. And now, you've got the Caltrans dollars coming. Now, they won't flow through for a little while, but you've got pickup in Caltrans' fundamental work this year and then that really helps our asphalt business. So, if you look at all of that growth and all of that visibility, it leads to a really helping pricing climate not just for 2017, but for the foreseeable – actually for the long term 2018, 2019, 2020. Our customers and the general construction market, knowing that that work is coming, allows everybody to take a little risk and just raise the pricing across the segment.

[Adam Robert Thalhimer:]

Okay. That's great. I appreciate that comment. Then just lastly on the outlook for acquisitions going forward, there's chatter of potential large deals out there. I'm just curious whether now is the right time to look more seriously at a large deal.

[J. Thomas Hill:]

The M&A pipeline continues to be very active. As we always say, this is about discipline of the projects that we completed fourth quarter last year, first quarter this year. We've been working hard for a long time, but we're going to be disciplined about the markets we look at. They have to be – growth markets will be very disciplined about what synergies are unique to us and everything does not fit us. We'll be disciplined in what we invest. If it's too expensive, we're going to walk away and we'll be disciplined. It's really important in the capacity and the speed to integrate these things. I think that our growth team is quietly doing a excellent job at this. I'm very proud of them. They're not going to stop now and they're working really hard at it. The acquisitions we got, you see it fit us well. We're integrating them I think effectively and quickly. They are in markets where you see substantial growth in public funding with the private side being healthy. They also – some really talented people we got with those and we will welcome them to the Vulcan family. So, we look at a lot of acquisitions. We look at a lot both very large and very small. But again, we're going to be picky about it because it has to fit us on all kinds of ways and we have to be good about integrating. So, like I said, pipeline is healthy. We'll continue to plug at it. And whether large or small, we're going to look at them and we're going to analyze them.

[Adam Robert Thalhimer:]

Thanks again, Tom.

[John R. McPherson:]

I think a lot of people don't realize, but we're always working on this. And we've done 20 acquisitions since the recovery began. So this isn't really new news for us. It's just always working at it, always being disciplined and it's just – we've got great organic growth, great organic margin expansion. It's just a really important strategic complement and something our teams that drive this have done a great job of for a while, but it's not really new news. Again, we've done 20 external transactions since the recovery began. And on top of that, we have, we think, a pretty exciting set of internal growth investment opportunities, internally developed new railyard positions, new reserve positions or reserve expansions. They were also excited about, and that is a deployment of capital have again attractive returns. So, I'd say expect us to keep doing what we've been doing. And as Tom said, keep the discipline.

[Adam Robert Thalhimer:]

Okay. Thanks, John. I'll turn it over.

[Operator:]

We'll go next to Trey Grooms with Stephens, Incorporated.

[Trey H. Grooms:]

Hey. Good morning, guys.

[J. Thomas Hill:]

Morning, Trey.

[Trey H. Grooms:]

Just a few quick questions. I guess on the California weather, a lot of focus on that obviously, but how should we be thinking about the timing of that coming through? Could we see it? It's mostly being achieved in 2Q. It sounds like activity definitely picked up there once the weather has started to cooperate. And I know that work's just kind of pushed to the right. So, just trying to figure out how quickly that could come back and any way to think about the magnitude of tons there.

[J. Thomas Hill:]

It came. It started coming back in March as soon as it dried out and that's a testimony to the work being there and people ready to go. So, I don't – I would tell you that it'll flow through fairly naturally. I mean, maybe a little bit back-half loaded just because you've got – you're running the bottlenecks with people and equipment out there on the road and now ready-mix folks can get out or lay down machines. But I would tell you that it will flow through. A lot of that work, depending on weather, is going to happen this year. I don't think – depending on what happened, normal weather cycles in California will be fine, but it's probably a little back-half loaded.

[Trey H. Grooms:]

Okay. And you gave us an impact, I think, to the cash gross profit from that rainfall on page 5 of the presentation. Any idea or maybe you could translate that for us into tonnage just so it can help us with our modeling?

[J. Thomas Hill:]

Well, first of all, that's really not the impact of volume; that's the impact of the flooding on our operations and the cost to handle that flooding and the damage of that flooding.

[Trey H. Grooms:]

Okay. Got it.

