Vulcan Materials Company (VMC) — Q2 2017 Earnings Call Transcript

Good morning, everyone. Thank you for your interest in Vulcan Materials. Joining me today for this call are Tom Hill, Chairman and CEO; and John McPherson, Executive Vice President, Chief Financial and Strategy Officer. Before we begin, let me call your attention to our quarterly supplemental materials posted at our website, vulcanmaterials.com. You can access the presentation from the Investor Relations homepage of the website. Rather than review each slide specifically during our call today, we will provide the key highlights in our prepared remarks in order to allow more time for your questions. Before we begin, let me remind you 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, management 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 Tom. Tom?

Thank you, Mark, and we appreciate your joining us for the call today. So let's get right to the key points. In spite of aggregate shipments in the quarter being severely impacted by rough weather across the Southeast and Mid-Atlantic, and by specific circumstances in Illinois and Coastal Texas, our unit margins in Aggregates reached a second-quarter record, and the pricing climate remains positive. In addition, our visibility to a turn in public construction activity continued to improve. There are more highway project tons in backlog than we've seen in at least three years. Private non-residential starts in our markets are now growing, having increased from plus 1% a year ago to plus 8% today. In both highways and private non-residential sectors, our markets are outperforming non-Vulcan served markets in starts growth. In addition, highway starts in Vulcan markets are up 7%. Although we have lowered our outlook for aggregate shipments in this calendar year, we anticipate the second half of the year to return to growth. The shortfall in aggregates volumes drove most of the gap between our reported results and expectations for the quarter. Shipment results are highly variable across geographies just like you'd expect given the dynamics I mentioned earlier. For example, shipments for Georgia, Florida, Alabama, Mississippi, and Louisiana were down 12% compared to the prior-year second quarter, which was well off trends and expectation. This was largely due to weather and its impact on project timing. At the same time, shipments from Illinois and Coastal Texas were down 19% and 12% respectively, due to severe reductions in large project work. Yet our backlogs in Coastal Texas and Illinois, like most of our markets, are very strong and growing. Our other markets combined saw shipment growth of over 6%, which is much more in line with expectation and trend. This growth came despite very tough weather in the East, with the West showing very strong shipments, as expected. It is important to note that the factors negatively impacting second quarter shipments are contradicted by strong underlying demand trends. In fact, looking behind the quarter's reported numbers, I am very encouraged by what I see. Leading indicators for shipments continue to strengthen, with public construction beginning to exit from the lull experienced over the last 12 months. Private demand continues to recover across most of our footprint, with key states such as California and Virginia showing renewed momentum. Long-term project pipelines for both private and public transportation work continue to build, and we are now seeing the rate of starts for transportation infrastructure projects returning to growth. A year ago, these starts for Vulcan markets were down 16% on a trailing 12-month basis, which had dragged on our shipments. Today, they're up 7%, and we're seeing meaningful improvements in our backlogs across various markets from California to Illinois to Georgia. Customer confidence remains very strong given this visibility, and the pricing climate remains positive. Pricing for the quarter was up about 6%, taking into account product and geographic mix. On a normalized basis, our cash margin per ton in aggregates improved by 7%. This is despite wet material, which is hard to process; on-again, off-again production schedules; and expensive production splits. To give you a better feel for the quarter, I'll briefly compare and contrast two of our important states, California and Georgia. They illustrate clearly the variability in the quarter, but also the quality of the profit improvement that we're seeing at the local level. In California, we saw volume improve by 10%. This marks the beginning of the recovery we anticipated in 2016. Pricing improved by 7%, and overall unit profitability improved by 49%. This aligns with the strong operating leverage that we enjoy. This California growth reflects a strong and strengthening private market, plus we have not yet felt the impact of additional state and local highway funding of approximately $6 billion per year, which will dramatically improve the public market. In California, we are also a major supplier to massive projects like the new Rams stadium, which was slightly delayed in the first quarter but has now begun shipping. Now, regarding Georgia, as many in the industry know, Georgia is a strong market. However, in the quarter, things slowed considerably due to DOT delayed projects and weather. For instance, Atlanta had 25 rain days in May and June. These factors contributed to a volume decline of 13%. But I am not worried about Georgia; the fundamental demand outlook remains solid. It is supported by both private construction activity and a defined slate of public transportation projects. Pricing for the quarter in Georgia rose a healthy 8%, which is a strong sign of underlying demand strength. We lowered our volume expectations for the year, adjusting our guidance range. This is due to compression of shipping days and the timing of large projects that we know are going to ship. In addition, I'm very pleased by our growing project backlogs, increasing public and private starts, and the growing preconstruction pipeline. We feel confident that we will return in the second half of the year to a sustained period of growth. To underscore this point, the backlog of large projects in Georgia, where Vulcan will be the major supplier, continues to swell. Large highway projects such as the I-75/16 work in Macon and the I-285/400 expansion in Atlanta have been delayed by the DOT as well as by weather, but they will start to ship soon. Now, I'll hand it off to John, who will walk you through the details of the quarter and discuss outlook and financing activities.

