Vulcan Materials Company (VMC) — Q2 2016 Earnings Call Transcript

Good morning everyone and thank you for your interest in Vulcan Materials Company. Joining me today for this call are Tom Hill, Chairman and CEO, and John McPherson, Executive Vice President, Chief Financial and Strategy Officer. To facilitate our discussion today, we have made available supplemental information for your review and use during this Webcast and on our website. Rather than walk through each slide, Tom and John will summarize the highlights. We believe this approach will assist your analysis and will allow more time to respond to your questions. With that said, please be reminded that comments regarding the company's results and projections may include forward-looking statements which are subject to risks and uncertainties including general economic and business conditions, the timing and amount of Federal, State and Local funding for infrastructure, the highly competitive nature of the construction materials industry, and other risks and uncertainties. These risks are described in detail in the company's SEC reports including our Earnings Release and our most recent Annual Report on Form 10-K. In addition to this call, management will refer to certain non-GAAP financial measures. You'll find a 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'd like to turn the call over to Vulcan's Chairman and Chief Executive Officer, Tom Hill. Tom?

Thank you, Mark. And thank all of you for joining us for our second quarter earnings call. Our business continues to perform very well even with a slower rate of shipment growth in the second quarter, our margins continued to improve considerably. We remain on track, consistent with our guidance to deliver full year adjusted EBITDA of between $1 billion and $1.1 billion. The fundamentals of the business continue to strengthen. I'll mention three areas in particular. One, the factors underpinning the continued gradual recovery and demand remain intact, notably, with higher levels of public funding supporting further growth in 2017 and beyond. Two, our internal execution remains very solid. We're meeting our customers' rising needs and we're balancing volumes, pricing, and product mix. Our teams are continuing to do an outstanding job converting incremental revenue into profits. And three, the core profitability of the business continues to improve, trading 12-month gross profit per ton in our aggregate segment increased by 31% to $4.77 per ton, and adjusted EBIT on a trailing 12-month basis increased 62% to $682 million. So, the foundation for multi-year growth continues to strengthen in demand outlook, in execution and in our core profitability. Now, regarding second quarter shipments. I want to reiterate a point made in last quarter's earnings call. A single quarter's result doesn't always give a good picture of the underlying volume trends in the business. Now obviously, the 3% growth rate for aggregates shipments in the quarter contrasts sharply with the first quarter rate of 17%. Prolonged bad weather in certain markets, large project timing, sales mix, and other factors can cause our business results to vary substantially week-to-week and month-to-month. Certainly, we've seen that variability over the last two quarters, but the underlying drivers and the basic trends remain unchanged. For example, if we pull back to look at just the first half of the year as opposed to looking at two quarters individually, we see that our core aggregates business has posted shipment growth of 9% over the first half of 2016 and pricing growth of 8%. Those results are in line with recent trends and with our plans for the year. I'll comment in more detail on individual geographies during Q&A. But taken as a whole, the bottom line is that we still see our core demand drivers and longer-term project pipelines strengthening across our footprint. In fact, we anticipate sustained growth in all end use segments, even though we've yet to see much benefit in terms of shipments from rising public funding. We'll see continued recovery in private construction. Public funding will start to pick up in an important way by 2017 and beyond, as states commit to large long-term projects on the strength of the FAST Act, and we see a healthy number of large projects that we will serve in the queue for 2017 and 2018. Now moving back to the second quarter. Just as a number of factors combined to boost the rate of shipment growth in the first quarter, several factors combined to affect shipments in the second quarter. We saw extremely wet weather in several key markets. At the same time, certain markets experienced a lull in large project starts, both public and private. This was despite a healthy pipeline of projects, and in retrospect, it's likely that some work was pulled forward into the first quarter. As you know, we typically see a fairly high degree of variance in shipment patterns across our individual markets, particularly month-to-month, but I think it's fair to say that the second quarter brought with it a higher than normal degree of variance. The second quarter could be seen as a story of the haves and the have-nots. Virginia, Texas, California, and Illinois combined saw aggregate shipments decline by 10% versus the prior year, while the remainder of our states combined grew shipments by 14%. We continue to see strong shipment growth across most of the Southeast, where the recovery has really begun to take hold over recent quarters. Certain of these states, for example, Georgia, have put in place higher levels of public funding that will support higher materials demand in 2017 and beyond, even though we haven't seen much of that impact yet. For California, Texas, Virginia, and Illinois, we've seen a mix of weather and large project timing impacting year-over-year shipment rates. All of those specifics vary by State and market. I'd note that California, Texas, and Virginia each have healthy longer term growth prospects and what we're experiencing now is more transitional or timing related issues. In contrast, we don't currently see a similar path to longer term demand growth in Illinois, due to that state's well-known fiscal challenges, although our team there has done a nice job of growing its profits and cash flows. I mentioned the significant fluctuations in shipment rates month-to-month throughout the quarter. As you saw in our press release during May, this resulted in daily shipments declining by about 5% from the prior year. On the other hand, daily shipment rates in April and June were up approximately 8% and 6% respectively. These kinds of fluctuations are not uncommon. All the more reason to avoid extrapolating from short-term volume trends in a business such as ours. Even though these swings in shipments activity at the local level can create some operational challenges, our teams have done a superb job adapting to changing market conditions and consistently meeting our customers' needs. So ultimately, I don't find the recent spikes and lulls in demand to be a great concern. It's just the nature of the business. Regarding our local teams' ability to adapt to changing market conditions, I'm pleased with the way our people are delivering continued profitability gains despite modest overall shipment growth and shifting delivery and production schedules. Regarding pricing; our average price freight adjusted selling prices for aggregates in the quarter were up 7% over the prior year, despite some headwinds from geographic and product mix. Meanwhile, our unit costs of sales were flat and unit cash gross profit per ton increased $0.86, or 15%, from last year's quarter. Our incremental flow-through rate exceeded 80% for the quarter and 75% on a trailing 12-month basis. We also enjoyed healthy margin expansion in our asphalt and concrete segments, despite low rates of volume growth. On a total company basis and excluding the impact of freight and delivery revenues, gross profit as a percent of revenue increased 500 basis points over last year's second quarter. Those are strong results, and they aren't one-offs; they represent a next step on a long-term path of continuous compounding improvement. We provided additional information regarding our longer-term profit improvements and our release and the supplemental slides, so I won't repeat that here. Other than to highlight that on a trailing 12-month basis, our gross profit per ton and our core aggregates segment has increased by 87% or $2.22 per ton since the recovery began in 2013. Now, before handing it off to John, I'd like to share a few thoughts regarding our expected results for the balance of the year. As I've already noted, we are reaffirming our full-year adjusted EBITDA guidance of $1 billion to $1.1 billion. We finished the first quarter trending towards the higher end of that range, although we gave some of that back during the second quarter. We continue to expect full-year aggregate shipments to exceed 190 million tons, but our ultimate results will depend in large part on three things, just as was the case in the second half of 2015. One, on the ability of our customers to catch up on weather delayed work. Two, on the start and completion timing of larger projects, and three, on the number of shipping days allowed by weather conditions, particularly in the fourth quarter. The demand fundamentals are there and strengthening. The pricing and unit profitability is there; it's on track and it's growing, so then it's really a matter of timing. How we finish will largely depend on how much of the work that is clearly there can be completed by the end of the year before we move into 2017, where demand will only grow. Let me sum it up. We saw a strong first half with 9% shipment growth and 8% pricing growth in our core aggregate segment. Longer-term demand fundamentals are in place, pointing towards a strong scenario developing for 2017. In the near-term, we've seen rapid growth across the Southeast, but a lull in large project activity in parts of California, Texas, and Illinois. We are benefiting from excellent continued improvements to our core profitability, even during a quarter with slower volume growth. The pricing climate remains positive, and as was the case last year, we need to make up for some weather delayed volumes in the second half. I'll come back in a moment with some final remarks, but for now, let me hand it off to John for a few brief comments regarding our overall cost controls, our balance sheet strength, and our capital allocation priorities. John?