[J. Thomas Hill:]

So that was not an impact of business delay. It was an impact of pits creeks running into pits and primary has been flooded and things like that. As we said, volumes were down 20% in January, February.

[Trey H. Grooms:]

Right.

[J. Thomas Hill:]

March started to return. So from an earnings perspective and volumes perspective, I think we're going to be fine in California.

[Trey H. Grooms:]

Okay. And then...

[John R. McPherson:]

And probably just to – again, just to be clear, that little bit of cost we put in there, as Tom said, that's just direct operating cost impact pumping flooded quarries, processing wet material. It's not the cost of, call it, lower fixed cost absorption, did lower volumes and it's not the cost of just the loss margin on absolutely lower volumes.

[Trey H. Grooms:]

Got it. Okay. That is helpful.

[John R. McPherson:]

We just want to give you what we could fairly directly see and measure.

[Trey H. Grooms:]

Understood. Got it. And then, on the – Tom, you mentioned projects with high – I think you called it high and lumpy demand that will kick off in 2017. I know that you guys have kind of been tracking all of this stuff for a little while and those things can move around. Can you give us any more color on those projects specifically? I think you talked about some big projects in Georgia and Carolinas.

[J. Thomas Hill:]

Yeah. Let me just kind of run out kind of big projects by state off the top of my head.

[Trey H. Grooms:]

That'd be helpful.

[J. Thomas Hill:]

You got the I-85 widening in Virginia, which is about 1 million-ton job. We'll probably, and this is an estimate, do 400,000, 450,000 tons of that. North Carolina, you got I-85 widening, again that's 1.2 million job, which a third of it will go this year. South Carolina, you got I-85, I-385 interchange. I mentioned the six projects in Atlanta – or in Georgia, rather. That's some 5 million tons and probably be 20%, 30% of that this year. These are all – this is work that's been booked and we're shipping. It'll start this year. Texas, you've got a number of jobs. The biggest one is probably right now. You got – two biggest ones will be US 281 widening in San Antonio, which is 1.3 million tons. It'll start in the third quarter. We'll start shipping on that job in the third quarter. Job that has not been awarded yet is the Grand Parkway in Houston, which is – that's 1.5 million-, 2-million-ton job. You've got Arizona Loop 202. That's over 2 million-ton job which we'll start shipping this year. And in California, you've got the Fresno, the Highway 180, which is bidding right now and it's a 1.5 million-ton job, so just to give you a little flavor. And those will – it's always with big work like that. You'll have times where we will get real hot and then times where we will have a lull, depending on what was going on on the roads specifically on that job at the time. When I say lumpy, that's what I mean. They'll call you up and say you'll be shipping fast and furious for a month and then you'll slow down for two weeks.

[Trey H. Grooms:]

Got it. All right. Well, thanks for the color. Super helpful. And then, I guess a little bit bigger picture, taking a step back and looking a little bit maybe longer term. With the pickup that we're seeing in a lot of your markets and the pickup we're expected to see over the next 12-plus months – 12, 24-plus months, do you guys see any bottlenecks or capacity constraints either at the mine or even maybe downstream, which could limit or cap the activity in any of your markets, just as we look at the recovery and kind of the cadence of getting back to something close to normal for you?

[J. Thomas Hill:]

Yeah. I'll start with our capabilities. I think that as far as big jobs go, we've worked real hard to get our plants and our people in shape. We're ready to go. Now, they're maybe in spot markets with certain clean stone sizes, you will see shortages of certain sizes. It's not a worry though. We have the firepower, we're not close to capacity and we'll be able to supply whatever comes at us, both whether that's aggregates or ready-mix or hot mix. And we've worked real hard with this over the last year to get ready because we saw this coming. Now, when you move to the roadway, you are going to see some bottlenecks. You will see some labor bottlenecks out there with paving crews and ready-mix trucks and ready-mix drivers. And I think in a lot of markets, we will see that. And, at times, that will create bottlenecks they'll overcome on. But again, you will have – we talk to a lot of customers and a lot of them are working really hard to get people on board right now and trained. I mean, new people because experienced people are tough to find out there. And a lot of our customers have really invested in their training programs to have folks ready to be able to pave these roads. It'll come and go with some shortages.