Thanks, Tom. I'd like to begin by underscoring that our business remains on track with our long-term goals for mid-cycle profitability. Aggregate shipment shortfalls to date led us to reduce our outlook for the current calendar year. But at the same time, key leading indicators for shipments for the balance of this year and beyond have strengthened in important ways. The pricing climate continues to reflect this confidence in the sustained recovery, and more tactically, the healthy backlogs that we and our customers see. The operating leverage inherent in our aggregates-focused model remains intact. And where we've seen good revenue growth, we've seen good flow-throughs. Our expectations for free cash flow growth also remain unchanged. Now I'll delve further into our outlook for the balance of the year. As you've seen, we are lowering our guidance for 2017 due to our revised expectations for aggregates shipments. We now anticipate full-year shipments of between 182 million tons and 187 million tons. A few comments regarding our outlook for the second half. Starts data for public transportation infrastructure projects historically serve as a reliable leading indicator of our shipments to that end-use, with a lag depending upon the nature of the project. The turn we are now seeing is due to a higher proportion of larger, more complex projects, and consequently, it can drive a longer lag between a project start and our shipment of aggregates to that project. That said, we're pleased to see the turn in this indicator for our markets, as well as the solid growth in our internal backlogs. We interpret these as clear signals that we are exiting the lull in public transportation shipments experienced over the last 12 months, returning to a new wave of growth, characterized by strength in public demand joining the continuing recovery in private demand. The long-term preconstruction pipeline continues to build, and we're finally beginning to see that core demand flow through to growth and actual project starts and our shipments. Again, the momentum in private starts remains solid across Vulcan's footprint, and in fact, it is already showing up in our shipments. For instance, we are experiencing particular strength in shipments to private end-uses across the Southeast, and now in Virginia and California as well. Therefore, we feel very good about the fundamental demand drivers and about the leading indicators in near-term shipments. However, for the second half of 2017, we remain cautious regarding the ultimate timing of shipments to selected large projects, as well as the ability of our customers to fully catch up on work deferred from the first half. Additionally, the turn in starts and shipments related to public transportation projects, although encouraging, has come a bit late in some markets to make a full impact on 2017 as originally expected. Of note, our aggregate shipments for July were up 2% over the prior year. Most Southeastern markets showed improved momentum as the month progressed alongside improved weather. However, we have yet to see a full return to growth in Illinois and Coastal Texas despite strong backlogs in those markets. Our lowered volume outlook primarily reflects the simple reality of the number of shipping days left in the calendar year. While we see a return to solid growth, we cannot guarantee that we can fully catch up to our original guidance in the remaining months. Our current outlook for the balance of the year, August through December, implies 5% to 10% growth in aggregate shipments over the prior-year period. Our trajectory for unit profitability remains unchanged. And as noted, same-store average selling prices for aggregates advanced 5% in the quarter despite volume headwinds and certain mix headwinds. On a normalized basis, unit cash margins improved by about 7%, again despite challenging operating conditions at many plants. Our cost disciplines remained sound, and in the markets where we've seen meaningful freight-adjusted revenue growth, we have experienced greater than 60% flow-through to segment gross profit. In addition, certain transitory cost issues, such as our transition to new, more efficient ships, will be behind us by year's end. We remain on track with our long-term pricing and margin improvement expectations. Now, I’ll close with a few comments regarding our recent financing activity and our current financial position. Through a series of financing and refinancing actions since the beginning of 2016, we have been able to fund high-quality growth capital investments while moving closer to our target debt structure. After paying down our 2018 maturities in July, our weighted average interest rate has dropped from 6.5% to 4.8%. The weighted average duration of our debt has extended from 7 years to 13 years. Annualized after-tax interest expense has grown by approximately $5 million. The rating agencies were supportive of our announced agreement to purchase Aggregates USA and the financing actions associated with that transaction. We remain committed to maintaining an investment-grade position throughout the cycle, and we should be in a position to pursue other smart growth opportunities as the recovery continues. Tom, back over to you.