Thanks, Tom. I'd like to start with one more compliment to our local teams and their operational performance and cost control discipline throughout the early stage of the cycle. Although we have had and will likely continue to have ups and downs from quarter-to-quarter, the overall cost trend has been impressive. For example, in our core aggregates segment, our unit cost of sales per ton as measured on a trailing 12-month basis has declined consistently with each reporting period since the recovery began in the second half of 2013. So over a three-year period, when our average selling price for a ton of aggregates increased by about $1.64, again measured on a trailing 12-month basis, our average unit cost of sales declined by about $0.57. Lower diesel prices have aided these results, but strong daily operating disciplines, effective coordination among local production and sales teams, and a commitment to continuous improvement have also played a central role. We often talk about how seemingly small improvements compound and add up to a sizable impact on our business, and in this case, our ongoing local operating disciplines have contributed meaningfully to the strong conversion of incremental revenue and to incremental profit that we've reported throughout the recovery so far. Unfortunately, we cannot make entirely similar observations regarding our SG&A costs, despite the fact that we've held administrative headcount basically flat since the recovery began. As you've seen, second-quarter SG&A was $13.5 million higher than the prior year. A bit more than half of this increase resulted from the amount and timing of accruals for performance-based incentives and deferred compensation plans. Approximately another quarter of the rise in second-quarter SG&A resulted from higher salaries and relocation expenses, primarily related to investments in our sales and business development talent and the strategic rotation of sales leadership across geographies. We will continue to make strategic investments in our sales talent and capabilities. Those costs and higher incentive accruals will cause run-rate SG&A costs to be elevated in the near-term, with our full-year projection now at $310 million. Although we are not fully satisfied with our recent results and trend, we will continue to leverage SG&A to sales throughout the recovery and beyond. The investments we're making are sound and ultimately support a higher volume growth at higher margins. I'll touch now briefly on our balance sheet strength as the facts have continued to improve, but the fundamental story remains unchanged. Our stated goal, as you know, is to maintain an investment-grade credit position throughout the cycle. We have achieved such a position. And of course, our cash flow profile continues to improve. In short, we have the financial strength and flexibility needed to pursue a balanced mix of capital reinvestment, growth investments including M&A, and return of capital to shareholders. Finally, I'll note that our weighted average cost of capital has declined significantly since the recovery began, in part due to our improving financial performance and credit position and in part due to our focus on aggregates and the divestiture of our cement and concrete assets from our portfolio. Turning now to capital allocation. Our summary message is that our recent and planned activities remain consistent with the priorities you've heard us articulate several times. We do remain active in terms of business development and the pursuit of acquisition opportunities that fit us strategically, and I think it is fair to say that we are aggressive but disciplined. We're looking at a number of opportunities at various stages of development, and again, we have the financial capacity to grow without overly straining our credit position. And we have continued to return additional capital to shareholders via share repurchases. As you know, we have not committed to a specific repurchase target. Instead, we will remain opportunistic and seek to balance a return of capital and reinvestment over time. And now I'll turn the call back over to Tom.

