Vulcan Materials Company (VMC) — Q4 2018 Earnings Call Transcript

Good morning. And thank you for joining our fourth quarter and full year 2018 earnings call. With me today are Tom Hill, Chairman and CEO; and Suzanne Wood, Senior Vice President and Chief Financial Officer. A question-and-answer session will follow their prepared remarks. Before we begin, I would like to call your attention to our quarterly supplemental materials posted at our website vulcanmaterials.com. You can access this presentation from the Investor Relations homepage of the website. A recording of this call will be available for replay at our website later today. Additionally, you can sign up to receive future news releases through the quick links on the Investor Relations homepage. Finally, 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 along with our other legal disclaimers are described in detail in the company’s earnings release and in other filings with the Securities and Exchange Commission. Management will refer to certain non-GAAP financial measures. You can find a reconciliation of these measures and other related information in both our earnings release and at the end of our supplemental presentation. Now I will turn the call over to Tom.

Thank you, Mark, and thanks to everyone for joining the call today. We appreciate your interest in our company. In addition to discussing the fourth quarter and full year results, we will also touch on several other matters of interest, including our improving pricing dynamic, our view on 2019 demand and shipments, and our financial expectations for 2019. Suzanne will review the financials shortly. But first, let me get right to the notable things about the fourth quarter that set us up for a strong 2019. The quarter was a great finish to the year. We delivered a 24% increase in gross profit in our core Aggregates segment. We enjoyed solid shipment growth, compounding price improvements and disciplined cost control. A principal driver of the strength in the quarter was an 8% increase in total Aggregates shipments, 4% on a same-store basis. These higher shipments were largely due to the growing demand in the public sector. The many increases in state and local highway funding that we have seen across our footprint are now turning into shipments. We are in the very early stages of big growth in highway demand. Shipments in the quarter rebounded in Texas and Virginia, states that are among our more profitable markets, and solid growth continued in Florida, Arizona, Alabama, and Illinois. Our pricing dynamic also improved in the fourth quarter, excluding the impact of mix, our freight-adjusted pricing increased approximately 5% compared to last year’s quarter; including mix, pricing increased 2% due to stronger shipments in relatively lower-priced markets such as Alabama, Arizona, and Illinois. We have seen improving pricing momentum quarter-after-quarter. This ongoing momentum sets the stage as we move into 2019. It’s supported by improved backlogs of private and public work, customer confidence, demand visibility, and logistics constraints. Throughout the quarter and the year we were highly focused on operating efficiencies and cost control. For the quarter, we converted all of our higher revenue into gross profit, finishing the full year with a 12-month same-store flow-through rate of 64% in our Aggregates segment. Overall, for the full year we increased total revenues, earnings from continuing operations before taxes, and adjusted EBITDA while decreasing our overhead expenses as a percentage of total revenues. For the full year, we achieved record Aggregates cash gross profit per ton of $6.32. Our safety performance, which is a leading indicator of operational excellence and proper stewardship of our most important resource, which is our people. I am immensely proud that we further advanced our safety performance improving on our record-setting results from the previous year. For 2018, our injury rate was 0.92 per 200,000 employee hours worked, which is world-class. This is a great tribute to the performance of our people throughout our company. Our performance in our core Aggregates business improved throughout 2018. The momentum we generated and these positive trends in our Aggregates business will carry forward into 2019. We continue to see growth in private demand in Vulcan-served markets. In the public sector, demand growth is coming on strong and it’s most notable in the markets that we serve. Nine Vulcan states that generate almost 80% of our revenue have passed infrastructure legislation over the last three years. These laws have raised funding by almost 60% over 2015 levels. Altogether, state laws and local initiatives to increase transportation infrastructure revenue have added more than $20 billion annually of funding in just these nine Vulcan states. That’s nearly half as much as the federal government provides each year for all 50 states. So the pace of the conversion of public funding and lettings into shipments continues to accelerate and while the timing of those shipments is never precise, the direction is clearly up. This creates a healthy and positive pricing environment. Our backlogs and booking pace are in great shape and are improving. This along with our 2019 fixed plant price increases gives us confidence in the growing strength of 2019. Now I will turn the call over to Suzanne for a more detailed view of the numbers.