Thanks, John. Now despite the volume shortfall and our revised outlook for the full year, I am very encouraged by how many key indicators improved during the quarter and by what that foreshadows for the second half of 2017 into 2018 and beyond. This time last year, California and Virginia were relatively soft; now they are demonstrating renewed momentum. Coastal Texas, although weak so far this year, should begin to deliver on a solid backlog of work as delayed projects kick off later this year. And we remain very confident about the Southeast, given continued growth in both public and private demand. Public transportation project starts have returned to positive territory. The pricing climate remains very positive. Our customers are confident, and our recent acquisitions have performed well thus far. Now, speaking of acquisitions, I want to briefly comment on our progress related to the Aggregates USA acquisition and our perspective on the M&A market. Regarding Aggregates USA, we are on track with this important acquisition, and the more we learn, the more excited we become. Their management team and workforce are outstanding, and the synergies we identified work well for us. This transaction is one that checks all the boxes. Operational synergies will include plant efficiencies due to balancing product mix. We will have cost synergies by managing our rail fleet more efficiently. We will serve new customers and serve our existing customers in different ways, with the right product at the right time and at the right place. We also have back-office synergies. Lastly, we acknowledge that in any acquisition, we have substantial opportunities to learn from the new business and its people. We are continuing to evaluate a number of bolt-on M&A opportunities. The M&A environment is rich right now, but we will stay disciplined, remaining focused on the types of synergies I just described. Now, we will be happy to take your questions.

Good morning.

Good morning, Bob.

Thanks for all the color, Tom and John. I'd like to discuss the pricing environment today and your execution. So two questions. First, you provided a lot of color around your expectations for volumes in the second half of the year, and I was hoping you'd provide some color about the pricing environment in the second half of the year, and kind of how much confidence your customers have given what you were talking about as backlog and some increased activity in both public and private markets. So just to make it a little cleaner, what are your expectations for pricing, and what gives you confidence in your ability to realize better pricing momentum going into the second half?

I would describe the pricing environment right now with two words: vision and confidence. I think our customers see the backlog of work they have and understand that it is coming. There's going to be a lot of pent-up demand. So, it’s a very favorable environment for pricing because of that. Now, given some of the hard-to-produce products, like asphalt sizes that are challenging to produce and more expensive to produce, you may see prices increase faster and higher, particularly over the next year or two, due to the rising highway demand and asphalt demand on those sizes. But people really understand the work that's out there, Bob, and they know it's coming, giving them a strong ability to raise prices across the construction materials group.

Bob, to clarify on guidance, our expectation for full-year pricing remains unchanged, and our expectation for full-year unit margin improvement remains unchanged. We are very much on track, despite second-quarter weather impacts. Again, the work is there, everybody sees it, and we even have some locations that are a little bit tight. So our focus is primarily on how much of our product we can get on the ground, and how quickly we can do that in the remainder of the year.

Got it. That makes sense. And John, could you take a moment to talk about trends in unit profitability? You've faced some volume headwinds, but you've achieved really good pricing in the first half. It seems like you're getting pricing and volume in the second half. What should our expectations be for unit profitability? Is there room for improvement? Are you satisfied with current execution, considering the environment? Thanks, and good luck.

We are pleased with current execution. If I step back from that, I would say our unit profitability and the continuous improvement in pricing and unit profitability from our perspective is very much intact and continuing. To highlight a few numbers or summarize, for the Aggregates segment for the quarter, the headwinds we've faced, profitability, and total profits were primarily due to weather and volume loss tied to those weather events. The way we look at it, we probably lost or deferred about 4.5 million tons of shipments in the quarter as a result of weather and project delays, which equates to approximately $40 million in gross profit impact. In terms of pricing, we had about $0.16 of headwind derived from product mix and geographic mix, which accounts for an additional $8 million to $10 million of gross profit impact. Moreover, we faced certain transitory cost issues related to diesel and the transition to new shipping methods, which caused approximately $7.5 million of headwind in the quarter. We faced similar impacts from operating in wet conditions, which made it more difficult to leverage fixed costs, adding another $7.5 million in impact. Overall, we estimate that these factors resulted in about $60 million to $65 million of gross profit impact in the quarter, primarily tied to volume and weather. Nonetheless, we expect a return to more normalized profitability and growth moving forward, and that should be reflected in our guidance.

