Vulcan Materials Company (VMC) — Q4 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 on our website supplemental information for your review and use. Rather than walk through each slide on this call, we will focus on the highlights. 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. These risks are described in detail in the company's SEC reports including our earnings release and our most recent Annual Report on Form 10-K. Additionally, we will refer to certain non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures and other related information in both our earnings release and at the end of our supplemental presentation. Now, I'd like to turn the call over to Vulcan's Chairman and Chief Executive Officer, Tom Hill. Tom?

Thank you, Mark. And thank all of you for joining us for our fourth quarter earnings call. You know, it's a very exciting time to be in the Construction Materials business. We have great momentum, and we are as well-positioned as I've ever seen us and we're looking forward to a strong year in 2017 and looking past 2017. Our foundation for sustained growth is as strong as I've ever seen it in my 27 years with the company. Our fourth quarter results didn't match up with the prior year's fourth quarter, which was exceptionally strong in a tough comparison. This comparison was affected in large part because of an earlier end to the construction season in 2016, and also due to continued volume weakness in our California, Illinois and coastal Texas businesses. With the exception of these three areas, fourth quarter aggregate shipments were relatively strong compared to 2015. October-November shipments exceeded the prior year's strong comparisons, before falling off in the second half of December. This is even with a slowdown in new construction starts during the election cycle with its related uncertainty. Lower shipments volumes and production brought lower fixed cost absorption. At the same time, we made the right investments to support the increasing production we see coming in 2017. These necessary investments to support growth in repair and maintenance and stripping, along with variances in end-of-year accounting accruals negatively impacted our unit margins. But stepping back and looking at the full year and our underlying performance trends, what you see is continued compounding improvements in our execution, our service to customers, and in our profitability. We are strongly convinced that we are in a long, multi-year recovery where we will continue to build our profitability, our franchise and deliver for our shareholders, our customers and our people. In fact, a longer recovery will enhance profitability as we benefit from further improvements in unit margins, pricing and operating leverage. Here's what we delivered in 2016: 16% growth in adjusted EBITDA, 22% growth in adjusted EBIT, 90% growth in net earnings, and 24% growth in cash provided by operations. These numbers reflect our continued success in making meaningful improvements to our underlying profitability, which includes 7% growth in aggregate freight-adjusted average selling prices in 2016, and 14% growth in aggregates gross profit per ton, a record level. We also saw further improvements in asphalt and concrete material margins and a 280 basis point gain in total company gross profit margin, and we achieved important pricing and unit margins across nearly all of our markets. Our 2016 results set us up nicely for 2017 and beyond. Our assets are positioned extremely well to serve the continued recovery in materials demand. The pricing climate remains constructive. Our operating disciplines will enable us to grow margins faster than pricing, and we have the financial strength and flexibility to grow, while at the same time returning capital to shareholders. Combining our strong cash generation and incremental debt capacity, we may have approximately $5 billion to either invest for growth or return to shareholders between now and return to mid-cycle shipment levels. I'll comment more on M&A later in the call. Let me just say now that I like what I see with the acquisitions landscape, and our disciplined pursuit of these opportunities. Now, we faced some volume changes – challenges in 2016 that I don't expect to repeat this year. You might simply say that we should face easier comparisons later in the year, but let me briefly touch on a few examples. In Texas, our aggregate shipments were down 10% year-over-year given several large project delays and prolonged bad weather. However, shipments in Texas began to strengthen in the fourth quarter. With our North and South Texas areas running ahead of last year's strong pace, we expect volume growth in Texas in 2017. California continues to lag expectations, although we began to see improvements in shipments in some markets, along with continued improvements in pricing. California's failure to address its declining transportation infrastructure in 2016 along with deferred construction on a number of large non-residential projects contributed to the low in our California business. Recent trends suggest those factors will change in 2017. We expect California, like Texas, to grow in 2017. Illinois also continued to lag, but not at the same pace of decline and pricing was strong. We believe that our Illinois business will hold steady in 2017. The remainder of our business showed strong growth in 2016, on the order of approximately 10% aggregate shipment growth and 6% pricing growth in total. For the most part, we expect that momentum to continue throughout 2017. For example, look at important markets in the Southeast, which enjoyed robust double-digit growth in 2016. South Carolina volume was up 17%, Florida volumes grew by 15%, and Georgia was up 20%. By the way, all of these markets should see double-digit volume gains again in 2017. John will walk us through our expectations for 2017 in a moment. But the bottom line is that we expect another strong year, on track with our longer-term goals, a year with growth in adjusted EBITDA of approximately 15% to 25%. So we are excited about 2017 and we're excited about the business well beyond 2017. As I look across our markets, the foundation is in place for an extended recovery, with growth in public construction spending just beginning to join the growth we have been seeing in private construction. And while I'm encouraged by the attention we see the Federal Government giving to sustained investment in our nation's infrastructure, our views regarding an extended recovery and demand are grounded in what's happening right now. In the November election, continuing a nationwide secular trend, ballot measures passed in Los Angeles County, San Francisco, Greater Atlanta, and South Carolina added $1.7 billion annually in infrastructure spending in these markets. Other states are poised for action this year. In California, work is progressing quickly in the Senate and Assembly with support from the Governor to increase transportation funding by $4 billion to $6 billion annually. Tennessee and South Carolina also have announced new highway funding proposals that stand a good chance of being enacted this year. So, the momentum continues to build. Voters across the country are demanding that something be done to catch up on decades of underinvestment in public infrastructure. The LA County measure passed with 70% of the vote. That's voters passing a tax increase on themselves, and nationwide, 74% of state and local ballot measures calling for transportation improvements passed during the 2016 election season. Now, certainly more is needed. Federal investment in physical infrastructure, as a percentage of GDP, is at 0.5%, lower than it's been in decades, and far below levels of investment in other developed nations. But notwithstanding the need for significant new investment, the foundations for a sustained and extended recovery of demand are already in place, and there is no construction materials company in the United States that is better positioned to take advantage of that ongoing recovery than Vulcan. Now I'll hand it off to John to walk you through our 2017 outlook. Then I'll close by addressing our M&A activities and other investments in growth. John?

