Vulcan Materials Company

Good morning ladies and gentlemen and welcome to the Vulcan Materials Company's second quarter earnings conference call. My name is John 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 will turn the call over to your next Mr. Mark Warren, Vice President of Investor Relations for Vulcan Materials. Mr. Warren you may begin.

Good morning and thank you for joining our second 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'd 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 home page of the website. Additionally a recording of this call will be available for replay at our website later today. Please be reminded that comments regarding the company's results and projections may include board-looking statements which are subject to risks and uncertainties. These risk 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. Finally 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 our supplemental presentation. Now I'd like to turn the call over to Tom.

Thank you Mark and thanks to everyone for joining our call today. We truly appreciate your interest in Vulcan Materials. Our second quarter results reflected our continued strong performance. A 15% improvement in adjusted EBITDA and 11% improvement in aggregate gross profit per ton. We are relentlessly focused on unit margin. It is one of our most important metrics and it increased in the second quarter by 58 cents to $5.74 per ton. On a trailing 12-month basis our aggregate gross profit per ton has increased at a 12% compounded annual growth rate from the second quarter of 2013. We remain on track to achieve our full year EBITDA expectations. Our overall results for the first half of the year and the trajectory of the principal drivers of profitability in our aggregate business volume, price and cost were in line with our expectations. I'll spend a few minutes giving you some highlights of our performance in these areas. Aggregate shipments in the quarter increased by 4% -over-year or 3% on a same store basis. This growth in volume reflects the solid underlying fundamentals in our markets. Shipments in our southeast and mid- Atlantic markets were particularly strong. California experienced another wet quarter but despite this shipments increased compared to the same period last year. Wet weather also affected shipments in Illinois, Tennessee and Texas. The second driver of our profitability is price and we perform well here also. Freight adjusted average sales price improved by .9% compared to the same quarter last year. On a mix adjusted basis the increase was 5.4%. The 50 basis point difference was due to favorable geographic mix. These increases were in line with our expectation and the pricing gains were widespread. Every key market across our footprint posted improved pricing. Our third key profitability driver centers on our cost disciplines and our operational efficiencies. Our management teams and our leaders across the company are keenly focused on this and are making good progress. We measure our operational efficiencies in a number of ways but one key financial metric for aggregate is the same store gross profit flow through. On a trailing 12-month basis it was 65% at the end of June. Our operational execution at the plant level keeps improving and it's rewarding to see that the hard work of our men and women at Vulcan is translating into strong incremental earnings. We will continue to focus on these disciplines because they are a significant contributor to the quality of our earnings and our ability to compound our unit margins. As we look to the second half of the year the overall view of our markets is generally unchanged. Shipments into private construction in markets are good. On the public side demand is healthy and continues to strengthen with the increases in state and local highway funding being converted into backlogs and shipments. We believe that we are in the early stages of a longer-term growth in highway demand which is a function of increased state and local investment in infrastructure. Since our last call another Vulcan state Illinois has passed legislation to increase revenues for roads. Since 2013 11 states that make up 85% of our revenue have increased fuel taxes or increased other ongoing sources of revenue for highways. This supports our positive highway demand outlook and the improved visibility underpins improving pricing. In summary our backlogs are good and our geographic footprint and capabilities put us in a position to take advantage of market opportunities. Now I'll turn the call over to Suzanne for some additional comments on the results. Suzanne.

Thanks and good morning to everyone. As Tom mentioned our trailing 12-month same store incremental aggregate flow through rate of 65% was quite good. While price is certainly an important driver of this metric I also want to touch on the impact of our operating cost performance. Operating disciplines, accountability and cost management significantly benefited our results again this quarter. Our same store unit cost of sales increased by less than 2% as compared to the prior year's quarter. The largest single component of this increase related to greater stripping activity which is a function of anticipated future shipments. This accounted for about 40% of the higher costs and for information the effect of diesel fuel costs was minor in the quarter. Our second quarter SAG cost increased mainly due to compensation related expense including incentives that are tied to earnings expectations and the share price. Our incentive plans are designed to reward our people for good execution and improved earnings both of which we have experienced. We also made investments in people and processes to accelerate the benefits derived from our sales and operational initiatives. Our trailing 12-month SAG expense as a percentage of revenues declined this year and we will continue to focus on further leveraging our SAG costs. I'll briefly touch on our non-aggregate segments. Asphalt growth profit was $28 million, an increase of $2 million as compared to the prior year. Shipments increased by 8% or 5% on a same store basis due to large projects in the Arizona market. While the -over-year shipment growth was good, it was less than we expected due to the adverse effects of weather on California and Texas volumes. Asphalt pricing in the quarter rose by 8%. This was partially offset by liquid asphalt unit costs which were 16% higher this quarter compared to second quarter last year. Our concrete gross profit was in line with Q2 last year with higher prices offsetting reduced volumes. Turning now to the balance sheet, little has changed from first quarter except that our net debt to EBITDA leverage ratio declined to 2.4 times within our target range. The average maturity of our debt is 15 years and our weighted average interest rate is 4.5%. Our leverage position and debt structure provide us with significant flexibility as we continue to grow our business. On page 8 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 be $815 million. While there were no share repurchases and no M&A during the quarter, these remain important parts of our capital allocation priorities. For the full year, we reiterate our expectation of spending approximately $250 million on operating and maintenance capex and approximately $200 million on internal growth projects. And now before I turn it back over to Tom, I'll take this opportunity to reaffirm our 2019 adjusted EBITDA guidance of between $1.25 billion and $1.33 billion. We tried to be thoughtful when we gave our initial 2019 annual guidance in February, and we have performed consistent with those expectations through the first half of the year. We believe we are well positioned to continue this execution in the second half of the year. We are mindful, however, of the storm-related challenges that can characterize the third quarter, and therefore, we remain comfortable with our initial guidance range and with finishing the year in the middle of that range. And now I'll turn the call back over to Tom for some closing remarks.