I'd add, John, when you consider our operational performance during tough circumstances, our teams did a great job. First of all, their safety performance improved significantly; our reportable accidents were down by 20%, and our lost-time accidents decreased by 35%. So they did a fantastic job taking care of one another, which in turn drives business success. John accurately emphasized that the primary impacts we faced were related to weather, specifically the volume reductions due to the weather conditions that hindered fixed-cost absorption. Wet weather made it quite challenging to run operations efficiently, and that inefficiency penalized our shipment results. Moreover, we are producing a higher percentage of asphalt sizes right now, primarily because we can see strong visibility regarding highway work demand. Asphalt sizes are inherently smaller, slower, and more complicated to produce. Nonetheless, our operational teams continue to focus on improving their efficiencies.

Just to summarize that: You had great execution in the quarter, you have a positive outlook on both price and volume, and John, just to confirm for the record, you're expecting continued improvement in unit profitability in the second half of the year, correct?

Yes, for the second half, and to emphasize – yes, in alignment with the longer-term goals we've laid out.

Nice work in a tough environment. Good luck.

Thanks, Bob.

Hi, good morning, Jerry.

Good morning, this is Abdul Tambal on behalf of Jerry.

Good morning, Abdul.

Can you discuss what needs to happen for volumes to increase in that high single-digit range over the balance of the year? Would favorable weather be a requirement for that? Which regions do you see hitting the high end of the volume range, and which regions do you expect to lag?

If you consider our current demand perspective, what's happening in the markets is generally positive. The one area that may be a little soft is non-highway infrastructure. I will delve deeper into specifics below. Starting with the Mid-Atlantic, in Virginia, we have actually seen our volumes increase in the second quarter, despite tough weather; both non-residential sectors have rebounded, and housing continues to be strong, including healthy highway work. Tennessee is also a robust state, though seeing some temporary slowdown in highways that will rectify itself through accelerated spending by the Tennessee Department of Transportation. Both of the Carolinas also continue to perform well, both publicly and privately, even before we experience the benefits of funding flows through in South Carolina. Georgia is incredibly healthy across all fronts; we have secured large highway projects amounting to approximately 8 million tons of shipments, it's just a matter of when they will ship. Florida also remains strong both on public and private highway fronts. In Alabama, we are witnessing growth on the private side, though the public works are a bit slower. Moving to the Coastal area, growth is happening. In Texas, particularly Coastal Texas, we anticipate significant project work to commence in the fourth quarter. These projects, which we initially expected to kick off in the second quarter, experienced delays due to permitting and various issues. North Texas and Central Texas maintain strong growth as well. In Arizona and New Mexico, while the private side is healthy, highway projects are noticeably flowing through, and we can expect progress there from being a major aggregates and asphalt supplier. Ultimately, California continues to be a strong story for us, with a 10% volume increase driven by private demand, complemented by a rebound in highway work as we serve all major metropolitan markets there. Illinois remains challenging. Currently, public demand is weak, but we do anticipate growth in residential areas and expect to see some larger work flow through in the next 12 to 18 months. Overall, despite setbacks in the aforementioned regions due to weather in the second quarter, our markets look fundamentally strong, and the starts data reflect a growing preconstruction pipeline both in the private and public sectors, which fuels our optimism.

Got it. Additionally, regarding California, can you share about whether you have started seeing any of the emergency funding flowing through into the projects? What are your expectations for SB 1 being able to influence your business?

That's an important question. Currently, we have seen no significant flow-through from that. As a reminder, those funds will only start getting collected in November. The state has mentioned it is trying to accelerate some projects; they are expected to let 13 jobs this year, with another 50 jobs pending permitting and design. Work might flow through in 2018, particularly for paving and repair work, but the more intricate projects typically take 18 to 24 months to fully materialize. Thus, I would say our earliest actionable timeline would be 2018, but realistically, the significant impact will likely extend into 2019 and 2020. We are often disappointed by the delays in how quickly these funding flows through, but rest assured, the work is coming and is critically needed in that state.

