Vulcan Materials Company (VMC) — Q2 2015 Earnings Call Transcript

Thank you, Kayla. Good morning, everyone, and thank you for your interest in Vulcan Materials Company. Joining me today for this call are Tom Hill, President and CEO, and John McPherson, Executive Vice President and Chief Financial and Strategy Officer. Please note a slide presentation will accompany the prepared remarks by Management and is available via the webcast. A copy of this presentation as well as a replay of the conference call will be available following the conclusion of this call at the Company's website. Before we begin, I refer you to slide 2 of our presentation regarding forward-looking statements which are subject to risks and uncertainties. Descriptions of these are detailed in the Company's SEC reports including our most recent report on Form 10-K. In addition, during this call Management will refer to certain Non-GAAP financial measures. You can find the reconciliation of these Non-GAAP financial measures to the most directly comparable GAAP measures and other related information in our earnings release and at the end of this presentation. Now I would like to turn the call over to Vulcan's Chief Executive Officer, Tom Hill.

Thank you, Mark, and thank you all for joining us today. Let me begin by thanking our employees for their outstanding performance in the second quarter. As you all know, weather conditions were unusually bad during the quarter with prolonged wet weather and serious flooding impeding construction activity in many parts of the US. In spite of these challenges, we operated safely, served our customers well, and delivered strong results. The metrics and slides we'll talk about today are largely the same as in prior quarters. We are on track to have a very good year. Our focus hasn't changed and neither has our optimism regarding continued performance improvement. Construction activity and materials demand continue to recover. Pricing momentum is accelerating, and our employees are doing a really good job converting incremental revenues into incremental profits. Despite the bad weather in many of our markets, we enjoyed strong earnings growth and margin expansion on higher revenues, underscoring our confidence in our full-year outlook. With improving market conditions and our focus on profit improvements, both pricing and margins continue to expand. As you can see on slide 4, adjusted earnings per share for continuing operations were $0.66 per diluted share, an increase of $0.30 from the prior year. Although overall average shipments were lower than expected due to weather, we continue to see expanding gross profit margins and expanding EBITDA margins. As you can see, overall gross profit margins increased by more than 450 basis points. These strong margins were supported by robust pricing momentum. We experienced strong earnings growth in aggregates and in each of our non-aggregate segments. This was also accompanied by declining SAG costs as a percent of sales. In spite of the weather challenges, our people did an outstanding job taking incremental revenue to the bottom line. As we've noted before, our local teams across our footprint are doing a great job managing sales and production mix along with pricing. At the same time, we continue to reap the benefits of improving operating efficiencies and resulting leverage. Total gross profit increased 34%, and adjusted EBITDA was up 33%. Same-store shipments increased 5%, and same-store pricing increased over 6% with strong pricing momentum across most markets. Our profitability continued to improve significantly whether measured by margin percentage or per-unit profit. Now, let's look at the monthly trend of our aggregate shipments and the impact of weather on slide 5. Rain in the second quarter reduced the number of available shipping days in key markets, and it certainly postponed shipments. Slide 5 shows the year-over-year change in monthly shipments. You can see the impact of rain on shipments in April and May, up only 5% and 2% on a same-store basis. In April, it was pervasive across most markets with above-average rainfall in 13 of our states. In May, severe wet weather affected plant operations and construction activity in Arizona, Illinois, Louisiana, New Mexico, Oklahoma, and Texas. In June, with the important exceptions of Illinois and Virginia, the weather allowed for more normal days of construction activity, and shipments were robust, revealing again the momentum in demand. The map on Slide 6 shows a breakdown of 5% growth in aggregate shipments across the country on a same-store basis. Even with all the wet weather, the vast majority of our states experienced healthy growth. Momentum in shipments continued with solid growth in key states, same-store shipments in Florida, Georgia, Illinois, North Carolina, South Carolina, Tennessee, Texas, and Virginia saw shipments growth ranging from 5% to 11%. Although California volumes were down 3% due to several large projects that had been delayed until the second half of the year, our full-year outlook for shipments growth in California remains unchanged. In our view and that of our customers, this is demand deferred, not lost. I'd like to draw your attention to Slide 7, aggregates pricing. As we've discussed before, pricing growth tends to lag volume growth. We experienced in the second quarter the initial stages of this improving pricing momentum. We are pleased with the nice increase in freight adjusted aggregates price of 6.4% in the second quarter, and we fully expect to see pricing accelerate. This is supported by the confidence we see in our customers' view of the markets. We had nine major markets where price increases ranged from $0.60 to $1.20 and another three approaching the $0.50 range. In limited instances where we didn't see such robust pricing, it was a function of product mix. We experienced much larger shipments of basin fines on new construction and large projects, especially in Virginia and North Carolina. Growing volume in basin fines may detract from price but improves overall profitability. Prices will escalate throughout the year as new prices are initiated and as we finish older jobs. At this point, we also expect second-half price increases to exceed 8%. Pricing momentum for Vulcan will continue. We are focused on earning a good return on the significant investments that we in this industry make on behalf of our customers. We talk a lot about the three profit drivers that are expanding our margins and profits, because they are important. On Slide 8, you can see that our second-quarter and trailing 12-month gross profit per ton increased 21% and 23% respectively. So in the quarter, price was up $0.71 per ton, but gross profit margin was up $0.76 per ton. Our sales and operations team continue to do an outstanding job turning demand into higher profitability. Nobody in the business does a better job of managing the combination of price, operating efficiencies, volume, and products. We continue to be excited about the ongoing very positive trend in unit margin expansion for Vulcan. It's not a new story. As you can see, on Slide 9 we have now seen eight consecutive quarters of expanding unit margin. Since our volumes began to grow in the second half of 2013, our gross profit per ton has increased sharply, and we are now seeing the additional benefits of strong and ongoing improvement in pricing. Our unit profitability is higher than when these operations were producing twice the volume. In the most recent quarter, we saw an increase in repair maintenance and labor costs. This is not surprising. Growing volumes are requiring us to run our operations longer, resulting in more repairs, and wet weather negatively impacts labor inefficiencies. This is something that we will be managing very carefully even as we see pricing momentum and continued unit margin expansion that more than offsets these costs. Even though we are still in the early stages of recovery, we are very pleased with this momentum. Demand for our products continues to escalate, and I am extremely proud of the way our people are focused on unit margin growth. Slide 10 shows our incremental margin performance in our aggregate segment. Incremental gross profit margin for the second quarter was 74% excluding the impact of acquisitions completed during 2014. Aggregates gross profit grew by $44 million on incremental freight adjusted revenues of $59 million. Including the impact of acquisitions, the incremental margin was 61% with a gross margin on those revenues impacted by acquisition accounting and weather. Since quarterly figures can be distorted by seasonality or one-time costs, we also present the same metric calculated on a trailing 12-month basis. For the trailing 12 months that ended this quarter, incremental gross profit margin was 72% adjusted for the same acquisitions. Aggregates gross profit increased approximately $157 million on incremental revenues of $219 million. Given our strategic focus on the aggregates business, our ability to take that revenue to the bottom line is a big advantage to Vulcan as volumes continue to recover. With that, I will now turn the call over to John for additional comments regarding our earnings performance and outlook for the remainder of the year.