Thanks, Suzanne. I'm very proud of how our people have performed so far this year, and I want to take this opportunity to thank the men and women of Vulcan, especially our operations and sales teams for taking care of our customers, holding each other to a high standard of operational excellence, and delivering on our financial results as promised. Our financial performance is important, but safety is always our number one priority. Our safety culture is strong, and our safety metrics are industry-leading. It is critically important and remains our number one priority to send our employees home safely every day. As we move forward, we will continue to capitalize on our outstanding geographic footprint, execute at the local level, take advantage of market opportunities, and continue growing our aggregate unit margin. Now we'll be happy to take your questions.

Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speak phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We will take our first question from Stanley Elliott of Stifle. Please go ahead. Your line is open.

Morning, Stanley. Hey, good morning. How are you all doing? Good. Congratulations on the quarter. Could you guys talk high level, kind of what you're seeing regionally? You know, certainly nice quarter here, particularly with the weather issues.

I think just from a high level, if you look at how each geographic area is performing, I'll start in the East. Mid-Atlantic states describe the private demand slow and steady. Public highway demand is very good. Importantly, we're seeing robust pricing and margin growth in the Mid-Atlantic states in 2019. Moving to the Southeastern United States, the Southeast states are really performing strong in the vast majority of those markets. I think the private side, we see growth, a little bit of a watch in a couple of areas, Nashville and Miami. Nashville is, the private side is still growing, but it's just long in the tooth. Miami, we're seeing a little bit of shrinkage on the private side. The rest of the Southeast states, very good private. Healthy demand from highways, so good volume. We're seeing really good margin expansion in this area, driven by good pricing and also responsible operations, cost management. Remember, this is, we're by far the largest in the Southeast United States, largest producer. An encouraging area, Illinois. This is a market that's actually, we're starting to see it turn. We're now seeing pick up in private demand driven by airport and tollway work. We just saw Illinois pass a highway bill, which we're thrilled with, so more demand coming on the public side. Non-res is growing, res is now improving, prices are improving. This is really good news for Illinois, which has struggled for the last five or six years. It is also good news because this is a really well run business and with these volumes coming on, we're able to leverage that performance. Moving over to Texas, DFW slash North Texas, very healthy public growth. Slower on the private side, probably some concerns on res and non-res. A little bit slower pricing in North Texas. South Texas, we see public demand is actually really hot. The private side, I'd say a mixed bag, res okay. Non-res, a little bit slower, but okay. Price is very healthy. Coastal Texas, this is a very strong market, both on public and private, very good pricing and margin expansion in coastal Texas. We've not seen anything really substantial out of the energy sector. It'll be exciting for 2021, 22. Moving over to California, this is despite wet weather, an exciting market for us, solid public growth, particularly in central and... And, excuse me, solid private work, particularly in central and southern California. The bay has gotten pricey on the private side, so maybe a watch for us there, but our focus there has been highways. Public side is growing and growing fast and accelerating. We've got big backlogs growing, highway lettings. Pricing in California has been very good, is very good. We see high single digit this year and we've seen very good cost control in spite of bad weather in California, so substantial margin growth. Everybody's concerned about California. I particularly am not. In fact, I'm really thrilled with our performance in spite of wet weather.

Yeah, and I just add one thing to that. I think in first quarter, you will remember us saying in terms of pricing that the pricing gains were very widespread across the country with all the markets, our key markets up in pricing year over year, say one, which was Illinois at the time and it was winter, so that wasn't of a particular concern to us. In the second quarter, Illinois has joined the rest of our key markets and each of those key markets had pricing that exceeded second quarter last year, so we thought that was a very positive sign as well.

Perfect. And then last for me on the cost environment, are you seeing anything in the second half of the year, be it labor, whatever it would be that would be paused for concern in terms of what's gonna happen on the pricing environment and then kind of as a corollary to that, you've done a nice job of putting a lot of growth capex and cost reduction at the corollary level and at the distribution level. Help us with that in terms of how we think about managing that cost structure going forward.

