Vulcan Materials Company

Good morning, ladies and gentlemen, and welcome to the Vulcan Materials Company's first quarter earnings conference call. My name is Justin, and I will be your conference call coordinator today. As a reminder, today's call is being recorded. During the Q&A portion of this call, we ask that you limit your participation to one question plus a follow-up. This will allow everyone who wishes the opportunity to participate. Now, I'd like to turn the call over to your host, Mr. Mark Warren. Vice President of Investor Relations for Vulcan Materials. Mr. Warren, you may begin.

Good morning, and thank you for joining our first quarter earnings call. With me today are Tom Hill, Chairman and CEO, and Suzanne Wood, Senior Vice President and Chief Financial Officer. A question and answer session will follow their prepared remarks. Before we begin, I would like to call your attention to our quarterly supplemental materials posted at our website, vulcanmaterials.com. You can access this presentation from the Investor Relations homepage of the website. A recording of this call will be available for replay at our website later today. Additionally, you can sign up to receive future news releases under email alerts found in the quick links on the Investor Relations homepage. 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, 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. Additionally, management will refer to certain non-GAAP financial measures. You can find a reconciliation of these measures and other related information in both our earnings release and at the end of the supplemental presentation. Now I will turn the call over to Tom.

Thank you, Mark, and thanks to everyone for joining the call today. We appreciate your interest in Vulcan. We had a solid start to the year, a 15% improvement in adjusted EBITDA, and 11% improvement in aggregate gross profit per ton. These results highlight the combined strength of our aggregate-focused business, our geographic footprint, and our sharp focus on improving unit margins. As you know, the principal drivers of our aggregate profitability are volume, price, and operational efficiencies. So I'll address each one of these in turn. First, aggregate shipments in the quarter increased by 13% or 11% on the same store basis. Importantly, the improvement was broad-based across our footprint. Of course, with record rainfall, California was the obvious exception. But with that said, reduced shipments in the West were more than offset by double-digit volume growth and our core markets in the east and southeast and in Texas. As we expected, some of the year-over-year improvement in these markets was due to pent-up demand from last year. This was evidenced by significantly higher shipments in January. Shipments in February and March were more in line with our full-year guidance. Overall, the pace of shipments in the first quarter clearly shows that demand is healthy. The second profitability driver is price. And as predicted, our pricing continued to compound from the fourth quarter. On a freight-adjusted basis, pricing improved by 5.4% from last year. On a mix-adjusted basis, pricing increased by 5.8%. As with volume improvements, our pricing gains were widespread. The third driver, and one that is sometimes overlooked, relates to operational efficiencies and cost control. Much of our time and attention is focused here because it represents an area where we can strongly influence the outcome. One of our key financial metrics is same-store flow-through. On a trailing 12-month basis, it was 57% at the end of March in line with our 60% long-term guidance. As we look forward to the rest of this year, our view of our markets remains on track with earlier expectations. We're still seeing growth in private demand in vol conserved markets. In the public sector, demand continues to grow, and the increases in state and local highway funding, which we've seen across our footprint, are turning into shipments. As we pointed out previously, we're in the very early stages of big growth in highway demand. Ten Vulcan states that generate approximately 80% of our revenue have passed infrastructure legislation over the last four years. These laws have raised funding by almost 60% over 2015 levels. The most recent state to join this trend was Alabama, which passed a gas tax in March. The pace of conversion of public funding and lettings into shipments continues to accelerate. We see this strengthen our backlog and booking pace. And this also supports a healthy pricing environment, which we experienced in the quarter and can also see going forward. Now I'll turn the call over to Suzanne for some additional color on the results. Suzanne?