Thanks, Tom, and good morning everyone. As you saw outlined in our release, our performance expectations for 2017 line up with the business's trajectory since the second half of 2013, when the recovery in our part of the economy began, as well as with the longer-range goals we've discussed previously. To give you a bit more color, I'll walk through some of the expectations underpinning our guidance range of $1.125 billion to $1.225 billion in adjusted EBITDA. And I'll provide some comments regarding the timing in what could be a back-half-loaded year with uneven quarterly comparisons. I'll start with aggregate shipments, where we anticipate a volume of between 190 million and 196 million tons or between 5% and 8% growth over 2016. Consistent with the preliminary outlook we shared during our September Investor Meeting in Atlanta, we expect year-over-year shipment growth across all end-use segments, residential, private non-residential, public transportation and other public infrastructure and in nearly all of our geographic units. Construction materials demand continues to recover and to recover broadly. Longer-term project pipelines, what has been called the water behind the dam, continue to build. As it relates to our ultimate 2017 shipments, the key question may not be around demand per se, but rather around the pace at which the end-to-end construction sector can move to meet that demand. The recent improvement in construction starts we have seen serves as a positive leading indicator, particularly for the second half of the year. However, we still see constrained construction capacity for certain types of jobs in certain geographies. This uncertainty regarding shipment timing drives our wider range regarding 2017 tonnage. As Tom noted, the overall pricing climate remains positive. For aggregate pricing, we see a gain in freight-adjusted average selling prices of between 5% and 7%. Price increases announced for our fixed plant customers have generally been well-received. The momentum in aggregate pricing reflects the confidence market participants have in the sustained recovery, as well as the continued focus by material producers on earning adequate returns on capital. It also reflects a number of construction markets that are effectively supply constrained in the short term, similar to the pricing dynamics that you see in housing, for example. To the extent improved product mix balances, including higher sales rates for fines and base material, negatively impacts reported average selling prices, it should also improve total cash flows. In other words, it would be a good thing. Again, we expect unit margins in our Aggregates segment to expand faster than the rate of pricing growth. For our Asphalt, Concrete and Calcium segments, we expect gross profit growth of approximately 15% in total, driven primarily by volume recovery and improving material margins in concrete. We do not expect the recent growth in Selling, Administrative and General (SAG) expenses to repeat in 2017. The SAG increase in 2016 over 2015 was driven primarily by incentives tied to the company's financial performance and stock price, certain investments in sales and customer service capabilities, as well as elevated legal and other outside service expenses. Operating and maintenance CapEx for 2017 should be approximately $300 million. This figure includes some carryover from 2016, during which time our expenditures were approximately $250 million as compared to our original guidance of $275 million. These figures exclude our internal growth capital investments, such as the opening of new rail yards, railcars or our Panamax-class ships. All in all, we expect another year of strong growth in net earnings, EBITDA and cash provided by operations amidst what for now appears to be an extended recovery in demand in materials shipments. We will persist with our focus on continuous compounding improvements in safety, in our operating performance, in our unit margins, and in our capital productivity. We've entered 2017 in a very strong financial position. Our capital allocation priorities remain unchanged from those discussed previously, and we're in a position to balance reinvestment in our current franchise, M&A and other growth capital investments, and returning capital to shareholders. Now, before handing it back over to Tom, I'd like to offer a few thoughts regarding the timing of revenue and earnings growth throughout the year. We don't give quarterly guidance, as you know, nor do we intend to. However, we do want to remind you that 2017 growth, especially on a quarterly year-over-year comparison basis, could be weighted toward the last three quarters or perhaps even the second half of the year. We expect our shipment momentum to build throughout the year as FAST Act funds begin to drive new construction activity, and as the recent improvement in construction starts begins to impact our business with its typical lag. In addition, and I know this is hardly news to most of you listening, the business faces tougher comparisons in the beginning of the year than it does later in the year. For example, last year's first quarter saw a 17% increase in aggregates volume over the prior year, driven by unusually favorable weather and exceptionally strong large project shipments. In contrast, the fourth quarter of 2016 was obviously not nearly as strong. Per these examples, we continue to encourage investors to focus on longer-term trends in order to understand the performance and value of the business. And from our perspective, those key trends, multiple years of volume recovery, a positive pricing climate, strong operating leverage, and accelerating growth in free cash flows remain substantially unchanged. Tom, back over to you.