Thanks, John. Before taking your questions, I'd like to say a few words about my confidence in our company. I've been with this company for over 26 years, and I believe our business is stronger and more resilient than it's ever been. We're in the midst of a sustained multi-year recovery. We're enjoying an ongoing recovery in private construction and on top of that, we are just beginning to see a new wave of increased public spending. We'll highlight these demand trends for 2017 and beyond during our aggregates date event on September 29. We have an amazing aggregates-focused asset base that positions us extremely well to serve the demand growth that is coming. Our core profitability and cash flows are very strong and just keep improving. Our balance sheet is strong. Our financial condition gives us a lot of flexibility to do smart M&A, to reinvest in our operations, and to return capital to our shareholders. And our culture at this company is great. Our people are helping each other get better every day, and they are upbeat and they are on their game. Our position is frankly an enviable one, especially when viewed against the backdrop of uncertain times, and I really like our position looking out over the next several years. At some point, our country must address the major infrastructure challenges that we still face as a nation. Look, it's good to have a five-year federal highway bill, but we still have a degraded highway system. Major U.S. infrastructure investment must and will occur eventually, whether as a matter of smart proactive economic policy, reactive fiscal stimulus, dire necessity, or some combination of these. We don't assume such a scenario in our longer-term outlook, but we will be well positioned to meet that need when it arises. In the meantime, we remain very confident in our business and are focused on making a strong franchise even stronger. Let me conclude by thanking our outstanding employees for their performance during the quarter and for the work they continue to do every day to deliver another year of very strong results. And thank you for your interest in Vulcan Materials. Now, if the Operator will give the required instructions, we'll be happy to respond to your questions.

Hi. Thank you for taking my questions today.

Good morning, Kathryn.

Good morning. First, going to focus on more specific states. For Georgia in particular, how much of your strength was driven by the new funding initiatives with House Bill 170, new rail lines in Savannah, or just overall improved economic health of the state? Just really helping us to balance because each of those are different types of buckets, one being a new business opportunity, one being new funding, and one is just day-to-day business.

At this point, Kathryn, it's all just organic growth in Georgia. You aren't seeing flow-through from the new highway funding. We might see a little bit towards the end of this year, but that's really going to be 2017 and 2018, so that's just really healthy growth in Georgia.

Okay. And nothing really from the new rail line to Savannah?

Not at this point.

Okay. Flipping to two states that were softer, California and Virginia. Virginia we were well aware of some of the wet weather, but specifically addressing those two states, to what degree were volumes impacted by large project delays, wet weather or any other relevant factor we should take into consideration? And if you're able to comment on how trends are progressing in each of those states as we go into Q3.

Yes, if you're asking whether we see any change or slowdown in demand growth in California or Virginia, the answer is no. The residential market on the private side remains strong, though we did notice slight softening in the non-residential sector during the second quarter. However, the leading indicators in the pipeline are robust. The public sector is expected to improve. While there may be a temporary lull in California as they respond to current conditions, we don't anticipate any deceleration in either state. Specifically, in California, the outlook is positive, particularly for large commercial and highway projects. Recently, we did experience a slowdown on the commercial side, as some customers have not taken on as much work as we had hoped. We can certainly improve our performance in Canada as well. There might be a short-term reduction in highway funding due to lower gas prices, but this situation will likely resolve itself. California has some of the worst roads in the U.S., and there are several funding bills in the state government proposing increases from approximately $3.5 billion to $7 billion. Additionally, there are over ten measures on the ballot for local and county projects that would potentially increase annual funding by around $2 billion. Overall, California's outlook is strong. In Virginia, as you mentioned, we faced extreme weather, and there were some timing issues with our projects. Last year, we completed two significant projects: the Midtown Tunnel and a large wind farm, while this year we had a delay with the Fairfield Marine Terminal. To give you a sense of scale, if we consider three major projects—the I-66 in Northern Virginia, the Chesapeake Bay Bridge project, and the Fairfield Marine Terminal—they collectively amount to around 7 million tons. Therefore, demand in Virginia is expected to keep growing.

And Kathryn, it's John. Just to put a little more color on the four states we called out and just to give you support, and again, to echo Tom's point, we do not see any cyclical change here in these states or across our portfolio. Really the only one, if you back up and take a trailing 12-month look, that's down on volume for us is Illinois. And we've talked about Illinois before; that's just a bit of a different fiscal picture rolling over some large projects that we didn't have this year that we did have last year. That's the one place the demand growth outlook just isn't as clear. Everything else that we're calling out is primarily a timing issue. It's weather related, it's pulling work forward into the first quarter, or it's just how large projects get started and they flow through the pipeline, so Illinois is a little bit different. But everywhere else is basically on the same track that it's been.