Thanks, Tom. I will begin with Slide 11, which summarizes the metrics and trends that Tom just highlighted. On this slide, we show the improvement in our overall segment results since the volume recovery started in the second half of 2013. Prior to this recovery, our annualized aggregate volumes were at 140 million tons two years ago. As of the most recent quarter, our 12-month trailing shipments are now 170 million tons, which means we have added 30 million tons in annualized shipments. While this reflects a consistent early recovery, it is still below what we would expect during normal demand conditions. Importantly, we've increased our segment gross profit by over $260 million during this two-year span, with gross profit per ton rising by more than $1 or over 40%. A crucial part of our strategic focus remains on sustaining these positive trends and capitalizing on the ongoing recovery toward normal demand levels for our materials. Now, let’s move to Slide 12 to briefly review our asphalt and concrete segment results for the quarter. These segments performed well, especially considering the weather challenges in Texas, Virginia, Arizona, and New Mexico. Our local management effectively serves customers while managing material margins. The results for both asphalt and concrete have improved due to recent transactions that have refined our asset portfolio. Year-to-date gross profit from these segments has exceeded expectations despite weather-related challenges. In the asphalt segment, gross profit for the quarter was about $21 million, showing a year-over-year improvement of $12 million driven by effective cost management and the impact of recent acquisitions. On a same-store basis, asphalt volumes increased by 8% compared to the previous year, and profitability per unit grew significantly. In the concrete segment, second-quarter gross profit was about $5 million, up from $3 million a year earlier, as margin improvements countered the impact of work delays due to weather, including a notably wet June in the Virginia and Maryland area where our primary concrete operations are located. Moving to capital allocation, Slide 13 outlines our second-quarter actions and updates in line with our previously communicated capital allocation priorities and goals, which remain unchanged. We continue to make capital expenditures necessary to sustain the long-term value of our franchise and meet rising customer demands, with core capital spending for the year projected at approximately $250 million. Additionally, we are committed to replacing two of our three Panamax-class ships that transport products from our high-volume quarry in Mexico. These ships have served for over 30 years, and the benefits of our Bluewater distribution network justify the investment. We anticipate progress payments on the construction of the new ships to be about $36 million this year, with another $85 million scheduled for 2016 and 2017. Next, we aim to maintain our financial strength and flexibility throughout market cycles. To support this goal, we have completed key components of the refinancing plan discussed during our February investor day and further detailed in our first-quarter call. This includes extending maturities on about $620 million of debt that would have otherwise been due in the next five years, establishing a new $750 million unsecured credit facility, and lowering our average interest rate. Our second-quarter results accounted for $45 million, or $0.24 per diluted share, associated with this refinancing. We also streamlined our corporate legal entity structure during the second quarter, which enhances our flexibility and reduces certain burdens, including significantly decreasing the number of state income tax filings we prepare. We expect this will lead to a reduction in annual state tax expenses by $3 million to $5 million, or around 100 basis points in our overall effective tax rate for 2015. Moreover, we may also be able to utilize all or part of about $60 million in state-level net operating losses that could otherwise expire unused. Next, we continue to pursue bolt-on acquisitions. In the second quarter, we acquired three aggregates facilities and seven ready-mix operations in Arizona and New Mexico for roughly $21 million, enhancing our positions in those markets. The pipeline for future acquisition opportunities is active, but we will remain disciplined, so the number, size, and timing of future transactions are hard to predict. As our performance improves, our capacity to return capital to shareholders also increases. We believe we can both reinvest for growth and return capital to shareholders as demand returns to normal. Now I would like to make a couple of comments regarding end markets and our outlook for the remainder of 2015 before I hand the call back to Tom for closing remarks and Q&A. As Tom mentioned earlier, and as reflected in our Q2 results, construction activity continues to improve in the locations we serve, though it remains below long-term trend levels. Despite weather challenges and political uncertainties, we and our customers are seeing gradual improvements in demand across our key end markets. Shipping rates during favorable conditions highlight our recovering demand across various regions and applications. While construction activities in our markets are still below long-term averages, the recovery is ongoing, which is the main takeaway here. In terms of private demand, significant growth in non-residential construction is being driven by manufacturing and industrial-related projects. Housing starts are trending upward across most of our markets, although there may be some month-to-month fluctuations. On the public side, growth in highway project awards has been supported by large projects, with ongoing state and local funding initiatives that will continue to bolster road and infrastructure spending, especially in the near term. At the federal level, there is optimism regarding potential passage of a multi-year bill this fall, as there is bipartisan recognition of the need for a significant multi-year program, which has been well covered by the press. Any concerns we have about our full-year 2015 volumes mostly relate to the weather in the first half of the year and our customers' ability to complete deferred work during the remaining construction season. In several markets, key customers are six weeks or more behind schedule and face immediate challenges in ramping up capacity. Additionally, uncertainty regarding the federal highway program may affect the start dates and timing of shipments for certain road infrastructure projects. The slight risk we see for 2015 shipments relates to timing and possible deferrals into 2016. Moving on to Slide 15 and our outlook for the rest of the year, our full-year EBITDA guidance range remains unchanged at $775 million to $825 million, despite the weather challenges faced in the first half of the year. We expect better-than-anticipated pricing and margin momentum will help compensate for any potential shortfalls in 2015 shipment plans. The ongoing improvement in pricing and margins is aligned with our strategic focus and is promising for the long-term performance and value of our company. I will now discuss some modest adjustments we’ve made to our full-year EBITDA guidance assumptions. As mentioned earlier, please view these figures as indicative midpoints of our expectations. We aim to give you a realistic picture of our projected performance while avoiding a false sense of certainty regarding every metric. For aggregate shipments, we've reduced our midpoint expectations for the year from 180 million tons to 177 million tons. This adjustment reflects the challenges many of our customers face in making up for delayed work, the longer production ramp-up at certain acquired operations, and a slight increase in uncertainty about the timing of large projects. Our outlook for a gradual demand recovery remains unchanged. Regarding aggregates pricing, we have raised our midpoint expectation for year-on-year growth from 6% to 7%. As Tom highlighted, pricing fundamentals are strong and improving in many markets, and we anticipate that the rate of improvement in the second half will outpace that of the first half. We expect these pricing trends to persist into 2016. Due to the potential shortfall in shipment volumes for 2015, we've slightly lowered our midpoint expectation for aggregates segment gross profit. We believe that the rate at which incremental freight-adjusted revenues convert into incremental gross profit will remain consistent with recent trailing 12-month patterns. Our asphalt and concrete segments have also experienced rising profitability on both a same-store basis and as a result of recent acquisitions and divestitures. Consequently, we have increased our midpoint expectation for full-year gross profit from these segments from $70 million to $80 million. Our expectations for SAG, DD&A, and CapEx are mostly unchanged. In summary, our businesses are performing strongly in terms of volumes, pricing, margins, and capital productivity. Our teams are executing well and effectively serving our customers while focusing on what they can control. The fundamental aspects of our business remain very promising. I will now turn the call back over to Tom.