Got it. Thank you.

Thank you for taking my questions today. I would like to follow up regarding California. Last quarter, you compared California's situation to Texas four years back, and I’ve appreciated the color you've provided in this call, specifically regarding the 10% increase in volumes. Can you break out the state growth, focusing on the L.A. market and Northern California, as well as the San Diego market, in terms of what’s driving real demand in these areas, both on the residential and non-residential side? Also, could you help us understand the breakdown in revenues between L.A. and the other markets, and how depressed demand is especially in the L.A. market? Thank you.

The healthiest market in California right now is Southern California. We've seen strong residential growth for some time, which continues to prosper. A significant difference lies in the non-residential sector, particularly in Southern California, where we observed preconstruction pipelines anticipated to materialize. Thus, the dynamic in Southern California remains encouraging regarding private demand. Conversely, Northern California has been comparatively slower on the non-residential front, although residential demand remains healthy, with a growing pipeline that will eventually manifest. As a reference, we previously faced a dip in state funding over a year ago due to budget issues, but those funds are now re-entering the mix, facilitating growth in public infrastructure. Therefore, I'll emphasize that Southern California is slightly ahead, while Northern California is catching up and filling its preconstruction pipeline. In terms of our market presence, our largest operations are located in Southern California, which accounts for roughly two-thirds of our California footprint, with the remaining third split primarily between Northern California and Central California. Those proportions are approximate and can vary depending on our demand cycle position. Importantly, our long-term reserve positions in California, particularly in a state with many depleting resources, are exceptional and unique, making it extremely advantageous for us both now and in the future. The recent improvement is largely driven by private demand. I believe you understand this well, given your insights, but public demand is still recovering from a funding lull that was driven by uncertainty in funding from Caltrans. We expect this situation to shift rapidly with new funding coming into play.

Great. One final question regarding Coastal Texas. We have various contacts in the building sector who report some optimism about slight improvements in that market. Could you help clarify the contrast between our industry feedback and your own observations there? Is it more a question of a project mix or some other fundamental aspects we should consider?

The fundamentals in Coastal Texas are solid, and we see strong employment and population growth. Residential growth has rebounded, while non-residential demand has remained flat but is beginning to improve. Our primary issue has been the timing of project starts; both highway and energy projects we anticipated to begin in the first half had to be moved to the fourth quarter, which is largely due to delays in permitting and other matters. Notably, the Golden Pass LNG project and Sabine Pass were scheduled to ship in 2017, but we've learned they won't really start until early 2018. Similarly, the Port of Freeport expansion faced delays; and the Chevron Phillips refinery upgrades were also postponed. Additionally, we had environmental and permitting issues with State Highway 550, along with delays for SH 288. Therefore, our primary challenges stem from timing issues with large projects. But I want to reiterate that the fundamentals are strong, and I am increasingly optimistic about the market's return.

That's helpful. Lastly, regarding Texas, there is a significant letting coming up in August for $1.1 billion. Can you clarify your capacity to meet demand given the jump in funding from $3.2 billion in prior years to $5.5 billion and projected $6 billion this year? Should we prepare for delays due to capacity constraints, or are your contractors and your figures able to meet this demand effectively?

That's something we will have to monitor closely. There will be capacity pressures, yet we hope these projects can get permitted, designed, and in place. However, with larger projects come added complexity, including intricate designs and the aforementioned permitting hurdles. We see this trend across all DOTs, especially in Texas. Nonetheless, the silver lining here is that this surge in large projects aligns perfectly with our capabilities — we have a robust backlog of work. Importantly, large projects do tend to take longer to start, but the work is slated and funded, ensuring that it will come to fruition.

Thank you very much.

Hey, good morning.

Good morning, Trey.

I just want to follow up on that last comment. Tom, you mentioned that with the increase in large projects, they are taking longer. John, you also mentioned that the lag has extended a bit on the highway side. Can you provide us a sense of what the historical lag has been and where it stands today? This would give us a frame of reference for the flow-through timing of the highway starts you cited — 7% growth in the Vulcan market.