Thanks, Tom, and good morning. I'll cover a few additional items and then comment on our 2019 guidance. In first quarter, our same store unit cost of sales increased year over year by 3%. The increase resulted in part from planned higher repair and maintenance costs. We are keenly focused on reducing downtime in our plants in order to improve our operational efficiencies and throughput in the upcoming seasonally stronger quarters. In addition, California experienced higher than expected production costs due to record rainfall. Our SAG costs were higher than last year as a result of the timing of certain expenses. For the full year, we'll be in line with our previously provided guidance. On a trailing 12-month basis, these costs continue to trend down as a percentage of revenue and we'll remain focused on leveraging this part of our cost base. With respect to the asphalt segment, gross profit was lower than last year, but in line with our expectations. Shipments increased by 5% on the same store basis, and pricing also increased by 5%. Unfortunately, these gains weren't enough to offset the 29% or $9 million increase in liquid asphalt costs. Concrete gross profit declined slightly compared to last year. Lower than anticipated shipments due to weather in Virginia were partially offset by modest price increases. For the full year, our outlook for the non-aggregate segment remains unchanged, as the first quarter is seldom indicative, particularly for asphalt. I'd like to move on now to the balance sheet and our cash flows. Our debt structure suits our business well. Our long-term debt reflects a weighted average debt maturity of 15 years and a weighted average interest rate of 4.6%. We intend to retain our investment grade credit rating, and accordingly, the target range for our leverage ratio is 2 to 2.5 times. Currently, we are at 2.6 times, but expect to be within the range this year. On page seven of the supplemental slides, you'll find information on our discretionary cash flow expectation for the full year using the midpoint of our EBITDA guidance as the starting point. As a reminder, we define discretionary cash flow as EBITDA less working capital change, interest, taxes, and operating and maintenance capital. On this basis, our discretionary cash flow for 2019 is projected to approximate $735 million. Using our capital allocation priorities, we can then determine the most returns-enhancing use of that cash, whether it's for internal growth projects, M&A, dividends, share repurchases, or debt reduction. So as you consider your models, I'll share a couple of numbers with you. In 2019, we expect to spend approximately $250 million on operating and maintenance capital in line with our prior estimate. With respect to internal growth projects, our investment plan calls for $200 million, which is down about $50 million from 2018 spend and in line with earlier guidance. Turning now to an update on 2019 earnings guidance, simply put, our view remains consistent with our February outlook. The trends in our backlog project work, our booking pace, and customer confidence continues to support our positive outlook for the remainder of this year. As Tom said, our first quarter results were definitely a solid start But we should keep in mind that it was first quarter, which is the smallest quarter of the year due to seasonality, and thus the least likely to affect our overall outcome for the full year. The takeaway is that we are generally where we expected to be at the end of March, having employed a thoughtful approach to our guidance earlier this year. We therefore reaffirm our full year expectations for 2019 adjusted EBITDA. As a reminder, that guidance range is between $1.25 billion and $1.33 billion. All other more detailed aspects of the guidance are shown on page 8 in the supplemental slides. And now I'll turn the call back over to Tom for some closing remarks.

Thanks, Suzanne. I'm very proud of our people's performance in the first quarter, and I want to take this opportunity to thank our operators and our salespeople for taking care of our customers, holding each other to a high standard of operational excellence, and delivering on financial results as promised. A 25% improvement in aggregate gross profit, an 11% improvement in aggregate unit profitability, That's not easy in a winter quarter. I'm also pleased that we continue to advance our safety culture in 2019 and improve on record setting 2018 performance. So far this year, our injury rate was 0.85 accidents per 200,000 employee hours worked. Our number one job is to keep our people safe. And this is going to remain a central part of our operating disciplines. As we move forward, we will focus on the key elements that deliver value for our customers and our shareholders. And we will keep our people safe and allow our plants to operate at maximum efficiencies. We will execute at the local level and will drive unit margin expansion. We have the best geographic footprint in the industry. and our business model and our people are flexible enough to take advantage of market opportunities and resilient enough to overcome market challenges. Our first quarter was a good step in the right direction towards achieving our 2019 goals. Now we'll be happy to take your questions.

Thank you. If you would like to signal with questions, please press star 1 on your touch tone telephone. If you're joining us today using a speaker phone, please make sure your new function is turned off to allow your signal to reach our equipment. Again, that will be star 1 if you'd like to ask questions. Our first question comes from Scott Schreier with Citi.

Hi, good morning. Hey, Tom, good morning and nice quarter. So I want to start off with a bigger picture question. Obviously, due to the structure of the business, aggregates, particularly well-run aggregates businesses, can command higher multiples than peers. But with concerns about the cycle that really took hold toward the end of last year, one thing that supports a higher multiple is an elongated cycle, which comes from visibility and from these larger type projects. And I know you talked about it, Tom, in your prepared remarks. Can you speak... to the visibility we have right now and the growth trajectory. How long does this last? I mean, assuming, of course, the $2 trillion quarter century plan discussed the other day doesn't go anywhere. I know in the past you've laid out things like mid-cycle EBITDAs. What's mid-cycle EBITDA? When does it happen? How much visibility do we have right now into the extension of the cycle?