Thanks, Tom, and good morning. I will cover some key points from the full year and then move on to our 2019 guidance. For the year just ended, we reported adjusted EBITDA of $1.132 billion. This represented a 15% improvement over 2017 and was achieved despite significantly higher diesel fuel and liquid asphalt costs. Diesel costs increased $26 million or 25% in 2018 and liquid asphalt costs were up $54 million or 32%. Gross profit in our Aggregates segment increased 16% in the year, our unit profitability increased 6% and our margins expanded due to solid growth in shipments, compounding pricing improvements and operating efficiencies. For the full year, shipments grew by 10% or, on a same-store basis, 6%, mix-adjusted pricing increased by 3.5% improving as the year progressed, and importantly, our same-store unit cost of sales decreased by 2%, more than offsetting the higher diesel costs I mentioned earlier. Together with our improved Aggregates pricing, this disciplined approach to cost resulted in the 64% same-store flow-through for the full year that Tom mentioned earlier. These results demonstrate the strength of our Aggregates-focused business even when we experience headwinds. As stated last quarter, we remain focused on the things we can control such as our cost base and the efficiencies and operating leverage that drive our Aggregates’ profitability. We focus on these rather than things not in our control such as cost pressures, inclement weather, or the precise timing of large project starts. Our focus on accountability is a large part of our success and we will continue these disciplines. Now with respect to the non-aggregates part of our business, it was a bit of a mixed bag. For the Concrete segment, gross profit increased by 10% year-over-year. On the other hand, the Asphalt segment had a challenging year with liquid asphalt costs negatively affecting gross profit. While we were able to increase our own prices to customers by approximately 6% in the full year, much of the rise in liquid asphalt costs occurred in the second half and so we were unable to fully offset the higher annual costs, and as a result, the Asphalt segment’s full-year gross profit declined by $35 million or 38%. We will continue our efforts to price so as to offset these costs, but the impact will be gradual as we cycle through existing contracts. In the accompanying slide, you will find information on our cash flows for the full year, but I will quickly recap the more noteworthy items. In the year we spent $222 million on operating and maintenance capital in line with our prior estimate. Our growth CapEx investment was $247 million, a bit lower than our guidance during the third quarter call. While some of this difference is timing-related, we do remain disciplined with our capital spending and continue our careful review of the nature and scope of projects. In 2018, we also invested $221 million in bolt-on acquisitions, which complemented our existing positions and expanded our capabilities in Alabama, California, and Texas. And finally, we returned $282 million in cash to shareholders through dividends and share repurchases compared to $193 million in 2017. So moving on to 2019, when we last spoke with you, we shared a preliminary outlook that called for mid-single-digit growth in shipments and pricing for Aggregates, with the caveat that our detailed budget development and reviews were underway. Having concluded those processes our current expectations are in line with those earlier assumptions. We expect continued demand growth in our markets, particularly on the public side and this view is supported by what we are seeing in our backlogs and new bookings. Specifically, for 2019, we expect Aggregates shipments growth of 3% to 5% and freight-adjusted price increases of 5% to 7%. Additionally, we maintain our longer-term view of an approximate 60% same-store flow-through rate to gross profit on a trailing 12-month basis, understanding that like this year, the rate can vary quarter-to-quarter. Turning to our non-aggregates segments which include Asphalt and Concrete, we expect 15% to 20% growth in gross profit collectively with the assumption of relatively stable liquid asphalt costs. SAG expenses in the year are forecast to be $355 million, reflecting higher revenues. Notably, our SAG expenses as a percentage of revenues continue to decline and we remain focused on efficiently leveraging our overhead costs. We anticipate that interest expense will be approximately $130 million and that the category of depreciation, depletion, accretion, and amortization together will approximate $360 million. The combination of these assumptions results in a 2019 adjusted EBITDA range of $1.25 billion to $1.33 billion, with the low end of that range representing a double-digit increase as compared to 2018. Now, as you know, our business is inherently cash generative, and 2019 will be no exception. As you model our cash flows for the year I will share some thoughts with you that will help you fill in the blanks. The most important point is that we will continue to follow our capital allocation priorities and will stay within our debt leverage target range. We project the non-discretionary uses of cash to be as follows in the year: Cash interest expense of $125 million, operating and maintenance CapEx of $250 million, and finally, cash taxes of $160 million. The discretionary uses of our cash involve returns to shareholders, internal growth capital, and acquisitions. So let me touch on each of these. First, we expect to maintain a progressive dividend, generally growing it in line with earnings to a level that is fully sustainable through the cycle. Second, we expect to spend approximately $200 million on growth CapEx for projects that are largely underway. These include the opening of strategic quarries in California, Texas, and South Carolina, as well as improvements to our logistics and distribution network and sales yards. Third, we will continue our disciplined evaluation of acquisition opportunities as they arise and we will only invest in those which fit our strategy and which offer superior returns and synergies. And last but not least, we will continuously evaluate the use of opportunistic share repurchases as a means to return excess cash to shareholders. As I conclude my comments on our 2019 guidance, let me quickly address our balance sheet strength and capital allocation priorities. We are committed to maintaining our investment grade credit rating, strong balance sheet structure and debt-to-EBITDA leverage between 2 times and 2.5 times. Currently, our weighted-average debt maturity is 15 years and our long-term weighted average interest rate is 4.6%. This debt profile, together with our strong cash flow, gives us the flexibility to sensibly and responsibly manage our business. Our capital allocation priorities are unchanged and we will be disciplined in the use of that capital, always seeking to improve our returns and shareholder value. And now, I will turn the call back over to Tom for some closing remarks.