And Illinois, how should we think about modeling Illinois not just for the next quarter, but for 2016, and what's your view going forward and how we should think about modeling Illinois volume? Is it a situation where we should expect a decline or flat? Any color would be helpful. Thank you.

We probably expect in Illinois, and I'll make sure we follow up on this with you. But just to give you a sense, I'd expect flat to kind of low single-digit growth from where we are today going forward, so it's not rapid decline, it's just not the same kind of growth on the shipment side. Now the other thing we call out in these states, California, Texas, Virginia, and Illinois of note is the businesses are still strong, so don't take near-term volume challenges as fundamental business challenges. I mean just to give you a sense, those four states had pricing growth over the last 12 months in the double digits.

Okay.

They had improvement in cash margin per ton over the last 12 months of over 20%. And so the businesses are good and sound. It's just a question of project timing and flow. Virginia for example was up strongly in volume in the first quarter over 20%. So we probably pulled some work forward there. We call it Illinois because it's the one place we just don't see the same kind of longer-term robust growth that we see in the rest of our portfolio.

Okay, great. And final question for me today. You talked about mix and geographic mix having an impact on average pricing in the quarter. Are you able to give a little bit more granularity on which was a greater factor in the quarter? Thank you.

I think it was a combination of the two. We saw shipments get impacted in coastal Texas with weather, extreme weather and some timing of projects; it's healthy pricing, so that was geographic. And then, you saw some substantial base jobs and shot rock jobs particularly in Florida, so you put all those together which was just under a percent.

Okay. Thank you very much.

Hi, good morning, everyone.

Good morning.

Hi, Jerry.

I'm wondering if you could just say more about what you saw demand by end-market across your footprint. It sounds like private non-res may have slowed; can you just flush that out for us either based on shipments in the quarter or based on indications that you're hearing from your customers? Thanks.

Yes. I think what we've seen is the growth in recent activities weakened just a little bit. Longer term, our backlogs are growing, the pipeline has strengthened, employment levels and other factors point to sustained growth. At any given time, that activity at different geographies will vary pretty widely. But if you look at the leading indicators, the Dodge Momentum Index, ABI; they point to renewed pace of growth in 2017 and beyond. And then just the simple fact that you've got single-family construction growing at the pace it's growing will pull non-res up, and that we'll see that coming.

Okay.

Our shipments to private non-res work in the quarter were still pretty healthy. So they can vary market-to-market. But I think we've all probably called the death of non-res spending prematurely several times now. Even if we see a little bit of weakness in near-term start indicators with our customers, and then, the data we look at, we’re seeing just as much if not more strength in the longer-term pipelines. We still see growth across all of the India segments we are talking about. With the one thing that surprised us being slow kind of jumps out is really public infrastructure spending. So again, the outlook there is strong, but we haven't seen as much in public infrastructure as we would expect it so far this year, giving all the fundamentals; all of the fundamentals are there, but the spending really hasn't been quite where we thought it would have been.

And John, Tom, can you say more about that last point? Is it an issue of timing in terms of some bigger jobs getting started or getting the bidding process done? What are you seeing as driving that delay, and how broad-based is it?

On the infrastructure piece, it's really just now you're starting to see the big capital projects, water, airports, those kinds of projects. If you look at tax receipts in our markets, they are at or near all-time highs. So it's going to happen. It's just a matter of timing, and I think the local governments are making the decision to go forward with the capital projects. But you'll see that come on in 2017 and probably more in 2018.

Okay.

It's a bit of conjecture on our part, Jerry. However, we've heard comments about the overall uncertainty of the election cycle potentially slowing some public infrastructure spending in various locations. Nonetheless, as Tom mentioned, projects related to sewers and water infrastructure are often essential. If we are going to construct as many new residential units as planned, new water infrastructure will also be necessary. Therefore, we believe it’s mainly a matter of timing, but so far in 2016, we haven't observed the growth we anticipated in that area.

Okay. And lastly, I'm wondering if you can comment on how volumes and pricing looked in July. So May obviously stands out as a month of downside in the quarter. Can you just give us some context on how July looked?

Well, Jerry, I'll jump in and say as the CFO that we can't comment on the third quarter yet. But in the spirit of that question, I guess one thing I'd note is if May had had the same kind of shipping rate trends that we had seen in June and April, you would probably have a very different feel to this call and results. We wouldn't be asking some of these questions. So as Tom said, it's not uncommon to have some variability in shipping rates week-to-week, month-to-month in a business that's all outdoors. But again, we haven't seen anything from our view that would indicate any kind of deceleration or anything that would take us off long-term trend. This is still a business with solid outlook for 2016, strengthening visibility for 2017, and in our view, multiple years of growth ahead of us.

All right. Thank you.

Thank you.