Thanks, John. At Vulcan, we've moved into 2017 with a great deal of confidence. Our business has come a long way over the last three years, and we intend to maintain that momentum. 2016, a year where we grew EBITDA by 16% on only a 2% gain in aggregates shipments really sets us up for a year that won't see the same volume headwinds. Certainly, we are encouraged by the discussions taking place regarding infrastructure investment and corporate tax reform. The country needs these changes. Vulcan's working families need these changes, and yes, Vulcan shareholders also stand to benefit. We have the wind at our back. Our job, internally, as always, is to focus on what we can control: to serve our customers extraordinarily well, to operate safely and efficiently, and to deliver better and better returns from the capital that we deploy. At Vulcan, we're not satisfied with tailwinds. We're going to raise our internal expectations. We're going to raise our disciplines and our intensity another notch. We're not waiting for national policy improvements to make our own business better. That's our job, and that's the job we're going to do. If we do that, we'll help our country grow and regain a competitive edge. We'll create jobs and opportunities for our people, and we'll be even better positioned to grow for many years to come. Now, on the topic of growth and in particular acquisition-led growth, I'd like to offer a few thoughts on the M&A landscape as we see it today. You likely saw a number of recent bolt-on acquisitions referenced in our press release. This may appear to be a pickup in activity after a period of relative quiet. But I'll tell you, we've been working hard on this all along, and we'll continue to work hard on it. The acquisitions noted in our release represent attractive additions to our positions in markets ranging from Nashville, to Dallas, to Albuquerque. In each instance, we're not only getting bigger, but we're also improving our capabilities to service our customers efficiently and effectively. John noted that we have the financial strength to invest for growth while maintaining the overall flexibility and resilience of our balance sheet. We're first and foremost going to maintain discipline in how we use our financial strength, but I expect you'll continue to see bolt-on acquisitions. These will add to our already strong organic growth trajectory and to the lasting value of our market positions over the long-term. And of course, acquisitions aren't the only growth investments we make. During 2016, for example, we invested in five new rail yards in markets such as Texas, Georgia, and South Carolina. So to wrap up, I'll note again that these are exciting times at Vulcan Materials. We're facing an extended recovery with the impact of the FAST Act just beginning to kick in. We're seeing a significant pickup in state and local transportation funding across our footprint. The pricing climate for our products remains constructive, and we're going to realize further profit margin improvements with multiple years of continued growth ahead. In addition, we enjoy the financial strength to pursue smart bolt-on acquisitions and other growth investments while also prudently returning capital to shareholders. Add to all of this the potential for meaningful corporate tax reform and a sustained increase in infrastructure investment, I think it's easy to see why we are very excited about our future at Vulcan. And now, if the operator will give the required instructions, we'll be happy to answer your questions.