What we said was mid-cycle, we bid about 255 million tons. And If you look at the cycle right now, let's take it in pieces. On the public side, we're stronger than we would have predicted five years ago. You've got substantial funding from states. In fact, that funding in our states is up some 60% over 2015 levels. And not much of that has flowed through yet. So you've got four or five years of big growth in highway demand. Turning to the private side, On the residential, we continue to see growth in the residential in our markets. Our customers feel good about single-family growth. Looking out, we see exciting markets with housing growth and a few that we're watching. What I'd put on the watch list would be San Francisco, Nashville, and Chicago. Exciting markets would be Houston, Southern California, Tampa, Jacksonville, just all of Florida. a lot of the southeast. So the fundamentals of residential growth are still in place, population growth, employment growth, and very low inventories of houses. So in our footprint, we still see growth in res. I would call out non-res very similar. Our backlogs, our booking pace are strong. We're shipping strong. Our customer's outlook is positive on non-res. So we still see strength both on the private side and the public side.

Thanks. And for my follow-up, I wanted to ask a couple things on the cost front. Obviously, you had some fixed cost absorption in California. You had the repair and remaintenance. It looks like we also had some inventory builds. So if I'm thinking about the cadence of the year, how can we think about some of those items? And I know that also in the past, sometimes you've given us a cash gross profit per ton bridge. I'm wondering if you could potentially walk us through that for the quarter.

Yeah, so, you know, I would describe it as a typical cold, wet quarter. And, you know, our costs were up about 3%, about 1% of that was the impact of severe weather in California. I'd also add to that that our California team did an excellent job managing their costs in really tough headwinds. The rest was, the majority of the rest was planned maintenance to get ready for the season. And that's very typical for a cold, wet quarter. you're just going to be inefficient in trying to crush rock when it's cold and wet. So you fix it while the weather's bad and run it when the weather's good. So we did a lot of R&M, planned R&M in preparation for the season. We actually had a reduction in inventory, which was a little bit of a headwind for us. And again, that's not unusual in a cold, wet quarter. You shut down to do planned R&M because you're not going to be efficient running. And I think our people have done a good job with inventories. If you If you look back, we've actually, over the last four or five years, we've actually lowered inventories of long sizes, which would be base and fines. And that's really taken our inventory and that we're long on a turn in the cash. And our inventory turns have continued to move up over the last four or five years.

Yeah, and I would just add to that, Scott. I can see where you got the question about inventory being higher. If you look at it on a year-over-year basis on the balance sheet, it does appear to be higher, but that's as a result of the acquisitions that we've done year-over-year, one reasonably sized one in the paving and asphalt side of the business. I think from the production cost standpoint in the quarter, the probably the better way to look at it is to look at what your inventory actually did in the quarter. So if you look at the balance sheet, you can actually see a decline and finish product there.

Great. Thanks a lot. I appreciate it, and good luck to the cube.

And next will be Nishu Soot with Deutsche Bank.

Good morning. Good morning.

Thank you. Yeah, good morning. I wanted to start off kind of digging into the commentary you mentioned about the backlogs, I'm sorry, the deferred projects that benefited 1Q, you know, February and March were more in line with your year guidance for low to mid-single-digit volume growth, whereas January was much stronger. I just wanted to dig into that a little bit. January, I would anticipate, would be much smaller volume-wise than February, and particularly March. So it just implies some really strong volume growth in January. Am I understanding that correctly? You know, so how strong was January? And then, you know, what does that speak to in terms of momentum carrying out of the quarter?

Yeah, so, you know, shipments overall in the quarter, it's a robust first quarter. And that volume growth, which is a very encouraging indicator was very widespread, with the obvious exception of California, which was just a washout. As we said, the big jump came in January. It was high double-digit. And if you remember, when we made comments on the third quarter, we said we had a lot of pent-up demand, and some of that may flow through into 2019. That's actually what happened in January. It was as predicted. Again, February and March were more in line with our guidance. What we're seeing out there is a real sense of urgency from our customers to get work completed so they can get on to their growing backlogs. And this was really evidenced in the first quarter as the weekend shipments were up 25% year over year. And what that signals is those customers got to get the work done and they're willing to spend overtime to get on to the next project. The private continues to move up, as we said. The big increase we're seeing is in highway shipments and the flow-through of that funding. And as we said, that increase in funding flow-through will continue for the next four or five years. I think that as far as the rest of the year, as predicted, I would expect shipments to be more like February, March. But remember, it's still just the first quarter.

Got it. Got it. No, appreciate the, uh, the details there. And then, uh, second question, one of the, uh, impressive thing about the numbers is, uh, the, uh, low double digit aggregates and volume growth, despite your largest market, California being down double digits. Uh, you mentioned it was broad based. How much did the aggregates USA footprint, which would have been less weather, uh, affected perhaps? impact that? So just how were you, if you could dig into how you were able to offset the double-digit declines in your largest market with the rest of your footprint? What were the particular drivers of strength or regions?