Yeah, I think you saw a very good performance in cost in the second quarter. Our total cost of sales was up 2% in spite of wet weather through a number of our states, which really eats up operating efficiency, so we overcame that. The biggest driver, the increase, as you heard Suzanne say in the second quarter, was stripping in anticipation of sales volume growth, so I'll take that problem all the time. We saw good improvements in operating efficiencies in the things that drive our costs. Our folks are very focused on this, more to come. I can't tell you how focused our operators are on improving their operating efficiencies that really drive the cost, and based on our performance in Q2, they're winning. This is so important, as you know, because it's a big driver of those unit margins and being able to take that incremental revenue to the bottom line. As I would describe, the rest of the year, more to come, and I would expect us to keep improving our operating efficiencies.

Perfect. Thank you very much. Congratulations and best of luck.

Thank you. Thank you. We will take our next question from Jerry Rivek of Goldman Sachs. Please go ahead. Your line is open.

Morning, Jerry.

Hi, Jerry.

Hi, Tom. Suzanne, Mark, how are you? Good. Good. Can you talk about the pricing cadence on the SPARP market heading into the back half of the year now that we have six months in the books? I'm wondering if the high end of your initial pricing guidance is still achievable or if there are mixed factors we should keep in mind as well.

We talk a lot about price. I think that remember that most of the FixWorth plant was priced in January and February. We did see some successes in mid-year price increases to fix plants in a number of markets, Virginia, Alabama, some of the Gulf Coast, Arizona. The other 60% of our work is bid work, and we're bidding it as we speak. We always tell you that that's not a spot market price increase, that's a campaign over time. We feel good about what we see in our backlogs and our booking pace. We think those prices will move up through the balance of the year as we bid, and all of that's driven by confidence and visibility into a growing market, particularly the very visible and very fast growing public market and highways. So I think as you look at, as we step back, and Suzanne, look at our booking pace and how our pricing is going and the pricing in our backlogs, we're very comfortable that the balances of the year price increases will be in line with guidance.

And in terms of, is there any potential to get to the high end of guidance? So to get to the high end, you'd have to put up pricing north of 8%. It sounds like we're probably gravitating towards the midpoint of the guidance, which implies pricing closer to, call it .5% in the back half compared to that. I would tell you, I would

shoot more towards the middle of the range of guidance for us. So I think that's a realistic and very achievable goal.

Okay. And then to shift gears for asphalt, in the past, you folks have gotten that business to be in the mid to high teens from a gross margin standpoint. And I'm wondering, is there anything structurally different in this cycle compared to the past? Because when we're looking at 8% gross margins in a business that has about 8% S&A to sales, that's not a fantastic profit contribution even with the great flow through that you're getting in aggregate. So I'm wondering, is there something structurally different in asphalt makes this cycle versus the past? Or when can we get back to those teens type gross margins?

Well, I think the simple answer is no, there's nothing structurally changed in asphalt. This is a function of liquid pricing and cost. And I think you're seeing a turn there. Overall, we're seeing profitability in the asphalt product line improving both in volume and unit profitability. You saw that in Q2 with volumes up 8%. And that was... Those volumes were up in spite of wet weather in Tennessee, Texas, and California, where some of our biggest liquid costs were up $11 million. However, gross profit per ton was flat. This stopped a six quarter run of shrinking unit margin in asphalt due to liquid prices spiking. That leveled off, as you remember, from kind of fourth quarter to first quarter. And it's been pretty much flat through the first half. Looking ahead, I would expect unit margins to be on the rise as asphalt prices are rising and liquid prices have stabilized. If you step back and look at the full year, I would maybe expect us to end up a little on the lower end of guidance in asphalt, and that's really a function of wet weather in the first half of the year. We just had so much rain in Tennessee, Texas, and California that we don't know that we'll have enough shipping days to get the volume we expected before the end of the year. Now, that being said, our backlogs are very good. Our leadings are growing and the unit margins are growing. So between rising unit margins, big backlogs, a dramatic increase in highway funding and leadings in Vulcan states, this product line has a very bright future.

And I would add to that that with respect to the guidance for the remainder of the year, Tom's right, we're just being a bit cautious in evaluating the number of shipping days we have left and the ability of our contractors to perform all of that work in a very compressed timeframe. If you go back to the guidance we gave at the beginning of the year for the non-aggregate segment, which is asphalt as well as concrete and calcium, we said that we expected that to grow year over year, the gross profit, by 15 to 20%. We now think that that gross profit year over year growth will probably be toward the lower end of that at about 15%. Again, being a little bit cautious on that. And I think that in terms of consensus, most of the consensus is at about 15% anyway. Okay, I appreciate the discussion. Thank you.

Thank you.

We will take our next question from Scott Shrier of Citi. Please go ahead. Your line is open.

Morning, Scott. Good morning.