Good morning. Thank you for taking my questions. I wanted to ask, possibly directed to John. In your last conference call, you mentioned that the upper limit for capital spending would be around $400 million this year, and it seems you're currently at about $200 million. What are your expectations moving forward? Will you still aim for the $400 million mark, or considering the market conditions, will you be scaling back a bit?

I think Bob, we'll keep up with that number. But let me give you a couple of important reminders. Our core CapEx spending as a portion of that $400 million is about $275 million. So think about that as core operating maintenance capital. And then there's another $125 million in that number that's essentially growth capital, non-M&A growth capital. So our CapEx outlook both now and through the balance of the recovery remains unchanged. We have not seen anything in the marketplace conditions and I'd underscore this that would cause us to put brakes on our own capital spending or on our pursuit of M&A. Again, our view on the business and its outlook, if anything, is probably strengthening, so nothing from an external market condition point of view that would cause us to adjust our capital spending.

Got it. That's really helpful. Thank you. And one question on profitability. Your gross margin expansion was pretty tremendous at 500 basis points and that came in ahead of what we were anticipating, and I wanted to understand what were the drivers of that? Was it more about getting favorable pricing, as obviously a huge tailwind for that, but how much was also operating leverage and what kind of relief did you get from lower costs for diesel fuel?

Yes, Bob, obviously we had healthy price in the quarter and that will continue. But I thought our folks did a really nice job with their operating costs, particularly with a little bit lower volumes. They continue to not only leverage the volume, but also just improve on the key operating efficiencies and disciplines that drive the profitability of the business. So it was a combination of the two. To answer your question on diesel, total diesel was an impact of about $7 million.

Got it. Okay. And just one final. I think you guys doubled your spend on share buybacks for the quarter from $23 million in the first quarter to $46 million. Any thoughts as you look out into the back half of the year about share buyback activity and what's left under the authorization? Thanks and good luck.

Thanks, Bob. I think we have over 2 million shares left on the authorization. So I think that it's not a question of authorization. Our path on share repurchase I would call unchanged, as we've said before. We'll continue to return excess cash to shareholders at this point in the cycle primarily through share repurchase, and we'll remain opportunistic in doing so as opposed to give any particular commitment to a certain level of repurchase activity in advance. But again, our basic approach to capital allocation remains unchanged, and as such, we may continue to repurchase shares as another way to return capital to shareholders.

Hi, good morning.

Good morning, Trey.

Couple of questions on kind of getting back to the lull in the large projects that you guys mentioned. I know you touched on some of the public stuff, but you also mentioned that there were some private projects there. And then also, May being the weaker month in the quarter, I'm guessing weather played a big role there that you highlighted. I guess what I'm trying to get at here is that the timing of when these projects that were either pushed to the right or what have you when those could come through. I mean, is that a third-quarter event or fourth-quarter or would they be more like into 2017? How do we think about the timing?

Well, I think it will be all over the place obviously with large projects. Let me give you kind of a little bit of a view on some large projects and put a little flavor on that. So if you look at Virginia for example, I mentioned Northern Virginia, the Route 66 projects will be probably 6 million tons; I-85 in that job actually will go in 2017, I-85 in Southern Virginia is over 800,000 tons, but you'll see some of that in 2016, but the majority of it in 2017. And in North Carolina, the I-85 widening is probably 1.2 million tons and we'll see a little bit of that in 2016, but the majority of it in 2017, and the Northwest Corridor in Atlanta is 1.5 million, and that's the widening of I-75 and it's a 1.5 million tons and that will probably do a little more, we will probably get 700,000, 600,000 tons in 2016. So it will be all over the place. And again, as John said earlier, it's going to be a matter of timing. The good news is the contractors and our customers want to get the work done, they are going to press to get it done because they have visibility and know what's coming in 2017, and so they've got to get this off their books so they can free their crews up and go on to other projects. So the desire is there, it's just a matter of will they have the crews in the fourth quarter, will the weather allow them to do it.

Right. So kind of with that, I'm just trying to get a feel for how we should be thinking about the quarterly cadence kind of looking into the back half. Third Quarter or Q3 obviously faces a tougher comp, but it's also generally a seasonally stronger quarter for you guys. And then with kind of the backdrop of weather and how things have moved around, anything unique about the seasonal cadence or your expectation there as we look in the back half?

I don't think there's anything unique about it except for very similar to last year. I would underscore what I just said about the contracts and desire to get it done. They are pressed even more in 2016 than they were in 2015 to get this work done because there's so much work coming for 2017. You'll see both on the commercial side and highway side, so desires are there and the third quarter is always healthy, but depending on weather, the fourth quarter could be great too. We'll decide to just wait and see.

Got it. And then last one for me and John, I mean, you guys in the whole team impressive incrementals and gross profit per ton. And I think last quarter you said that you expect to see incrementals for this year a little higher than the longer-term kind of 60% target. And with half the year behind us now and the current cost environment, can you update us on your thoughts there?