Well, I think that everywhere except for California saw strength, particularly in our very important Southeast market. We're the largest producer in the Southeast, and we really, really benefited from big demand in those Southeastern states. You know, it was just widespread. And, again, you had some big projects scattered out across that flowed from fourth quarter last year into first quarter this year, and that was really what you saw in January. Got it. Thank you. Sure. Thank you.

And our next question will come from Catherine Thompson with Thompson Research Group.

Good morning, Catherine.

Hi. Good morning.

Good morning.

Thank you for taking the time. Thank you for taking my questions today. Just first on the follow-up on CapEx, could you give us a little bit more color on the $55 million spend for internal growth projects and expected returns? I know there's looking at building out new sites, but just wanted to get some more color on what type of growth projects you're targeting for those.

Sure. I'll address that one, Catherine. In terms of the growth projects and what we spent on in the quarter, the spend was largely on what we've outlined before. We are opening some additional sales and distribution networks in certain parts of the country, along the Gulf Coast, into Charleston as well to sort of help expand the network there. We are also expending money on the opening of two or three greenfield sites, one of which is in California. And we would expect in that one to hopefully begin having a few shipments from that late this year. In terms of returns, we don't go into the specifics of the returns on those individual sites. projects other than to say that they are definitely accretive to the returns of the company and have a higher return than what the company generates overall. And that's the main reason for doing those projects is you look at an internal growth project versus M&A, this is a way to get exactly what you want, where you want it, without potentially having to pay a lot of blue sky. And when you are able to do it internally, it causes the return on investment to rise.

I would add to that that there is a ramp-up time for these, just because you buy something that's already going, and this one you have to ramp up. But They're adjacent or in our footprint, so they're additive to the franchise and protect the franchise. And there's some of our highest returns. You're not paying the boost out, but also the flip side of that is it takes a little time to ramp up.

Okay, perfect. And then a follow-up on ASPs. Nice job in the quarter. Thank you also for confirming that. You didn't build inventory, and it does look that from an industry standpoint, at least from the folks with whom we've spoken. In general, there's not been an inventory building Q1 this year to the same degree as last year. Just a confirmation that this certainly should be positive for pricing going forward, and then second, on a follow-up to that, could you just give more quantification or color on the commentary of project type mix? in the quarter and how this impacted pricing for the quarter, and really more importantly, how you think it will, how it impacts it as we look further out 12 to 18 months from now. Thank you very much.

Yeah, thank you. You know, the quarter, the pricing momentum in our markets continues to improve. This was, as we predicted, third quarter, fourth quarter last year. The mix was about 40 basis points. All of that was base. which a higher base or fines in a cold, wet weather is not unusual. It's also indicative of new highway construction. But overall, we're seeing widespread price and momentum across the vast majority of our markets. In fact, all but one market, every market we were in saw price increases after one, and that one was flat. I think the foundation of this is the visibility to that highway growth. and the continued demand growth and shipping growth on the private side. Our January and April price increases to fixed plants were all in place. And we'll see bid work push up throughout the year. And as you know, bid work is a campaign over time. It's not a one-time price increase. So the 19 price increases came out of the gate strong. But I think what's really important here is it provides a good start to improve unit margins. As we said, those unit margins were up 11% in the quarter, and this is the second quarter in a row that we've grown unit margins in the face of some pretty tough conditions. And that's simply sound execution and disciplines under difficult circumstances by our people. And if you remember, if you kind of look back over time, this is usual for us. If you look back six years, we've gone from roughly $3 to just under $3 to almost $5 from a 12-month basis on unit margins. That's 12% compounded annual growth rate, and we saw 11% in the first quarter. So my hat's off to our sales and ops folks, and we thank them for that. And this is our job, and we'll keep plugging at it.

Yeah, I'd just add one thing there, Catherine, going back to the commentary around base sales. and the fact that produced a bit of unfavorable product mix of about 40 basis points. Our base sales did increase pretty substantially in the first quarter year over year. Last year they constituted about 22%. This year about 27%. So that's about 500 bips up. So to, you know, given that significant increase to only have – you know, a product mix effect of about 40 basis points, I think is pretty good. Yep. Perfect.

Thank you so much. Thank you. Sure.

And our next question comes from Jerry Revich with Goldman Sachs.

Hi. Good morning, everyone. This is Ben Brood on for Jerry. Morning, Ben.

Hi, Ben.

Morning. Just wanted to touch on pricing. So If we look back to last year, pricing improved over the course of 2018. So as a result, you'll probably be facing tougher comps in the second half. As a result, obviously you had very strong pricing, 5.8% year-over-year excluding mix. Should we think about pricing kind of steady over the course of the year, or does that second-half comp present a meaningful headwind?