Thanks, John. As John stated, we are confident in our full-year outlook. We are pleased with our team's performance in the second quarter despite the challenges of extreme weather. Our markets continue to improve in each market segment and across most of our geographic footprint. This growing demand is causing pricing momentum to pick up robustly, which is clearly demonstrated in the second quarter results. I am confident in our employees' ability to execute on the disciplines of operating efficiencies that drive cost control and customer service that drives value and price, all of which improve our unit profitability. We are very proud of our employees' hard work and dedication. We are also pleased with the level of activity on the Highway bill in Congress over the last two weeks. This culminated on July 30 in the Senate's passage of a new six-year bill, the Drive Act. The Senate and House also last week passed a three-month extension to Map 21, the current bill. This will allow the House time to complete work on its version of the new bill. House and Senate leadership has stated their intention to go to conference with their respective bills and send a new multi-year bill to the President for his signature in the fall. This gathering momentum in Congress to address federal highway investments, coupled with growing initiatives to improve roads in many states, is very encouraging. We along with many other transportation stakeholders will continue to press for additional much-needed investments in America's aging infrastructure. As we look forward to the balance of 2015 and into 2016, we are excited about the accelerating momentum and demand in pricing and the improving execution by our employees. They are finding new ways to improve this Company and our profitability every day. Now, if the operator will give the required instructions, we will be happy to respond to your questions.