Hey, good morning. Congratulations on a very strong 2016. I was hoping you could just step me through the bridge in terms of the sequence of shipments from October, November, December because you guys sounded pretty bullish, I think, on your last update from November 3. And I was also hoping you could kind of give us a bridge on gross profit margin? I think John called out a couple of items that affected fixed cost absorption like the timing of repair and maintenance work and stripping expenses, and whether those are like one-time costs that pertain to the quarter or whether kind of a normal incremental profitability that you guys generate will be visible as we move into the new year?

Yeah Bob, it's Tom. I'll start first with how we saw volumes in the fourth quarter. October and November were actually from a shipping rates perspective, ahead of the prior year and going very strong. The bottom line through it, at least ran out of – we ran out of time on the construction season. In 2015, we were able to ship all the way to the end of the year. And depending on the market the second week, first week, third week of December we just – the season ended, and it just – that's what caught us. So I think the demand going forward is there. We're confident in 2017. The work is there; in fact, it’s really exciting. It's going to be when the construction season starts up and who knows when that's going to be. But when it does, we'll start to see the large highway projects, that FAST Act flowing through plus some of the big non-res projects will start shipping.

Bob, I'll take – I'll start with your second question, but again, just on volume, and you probably saw this referred to in our release, total business for the quarter on a shipping rate basis was up 2.5%, October-November combined, that's despite the challenges that we had in California and Coastal Texas and Illinois. And just to give you a contrast, December was down 11%. So, really good momentum, particularly in our core markets—our core Southeastern markets, those were actually up in the quarter for the full quarter. They're up about 9% October-November on a shipping rate basis, down 7% in December, just to give you a sense for the fall off relative to last year. I'll highlight that because it ties to your second question, Bob. There are really three big things in the quarter that affected unit margins in our Aggregates segment and gross profit margins in our Aggregates segment. And they're really all timing-related. So the first thing we would say and call out is that the full year trends are the right trends to look at. The full year trends in terms of unit cost production being up 3% year-on-year, and then full year trends in terms of 14% improvement in unit gross profit margins in our Aggregates segment, those are the right numbers to focus on. With that said, let me kind of say what happened in the quarter. Again, really about timing, we noted first in the quarter that our unit cost of production increased 13%. Again, that compares to a 3% increase for the full year. That's all about timing of cost. So that's about $0.89 of cost increase in the quarter that contrasts to about $0.22 for the year. Again, the $0.22 is the right number. But that timing factor by itself resulted in about a $30 million impact in the quarter, and it's about a 500 basis point impact to gross profit margin. So that's the big driver: is timing and costs. Again, look at the full-year trend, right numbers to look at. Two other factors: one, we called out pricing up. We had about $0.14 in the quarter of negative pricing mix both product and geographic. That's about another 100 basis points of impact on margin, still a very good thing for sales and cash flows, about a 100 basis point impact on stated gross profit margin. And then that volume fall off that happened at the end of December, losing those incremental tons, which come at a higher rate of incremental gross profit, had about another 100 basis point negative impact on margin in the quarter. Add those up, it's about again $30 million of impact due to timing differences and unit cost of production. That's really the difference between $0.89 and $0.22 across 43 million tons. It's about $6 million with negative mix on pricing. And on the incremental tons, we think if we lost about 2 million tons, it's probably another $18 million of gross profit with the associated revenue that came with it. So, that's the rough walk-through. That's the way we look at it, I come back to looking at the full year numbers as the best indication of how the business is doing: 3% growth in unit cost in our Aggregates segment, 14% growth in gross profit per ton in our Aggregates segment. Those are reflective of really what's happening in the business and they're reflective of what you see in our guidance.

That's extremely helpful and clarifies what I was trying to understand. One other question, and then I'll turn it over, kind of a high-level question. It seems like you're saying this cycle is going to be stronger for longer and you're talking about mid-cycle profitability, which kind of seems like it shifted out a little bit just due to timing situation but a lot of things are going to come on in the back half of the year. I haven't heard Tom sound this optimistic in a while, and he put that out that $5 billion number there, which is a huge number in terms of balance sheet leverage if you want to buy something and free cash flow generation. What are your thoughts on capital allocation for the next 12 to 24 months? And you guys have any new thinking around that as we move closer toward mid-cycle? Thanks and good luck.