I think you nailed it. I think we would expect our price increases to be steady throughout the year in line with our guidance. And you've got to remember, so the fixed plans, as I said, went into effect January and April. You'll see some of those, you'll see mid-year price increases. But the bid work, which is the majority of our work, as I said, is a campaign over time. And we'll continue to push that up throughout the year. And you've got to remember, we're looking at our backlogs and our booking pace and our pricing and our booking pace, and it would support that 5% to 7% guidance that we're given. And I would see that smoother in 2019, whereas it was kind of a ramp up in 2018.

Got it. And this kind of feeds into the mid-cycle question you addressed earlier, but I appreciate that it's a few quarters away, but can you kind of give us an idea how you are thinking about pricing in 2020? It's obviously very strong this year. Can we keep that momentum into 2020 and continue that path to a strong mid-cycle level of performance?

I think I would turn that to, obviously, we're not going to give you a guidance for 2020. It's too early. We're still in the first stages of 19. But I think what I would look at there is what drives price and its visibility and work that's coming so people are secure that they can take price and give prices out there in the marketplace. And that is what's so important about the growing highway demand. Everybody knows it's there. It's very visible. They know way out in advance what's coming. And so whereas private work is helpful there, but it's a little less visibility and a little less sure than a state saying they're going to do X, Y, and Z jobs. So I would predict pricing to continue, the momentum to continue to increase over time. underpinned, again, by the visibility of the highway demand.

Got it. If I could just squeeze in one quick follow-up on that note, obviously the infrastructure demand is very, very positive. There's nothing that you guys see looking out that would represent a downside risk to the current infrastructure demand, kind of like what we saw in 2017 where there were project delays or or engineering constraints. Is that not the case this time around?

You know, there's enough flowing through. I would expect it to be a little smoother. You've got to remember, we went back to 17. That was just a couple of states that had new highway bills. Now we've got 10 of our states that have all passed increased funding. That funding increase is $20 billion a year over 10 states where You know, the federal bill is $45 billion a year over 50 states. So this is substantial. It's big. It's widespread. And I think will there be air pockets of how fast it grows by or, you know, it'll be – I wouldn't expect it to be a smooth go up. I would expect it to always be going up over the next four or five years, though.

Awesome. I appreciate the caller. You bet.

Thank you.

Next will be Phil Ng with Jefferies.

Hey, guys. Great quarter. Thank you. It seems like some of the bottlenecks that may have held you back have started to ease a bit. I'm curious, your ability to kind of play catch-up given some of this pent-up demand. If you continuously double-digit growth like you did in the quarter, and we're not saying that's the case for the rest of the year, but if you have that type of growth trajectory, do you have enough bandwidth and inventory to kind of meet that demand?

Oh, sure. And we have the bandwidth and production capacity I mean, the capacity is built in these plants to do, you know, 300 million tons. It's just a matter of hours. But we'll handle whatever comes at us, and we have the firepower to do that. I'm not at all worried about that. In fact, I'd love to have that problem.

Okay. Sounds great. And then shifting gears to, like, California, what are you expecting in terms of how much that market grows this year? Certainly some puts and takes. We have resus showing some signs of a slowdown. and the software one key start, but public sounds quite robust with SB1. And can you remind us, what are the splits between private and public for California?

Yeah, obviously the first quarter in California was a washout, but the fundamentals in California are very strong. You've got SB1 coming on with a steadily increasing implementation. Remember, we're only a year and a half into the funding of SB1. We always tell you it takes two years to But Caltrans is actually doing a pretty good job getting work out there. We've already backlogged probably a million and a half tons of aggregates and a million tons of asphalt. And you got to remember, much of that's going to ship this year. And remember, we're the largest aggregate and asphalt producer in California. So this is right in our wheelhouse. The backlogs and booking pace would support our plan for the year. We will have a good performance in California this year. You know, time will tell if we can catch up on projected volumes in California for 19, but the work's there. The management team actually performed extremely well in a tough quarter with their costs, as I said earlier. You know, it boils down to I'm not concerned about California. If anything, I'm actually very excited about California, both the demand level on the private side and the big demand coming on the public side, our team's performance. So, We'll have a good year in California. As far as the split, I would tell you in Southern California, we are more about 50-50 like we are across the country of private versus public. In Northern California, we are – Central and Northern California, we're probably heavier on the public side than we are on the private side.

Got it. And just one last one for me. Can you talk about how trends are tracking in April and May, and how extended are your backlogs? I know one of your competitors mentioned – some of their customers and contractors that have started to reach out for work in 2020. Ray, just curious if you're seeing some of that as well. Thanks a lot.

I'm sorry, I couldn't hear the first of your questions.