I can provide some context. Historically, we've seen about a 9 to 12-month lag, and that has now likely extended by approximately three months. Of course, this varies by specific project; some delays originate from larger complex projects or challenges through design-Build efforts, leading to shipment schedules being delayed from the previously agreed timeline. Overall, while we have observed an upward trend in starts and demand for public transportation, the actual shipment of aggregates has lagged by an additional six to eight weeks longer than anticipated. That said, it's reflected in our adjusted guidance for the year.

That makes sense. Can you provide some visibility on the timing of projects that were pushed back? While I don't need a project-by-project update, I am interested in your sense of general visibility regarding the back half guidance tied to these delayed larger projects?

We have included a number of these projects in our guidance, with some already starting to ship recently in July, and we expect some more to start rolling in August and September. For Texas, we anticipate significant projects to take off in the fourth quarter. However, the pace of work is leveling out. As I mentioned earlier, May and June were particularly challenging due to widespread rain, with some locations experiencing rainfall for more than half of those two months. The contractors found it difficult to proceed on jobs, and whenever we experience a stretch of clear weather, our shipments tended to spike. In conclusion, the work is assuredly there, and we anticipate it's going to come through, which reflects positively in our outlook.

Understood. And on the downstream side, do any concerns about labor availability for concrete or roofing drive finishers impact shipments? Are you concerned these shortages could create bottlenecks that delay progress?

From Vulcan's perspective, we are well-equipped, and we are continuing to add both quality and quantity of employees. However, assessing our customers' perspective on concrete jobs, we may see some short-term pressure. In contrast, large highway works will not be strongly affected, as contractors are proactively preparing for anticipated demand due to the visibility of existing project work. There may naturally be some tension with concrete in terms of drivers and finishers, but I believe these issues will be manageable long-term.

If we step back a year, we observed that our customers were hesitant to make investments ahead of the election, which is different from the current landscape. It now feels like our customers actively want to boost their own capacities and are gearing up accordingly.

Thank you for addressing all the questions. Wishing you good luck in the upcoming months.

Thank you.

Thanks for taking my questions. My first question pertains to the leading indicator you mentioned; you indicated that public highway work has increased by 7%. Can you clarify if that figure represents a year-to-date figure or just for June?

That is a trailing 12-month figure as of June.

Got it.

It's best to examine the trailing 12-month figure since monthly data can be noisy. The underlying trend suggests a return to growth and strengthening across our markets.

Also bear in mind that in numerous instances, this is occurring before new funding flows through in states like South Carolina, Tennessee, or California.

Understood. Lastly, given that your commentary seems incrementally positive, could you speak about your 2018 plan? Are you planning to achieve those objectives? Any thoughts would be appreciated.

As John noted, 2017 appears to hinge significantly on the number of shipping days we have available. Everything that doesn’t come to fruition in 2017, logically, won't just vanish; thus we see growing starts and promising private demand. Therefore, we are optimistic about the second half of the year and even more so about 2018, 2019, and 2020, as private demand continues to be robust and the public side strengthens.

While we're not providing 2018 guidance at this moment, based on our current observations, strong backlogs, discussions with customers, public funding developments, and everything we have discussed, we would be genuinely surprised if we were not entering 2018 — both we and our customers — with sturdy backlogs and a very optimistic outlook. The starts data, which we've emphasized in our materials, indicates we are entering what we believe to be another growth wave in this long recovery. It seems we are on the precipice of a period with both public and private sectors driving growth together, which is reminiscent of the conditions we witnessed in the latter part of 2013. However, today we can confidently assert we are operating with substantially higher prices, better per-ton margins, and a stronger balance sheet along with key acquisitions on the horizon. Therefore, we are genuinely excited about the outlook for 2018 and beyond. That said, we are not offering guidance, but we do believe a robust and healthy position awaits us and our customers as we approach the new year.

That's helpful. One thought on long-term outlook: I typically see 3% to 4% growth rates in an upcycle, sometimes even up to 5%. Do you think a 5% long-term run rate is feasible, or is there potential for better numbers given the current environment?

The demand we're experiencing certainly indicates the potential for faster growth rates. A considerable pent-up demand can lead to growth exceeding those estimates. However, when evaluating the breadth of our portfolio across various markets, combined with established constraints, a long-term forecast of 5% to 7% seems more pragmatic than aiming for double-digit growth overall. Demand is undeniably present and conducive to swifter growth, with certain individual markets clearly exhibiting greater potential, but maintaining steady long-term growth seems more likely across our extensive portfolio.