I'll start with kind of a CFO view and then Tom might comment more on just the M&A landscape and how we're approaching it broadly. But our overall capital allocation priorities are unchanged. So we will – and the thing to take away is we got the flexibility to do all of these things. So it's about balance and not either-or for us. We will continue to make investments back in our franchise, so that's next year CapEx guidance of about $300 million. Again, that includes some carryover for this year. And again, you'll see accelerating free cash flow in the business. We continue to have incremental debt capacity staying within our investment grade parameters. That could be roughly $2 billion of incremental capacity as we move through the recovery part of the cycle. We would expect dividend to continue to grow with earnings, but we're very focused on the sustainability of that dividend. As Tom noted, we are actively involved, if not aggressive on the M&A trail. We're going to stay disciplined, but we have a lot of really good opportunities there. We'll continue to pursue those. And then we will continue to look to return excess cash after all those items to shareholders via opportunistic share repurchases that make sense. Now, all those things with the same priorities we've talked about is just – we just know that we're entering 2017 in a really good position to pursue all those things. And Tom, I'll hand it off to you, maybe talk about M&A.

Yeah, Bob. I think that you saw us close a few that we noted in the press release. Don't be surprised if you see that pattern continue. We have a lot of conviction around the continuing improving cycle. And there are a lot of M&A opportunities out there, some of which we should be the clear owner of those. It's always difficult to predict timing, but what we will say is that we'll say stay disciplined in our acquisition process. But I think you'll probably see this pattern continue.

Nice work guys. Stay in the course.

Hi. Good morning, everyone.

Hey, Jerry.

Good morning, Jerry.

I'm wondering if you could just flesh out for us some visibility that you have into the ramp-up into the back half of 2017? You've been very clear that the first quarter is a tough comp for a while now. I'm just wondering, can you just give us some data points either large project bids or whatever underpins visibility on the significant ramp-up in the back half of 2017? And within that context, can you just talk about what you're seeing in Texas specifically, that's giving you confidence that Texas will return to growth in 2017?

Yeah. I think that as we look at 2017, we see broad-based growth in, of course, all of our segments and our geographic footprint. The Mid Atlantic and the Southeast continue to be very, very strong. As we look at our confidence – as far as the timing of that, it's really about when the construction season starts. The work's there. We have visibility of jobs, we backlog the jobs, they're ready to go. It's in every market we have. When does the sun come out and when we start shipping, and when does that begin? So, that will control the timing and that could be the first quarter or second quarter, but it's going to start. I'd like to touch for a minute on California. And as we said in California, it isn't if, it's really when and we're beginning to see that when come around. It's really going to be driven by the private side in California and we've been very focused on the private side, particularly the non-residential, and I'm pleased with our team's execution on that. I would tell you in California, our customers are a lot more optimistic than they were a year ago. And we're beginning to see those large projects let and start, and we've backlogged a number of them. I'll give you a couple examples: the new Rams Stadium, we'll start to ship in the next couple of months, and this is 750,000 tons. The Mid-Coast Trolley extension in San Diego, again, it will start to ship whenever the season starts. It's about 200,000 tons. Silver Lake Reservoir is a really nice project for us because there's a lot of base and fines. And then the Otay Ranch residential project is a good example of the residential work that's going on in California. It's one of seven different phases of a residential project, and the first phase is 100,000 tons. And then, I'm pleased our team just closed on the LA Street contract, which is a five-year contract for asphalt, a million tons of asphalt. So we're seeing California demand pick up, but again, it's going to be driven by the private side. And I got to tell you, I'm feeling good about our execution in California and the team we have in place. So moving to Texas, I think we expect good growth, continued growth in Texas. Look, the fundamentals in Texas are all there. It's still growing. We see employment growth in Texas. We see population growth in Texas. The oil bust impact at this point on employment has really about bottomed out. So those headwinds will go away. It has the most healthy highway program probably in the country, and highway work in 2017 is very much in our footprint both in aggregates and asphalt. On the private side, residential and non-residential continue to grow. We'd probably – again, we bottomed out in Houston; we'd probably see some small growth in Houston. So, we expect healthy growth in Texas in 2017.

Okay. And Tom, can you comment about the Coastal Texas specifically, how much of your exposure is directly or indirectly to large-scale ethylene and LNG projects? Is it possible to tell just so we're appropriately calibrated as those projects eventually roll off?