Hi, good morning, everyone. So, last 12 months, you had 65% incremental margins. They're over your company norms and your target levels. It looks like you have good cost control, you have volumes to support the fixed cost absorption, pricing in the mid single digit range. You got your stripping out of the way this quarter. Is it possible to maintain a 65% run rate given the compounding profitability characteristics of aggregates? I'm not asking you to commit to it. Of course, taking into account all your comments on guidance, but I'm curious what would be needed and is it possible to sustain an elevated level of profitability?

I think we... First of all, let me... If I misspoke on stripping, I didn't mean to. The stripping is not out of the way. That will continue through the year because of demand and what we see coming, particularly with the highway demand. So, stripping costs will stay up for a while and I would expect them to stay up. I know they'll stay up for at least the next six months. Again, that's a good thing because it's anticipating big volume growth driven by public demand. I think... We hate to sound like a broken record, but we're gonna take you always back to 60. Not that good things can't line up in a row for a while to get you above 60, but we point out while you have a lot of tailwinds, this sport's played outside. There's a lot of things that can happen and offset just the tailwinds. You're not gonna have them. You're gonna get some things that are going to challenge you along with the good stuff. So, just from experience, can you have a period at above 60? Yes. Can you have a period below 60? Yes, but I think we'd always bring you back to 60.

Got it. Understood. And then I wanted to ask another one on the cost side of things and your cost containment. And I'm curious if you could speak to some of the efficiencies or profitability you're seeing in some of the long haul markets, either through your vessels in Kintana Roo or the rail networks. And also a little more on that. We've been hearing about some moderation in transportation costs, and I'm wondering if there's some puts and takes there. One of the things that we've heard or you've spoken about in the past is higher transportation costs generally enhance the economic moat of the aggregate's business, but is there the potential that moderating costs could actually potentially open up some more competition and pressure pricing? Thank you.

I think, first of all, the cost I'm referring to as our actual operating costs, not transportation, it's actually the cost to produce and sell rock, taking the logistics, taking most of the logistics out of that. So I'm really referring to our total cost of sales to produce stone, ex transportation. Going to your transportation question, we're seeing rising costs for long haul transportation, particularly by rail. As you know, and this is a spike, but it's real this year, the Mississippi River and the river transportation costs have been delayed and higher due to flooding. So I would tell you that particularly long haul transportation, we continue to see it escalate, not go down or no level off. It's actually going up at a pretty

good pop. Got it. Great. Thank you.

We will now take our next question from Katherine Thompson of Thompson Research Group. Please go ahead, your line is open. Good morning, Katherine.

Good morning. Hi, thanks for taking my questions today. I'm first really just more on the policy related with Illinois and also following up on SB1 and Prop 7, but with Illinois, could you give, just given the increased funding, give more color in terms of what end markets you primarily serve in Illinois today and what has it looked back historically when there was actual funding for infrastructure and shifting for SB1 and Prop 7. Are you seeing the full impact of those two initiatives or do you believe that funding and lettings will continue to grow? Thank you.

Illinois, we really service the full market and we're not focused on private, particularly the private or the public and we service non-res, res, public and highways. It's nice to see Illinois turn. That highway funding will take a while to flow through as it does in every state. However, particularly in Illinois, we think we'll get bridged because there is substantial tollway and airport funding, which is very close to one of our largest quarries up there, but Illinois doubled their gas tax from 19 cents to 38 cents. It is firewalled. It will take... That will actually double the capital expenditures in Illinois for highways over a six year time frame. And as I said, we're starting to see res and non-res turn. I think what's thrilling to us, this is a very well managed business for us. So as I said earlier, this is exciting because we are improving unit margins regardless of... We've been improving unit margins in Illinois despite challenges for volume. This volume growth will really put the turbos to that and so we'll enjoy that. As far as highway spending is concerned, kind of across the country, we're excited about it and I'll run through eight or nine of those if you'll allow me. Florida highway lettings in 2020 will be up 25%. Georgia highway lettings will double in fiscal year 2020. We expect highway lettings in Texas to be up 25%. VDOT and regional authorities should be up 20%. South Carolina up 10%. Tennessee revenues have doubled. Excuse me, up 40% since the improve act passed. California is very exciting. We've seen since SB1 through fiscal year 2017-18, we have seen lettings double. They will be up another billion dollars in fiscal year 20 which just started. So to your point, highway lettings are very good and dramatically improving over the next 12 months.

Okay, very helpful. And then shifting to the residential and market, where are you seeing areas of strength, weakness and what's the cadence of growth you're seeing for your major markets? Thank you.

Thank you. Starting in the West, REZ in California is good. A watch for us would be San Francisco which has gotten pricey. Moving to Arizona, REZ is quite strong, non-REZ and REZ. The private side. In Texas, probably a watch in DFW where Houston is strong. The Southeast, the private market is quite good across the vast majority of the markets. The watch for us would be residential in Nashville which is, we're growing to residential. We're watching it because it's been there a long time and it's been very hot a long time. Miami, a little bit different story. Probably some contraction in the private side in Miami. In the mid-Atlantic, I would describe the private side as steady, slow growth.