Understood. Lastly, is it reasonable to say that your pricing has remained above inflation for some time? Going forward, as this cycle matures, can we expect to continue getting favorable pricing? Is that a realistic assumption?

Pricing dynamics mainly depend on what's happening in the market concerning demand, visibility, and confidence levels. If we assess the private sector, which remains robust, the persistent growth will allow us to achieve favorable pricing levels for the foreseeable future.

Okay. Thank you very much.

Hi, thank you.

Hey, Garik.

To start, a housekeeping question regarding your volume guidance for the second half of the year: Does the 5% to 10% projected increase include the acquisitions you completed in the first quarter?

Yes, although they don’t significantly affect volume, they are included in our guidance. The 5% to 10% refers to the period of August through December, so you can think of it as roughly translating into 4% to 8% for the overall second half because July showed a 2% increase.

That clarification is helpful. I just want to check in on the relative softness in July, compared to the back-half guidance. Was that largely driven again by weather conditions?

Yes, July's performance can be easily attributed to weather — the first two weeks were heavily impacted by rain, while the latter half allowed us to recapture some momentum. As we all know, some regions faced significant rainfall in July, but despite that, we still achieved a 2% overall increase.

Not to mention, we also experienced continued weakness in Houston and Illinois, which was part of the overall trend. You’ve examined some factors in your work, so it’s clear that the remaining shipping days in the season are pivotal to our success.

Understood. Thank you. Moving on, regarding your outlook in highway work that you’ve mentioned has improved. I'm curious if you're hearing any concerns over the current federal challenges regarding the debt ceiling or ongoing resolutions impacting project timing delays?

I don't foresee any impact from that. The FAST Act is secure, and we’re observing a consistent flow of those funds. That’s been very positive for us. The real question pertains to future needs in the coming years. There's considerable momentum in D.C. around addressing the Highway Trust Fund, with bipartisan interest in acting on this issue. We recently witnessed a significant number of Congress members advocating for fixing the Trust Fund. Therefore, I don't perceive any immediate threats to federal funding.

As anecdotal evidence, we sensed that in early 2017, when considerable talks about a $1 trillion infrastructure program circulated, some DOTs and local governments hesitated to initiate projects. However, they seem to have resolved that hesitation; they are now focused on moving forward without distractions. This is beneficial for all of us, and we'd prefer to avoid uncertainty as it only complicates the process.

Great, that clarification is appreciated. Thanks.

Hi, thanks for taking my question. I wanted to inquire a bit more about the concrete segment, which continues to show strong growth, particularly in Texas and Virginia. I noticed impressive sequential and year-over-year pricing improvements in concrete. What factors are contributing to this performance and how should we assess it moving forward?

We experienced volume growth across all of our concrete markets, with notable margin improvements seen primarily in Northern Virginia and Texas, along with our recent operations in California. We are very pleased with the performance of our concrete division, and this success can be attributed to our customer's increasing efficiency and the ability of our teams to serve them effectively.

Northern Virginia is still our biggest concrete market. When you see improvement there, it reflects robust private demand, which we’ve discussed previously; this is what drives greater concrete usage in that area.

Thank you. Regarding the strong shipment growth of 6% you noted in the Virginia-Carolinas-Tennessee areas, I know you outlined the overall volumes lost in the quarter mainly due to weather and delays. Can you quantify what that 6% figure might have looked like without these weather effects?

Those figures would have been higher due to weather impacts across South Carolina, North Carolina, Tennessee, and Virginia. Certainly, if we factor in the estimated loss from 4.5 million tons due to weather and project delays, it would have been higher without those external negative influences. Those particular markets faced tough weather, particularly later in the quarter, which significantly impacted our results.

Thank you for your time spent with us this morning. As you've noticed, John, I, and the rest of our Vulcan family are very optimistic regarding our business, the growing work pipeline, increasing project starts, and rising backlogs on both public and private fronts. Our teams work diligently every day to enhance our business, and we consider these to be thrilling times. We look forward to sharing more updates with you over the coming quarter, and we're eager to reconnect at the end of the third quarter. Thank you for your interest in Vulcan Materials.