Sure, Terry. I think we still say 60% is our long-term as in through the entire recovery and expansion cycle number, but that's a multi-year view. We've obviously been doing better than that of late, sometimes substantially better. I think for the balance of the year, I'm not sure we see a much different trajectory than we've been on so far this year in terms of incrementals. Some of that in a very short period of time if you took an individual month or maybe an individual quarter can be influenced by the mix of price and volume in our growth. But overall, our team has continued to do a great job. Again, I come back to something Tom said in his remarks. The work is there. The demand is there. Importantly, Terry, to your question, the profitability is there; core profitability in our business is maybe running a little ahead of our plan. And so we come down to for 2016 is really a question of timing of the shipments and how much gets done this year versus next. But again, the work is there, the demand is there, and importantly, the profitability is there, and we see that trend continuing.

Great. That's it for me. Thanks a lot.

Thank you.

Hi, thank you. First question is just you talked about the weakness in Illinois; it sounds like there's a fundamental change perhaps when you think about that market. Could you just speak to perhaps the importance of that market strategically? And then just broadly what you're seeing and what your appetite is for either acquisitions or divestments at this point in the cycle?

First of all, as John said, you've got a lot of well-known funding and budget issues, although they did reaffirm the highway spending in Illinois on one hand the positive, and they also cut the tollway spending in half, which will cost us about $700 million in the state for next year. I think the positive side of that is you're still seeing growth on the private side. And as John said, this is a very good business for us, and we have a very, very strong market position, and our teams up there have done a great job of improving their unit margins even with some falling volume. Some of that volume, Garik, is we were at two very large jobs, one at O'Hare and one the tollway that we were working on last year and we're starting to wind down, so some of that's just again timing of projects. But overall, it's a strong market for us and an important market, and one that I think our folks have done a great job improving.

Okay. And could you touch on just the second part of the question with respect to M&A at this point in the cycle, what are you seeing out there as far as valuations are concerned, what’s your appetite for additional deals and how do you balance that relative to your capital structure?

They're still out there. We've got a number of them, as John said in his comments, that we're working on, when they will close is always, each one is separate, and each one is timing. But you always have to be disciplined about what you're buying and what you are paying and what the unique synergies that we have for Vulcan are and how do we leverage those so it's there. We're hot on that trail, and we've got a number of them in the pipeline.

And only thing we would add to your question, which I think we also addressed in our comments, is if anything, we're pushing harder on opportunities particularly those that fit us strategically. We're going to stay disciplined on valuations obviously, but we've worked hard to be in a position where we now have the financial capacity to really do good deals where they exist, to make the right ongoing capital investments in our business, and to return some capital to shareholders, so we can balance all those things, and we will certainly have the financial flexibility to pursue M&A of that growth. All that said we're going to stay really disciplined about it.

Okay. Thanks, just want to shift as my follow-up question to the coastal markets in Texas. Clearly weather impacted demand in May in particular. Are you seeing anything fundamentally changing or decelerating along the coast? If so, how does that impact the productivity out of your Cancun quarry? And then, also, would there be anything for us to think about over the maybe in the medium term if there is deceleration in the coastal markets in Texas around price mix given it was a headwind in the quarter?

The situation in Texas, particularly in the coastal area, was significantly affected by the weather. Coastal Texas experienced flooding for over a month, which had an impact on our operations. Additionally, we faced timing issues with large projects such as the Grand Parkway and several major energy initiatives. While we've completed some of that work, there are still projects like Golden Pass and Beaumont LNG in the pipeline that will contribute next year. The weather patterns in the second quarter have made it difficult to gauge developments in both residential and non-residential sectors, and we have likely seen some softening in Houston. However, there has been a substantial increase in highway spending, which we first noticed in 2015 and 2016, and this trend is expected to continue into 2017, 2018, and 2019. The visibility of our operations is affected by the poor weather; when volumes drop by 30% in one market, predicting outcomes becomes challenging. Nonetheless, we are observing a rise in public spending that could help counterbalance any potential decline in private spending. So far, we haven't experienced any significant drops elsewhere in Texas, and while we have seen some softness in Houston, it hasn't spread throughout the state. Regarding your question about price impacts or logistics from our quarry in Mexico, I wouldn’t classify any changes as material. Well, I think you have to remember the quarter in Mexico we shipped to some 17-18 port facilities all the way around from Brownsville all the way around to Jacksonville, Florida. So where you might have some temporary softening and timing of projects on the coast of Texas, you've got the Southeastern Florida and those markets picking up substantially. So there's a lot of flexibility in that overall business. And we think we're fine with it.

And again, on pricing, which is just really a mixed issue, not a fundamental underlying price issue. I don't think we would expect these kind of declines we saw in the second quarter and future quarters. So I don't see anything that I would try and model in on pricing.

Okay. Makes sense. Thanks so much.

Hey, good morning guys.

Good morning.

So I was curious about your comment on the election year having a numbing effect or people, whatever you said, maybe on the local side. And just wanted to get a sense of if you could characterize the political sentiment you're getting from you're canvassing of Washington in light of kind of the positive spirit of dialogue lately on public infrastructure spending.

I think the good news there is everybody is talking about it. Both Presidential candidates who got a number of people in Washington concerned about the country's infrastructure. They all know it's an issue. And they also understand that it is stimulus if we do it correctly. So like I said, we have a five-year bill, but we still have a degraded highway system, and that bill is not going to improve that grade. So it is an issue and now what's going to happen we don't know; we know what's going to happen with the election, but it is an important issue in one that people are putting out there in front of everyone.