Yeah, Catherine, and I would just add to that that, again, looking at our geography, our footprint and the markets we serve, the fundamentals continue to be in place. You've heard us mention those a number of times. Good population growth, good employment growth with respect to REZ, still relatively speaking, a low level of houses. We're certainly not back anywhere close to peak starts. Then with the interest rate environment and the Fed signaling that it is, while things can always change, it's relatively unlikely that we're going to have a rate rise in the next little bit. Those are fundamentals we watch all the time that are generally moving in a positive direction. Thank you very

much. We will now take our next question from

Rohith Seth of SunTrust. Please go ahead. Your line is open.

Hello, Rowan. Hey, how are you doing? My question on the energy projects, you touched on that a little bit in the prepared remarks, but can you just talk a little bit about the opportunity set and what you're seeing there?

Yeah, we are following about a dozen projects that are multi-year, multi-million ton projects that are at different stages in the pipeline. All of them are different stages. The vast majority of this work will ship between 2020 and 2023. So we're not there yet. There's a little bit shipping around the fringes of a few of those. So we're trying to help those folks get numbers and get those projects ready and get them started. Remember that with our blue water capacity, it gives us an edge here with these projects. They'll be exciting. We're working on them. But I wouldn't expect them to start impacting us until sometime mid-year 2020.

Okay. And then I just want to talk about your backlog. You guys used to put a slide together in your deck, showed the highway backlog. Would you characterize that as moving up, down, or kind of stable?

I would describe highway work dramatically moving up, and that will continue to escalate over the next five to seven years. Okay. Thank you. That's all I got. Thank you.

Thank

you.

We will take our next question from Trey Grues of Stevens. Please go ahead. Your line is open. Morning, Trey. Good

morning. Hey, good morning, everyone. First, we'll be on just, I guess, some housekeeping here on the mixed benefit that you guys realized in the quarter on price. Was that more of a product-related mixed benefit, or was there a geographic benefit there, and then any expected mix impacted in the third quarter?

Yeah, the 50 basis points was geographic mix.

Okay. Yeah, as far as the second half mix, I wouldn't expect there'll always be some kind of mix with geography and a little bit of product, but I wouldn't expect it to be dramatic in the second half of the year.

Okay. Fair enough. Thank you. And then you also, you mentioned the stripping cost, and of course, that can happen from one quarter to the next. And I think you said that it's going to be ongoing. And then also with freight costs, you said, still going up for you guys on the longer haul stuff. But as we look at the increase in cogs that we saw in the quarter, I think it was the 2%, is that a similar kind of rate that we should be thinking about as we look in the back half when we're looking at these costs?

I would tell you that the short answer to your question is yes. I think that our folks are doing a good job, as I said earlier, executing on those operating disciplines that drive cost and the efficiency with that. I think it's important in this that you take that cost and take it to unit margins. We saw unit margins in the second quarter up 11% to $5.74. We've now put together three quarters in a row with double digit unit margin improvement, and that is a combination of solid pricing but very good operating execution. And it's not about spending money. It's really about the execution of the operating disciplines that drive costs. So you heard me thank our folks and the men and women of Auckland that drive those unit margins. I'd like to do that again because they're now consistently turning in double digit improvements and gross profit per ton. So I would expect us to continue our operating disciplines and the costs to follow.

Yeah, I know that operating execution has really been a focus for you guys. Congrats on the good results there. Last one for me is just on, of course, the Illinois market you mentioned in Texas and Tennessee saw delays. But to Suzanne's point earlier on, I think we were talking about ready to mix, but there's only so many hours in a day and so many days in a quarter and in a year. So as we're kind of looking at the delays that we saw in some of these markets for you guys, I know the underlying demand is there. That's pretty clear. But how do we think about the opportunity to kind of execute or realize on some of this maybe pent up demand that might be there?

Yeah, so you're right. You're exactly right. There is only half the year left or less than half the year left now. We also have some bottlenecks with transportation. I think the underlying demand is there. That demand is not going away. So whatever we don't ship in 19, we will ship in 20. You saw the perfect example. That's in January of this year when that were pent up and shipped in January. So it'll really be a function to some degree of weather and timing on some large projects. I think if you don't mind, I'll stop and step back and kind of let you know how we look at the second half of the year. As you heard Suzanne say, we are very comfortable with our guidance. I think we tried to be thoughtful when we gave you guidance in February. We said the upper end would be good weather and jobs starting on time. The lower end would be implement weather and jobs delayed. As you look at us giving guidance, staying in that guidance range for the balance of the year, I think what we want to do is be prudent about weather and timing on jobs. We had a really good start to the year with January extremely strong with that flow through of work from 18 pushing back. The rest of the year shipments, the other months has actually been at the high end of our guidance, ex-January. But now we need to remember that the third quarter is our most volatile quarter. It is the peak of the construction season. At the same time, it's also the heart of the storm season. We've already experienced one storm and luckily didn't clip us too bad. So we're just trying to be realistic and transparent about threats in the middle of peak of construction season. If you move to pricing, our pricing has consistently through the year been in line with guidance. We would expect that to continue for the rest of the year. And our look at that is solidly in our guidance. As we talked about our operating disciplines, we have executed well and created cost savings. All of that has driven double unit margin growth for the first half of the year. We would expect that to continue for the balance of the year. So I would think we'd be on the high side of aggregate volume guidance. Moving to asphalt, asphalt work was delayed. As we talked about, it was delayed in the first half because of rain in Tennessee, California, and Texas. Those are three of our biggest asphalt states. So in spite of very big backlogs and growing lettings and growing unit margins, some of that work may get pushed back just because of what we talked about the number of times. As Suzanne mentioned, a bit extra cost in incentives and investment in unit margin on SAG. So I would expect the year to play out this way. A bit stronger on aggregate earnings, a bit lower on asphalt earnings. You put all that together, I would tell you that Suzanne and I are confident in the year in the middle of our guidance range.