Can you talk about how your trends are tracking in April and early May?

Yeah, well, Ms. Wood just kicked me under the table about me trying to talk about April and May. But I would call out the full year. I would expect our price and volume to track pretty smoothly as what we have in our guidance.

Got it. And then the backlogs, are you having conversations with customers into 2020 already, or how is that kind of shaking out?

Well, you know, some of the big work that we're bidding today will flow into 2020, but, you know, most of it's going to be shipped in 19. But, you know, when we bid work that goes out years to come, we'll put escalators in it. Got it. All right. Thanks a lot. Thank you.

And next will be Adam Thalheimer with Thompson Davis.

Morning, Adam. Good morning. Morning. Great quarter.

Thank you.

Thank you. Tom, sorry to harp on this again, but I'm just curious on the guidance, the volume guidance. With such a strong start to the year, 5% volume guidance would be kind of, I don't know, 3% each quarter for the rest of the year. Is there just some conservatism baked in on your part there?

Good. Well, I tell you what, I'd rather be ahead on the batting than behind. But you've got to remember, it's still the first quarter. And if history repeats itself, we're going to see some headwinds this year. And you saw February and March shift more like guidance. So, you know, it's a solid start. I think we were thoughtful in our guidance, and I still think we're thoughtful in our guidance. I don't – Again, it's a great start, but most years we see some storms and fires and hurricanes in there, and who knows what's going to happen this year. Hopefully not, but we'll see.

Yeah, I would just add to that. I mean, I think it's a little bit early. Yes, it was a great start to the year. As Tom said, we did have some pent-up demand coming through in January that propelled the numbers beyond the guidance. you know, we feel comfortable with where we are from a backlogs and booking pace perspective for the rest of the year, but I think only, you know, 45 days or so, 60 days or so after we gave the initial guidance that we spent a lot of time thinking about taking all of these factors into effect, it's probably a bit premature to go down the path of revising that at this point on the basis of you know, the seasonally, you know, slowest quarter of the year.

Okay, understood. And then can you give a little more color on non-res, Tom, particularly the bidding?

Sure. As we look out, you know, our non-res shipments have been strong. Our customers' outlook is very positive on non-res. The backlogs and booking pace are good. You know, in non-res, you rarely see all your markets line up at the same time as strong. So I'd call out markets that we watch out, we're watching from a non-res, and some we're excited about. The watch list would be – and this doesn't mean they're going to go down. It's just we're not quite as excited about them as we are others. The watch list would be a place like Baltimore, Nashville, Dallas – Markets where we feel very good about our non-res we're excited about would include Southern California, Atlanta, Phoenix, and North Virginia. But I think we'll continue to see strength in shipments and non-res throughout 2019. Great.

Thank you.

Thank you.

And next will be Michael with RBC Capital Markets.

Morning. Morning. Thanks for taking my questions. I wanted to first question circle back on one of the earlier questions and comments around cost quantification just on the 3% unit cost. It sounded like 1% was kind of the weather impact, so then if we look at the bulk of the remaining, I think that would translate to roughly 10-ish million in terms of headwinds from some of the maintenance and repair costs. And is that on track? And then second, how should we be thinking about unit costs through the balance of the year as you get back into seasonally stronger periods?

So that's a good question. On California, so if costs went up 3%, I would look at it this way. California was about a percent of that. And with that said, I think our folks did a good job. They just had a tough go of it. And that happens when you have that much rain. The other 2%, about a percent and a half of that would be R&M. I say R&M, repair and maintenance. We took plants down because it was not a good time to run. That's what we should have been doing. Then when the sun comes out, the season, we can run at maximum efficiencies. Then inventories was about a half a percent. Again, that was by design. You don't need to be trying to build inventories when you have operating efficiency. That's how I'd look at it. As I look through the quarter, I wouldn't see big shifts in inventories. I wouldn't expect the sunshine backside of California back running. I think that operating team is very talented, and they will do a very good job with that. Our R&M will level as the year goes along and as we start running.

Okay, so flattish in terms of unit costs for the balance of the year, and that's kind of how you get back to the 60% incrementals. Is that fair?

That's probably a little better, up a little bit than flat, but in all said, yes, you're correct. Generally flat, yes.

Okay, and then my last question, just on the mixed commentary, understand the impact of the base from a product standpoint. So if you think about the potential for a rebound in California and the mix of base to potentially move a bit lower through the year, how should we be thinking about the overall mix impact within your full year guide as it relates to the pricing?