And Timna, it's John because I may have made the comments just to add to that. And my comments weren't reflective on the nature of the dialogue around future infrastructure spending which we actually, as Tom said, is quite positive at a federal level, State level, and local level across many of our geographies. It's more just a negative tone and some degree of uncertainty that would seem to affect private investment levels. And you'll know more about this than us, but you may have seen some of that in second-quarter GDP data. And we probably have some customers who, on balance, just given negative tone out there, particularly on the private side, are a little more reluctant than they would be in a different time to add their own additional capacity, to make their own big capital investments whether that's new equipment or land for development or larger staffs. So I wouldn't want to make it too big a deal. What's interesting though is just this disconnect between the tone you're going to hear in the middle of an election cycle which is really negative and what we see in our own business which frankly is pretty positive, but nothing longer term; the dialogue around higher levels of public infrastructure spending particularly on road infrastructure and other infrastructure we are pretty excited about.

Okay. And then to wrap up with a couple of other thematic questions. So are you seeing much for small on labor constraints that we've been hearing about on construction? Is that an issue at all for you? Second of all, how good is your visibility relative to normal levels in light of that kind of more cautious sentiment?

I think that first of all, we are seeing labor shortages with our customers, whether it's ready-mix truck drivers, finishers, or carpenters in residential construction. There are labor constraints out there, which create a bottleneck for our customers and for us as well. They are working through it. We've been discussing this issue for about a year, and that's actually positive because it indicates growth that is outpacing their ability to fill positions. The work is not going anywhere; it’s just a matter of timing.

And on your question about normal, it wouldn't change our view of normal, but as we've discussed many times before, these bottlenecks whether they are labor or others that some of our customers face, they probably do constrain on the margin the rate of growth or the rate of recovery, keeping us for now in the 7%, 8%, 9% rate as opposed to something that the underlying demand would justify being higher. The flip side is that it can create a generally positive pricing climate, but it may make for a longer recovery at a slightly slower rate like that 7%, 8%, 9% rate as opposed to something that would get up into the sustained double digits for a very long period of time.

Okay. Great. Thanks guys.

Hi, everyone. Thank you for including me. I have a quick question about the outlook for costs regarding the aggregate unit costs. It's clear that the incremental costs are expected to be strong this year. Diesel has provided some advantage, but how much longer can we expect that to continue? Additionally, could you discuss the investments you're making in either sales or production to maintain these strong increments or to ensure they remain above your historical average?

As you look out towards the second half of the year and the price of diesel last year versus the price of diesel this year, it's probably not going to be a big cost advantage going forward. I think that, as I said earlier, I think our folks are doing a really good job of concentrating on our own operating efficiencies that we can control. Volumes are coming back, can help that. So I feel pretty good about our cost and our ability to take incremental revenues to the bottom line. As far as capital projects, they are all over the place. Some is as simple as replacement of mobile equipment, screens, and crushers. Usually when you do plant capital, it’s a combination of both replacement and process improvement to get more throughput or reduce downtime, which helps on your cost obviously other than just like-for-like replacement. On the growth side, we've got a number of facilities who are working on our distribution network both rail and blue water that are all at different stages of completion, and then we've got a number of greenfield projects that we're working on at different stages in completion.

Only additional color I would add is while we may not have the same tailwinds from diesel moving forward, we should be beginning to work out of a period where we had elevated repair maintenance costs kind of earlier in the recovery. So we're hopeful those trends will offset each other a little bit; some more work to do there. And just a reminder, we've got a lot of fixed costs yet to leverage in this recovery. So as Tom said, we're pretty proud of what our teams did, and particularly as an example in a quarter without much volume growth and still with very uneven production schedules due to weather challenges to control your costs in a quarter like the one we just finished is a good sign of the right disciplines. So we have a pretty positive outlook about our margin performance looking forward.

Absolutely, I agree. And just a reminder, when do the new ships come online? Is there any way to talk about either improved efficiencies or cost savings or anything along those lines around the ten new vessels?

Yes. They will come online at different stages next year. And they will both be more efficient both particularly in fuel, also they have less draft and more tonnage capacity. So we'll see improvements cost-wise with those ships as they come online, and we'll be excited to get those.

Probably a little early to talk about it specifically though. That may be something more a 2017 item, probably a little too early to talk about it specifically, but they are good investments.

That sounds fair. And then lastly on the M&A side, obviously, plenty of flexibility within the capital structure, are you thinking more on the bolt-on side or there are new markets you'd be interested in entering? How should we think about that from a footprint perspective?

Both, primarily bolt-on. I mean those are some of our best returns and it proves out the efficiencies in the overall franchise, but it's healthy; and so, and then as far as new markets, we did that 18 months ago in New Mexico and where we have a path to number one or number two position, we'll look at new places and if not, we probably won't.

Is it still fair to say mostly aggregate-focused and potentially some downstream assets, but certainly not the primary focus?

You said it well. We like aggregates.

Perfect, guys. Thanks very much and best of luck.

Thank you.

Thanks.

Hi. This is Nick Chen for Rob. Thanks for taking our question this afternoon. You guys touched on a little bit earlier just discussing California, but I was hoping you could opine a bit on just some of the State level funding bills that you guys are tracking and sort of where you expect them to have the biggest impact going forward?