Sure. I think that, that really affected the comparisons between 2015 and 2016. We had really big projects in 2015. They really kind of finished out in 2016, and we didn't see them ever flow through again in 2016. And I would tell you, they're probably not going to flow through in 2017. There are some out there, but they're not going to start till 2018. So what's built in here is really based on the highway program and conventional residential and non-residential growth, not the large energy projects.

Okay. And, John, in your prepared remarks, you said the price increases were well-received so far. Can you talk about the magnitude of the price increases in 2017 compared to the price increases that you put in at the start of 2016? And specifically, were you able to put in price increases into markets where volumes were down significantly in 2016?

Sure. I'll offer a couple comments, but I'll hand it out to Tom to kind of give you around the horn on what we're seeing in pricing, because it is really continued positive climate. The first thing I'd say, Jerry, because it links into pricing is don't take our comments about the back-end loaded as concerns about the underlying recovery at all. They're concerns, if anything, about timing, but you just heard Tom say, look, California and Texas are returning to growth for us. The rest of our franchise has been growing. Illinois should be flat, not at the same decline it had last year. So we're pretty excited about how we're set up for 2017. We're also just acknowledging a tough first quarter comp, and we're acknowledging the timing uncertainty we've seen with respect to large projects and when they actually take aggregate shipments. But, again, that's about timing; that's not about conviction in the recovery. Now, you see that in pricing. The market participants see the demand. It's a big driver. The demand coming is a big driver of the pricing climate. The magnitude of the changes varies across markets. But in total for us, the way we look at it is the compounding margin improvements we've seen should continue and continue apace and consistent with the long-term goals we've laid out. I will note in – sometimes it gets missed, but even in those markets that we had a lot of volume challenge last year, the Californias and Illinois as examples. We actually had quite healthy price increases. So it's not like all is bad in those markets, it's more of a temporary issue with respect to volumes. But let me hand it off to Tom to give maybe a better around the horn in what we're seeing in terms of the price increases we put in place so far.

Yeah, Jerry. With confidence in a long, gradual recovery ahead of us, the environment for price increases continues to be quite healthy. And it's driven, obviously, by improving demand, but also as we'll tell you, as we've always said, it's driven by the visibility that our customers have in the growing pipeline of work. We're seeing rising prices and/or margin expansions across our footprint and across all product lines. As I look at the numbers without – I'm not going to get into naming markets, but I'll give you some examples of price increases that we implemented January 1: reading down the list, $1.25, $1.35, $0.50, $1.75, $0.60. Look, these are robust price increases and there continues to be a lot of confidence in a long sustained recovery, and it's showing up in pricing.

I'm sorry, just to clarify. Even markets like California and Texas that were down in 2016, you are getting significant price increases to start off 2017?

The answer to the question is, yes. In fact, we had price increases that were very, very healthy in those markets in 2016, and we'll continue to see price increases in 2017.

Thank you very much.

Thank you.

Hey. Good morning, gentlemen.

Good morning, Trey.

One question, I guess is for John on the incrementals. I mean you gave us some good color on how to think about incrementals for the full year this year. And I understand that's the best way to look at the business overall. But you did also highlight the obvious tough comps we're facing here in the first quarter, not just you guys, but pretty much everybody facing in the 1Q and how this year could be more back-end loaded. I get all that. But just for our modeling benefit, if we could get a little bit more color on how to think about the margins early in the year, especially given – coming off of a kind of an abnormal margin situation in 4Q, and then you'll probably have kind of continued lack of fixed cost absorption in 1Q relative to other times in the year. Just any color, even if it's directionally on how to think about margins would be super helpful.

Trey, I'll try and give you some directional help, but you probably know what I'm going to say, which is we don't give quarterly guidance. And for a variety of reasons particularly in a low-volume first quarter, let me just start by acknowledging that it's a little bit unpredictable. Keep in mind that our business as it ramps up, we're running a business now that daily shipment rates, depending where you are in the year, can range from 700,000 to 900,000 tons. It only takes a couple days shifting from in the end of March, as an example, to have an impact on first-quarter incrementals. So I'd tell you to really focus on trailing 12-month trends, and not over-read the first quarter regardless – just like we said last year's first quarter, don't over-read the blow-out numbers. So all that said, nothing that we see—there is no boogeyman in the business that we see that would lead to a slower overall rate of margin improvement. So there's some timing differences quarter-to-quarter, but there is nothing major negative out there. If I think about some of the factors at play, you already mentioned some. But diesel throughout the year, we'll see how it plays out. Our assumptions for our guidance have diesel a little bit less than $2, so that's a small headwind for us next year. Rising during the year, and the fourth-quarter diesel was a slight headwind, but not a major headwind. And the next big factor I'd point out is just the timing of price increases, and how they flow through the work. Again, the first-quarter number can be a little bit deceptive that way. But it's really difficult—our big question in the first quarter really is probably more about volume than underlying margin structure of the business. Now, we get a lot of great operating leverage and a lot of great fixed cost leverage, so without that volume it impacts our incrementals. But this is mostly about timing of volumes as opposed to seeing major changes out there on the cost horizon if that makes any sense.