[Trey H. Grooms:]

All right. Thanks for that, Tom, and thanks for sneaking me in here at the end of the call. I appreciate it and good luck with the rest of the quarter.

[J. Thomas Hill:]

Thank you.

[Operator:]

We'll go to Scott Schrier with Citi.

[Scott Schrier:]

(56

[J. Thomas Hill:]

Yeah. So, as far as our confidence in SB 1, we said over the last two years, it wasn't if, it was when and the need was just that big in California. This is a parallel theme across many, many states and we've seen it many, many times. And actually, this is a parallel theme for the country. There is a lot of public support for infrastructure spending and now there's starting to be a lot of political support for infrastructure spending. These are big plays in California, Tennessee and what's going to happen in South Carolina, they're almost ready to pass their bill. This will continue to happen across other Vulcan states and other states throughout the country, but it's also going to happen at some point in time on a national level. Back to your question on Measure M, Measure M and which is in Los Angeles, is about $860 million per year. Measure B, which is Santa Clara County, is $210 million per year. And then the BART Bond is about $200 million. Total that up, that's $1.2 billion a year in just local funding on top of the $9 billion that moved from $3.75 billion to $9 billion in the state. And the point is California's infrastructure system is broken right now, and we are very pleased that the public and the elected officials have had the wisdom and the foresight to do something about it because it will really affect their economy if they didn't. So, I'm not sure our crystal ball told us when it was going to happen, but we knew it had to happen.

[Scott Schrier:]

I want to ask the cash gross profit question a different way. It looks like based on your commentary not accounting for fixed cost absorption, if I add that $14 million back, it looks we're at about 5% cash gross profit growth, 60% incremental margin. To me, that sounds like it's really setting a floor for what the year could be. Is that an accurate way to look it at or are we going to have any more cost related to, say, the ships or stripping or that $0.28 you called out for labor and repair? Or should that really be not part of the equation going forward?

[John R. McPherson:]

I'll start and I want to start again probably the most important point, which is to point you to full-year guidance because you can get twisted around in our business if you're trying to extrapolate just from Q1 unit margin numbers, given how low it is in volume and how low it is in total gross profit. And by the way, I would say the same thing if we had a blowout high number on one of these metrics in the first quarter. So just extrapolating from Q1 is just a little bit faulty to start with. But to answer your question a different way, has anything changed about our view of 60% flow-throughs over time? No. Has anything changed in our full-year expectations for improvement in unit margins, whether gross profit per ton or cash gross profit per ton? No. Are we still on track with the kind of cash gross per ton improvements that tie back to our $2 billion goal at normal demand? Yes, we absolutely are. Those things haven't changed. The conditions are in place. The pricing environment is positive. Our long-term cost control has been actually exceptionally good. And so, even though during the balance of the year and these were incorporated into our beginning-of-year plans, we will have higher stripping costs this year than we did last year. We do expect to have higher diesel cost this year than we did last year. It's not a surprise that we're transitioning in our ships and that'll have some cost, but those things we should be able to overcome in this environment. And really, that continuous compounding improvement you've heard us talk about and the quality of execution that you heard Tom talk about, which is reflected in our safety metrics also, those are all things that give us confidence that if you were to look at it from our chair, if you look at the operating metrics the way we're able to look at them at a plant level, plant-by-plant, you'd basically see that we're on track with our plans. And those plans have margin improvement for the full year.

[Scott Schrier:]

Thanks. If I can sneak one last one in there, you called out the 10% pricing in Georgia. I'm curious of how that compares to maybe some of those surrounding states in the Southeast, if you can talk about the magnitude of the pricing you're getting in those states.

[John R. McPherson:]

I'll start. Tom may want to add. We try to call out a few sometimes to give you flavor, but we don't like to walk through pricing in an individual market, individual state basis too much probably for some obvious reasons. One of the reasons we called out Georgia and California in addition to just having high pricing is really they're places where you have very good visibility. So, you've had the kind of public funding passed, you've got better visibility to forward demand, and you see that kind of growth. I would say that price increases are widespread. They're widespread across the Southeast. I would say that they vary by degree, but that is much about a moment in time as the long-term trend. And the margin improvement across the Southeast, when Tom was talking about our core Southeastern franchise kind of humming, it's not just on the top line. It's really throughout the P&L. We like what we see. Those are very profitable well-run positions for us and we're excited about what we see.