Thanks a lot.

We will now take our next question from Garak Schmois of Longbow Research.

Oh, hi, thanks. And thanks for all the detail on the guidance. You kind of answered a lot of my questions there. But I wanted to ask, your backlogs are very strong. You've got a stronger outlook across your geographies. And I know we're not talking formally about 2020 yet, but if you look out over the next 12 to 18 months, what would be the limiting factor outside of, say, weather to drive volume growth as you see it? It just sounds like your visibility has gotten better. So is there certain capacity constraints in the market that would limit your ability to continue to grow, call it this low to -single-digit volume clip, or anything else out there that could be an inhibiting factor for you?

I don't think I see inhibiting factors that would limit low to -single-volume growth. I think that's achievable. I think when you get above that, it gets tougher because of things like transportation and labor for our customers, not for us, but for our customers. You also are seeing maturity of a lot of highway dollars. And mixed in that are bigger and bigger, more complex jobs, the timing of which can be all over the place. We've had a few jobs delayed even this year with some big highway work, and still we're shipping well within the top end of our range of guidance. To answer your question, I don't see it for the numbers that you say. Now, if you want to get to -single-digit, yeah, you start to get compressed with labor and transportation and just our customers' capacity.

Okay, thanks. And I just want to ask, just on -N-A, just given the bump due to the performance compensation in the quarter, how should we think about -N-A costs through the balance of the year?

Yeah, it's a good question. We had initially guided back at the start of the year to around $355-ish million. We now expect that number to be somewhere between $360 million, $365 million. Obviously, we will continue to look for ways to leverage that, but year over year, that will put our -N-A expenses or our -A-G expenses, I should say, as a percentage of revenues basically in line with where they were last year, tick below. And it's important that we made some of the investments we did because, again, we are on a very serious course here to improve our unit margins. We have a number of operational initiatives underway, and so I think making investments there to help further those initiatives and hopefully deliver results a bit quicker are good investments to make. Hopefully, that updated guide is helpful. I think the consensus on -A-G expenses for the full year is about $360 million, so pretty much in line with that.

Okay, thanks. I just want to ask just one more question just on pricing. Are you seeing any markets? I know you don't like to formally talk about mid-gear price increases because you're continuously evaluating pricing on a -by-job basis, but are there any markets that are structurally just given the demand strength coming in maybe towards a higher-end guidance that are tighter on supply and in turn fundamentally seeing a more attractive supply-demand environment in terms of potentially better pricing environment?

I think there's a few markets where certain sizes are tight and there's pricing opportunity, but I think the big driver on pricing is the visibility on demand that's coming and the people's confidence that they have worked and they can take risk on to perform pricing and profitability, and I think that's pretty broad spread, and it's followed a lot of it's followed the increases in state and local funding as we talked about in all the states that drive the majority of our revenues. So while that's out there, I think the big driver is more fundamental and more ingrained, which is a good thing because it means it's more long-term. Great, thanks for the help. Thank you.

We will now take our next question from Phil Engie of Jefferies. Please go ahead, your line is open. Good morning. Good morning.

Nice to see the acceleration in pricing this year in aggregate. Backlogs sound quite strong. Impression here is some bottlenecks on the shipment side. Is this level of momentum on growth on pricing sustainable for the next few years?

Short answer is I think the answer is yes, and the reason I have confidence in that is because of the long-term substantially growing funding on the public side and highways and how visible that is and how sure that is. And so you put those, you pick that it's growing, that it's very visible and that it is sure and protected, gives people confidence throughout the construction sector that they can take risk on price. Got it.

And just on that note, appreciating that most of the highway funding has been driven more at the state level, but with funding for the highway trust fund expected to wind down next year, what are some of the milestones that you are looking at from a timing perspective before you think if nothing gets done, you could see some of these projects push out or stall a little bit?