Thanks, Suzanne. I am proud of our people’s performance in the fourth quarter and for the full year. Despite serious external disruptions in 2018 and large increases in the cost of liquid asphalt and diesel fuel, we still delivered strong top and bottom-line growth, while also growing the business in strategic locations. Our strategy is clear and compelling. Our operational structure is lean and locally led and our positions in attractive long-term growth markets are simply unrivaled. Our teams perform to high standards, focused on continuous improvement. We are well-equipped to take advantage of market opportunities or market challenges. We have big goals for 2019. These goals are focused on improving our performance in our operating disciplines, how we service our customers and how we grow our people. We are leveraging our strengths and growth opportunities further building on the deep engagement we have in the day-to-day improvement of our business. We also continue our strategic focus on logistics all across our footprint, encompassing rail, trucking, Blue Water, and our barge system, with a focus on improving internal efficiencies, while continuing to enhance the customer experience. We are excited about 2019 and the following years for a number of reasons. Most notably, the sea change we are witnessing in the public sector investment in transportation infrastructure and the very positive impacts of our focus on growing unit margins. Moving forward, we are especially well suited to benefit as infrastructure demand in key Vulcan states continues to grow, fueled by these substantial increases in state and local funding. Now we will be happy to take your questions.

Good morning, Trey.

Good morning.

Hey. Good morning, everyone. First off, I guess, I want to just ask on the pricing, 5% to 7% increase this year. Can you talk about, is there any mix expectations one way or the other there and any color you can give us maybe on how to think about cadence and any other driver factors behind that guide?

Sure. As Suzanne and I both said, the pricing momentum in our business is clearly improving. We saw another big step up in the fourth quarter. If you look at ‘19, our confidence is really built on three things and three things that we have a lot of visibility to. The first one would be our current booking prices continue to move up. Number two, our bid and backlog prices are up. That’s something we see very clearly and it constitutes about 60% of our business. And then, third, Trey, we are experiencing solid price improvements in our January and our April prices increases to our fixed plant concrete and asphalt customers. We are seeing price increases across every one of our markets in ‘19. Supporting that confidence is our customers’, the visibility they have in demand growth and it’s really underpinned by the improving pipeline of big public work and solid backlogs of private work. I am pleased with the disciplines in our sales force and how they blew pricing up over the last two or three quarters. There may be a little bit of positive geographic mix built into ‘19 but the reality is, if you look at our backlogs our bid work and fixed plant prices, they are all just definitely up from where we were a year ago.