Oh, yeah. Yeah, that's super helpful. And the big wildcard obviously being volume in the 1Q, given the tough comp is – that was kind of the reason for the question, because I know it's not easy for you guys to call, and definitely not easy for us sitting in our chairs with the kind of unique 1Q we're facing.

Once again, I know this isn't that helpful to you and that's why, again, we don't give quarterly guidance. But if you think about full year trends—that continued double-digit growth in unit margins is something we still feel good about.

Got it. Okay. And then also mix played a role in 4Q—given the outlook you have for your different geographies and how they might perform, you mentioned seeing California and Texas returning to some growth there. But given that outlook and then also for your end markets, is there any kind of a mix impact, good or bad, negative or positive, I guess, that we should be thinking about as we go through 2017 and any assumptions you've laid out there?

It's Tom. I don't see a lot of mix impact in 2017, and if it were to come from the base side, we'd be very happy with it. And it would be additive to the volumes that would be at the high side of the volume guidance. But I think we feel pretty good about how we've looked at it and we do those budgets from the ground up. So I don't see a lot of mix in those numbers, and again, if it were there, we'd be pleased with it because it'd be fines and base.

We're referring to healthier product mix which, as you well know, Trey, with some of the new construction coming on, can put a little bit of downward pressure on reported average selling price, but if you look at real like-for-like pricing, that trend is still very positive.

Got it. But you guys are reflecting that in the range you gave?

We think we are in the 5% to 7%. Again, because our pricing decisions—you hear us say this all the time—are made so locally, I mean, some have been made around this call. It can be a difficult number, but that's included in the range, the 5% to 7%. We don't see—I'm going to call it any deceleration in the pricing climate per se. We'll have mix effects across the business product and geographic, but the overall climate is – I mean, it's very consistent with last year.

Yeah. The climate is consistent. I think it continues to be healthy and it's not like you're getting price increases in asphalt rock but not in base. It's really across segments, and it's across product lines, and it's across the geographies.

Got it. And last one from me, just to kind of touch on that $5 billion that you mentioned earlier, Tom. Just to be clear that I'm making sure I understand that. And that's your expectation for cumulative free cash flow, so net of CapEx, cumulative free cash flow through the years as we kind of progress towards that mid-cycle volume. And I think you pointed to in the past is something like 250 million tons. Is that the right way to think about that $5 billion?

Two parts to it, Trey. It's roughly a $3 billion of cumulative free cash flow and $2 billion of incremental debt capacity. And think of that incremental debt capacity is 2 to 2.25 times mid-cycle EBITDA. They are then investment grade parameters. A rough number, but not—your own modeling will probably come up with something not dissimilar. And now, we're not going to get way ahead of ourselves and spend that money before we make it in some kind of crazy way. But it is a—the business model throws off a lot of cash, and you know that, that's just—it's worth thinking about.

Right. I think that's right.

And now, we're not going to get way ahead of ourselves and spend that money before we make it in some kind of crazy way. But it is a—the business model throws off a lot of cash and you know that, but that's just—it’s worth thinking about.

Hi. Thank you for taking my questions today. One is just a follow-up on pricing, as we have also seen pricing momentum improve, but I think just for the reminder for us on the call, could you go through your top five highest per unit priced markets? Because we know that there are some that have perhaps lagged on a volume basis, but it'd be helpful if you could just give us a reminder of those top five per unit priced markets?

Yeah, Kathryn, I think there is a little bit of a missed number here. Our top pricing markets are going to be, what we call remote markets. So, they're going to be on the coast where we ship products into them. And some of those may or may not be the top margin markets. Some are; some would lag some of those things. I think that—we'd tell you, it's such a local business, that's all going to be relative and the top pricing may not be the top margin. But I think the important here is that we are seeing pretty good price increases consistent across all of our markets in all segments. I think as those— as the projects kick in, particularly from the FAST Act and from the new state highway over 2017, 2018, and 2019, it will only continue to support price increases along with the private side, which just continues to grow.