Good morning, guys.

Good morning, Trey.

Tom, you mentioned accelerating demand. I was wondering if you could give us a little bit more color around what you are seeing in specific geographic markets now that the weather has started to cooperate. If you could kind of give us an idea more specifically there.

Overall, we are experiencing growth in all market segments and in most of our geographic areas. We expect about half of our individual markets to see double-digit growth this year, reflecting strong demand across the board. Texas is currently our hottest market; despite the weather disruptions, we saw same-store shipment volume increase by 8% there. Florida remains very healthy, with an 11% increase in the quarter. Georgia is also doing well, and although it faced some weather challenges, the demand has simply been delayed, and we are seeing strong shipping whenever the sun shines. In general, the majority of the market is performing well. The only areas lagging slightly compared to the rest of the country are Alabama and Mississippi. While California's second quarter was a bit sluggish due to some postponed jobs, its demand growth remains steady overall.

Thanks for that information. You have been showing strong incremental growth with improving unit margins. I’m curious about when we might begin to see these increments slow or stabilize, considering John mentioned a mid-cycle demand expectation of around 250 million tons, after coming off of 170 LTM tons. When might we notice a deceleration in this recovery or a slowdown in the growth of unit margins?

I think when we discuss these operations at peak levels, they could have reached 300 million tons, but currently, we're at 177 million tons. The normal expectation was 255 million tons, so we still have a significant distance to cover before considering any decrease in incremental revenue or returns.