I would expect not a big impact from mix geographically. If anything, maybe a little positive. The mix on product mix, I would expect base to continue to be pretty strong, maybe not as strong as it was in Q1. But the reason I say that is you've got a lot of new construction out there with the highway funding. And by the way, this is a good thing. This is not, but we'd go back to, I'd point you right back to guidance, which is five to seven, mix adjusting.

Great. Okay. Thank you.

And next will be Trey Grooms with Stevens.

Good morning, Trey. Good morning. Hey, good morning, Tom and Suzanne. So I guess first off, you mentioned you're seeing kind of an accelerated or accelerating transition from lettings to actually seeing aggregate shipments. Tom, what, in your opinion, what's driving this and is it sustainable as we, you know, kind of start moving into the busier time here? You know, as we look at the backlog that you have, as we look at the states, you know, that you're in and the increase in funding, is this, I guess, shorter lag between a lettings and when you guys see work? Is that sustainable or do you see that kind of stretching out again?

I think what I see is this is sustainable. In fact, I think it is going to compound that growth rate over time as funding within a state matures and then as funding between each state comes online. So I would expect it to be stronger over time. You're seeing it in our backlogs. You're seeing it in the highway lettings. You're seeing it in the state's highways budgets. And the bottom line of this is the maturing of the DOTs into their funding. And as we said, it takes two years, and then it ramps up over time.

Yeah, I think Tom's exactly right on that. I mean, this is just a natural progression. It takes about two years, and so you're beginning to see come through now, you know, some of which we had hoped would have come through last year. But it just takes longer when the projects are initially beginning to ramp up.

Got it. All right. And then you mentioned January benefiting from some pent-up demand. Was that more kind of the catch-up you're talking about here, or was that just weather-related things that didn't happen last year that kind of pushed into January and there was a catch-up period and now we're back to normal?

I think, well, the overall growth is what we're talking about. The bubble, so to speak, in January was work that flowed through from 2018.

Okay. And so California weather likely created some level of pent-up demand. How should we think about that flow through? And then also, you mentioned Virginia weather impacting ready mix. Did that impact aggregate shipments as well? And is there any pent-up, I guess, shipments there? I'll take Virginia first.

The The cold, wet weather is going to impact ready-mix concrete worse than it is rock. We actually shipped a lot of base. Agri-shipments in Virginia were actually up in spite of the weather, but it was more based in clean stone. That, again, is very typical for a cold, wet quarter. We also did more vertical work last year in ready-mix. We had more flat work this year. Also, the flat work is more weather-sensitive. Not worried about Virginia. In fact, Virginia will have a very good year. It had a great start with aggregates, but the ready mix, our backlogs are there, and it will perform. On California, I think it's this. Again, the booking pace and backlogs in California, both from a volume and a price perspective, is excellent. Same thing with our asphalt, with growing prices in asphalt. We'll have a very good year in California. The timing of this with such a quarter increase I can't predict yet. Hopefully, we'll get it all done. Our customers want that to happen when the sun's shining. They're shipping and they're busy, but it's really a matter of do you have enough days and the timing of those projects. But again, that's a matter of timing. California's going to have a good year. It's a matter of whether it's a good year or a great year, but it'll be solid. And if we don't do it in 2019, we'll do it in 2020.

Got it. Thanks for taking my questions, and congrats to you and the team on a good quarter. Thank you.

Thank you. And next will be Garrick Smoltz with Longbow Research.

Hey, this is Jeff Stevenson on for Garrick. Oh, hi, Jeff. Hey, how are you? Good. Yeah, my first question was just a follow-up on California. I was just wondering if you could provide any more color on contractor labor and other capacity issues that might impact demand from getting work through this year.

Yeah, well, labor is an issue not just in California, everywhere, and not so much for us. I mean, we have pressures on labor, but we can get it done. It's really our customers. I think that highway demand growing faster is more labor efficient. So that will actually help us, but everybody has pressures on labor. But it really affects, and I think back it up to the highway. Our contractor customers, the highway piece of this, have done a good job building labor forces with the visibility to the work coming. But it will be a constraint, and that's just a piece of the question mark of can we get all the work done in 19. Again, it's a timing issue. So labor is an issue, but we'll ship past it, I think.

Okay, great. And then you'd expect that asphalt to make up most of the gross profit improvement in the downstream businesses. And I'm just wondering if this is tracking in line with your expectations, giving liquid asphalt costs have held up more than expected.

Yeah, the Porter was actually right in line with our expectations. Prices in hot mix were up 5%, but liquid costs were up $100 a ton for liquid. So liquid costs us in the quarter about $9 million. Now, that's first quarter or first quarter. If you look back to the fourth quarter, liquid, as predicted, is pretty much leveled out. And our backlogs and our booking pricing on future work for HotMix, it continues to escalate. So we'll catch this up. It'll be a ramp up throughout the year. But I think we're good with our plan. I have confidence in our plan. And, you know, the big ramp up in highway demand is very, very important for that asphalt product line because that's what most of the paving is.