[Scott Schrier:]

Great. Thanks.

[J. Thomas Hill:]

To add to that, places like South Carolina and Tennessee who have always had good pricing momentum for a number of years now, the visibility of those highway bills will only help that.

[John R. McPherson:]

Yeah.

[J. Thomas Hill:]

What's really nice about that is those are long-term demand drivers.

[John R. McPherson:]

And this isn't really a comment on pricing, but just to be complete, just make sure we're also calling out some of the slower places, if you will. Alabama, still a little bit slower in terms of demand. Mississippi, still a little bit slower. Louisiana for a cycle had a lot of large projects, so I don't know exactly what I'd read on that. We like the outlook next year there. Tennessee has really started to improve quite a bit. We talked about that. Kentucky, still slow. Illinois, we talked a lot about, structurally a little bit slower, but I'll tell you our team there has done a great job driving profitability improvement in a market that doesn't have a ton of growth. So, those are some of the places. If you wanted places that from an overall demand picture are a little bit slower, that we'd call out.

[Scott Schrier:]

Great. Thank you. Congrats on the progress and good luck.

[John R. McPherson:]

Thank you.

[J. Thomas Hill:]

Thank you.

[Operator:]

We'll now take a question from Jerry Revich with Goldman Sachs.

[Jerry Revich:]

Yes. Hi, good morning. Good afternoon.

[John R. McPherson:]

Hey, Jerry.

[J. Thomas Hill:]

Good morning, Jerry.

[Jerry Revich:]

At your Analyst Day, you folks spoke about just the cadence of new construction starts driving weakness in the business in the back half of last year. And I'm wondering, based on your updated assessment of what you're seeing on the ground, have we turned the corner? In other words, how broad based is the visibility improvement that you folks are seeing now compared to six to nine months ago? Can you just flesh that out for us?

[J. Thomas Hill:]

Yeah. As John said, I think for the full year, we're very confident in our guidance, maybe for timing of jobs and even the stuff we talked about California, maybe a little back-half loaded. We're off to a good start. And I think we're off to a good start not only on demand but also the prep work we've done to get ourselves ready. Our markets are looking healthy. The private non-res side, which we talked about in Investor Day, that was coming is starting to flow through. We talked about that in California and the jobs – the big highway work, which is the FAST Act and state funding just beginning to flow through are starting. So, I think what we're seeing is what we predicted in Investor Day.

[John R. McPherson:]

Jerry, the only big color I would add I think on the start data and kind of what we see on the ground is – and then I'll try and compare and contrast the year-ago. A year ago, we were beginning to see some start activity weaken and it continued to weaken, let's call it, through July at least. What we're seeing now hopefully is the benefits of its strengthening since that time. And in Vulcan markets, as opposed to the country overall, obviously residential start activity I think is well-covered. People see that. Private non-res start activity continuing to improve in Vulcan markets. I think it's down in non-Vulcan markets, but it's improving in our markets. We want to see that continuing. Public transportation starts improving in Vulcan markets. So the trajectory is good. We want to see it continue, Jerry. But the trajectory is much more positive, if you will, than it would have been this time a year ago. The one thing I'd say and you know this well I think, we will have a lot better visibility to that in our call about the second quarter. It's just will be that much further into construction season DOTs will be kicking off their new year. We'll actually see which projects are really moving at what schedule. So, I know it's awkward, but we just really do have better underground visibility when we next talk than we do right now. All the signals are clear.

[Jerry Revich:]

And what...

[John R. McPherson:]

They will know more as we get little further into construction season.

[Jerry Revich:]

Okay. And lastly, you spoke about the run rate for $35 million on the acquisitions that you've made year-to-date. Can you just talk about what proportion of that is synergies versus the underlying business? And then, the acquisitions that you're valuating from here, can you just give us a rough label for how much is that in new markets versus existing Vulcan markets?