Sure. I talked about California. They were going to lose a little bit of funding but there are a number of three bills in particular that would add between $3 billion and $7 billion. And they have to address their roads. And then the local impact which is in total if they all pass would be $2 billion a year. So Texas is one of the fastest-growing highway markets. We saw a 30 in our markets in Texas in just the highway lengths alone. In 2016, we'll see an improvement of over 30%, state is a whole improvement of over 20%, and a lot of that will really actually go in 2017. And then you'll have improved funding again in both 2017 and 2018. That will go up about 15% or 20% in 2017, and then there's another over $2 billion that comes onto Texas in 2018. Georgia basically doubled their highway funding that passed a year ago and we'll see a little bit of that in 2016 as I said earlier, the majority will come in 2017 and 2018. North Carolina has improved their funding as has Florida, as has South Carolina, as has Virginia. There are bills being discussed in Alabama and probably won't be addressed until 2017. I'd tell you a similar story in Tennessee where it needs to be addressed; they have not, it won't happen in 2016, hopefully will happen in 2017. So, as I said, a lot of our states have marked improvement in funding, and the vast majority of that, except for Texas, will flow through in 2017 and 2018. So we're really looking forward to this, and this was a real bright part of our future.

That's really helpful. Thanks so much.

You bet.

Thanks. Good morning.

Good morning.

Is there a way to think about the moving pieces of these various issues in May in terms of the impact you reported average price for the quarter?

I believe the average price was strong despite some issues with geographic and product mix. One significant factor affecting the quarter was the mix issue in coastal Texas, where volumes declined by 30%. While pricing in that area remains healthy, it did have some impact. Overall, the pricing environment across our territory stays strong, with price increases occurring throughout the entire construction segment driven by rising demand and the visibility of what everyone anticipates for 2017 and 2018.

Just giving a little more color if it helps, I think our average selling prices, if you take all of the moving pieces and adjust as best you can on a like-for-like basis, probably would have been $0.03 or $0.04 higher than what we reported. Again, a lot of that is having a big decline in coastal Texas. Now at the same time, that's accounting for some of our Southeastern markets which have good pricing too, growing pretty quickly. So on a total like-for-like basis, when you look at geographic issues and the product mix issues, our rate of price growth year-over-year would have been a little closer to eight than what we reported. But I wouldn't let any of that distract you from what Tom said, which is the core pricing outlook and climate remains positive, given where we are in the recovery. And I'd also just remind you prices went up pretty healthy in those very same markets that were volume challenged, so Virginia, Illinois, California, Texas, those are all markets that have had good pricing and margin improvement not just in this quarter but for the last few quarters.

Okay. That's helpful. And then you've talked about the variability and timing of all of these large projects in terms of volumes. When we think about your outlook for potential volume for the year and kind of the company overall, is it more heavily impacted by larger projects than what we would typically see?

No. I don't think it's more. I think this is just a piece of it. So part of it is going to be the large projects. As we said earlier, part of it just across the entire market segments is going to be, can the contractors and can our customers get the work done in the time that they have. So we talked about labor shortages; you have those and those are an issue, so it's about both timing of large projects, our customers' ability to get work out, and then how many days do we have of construction in the fourth quarter. All that will go together to really see how the year turns out. But I'll remind you this is exactly what we saw in 2015.

Okay. Thank you.

Hi. Thank you. Could you comment a little bit more on the mix, as you mentioned, the Texas coastal situation was impactful? And presumably, that mix will turn more favorable, so simply by virtue of that. But could you elaborate a little bit more going into the future? And also, were there any other mix issues other than coastal Texas, and as you go more into your bigger infrastructure build in 2017 and 2018, what are the implications for the mix in that?

Well, first of all, in the quarter, pricing was a combination of the mix impact was both geographic which was Texas and then mix. So we had some large base work in the Southeast and we also had large shot rock projects in Florida. And while they may have an impact on price it has an overall positive impact on profitability because you've got to sell those mix of products, and some of them are cheaper to make. And so the price of the margins while the price may be lower, the margin is very healthy and you need to sell the full product line to maximize profitability in our operations. On your question about highway construction and coming highway construction, that really plays into our hand in that it is a really healthy mix of what our plants produce. It has a combination of base and fines because it's new construction, and it has asphalt rock; it has concrete rock, so it gives the full flavor of everything we produce and just pushes the overall profitability up.

When considering our geographical strategy, we are optimistic about it now and in the long term, particularly regarding the diversity and positioning of our geographic mix. The trends we are observing, along with the growth and increased public spending we mentioned earlier, should provide us with advantages from a geographic perspective. We are in a strong position to capitalize on where growth is occurring.

Over and beyond that on aggregates, it also fits into our hand with our asphalt business. So we have very strong positions in a number of states with asphalt, which is a lot more public driven, so all of the spending on highways will help that business.

Great. Thank you.

You're welcome.

Thank you for your interest in Vulcan Materials, and we look forward to talking to you this quarter and over the balance of the year. And I would like to thank our employees for all of their hard work and the things they do to make this company great. Thanks.