Well, first of all, I don't see the demand stalling because of the federal funding. If you take, let's step back and look at federal funding first and then we'll go into the total highway demand. The House and the Senate are working on a highway bill. Our policymakers and key committees are working on the reauthorization package now. Recently, the Senate Environmental Public Works Committee is right now working on a bill which would increase funding by 28%. We'll see what happens with that. And funding is a big part of the ongoing conversation. But that being said about the highway bill reauthorization, you got to remember two really important facts when it comes down to highway demand. Number one, the feds are not going to let highway funding go down even if the FAST Act expires. They'll make extensions and keep funding there regardless. Number two, our states and local governments are extremely well funding. So funding in Vulcan states is up 60%. That's an increase of over $20 billion per year in 11 states. Now remember, put that in perspective, that's 20 billion in 11 states versus a federal bill which is 45 billion over 50 states. And that funding is really starting to flow through. We're starting to ship on it and you're seeing the lettings grow. So highway demand will grow, absolutely grow, over the next five to seven years.

Got it. And I would just also add to that that, historically, at times in the past when it was time for a federal bill to be renewed, states have operated in this federal bill extension mode so they understand how to do that and are comfortable with doing that. And I think the other point I would make is that if you divide the highway spending among federal, state, and local levels, it's about a third, a third, a third. So that's why we keep talking a lot about this state funding and local funding and the importance of it because that represents about two-thirds of the spending.

Got it. That's a really helpful color, guys. And just one last one for me and a question for you, Suzanne. Based on the outlook the next few years from a gross standpoint, it definitely sounds strong. Directionally, how should we think about CAPEX and Capital's Wyoming priorities? There were obviously a few big deals in the market a few years ago, but just curious how you're thinking about M&A, the pipeline, and just directionally the sizing of somebody's potential target.

Yeah, absolutely. I mean, if you've looked at the M&A we've typically done in the past, it's been more of the bolt-on variety as opposed to big M&A. I mean, look, deals come and go in the market. We take a look at the deals when they arise because that's just good practice to do that. But we have been very disciplined with our approach to M&A and we would continue to be so. We have pretty big hurdle rates that deals have to get over. They have to be very strategic to us. They have to be accretive to our return on investment profile. They have to be something that significantly extends the value of the franchise. And they have to be deals that we can integrate quickly and efficiently so we are able to derive the synergies from them. So we continue to look, but again, we're disciplined. We would wait for the right thing and we're not going to be crazy about multiples. That is not helpful in any event. If we think about other uses of that capital from a growth perspective, remember we're going to be spending about $200 million this year on growth capex, our internal growth projects. We're really excited about those. It is a way to enhance and generate EBITDA without a lot of risk and without paying some blue sky goodwill that you might have to pay if you were to do a bit of M&A. And just as a reminder, some of those growth projects that we are working on this year and which are embedded in that $200 million projected spend are some green field quarries that are in geographic areas that are beneficial to us, California, Texas, South Carolina. And in addition to that, and personally I'm very excited about this part, we also have a number of sales yards strategically located in the US that when they come online would extend our franchise and our ability to reach customers. So M&A is one pathway, but for me, low risk, EBITDA enhancing, extend the value of the franchise. I quite like some of these internal growth projects. And again, we put those through a pretty strenuous return on investment review and they are, you know, accretive as well.

Got it. Thank you for the color.

Sure.

We'll take our next question from Michael Wood of Namura. Please go ahead. Your line is up. Good

morning. Hi, thanks for taking my question. Hi, I wanted

to ask

if your markets in cement are impacted at all by the merger of the two large state-owned enterprises in China and if that's had a positive or negative impact on pricing in concrete?

I wouldn't see it affecting our markets in concrete, positive or negative. I just don't see a lot of impact for that. Okay. Now that being said, we saw...

Go ahead. I'm sorry. No, I'm curious since you improved that segment

as well in two Q versus one Q, but you still have lower gross profits year over year. So if you can also talk about your confidence in the back half and how you're seeing pricing in the market.

Yeah, actually our volumes is what we were... Gross profit was actually slightly down 2% and that was really driven by volumes being down. Some of that was rain in Texas, some of that was timing of work in Virginia. Our prices were actually up 5% and unit margins were up 5%. So assuming we can get our projects going and get a little sunshine, I think we'll be fine the rest of the year in concrete.

And on aggregates, can you give us some indication of the weather impact or the lost shipping days in the quarter?

Yeah, I mean that's a dramatically... That's a big mixed bag where in the quarter, for example, I'll give you a few examples in big markets where we got hurt. Dallas had another 15 days of rain. San Antonio had an increase of 24 days of rain. Houston had an increase of 6 days. In California, we saw LA up 5 days, San Francisco up 9 days. So I guess that kind of gives you a feel for what that was like. And Knoxville was up dramatically, but I don't remember exactly the days in Knoxville. And then if you look at Illinois, we lost the full month. We lost 22 days in Chicago.