[John R. McPherson:]

Yeah. I'll start and maybe Tom will chime in. And just for the sake of clarity, so when I refer to the $35 million of run rate, that's against the six bolt-ons we've done for roughly $230 million since the third quarter of last year. A portion of that was in our beginning-of-year guidance and plan as we discussed in our previous call. I'd say there's probably $10 million to $15 million of additional EBITDA for the 2017 year that wasn't in our prior communications from these acquisitions. A lot of that will depend on pace of integration. But again in the context of our overall plan, it's not a major shift. But at kind of full integration – not yet full synergy probably, but full integration – we see contribution of about $35 million from those assets. That's an EBITDA number. And of course, we'd expect long-term growth beyond that initial run rate.

[J. Thomas Hill:]

As far as where they are, all of these are either in or adjacent to existing markets or there is, in the case of asphalt and concrete, extensions of our aggregates business. And so, they do a number of things when we get the right ones. They expand our franchise, they protect the franchise and they expand profitability. So we're very pleased with what we got.

[Operator:]

I do apologize, his line is having an issue. I will go next to Brent Thielman with D. A. Davidson.

[Brent Edward Thielman:]

Thank you. Just a quick question, Tom. The comment about the California 20% below normalized levels at pretty big states, when you look at it kind of where you play specifically, are there even wider margins in that? Because I think about the Bay Area, which might be a little later in the cycle, and maybe Southern California isn't.

[J. Thomas Hill:]

Yeah. The Bay Area is probably a little further in the cycle, but not a lot. And I'd say, as I said earlier, the marked improvement in how we're funding, which is more than a doubling over time, will raise the per capita average in that state just because it's such a big jump. I think that as we look at it, again, California has all the pieces that Texas did four, five years ago. The private side continues to be very healthy. It would seem the non-res really started to kick in this year. Residential is healthy. So, I think as we move forward, it will be a steady pace in California. It's not going to be a big jump and a part of that is also because these highway funds phase in, in about like $0.25 billion and then they work up over full-year timeframe. Actually over time, these continue to grow. So, I think you'll see really healthy steady growth over time, which also creates a good environment for pricing and for improved margins.

[John R. McPherson:]

And to a question that was asked earlier, we and the overall, call it, construction sector like the very long-term nature of this. You've heard us talk about a preference for long-term solutions in the federal side. The long-term nature of this helps our customers make those investments in additional capacity, whether that's staff or equipment, and it's a much better environment for us than I'm going to call out a one- or two-year stimulus type approach. We really like the long-term nature of this in California. And the funding sources are very predictable and it's just a very good resolution for the state and for suppliers like us.

[Brent Edward Thielman:]

Okay. And then just a quick follow-up. In terms of the growth in business development, kind of the way you guys are thinking longer term in nature, is California a market where there's a lot more room to grow in terms of acquiring quality assets and finding the right markets? I mean, it's kind of the big kahuna there already.

[J. Thomas Hill:]

Yeah. Well, California – and we work all the time hard on California, we made a number of acquisitions in California over the last four years, both in asphalt and in the aggregates business. If you remember, we also got out of the ready-mix concrete business and swapped it for asphalt assets in California, Arizona, which was a very good move for us strategically. I think there are plenty of opportunities in California. You also got to remember with a big growing demand in California, there is a marked shortage of resources in these big growth markets. We've worked hard over the last decade plus to make sure that we permitted and grew our reserve base and have reserves for generations, not just for the short term. And with this big highway fund, that will put pressure over time on reserves from some of other folks in California and I think we have a very good position in these big growth quarters with long-term reserves.

[Brent Edward Thielman:]

Okay. Thank you. Best of luck.

[J. Thomas Hill:]

Thank you.

[Operator:]

At this time, I'd like to turn the conference back to Mr. Tom Hill for any additional or closing remarks.

[J. Thomas Hill:]

Thank you. Listen, thank you all for joining us today. We appreciate your interest in Vulcan. As you can tell, John and I and the team are very excited about what we see ahead of us, both on the public side and the private side, and we see those opportunities now stretching from California to the Sun Belt, to our core Southeast businesses, up to Mid-Atlantic. So, we've got a great start to the year. We look forward to talking to you on the next call and update you on our progress on growing Vulcan Materials Company. Thank you.

[Operator:]

This concludes today's call. Thank you for your participation. You may now disconnect.