Trey, I want to emphasize that while we are experiencing some increasing costs in certain areas, we have managed to handle them effectively so far, which is reflected in our margin performance. Our local teams have performed exceptionally well. We do not anticipate any immediate changes in our recent trends, but I want to stress that our long-term guidance on flow-throughs is closer to 60% rather than the recent trends you've observed. However, this should not be interpreted as a signal that we expect a significant decline in our recent performance.

Understood. And then on asphalt, very strong, the incrementals and the margins there tracking well above our expectations. Is there anything going on in the quarter there? Do you expect these trends to continue in asphalt?

The asphalt segment increased by approximately $12 million, with $9 million attributed to operations rather than same-store sales and $3 million from acquisitions. We are pleased with this performance, especially considering that much of our asphalt is located in Texas, New Mexico, and Arizona, where weather conditions posed challenges. Our operating team effectively managed to deliver value to customers, handle material margins and operating costs, and maintain customer service despite the rainy conditions, which is a commendable achievement. Additionally, the improvement from the recent acquisitions indicates that they have been integrated successfully and swiftly, adding valuable talent to our team. We are satisfied with the performance from both same-store sales and acquisitions, and I don't foresee any factors that would impede this momentum at this time.

Thanks a lot for the color. Good luck.

Trey and for others, just to remind people folks newer to our business, we tend to earn pretty good returns on capital in the asphalt segment through the cycle and over time, so we are pleased with those investments.

Hi, thanks for taking my questions today. First, could you clarify the contribution from acquisitions in the quarter regarding both top line and operating earnings? You may have mentioned this, but I might have missed it. How many tons of aggregates were acquired?

I believe that the tonnage from acquisitions in Q2 was slightly over $1 million. Looking at the overall performance of our acquisitions, we are satisfied with the results. We did experience somewhat higher costs due to two main factors. Many of these operations were located in Oklahoma, Texas, New Mexico, and Arizona, where weather issues impacted shipments and increased costs. Additionally, we recognized that with some capital investment and modifications, we could significantly enhance our long-term product offerings, product quality, and operational efficiencies. We implemented those modifications in the first half of the year, and I expect to see the benefits from them in the next quarter or two. Overall, we are pleased and remain on track to achieve our EBITDA target of $40 million to $50 million, and I commend my team for their effective integration efforts.

Kathryn, just as a reminder for everyone, we acquired not only some aggregates operations but also some good asphalt and concrete operations. So in total for the quarter the revenue from those operations was approximately $50 million. As they get ramped up and as we put some additional costs into them as we ramp them up and I'd say ramp them up and as Tom mentioned hit some particular product needs of particular customer groups, the EBITDA contribution in the quarter was about $11 million year-to-date. About $16 million from those acquisitions and generally on track, as Tom said, with our expectations.

Let me correct one thing. That volume was just north of 1.4 million, I misspoke, in aggregates.

In terms of overall pricing, we understand that since it's a local market, prices can vary significantly based on geography and product mix. With that in mind, I have a two-part question. First, as pricing has been accelerating this year, how much of that is due to larger price increases versus a greater mix of higher-priced markets finally adjusting their pricing? Thank you.

I think in all pricing was up in all markets except for Virginia. And that was really a mix issue. We had some very large sales of base and fines which, as we say, is a good thing. We like that. It actually improves our profitability. We are seeing robust price increases in most of our markets. I'll give you a little flavor on that. If you looked at South Carolina, Arizona, Alabama, we saw price increases from $0.40 to $0.50 in the second quarter. In the middle of the country, which would be Tennessee, Kentucky, Arkansas and Illinois, we saw price increases in the $0.60 to $0.75 per ton range. And then we saw in a few markets we saw some very marked price jumps in the $0.80 to $1.20 a ton range in California, Florida, Georgia and Texas. But overall it's still a local business, and our local teams are working hard to make sure we deliver value and quality and service to our customers. I think we have a lot of confidence that the pricing momentum is across all markets, and we feel good about it at this point.

Kathryn, I think those are the most important points. We haven't had much tailwind to pricing based on geographic mix if that was your question. It's more prices across many, many markets improving.

That was just to the point I was going to follow up on. Given you haven't seen a tailwind from geographic mix and you are also flowing through costs from acquired assets, you should see theoretically, all things equal, improving incremental margins as the year progresses.

All things being equal.

Hey guys, congrats on a nice quarter.

Thank you.