And Kathryn, if you look at it, just building on Tom's answer, and I think—well, you know this I know, but especially if you look with a two-year or three-year view, there's a pretty good overlap between further remaining growth in the recovery and generally speaking markets that are higher margin, at least, as we sit here today. Now, we'd tell you that for the markets that are on average lower margin we're working hard to move that up, but as the recovery unfolds, that should be a little bit of a tailwind to us and that we have a lot of room to go in markets that are attractive on a margin perspective already.

Okay. That's helpful. Just want a little bit more color on your higher stripping costs that you noted in the press release. I assume this is—you’re typically building in the winter for the build-up in the peak of the construction season in the spring and summer. But is it correct to assume that the higher stripping cost in part is driven by higher backlogs and expected higher demand, particularly for certain key products such as clean stone?

Yeah, Kathryn, that's exactly correct. We are making hay while the sun's shining in that we – while we don't have those shipments and don't have—well, that fell off in the second half of December gives us an opportunity to go ahead and get some work done, so that we could bank reserves that were stripped for the season that we see coming in, in 2017 and wouldn't have to go outside and maybe pay higher prices for. So this is just prudent long-term operations management.

And Kathryn, those higher stripping and repair and maintenance expenses, just to be clear for everybody, they're in the $0.22 increase in unit cost of sales that we talked about for the full year. The distortion just happens because they occurred in the fourth quarter when we happen to have lower volume.

Yeah. Understood. One other subject I want to talk about is your non-resident market. I know there's been a lot of focus on public end market, but one of the things we're focusing on is a little bit more expansive definition of infrastructure under the new administration. Could you break out how much of your non-res end market is more heavy versus kind of your traditional or commercial kind of office type non-res projects? And if you have any view just with the change of administration on how your thoughts on traditional infrastructure versus that more expansive definition? Thank you.

Yeah. I'd tell you that, we've seen really healthy growth in the non-res sector in office, lodging, warehouses, distribution. And what's lagged some is manufacturing, institutional, and government. They actually declined somewhat over the year, but I think we are seeing some return in those. The fundamentals ultimately for non-res are in good shape. You got population growth, you got employment growth. The external indicators are showing strength today and you've also got really healthy residential growth, which will pull non-res behind it. I think if you look—step back and look at our footprint of where we seeing substantial strength in non-res it would be the Southeast, the Mid-Atlantic, Southern California, Arizona, Texas, excluding Houston and we think that's, well, actually may show some small growth in the year. But overall, I think we see healthy growth in the non-res segment.

Kathryn, just building on that and talking a little bit about—I’m not going to call it new administration and discussions. But we probably know one thing that you're very well aware of, which is we're already exceptionally well-positioned against a number of the increases and infrastructure funding that are already happening, particularly at a state and local level. And you know that well, but (52:55) of those increases that are already happening and we're very well positioned against those, whether that's improved maintenance or new road construction or port construction or water improvement or you name it, all those things we're well positioned against. In terms of the broader definition of infrastructure and things like longer-term federal programs, one of the great things about aggregates-focused business is we serve all those things. So we're absolutely fine and well-positioned against a broader definition of infrastructure whether that's airports, intermodal facilities, typical transportation on and on and on and on, we're well-positioned to serve substantially all of that increase in demand.

I'd tell you that—I'd add to that, Kathryn, if that happens, as John said, we're in a great position for that and all of those projects will need our products. And I'd add to that, that – Vulcan Materials will be essential to building those critical infrastructure projects. I mean, that's what we do. And they don't really happen without us very well.

Great. Thank you. And final just handholding question of the $40 million EBITDA shortfall, how much of that is transitory versus any ongoing type issue? Thanks very much for answering my questions.

Kathryn, if you're referring to the quarter and what might be seen as a shortfall in gross profit margin percentage to that $40 million?

Correct.

If I would say that, substantially all of that is transitory or timing and that the right number to look at would be a $0.22 increase in unit cost of sales for the year and not the $0.89.

Well, thank you all for joining us this morning. As we look forward to the 2017, so I would coin it as, we're set up well for 2017. Our long-term cost trends are very good. Our markets are showing growth. And our pricing shows the confidence of us and our customers and the whole market in that long-term growth. So thanks again for joining us. And we look forward to sharing news in 2017. Thank you.