And if you go back and look at the shipment volume guidance range we gave at the beginning of the year, which was 3% to 5%, you'll remember we talked about what would put us at the top end of the range and what would put us at the lower end of the range, the 3%. And the two things we called out would put us there would have been delay of some big projects that's sometimes just unavoidable. It's outside the control and also weather. And so given the fact that Q2 was wet, as Tom just described, I mean we were... Frankly, we were pleased to have our volume growth come out at 4% in the quarter because don't forget, California and Texas, two of the markets we've called out as being quite wet, as have others, those two markets comprise about 30% give or take of our volume. So we were pretty pleased.

Okay. Thanks for all the color.

Sure. We will take our next question from Mike Dahl of RBC Capsule. Please go ahead. Your line is open.

Good morning, Mike. Good morning. Morning. Thanks for taking my questions. Sure. Suzanne, I wanted to pick up on that last comment. And if you think about the performance in the quarter, despite some of the headwinds, it doesn't actually seem like that much of a heavy lift to get not just to the top end of the volume guide, but maybe a bit above the volume guide for the year. Now, Tom, I know you made the comment that maybe it's high end of that and so the 5% range, but as just more specifically thinking about what you've seen quarter to date, is there anything you'd point out as far as volume cadence and kind of what to expect for magnitude of growth in 3Q versus 4Q?

Yeah, I think, you know, let's just concentrate on the third quarter and really for balance of the year. But I think what you heard me say was we're trying to be prudent going into the third quarter and the underscore there is the third quarter is the peak of the construction season, but it's also the peak of the storm season. So that can go really, really well or that can go really, really tough or it can be a mixed bag. And so I think us telling you the high end of our guidance is trying to take some of that into, for volume, is trying to take some of that into account. You know, the perfect example, that is what we saw in the first half in California. And so, you know, it's really trying to be thoughtful and trying to give you our best educated expectation of what we expect based on history and based on our backlogs and based on what we see as a book in place.

That's right. And I would just add to this, I've got the numbers here for the second half last year in, you know, I have the third quarter as well, but, you know, let's not forget last year, you know, in the third and fourth quarter, those were not, you know, I don't really consider them to be terribly easy comparisons. If you look at the second half last year, our volume grew 9%, our gross profit per ton grew 11% and for the two quarters combined, our flow through was about 63%. You know, that's a pretty good performance that we would be talking about, you know, over achieving here. Price was at 2%, you know, perhaps there's some upside there, but it was a pretty strong, you know, volume and gross profit per ton second half.

Right, I appreciate that, but I guess it's good to hear that that upper end sounds like it actually does incorporate the, you know, some conservatism around the weather, which is great. The second question I had is, is bigger picture, you kind of alluded to a few different times, some of the internal initiatives and I know some of these are earlier stage than others, but can you give us a flavor on some of the internal initiatives that you're using to drive unit margins over the next couple of years? Where are we at on some of the big initiatives and, you know, can you quantify any goalposts for us to be thinking about in terms of impact?

You know, from a very high level, what drives our quality earnings is what drives gross profit per ton. Again, in a high level, that would include areas of focus, commercial excellence, our logistics efficiencies, number three, how we procure our goods and services, and the fourth, our operating disciplines and the disciplines around those efficiencies that drive cost. We've been working on these at different stages over the last few years. We've invested in people and processes and systems to improve our metrics and our disciplines. And what you're seeing is results in improvements in our gross profit per ton. Again, you know, I bragged to our people on this earlier, we've put together now three quarters where we've had double digit improvement in unit margins, so solid work, but as you pointed out, we're far from being done. We've got a long ways to go. And when you start talking about goalposts, this, you got to remember, this is an ultra local business. And every one of our markets and submarkets has their goalposts, but putting those together is not as nearly as important as what happens on that local level. So, you know, this is exciting. We've done a lot of hard work. We got a lot more hard work to do. So, but I congratulate our folks for being disciplined and being diligent with this, but more to come on these efforts.

All right. Thank you.

Sure.

We will take our final question from Robert Muir of Burenburg Capital. Please go ahead. Your line is open. Good morning, Robert. Good morning.

Hi, this is actually Dan on for Rob. Oh, great. Thank you for taking my question. Just a quick question with regards to the split between the and markets. Is there any way to quantify the performance of like infrastructure, res and non-res? In particular, I remember last quarter around the southeast, non-res was particularly strong. I was just wondering whether that has continued and what you've seen across your geographic footprint. Thanks.

I think that what we would describe the private side in most of our market as growing and steady growth, you know, a few places a little hotter than others. The public side is growing and growing faster and will continue to grow faster. I would call the public side absolutely across our footprint. We see growth. Again, as Suzanne said, the fundamentals for the private side, which are population growth, employment growth, very low inventories of houses, and now we expect lowering interest rates. That is a good formula for private demand growth. Put that with the dramatically growing funding from highways and that maturing into lettings and now into shipments. That is a great formula for public demand growth. So I would call it solid and exciting, and I would call it solid and exciting across our footprint.

Okay. Thank you very much. Thank

you. Well, thank you for joining us today. We really appreciate your interest in Vulcan and your time this morning, and we look forward to discussing the company and our results and our performance throughout the quarter. Look forward to seeing you.

Thank you.