I was hoping to follow up on Trey's question first on the demand side. Mother Nature willing, we've got three to four months left on the construction season. To the degree you are comfortable framing out how you're thinking about the out year, it would be great just to get a sense for what the leading edge indicators are that you're looking at, how quoting activity seems this early looking out into 2016, kind of maybe quarterly business review highlights. Anything you can point to on that front that would be helpful handholding.

Ted, this is John. Why don't I give a couple of numbers just to lay out a couple benchmarks maybe and Tom will add some additional market color in terms of what we're seeing from customers. All in all, we estimate that we've had about 4 million tons of aggregate shipments to start there deferred out of the first half. You can tell that we expect to catch up maybe about 1 million of those in the balance of the year, just by the change in our indicative guidance. A lot of that will, as you said, depend on Mother Nature and how long the remainder of the construction season is. And it really depends a good bit on how well many of our customers, and Tom can comment more, how much capacity they can add, and how much work they can just get done. To give you a rough sense of the 4 million tons we have seen deferred in the first half, roughly we'd expect to catch up about 1 million tons of that in the second half. That is less a function of any demands concern and just more a function of the time and capacity of our customers to get their work completed.

I think well said. Ted, as you said, we probably have four months of solid season left. It will come down to constraints from contractors. Can they get in to get the job? How many ready-mix trucks can they get? How fast can they get crews laying asphalt? But overall, remember this is work that we see if we don't get it in the third quarter, fourth quarter this year, it will follow in the first or second quarter of next year. So it won't go away. It's just postponed. And it's very normal when we have this kind of weather to see it push back, and when the sun comes out we are shipping hard.

Okay. So maybe asked a little bit differently, if we were to think about the comments on a gradual recovery, normal recovery, would it be fair to think, at least the way you're thinking internally, is growth rates of end markets in 2016 could approximate 2015? Anything you might share on that end?

Ted, we haven't provided any guidance yet, and we will do that when the time is right. However, overall, given our fairly diversified geographic portfolio, we don't currently see any indicators of slowing momentum as we head into next year.

Okay. That's really helpful.

There are always state-specific issues, right? But across the portfolio in total, although we're not giving guidance, we don't see any decline in momentum.

That's helpful. The second point of clarification, could you provide a comparison of EBITDA from Q2 2014 to Q2 2015? I understand that pricing, volumes, energy, and acquisitions are all positive factors. Could you help us understand the challenges in more detail? I know that R&M, labor costs, and SG&A have increased, so a comparison there would be great, and I'll get back in the queue.

I think the primary challenge we encountered was slightly higher costs this quarter. Labor costs increased, and repairs and maintenance were up as well. Weather conditions caused inefficiencies in our stone operations, ready mix, and asphalt. The weather impacted labor and also affected our overall operating efficiencies, including fuel usage and electrical power. We're starting to operate our plants at increased demand, which has led us to identify some weaknesses in our fixed equipment. We took the opportunity during the downtime in the second quarter to carry out repairs, hence the rise in repairs and maintenance costs. However, when looking at it from a long-term perspective, our year-to-date costs are down about $0.10. On a same-store basis, they are down $0.16, and over the trailing 12 months, they are down $0.22. Maintaining discipline in operating efficiencies and costs is crucial, and it's something we need to consistently manage. Our team is very focused on the factors they can control and on improving operational efficiencies. The cost increase I observed this quarter was primarily due to a combination of repairs and maintenance and weather-related inefficiencies.

At the gross profit line, we saw a balance between the benefits from diesel and other cost increases. On a per unit basis, the cost structure effectively evened out at the gross profit line. The primary factor affecting us is volume. We estimate that the 4 million tons deferred from the first half of aggregates translates to approximately a $35 million impact at the EBITDA line. Overall, while costs were managed well, volume presented a challenge.

I can get more into that offline. Thanks and best of luck this quarter, guys.

Thank you.

Good morning, thanks for taking my questions. Congrats on a good quarter. My first question, a follow-up on the asphalt segment. How much of the incremental operating margin was impacted due to oil prices, and if oil was a significant part of that, do you believe that you'll have to pass on some of that as the year progresses, or will you be able to maintain those margin levels for the remainder of the year?