And I would just add to that in terms of asphalt, when you think about the guidance that we gave for the year back in February, we said that a majority of the improvement in gross profit would come from increased volume. And based on our backlogs and booking paces, as Tom mentioned, said we feel pretty comfortable with that right now. And the other point I would make is that, particularly with respect to the first quarter, remember, in California, that is an extremely big asphalt business for us. And so, no doubt, while we were pretty much on track with what we expected in first quarter from an asphalt perspective, You know, California, you know, if it hadn't been raining out there virtually every single day, that would have certainly been helpful as well. So we can look forward to that as the sun begins to shine a bit more. Okay, great. Thank you.

You're welcome.

And next will be Adrian Heath with J.P. Morgan.

Good morning.

Hi.

Good morning, Adrian.

Hi. Good morning, Tom and Susan. Thank you for taking my question. Just two questions. One is, in what percentage of your territories you had the price increases in January and what percentage was in April? And the second question is, you did not have much M&A activity in the quarter. Should we expect lower M&A activity this year, probably on higher valuations than what we had last year? Thanks.

As far as pricing was concerned, it was pretty consistent through the quarter as to how the quarter turned out, and that was as we predicted for the fourth quarter call. So it was – and I would expect that throughout the year. As far as M&A, we're always working on a few of these. That's happening today. It's always – it's hard to predict what's going to happen in M&A as the sellers decide when they want to sell, and we don't have a lot of control over that. I think what I look for for us in M&A is, and I've said this a lot, is discipline. Be disciplined about what you're going to buy and be disciplined about those synergies that are unique to us. Try not to pay for those. Make sure you don't overpay. Pressure test the project. And then once you get it, make sure you integrate it quickly and accurately.

That's right. And I would also add to that from the M&A perspective. If you look back to the amount of spend we've had, in M&A over the past, you know, 12 to 18 months, you know, it has been, you know, pretty sizable for us. And so I think, you know, whether there is a deal out there to be done or not, I think having, you know, a relatively quiet quarter to make sure, as Tom said, those are, you know, bedded in and we stay very focused on making sure we get off to a really good start in the aggregates business is probably the most important thing for us to have done in the first quarter.

I understand, Tom and Suzanne. And you mentioned that you're opening three, I think you said three quarries and one in California. And what are the chances that we could see even more quarries being opened this year?

I think that, you know, that quarry took about 10 or 15 years in development. It took a lot of work for our local folks. It is extremely hard to open a quarry anywhere, much less California.

And how big is going to be this quarry in California?

It's a mid-range quarry, but I don't think we want to be public about that at this point. Thank you, Tom. Thank you.

Next will be Lee Nolley with SunTrust.

Hi, thanks for taking my question. Good morning. Good morning. So just real quick, in the past you guys have discussed leveraged The target is two to two and a half times. I think you confirmed that last quarter. But prior to that, there's also this target of 1.5 times at the cycle peak. I'm just wondering, can you give your kind of updated thoughts around how you plan to manage leverage through the cycle? And is that 1.5 times target still out there?

No, our target range is two to two and a half times through the cycle. And we are comfortable with that. We think that's an appropriate target. leverage range. It gives us the flexibility and stability we need to manage through the cycle. Because remember, in the downturn, we will be, even though EBITDA may fall a bit from fewer shipments, we'll be very cash generative because we'll basically be spending virtually nothing on growth capex. And if we go into the cycle as we plan to with our our fleet pretty young, then we will not have to spend very much at all on, you know, from an operating and maintenance side as well. So that cash profile that's a little countercyclical to profit gives you some cushion as well. We like to be flexible in what we do. We're comfortable with the two to two and a half times. But, you know, certainly, you know, if we were you know, in the middle of the cycle and felt it was appropriate to reduce the leverage range further, you know, that is certainly within our remit to do. But, you know, when you think about our business model, we're pretty comfortable at the two to two and a half times. We'd certainly like to be toward the lower end or at the lower end of that range as you're entering the downturn.

Thanks. All that makes a lot of sense. Thanks for the clarification. Sure.

And that does conclude the question and answer session. I'll now turn the conference back over to Mr. Tom Hill for any additional or closing remarks.

Again, thank you for your time today, and thank you for your interest in Vulcan materials. We look forward to talking to you throughout the quarter. Have a good day.

Thank you.

Thank you. That does conclude today's conference. We do thank you for your participation. Have a wonderful day.