There were definitely benefits from oil prices, but when you're operating over 50 asphalt plants across the entire Southwest, it becomes really challenging to isolate those effects. It's primarily about managing oil usage with recycled asphalt products and shingles in each mix design, maximizing those, and increasing operational efficiency and costs associated with running the business, alongside sales, service, value, and pricing. Therefore, it's quite difficult to separate those factors. Regarding passing on any savings from oil, we don’t foresee any challenges at this moment. While we can't be entirely certain, we are currently confident in our ability to manage customer service, material margins, and operating costs, and maintain our performance as it stands.

Thank you. And then on the aggregate segment as we go into the back half of the year, have the regions in which you are seeing pricing momentum changed from what you saw in the first half of the year, and can you detail that a little bit more for us?

I don't know that anything has changed as far as the momentum we see in the pricing. Obviously, the margins that are more mature in the recovery margins because price lags volume are seeing the bigger jump in pricing. But overall I think the trend is pretty steady. I think it will continue. Not only is it steady, but it will continue to improve as we go forward and as we said earlier, we'll be back half loaded with price improvements.

The range varies substantially across markets, but I think to come back to what Tom said, I think all of our states saw pricing increases on a same-store basis at some level. So a trend if we went back a few quarters would be that it's broadening. The rates vary substantially across states, but the trend would be that it's been broadening.

Okay, that's helpful. Thank you.

Hi John, it's actually PT Luther in for Timna today. You made some positive comments about demand trends. I wanted to check if you are seeing any impact from the weaker energy markets among your customers, perhaps in LNG projects or similar areas.

If you look at the energy projects along the coast, including LNG and refinery projects, we are continuing to see increased activity. I estimate we will ship over 2 million tons to that segment this year. Our advantage with blue water delivery to these projects is that they need large volumes delivered quickly. If we project that to 2 to 2.5 million tons this year, I can tell you that for next year, based on what we currently have under contract, we will be slightly below 2 million tons. Additionally, there are around 8 million tons in projects that are in the planning or permitting stages but have not yet been bid. There is no slowdown in the energy projects along the coast.

Great. Thanks. In terms of the pricing momentum you're talking about in the second half, is that primarily from price hikes that you've already implemented and announced in the first half? Or does some of that assume some additional price hikes in the second half as well?

As we always say, our pricing is across dozens of markets, so each one is individual. Then you've got, within those markets, you have fixed plants where you have price increases that come at all different times of the year. And then you've got quoted work which you are pressing price with each quote, each week. So, it is a combination of what we've secured, pricing that will quote higher in the second half, and then announced price increases in the second half. And then you are also working off of old work, so you've got to put all that into the mix and again you've got to aggregate all those pricing movements across all those markets.

Great, that's helpful. Thanks again.

Thank you.

Hi, thank you and congratulations. First question is on diesel had a nice benefit here in the second quarter. Coming into the beginning of the year we thought there could be potential upside because of diesel savings. Just wondering how you're thinking about diesel costs in the back half of the year as it relates to your overall EBITDA guidance.

I think if you look at our guidance, this goes into individual operations, and so there is diesel savings built in from a ground-up perspective in the second half of the year. There's also built into that is labor costs and repair and maintenance costs and operating supply and parts. So I think when you put all that together if you look at our guidance, we do have diesel built into it.

Okay. Thanks. I guess it's fair to assume that some of the other costs you've mentioned will partially offset.

I think that's the right way to think about it, Garik. I don't know that we're the world's best to predicting future diesel prices and those kinds of things, but we will begin to comp over, if you will, lower costs as we get into the third and fourth quarter. So I think you summed it up well, which is, we would expect to continue to manage to improving margins in the second half in total, and underneath that is a mix of several factors: probably a little help from diesel costs, probably a little bit higher repair and maintenance costs than we've seen in the past.

Makes sense. Shifting to capital allocation, you mentioned think it was $30 million or so to update your Panamax fleet. Just wondering if this is in relation to any sort of capacity addition that you are undergoing in the Cancun facility, and if we should anticipate increased volumes coming out for your long-haul operations?

These are specific replacements for the ships that we started that operation with. So those ships are some 30 years old. It's time for them to retire for all kinds of reasons. Now what we will get in the new ships is, with technology, we'll have a little more payload. We'll have much better fuel efficiency's and probably a little better speed out of the ships, so we'll get better efficiencies, but the bottom line of that is those ships are replacements.

Okay. I'll ask the highway bill question. You sounded pretty optimistic in your prepared remarks around a new highway bill. Just wondering, it's early, but if you could provide some thoughts on if we do get a multi-year bill towards the end of the year, potentially what kind of volume opportunity would that imply for aggregates demands moving forward?

I can't specify a number at this time due to the uncertainties surrounding the highway bill and its implications. However, I can say that having a long-term bill, even with the current funding levels, is beneficial for us. It provides reassurance to the states, as many of them are delaying significant projects because they lack certainty about federal payments. If we receive flat funding with a long-term bill, we view that positively. Additionally, several states have notably boosted their funding, including key states like California, which are recognizing the need to enhance their funding and are taking action. Overall, we feel encouraged by the Senate's and House's efforts, and we are optimistic about the momentum we're seeing. Moreover, states increasingly acknowledge the necessity for enhanced funding.

Got it. Thanks again.

Thank you.

Hi, good morning.

Good morning.

Just to continue the discussion on the regulatory side. California is in session, or the legislature is in session about potentially increasing state highway funding. How optimistic are you that something goes through and what's your sense on where that process stands now?

Let me give you a little background on California. Their highway bill right now is at about $11 billion annually. If things stay status quo, they've cut that to about 5% to about $10.5 billion. They recognize that they have to take steps to not only keep that whole but to improve it. There's Senate Bill 16 which is out there right now which would increase it by another $3 billion. It is too early to give you a guess on that at this point or a prediction. I think the good thing is that they recognize that they have a shortfall. They're going to have to address it, and they are taking steps for it. Of there's any place that needs roads, California sure does. They do recognize it, and the leadership there is taking steps to improve it.

What's your sense on timing? How do you expect it to play out and what are the negatives?

Too early to tell. I think it's too early to tell. I wouldn't take a guess at it at this point.

In the press release you highlighted stripping costs just naturally in mine plans evolve as companies get price increases. Can you just counsel us on how to think about stripping costs over the next couple of years? How much are you changing mine plans as pricing is picking up here?

I don't think we're altering our mine plans based on pricing. The plan is fundamentally driven by the long-term operations of a quarry. Obviously, as the volume increases, you'll need to strip more since you're producing more tons. There are times when we take advantage of opportunities to strip, so if we're not running operations for any reason, we might redirect our crew and equipment to strip because it makes sense financially. However, overall, price doesn't influence our plans; volume does, as it necessitates more stripping. Each mine's plan is tailored to its long-term operational needs. We're managing these operations with a long-term perspective, spanning decades rather than just a few years, and stripping plays a significant role in that long-term strategy.

Alright, thank you.

Thank you.

Thanks.

Good morning.

John, you mentioned that for this year the price is up 7%, whereas you previously stated it would be up 6%. I believe you also indicated that this level of pricing growth is a positive figure for 2016 as well. Is that correct?

I wouldn't specify a particular level, but we are currently observing ongoing pricing momentum as we move into 2016. This reflects a more structural trend in our business rather than a temporary one. However, I'm not trying to provide guidance on any specific number for 2016.

Let me add a little bit to that. I think it's more about momentum. We mentioned that price would follow volume, and as volume continued to grow, pricing would increase alongside it. This was very clear in the second quarter. I think as we keep seeing volume grow, pricing momentum will also continue to rise. Not just the percentage, but overall pricing will keep accelerating.

You gave a good breakdown of volume by month in Q2. I'm just curious whether you can share figures for July.

No, we can't provide guidance on that at this point.

It seems like you might have been a bit cautious with the volume expectations for the latter half of the year. Are you thinking that 3 million tons could be either lost due to the weather or perhaps deferred to 2016?

I think for sure they are not lost. Those jobs are not going away. Our customers have a backlog and are going to do the work. It's really a matter of if you look at hundreds of jobs and even the fixed plant with hundreds of jobs, can they get on that job? Can they get it all done in the compressed amount of time they have to do it in the construction season 2015? So if they don't get it done, it will push back into the first quarter or second quarter of 2016. If you look at asphalt for example, asphalt and our ready-mix plant is do they have the plant capacity and the truck capacity to catch up from where they are? Again, it's not lost. If it doesn't happen in 2015, it will happen in 2016. As I said earlier, this is really normal for when we have severe weather like this. We'll do the work. It's just a matter of timing.

Okay. Thanks, Tom.

Thank you.

Thank all of you for your interest in Vulcan Materials Company. We are proud of our second quarter, and we look forward to talking to you throughout the quarter. We'll talk to you then. Thank you.