Got it. That’s helpful. As a follow up, could you provide more details on how you anticipate reaching that 3% to 5% volume growth? You mentioned solid growth in private demand and strong growth in public demand. Can you elaborate on your assumptions regarding this, including any considerations related to weather, end markets, or geographic mix? Any additional insights on how you arrived at these projections would be appreciated.

I think it would be helpful if I walk you through the country and discuss various markets. Starting with California in the west, we observed strong volume and price growth in 2019. The public sector is showing real strength with SB-1 measures starting to take effect and projects beginning to move. The private sector is also expanding in both residential and non-residential areas. There may be some slight weakness in housing in the Bay Area, but overall, the private sector is performing well, and we experienced strong pricing in California in 2018, which will continue into 2019. Moving to Arizona, we see good growth in both public and private sectors, with residential and non-residential areas remaining robust. We initiated significant highway work in 2018, which will extend into 2019, along with positive pricing momentum. In Texas, highway work is particularly strong as Prop 1 and Prop 7 funds start to be utilized in 2019, benefiting Vulcan in both Aggregates and Asphalt. Housing demand remains strong, while non-residential growth is moderate but improving. Overall, demand is good with excellent pricing momentum. Coastal Texas is showing particular strength; even though we experienced a downturn, we are now active on both the private and public fronts. In the central region encompassing Louisiana, Mississippi, Alabama, Arkansas, Kentucky, and Illinois, demand is likely more challenged than on the West Coast or East Coast. However, we are optimistic about our pricing execution, particularly regarding unit margins, and I commend the team for their performance despite facing some challenges. In Tennessee, highway work is expected to flourish as the Improve Act is implemented in 2019, with both Aggregates and Asphalt involved in these projects, and a favorable pricing environment with 25 Improve Act projects currently in our backlog or bidding process. In the Southeast, covering Georgia, South Carolina, and Florida, we are seeing solid growth across all segments, which is a significant advantage for us, along with strong pricing. North Carolina is also experiencing healthy growth across all segments, accompanied by improved pricing. Highway funding is beginning to increase in North Carolina. Finally, in Virginia, we have solid growth in all sectors, with rising prices. Overall, it appears to be a strong year ahead with prices increasing across all of our markets.

All right. Thank you very much. That’s all very helpful. I will pass it on. Congrats on a good quarter.

Thank you.

Good morning.

Hi. Thanks for taking my question. Good morning. I wanted to actually follow up with my first question on the geographic commentary and drill down specifically into California and I was hoping that you would be able to give, if possible, a little more in the way of order of magnitude for growth on the public versus private and I am thinking within private specifically on those comments about residential. If we look at what the builders are reporting from an order standpoint, certainly some significant declines. Just curious kind of how much of that is just going to impact you guys with a lag or if there’s something else driving the offsetting strength in residential?

I will begin with the public sector. We believe Caltrans is effectively accelerating SB-1 funding and project lettings. We have already accumulated over 30 projects in our backlog, and we are aware of another 15 to 20 projects scheduled for bidding in the upcoming months. They are doing a commendable job of organizing and initiating this work, which we are starting to see reflected in our operations. In California, we are the largest producer of aggregates and asphalt, and these initial projects require a significant amount of hot mix. We are very optimistic about Caltrans and their swift allocation of funding for project lettings, and we expect to see this work progress throughout 2019. On the residential front, we continue to observe growth across most markets in California. The Bay Area may be an exception where we anticipate some weakness, but the fundamentals remain strong, and inventory levels are still quite low statewide. In the non-residential sector, we are experiencing strong backlogs and bookings, and we expect to see growth in non-residential projects in California in 2019.

Okay. That’s helpful, Tom. Thank you.

Thank you.

My second question is with respect to the guidance around Asphalt and so just hoping to understand that a bit better, I think the combined three categories you are guiding for in dollar terms an increase of something like $16 million to $22 million in gross profit. So I think there’s a comment that most of that’s driven by the Asphalt part, but can you just give us a little more detail around how much improvement to expect in Asphalt and I know you mentioned timing, but just given where Asphalt costs are currently, should we expect that that whole $54 million is recouped at some point over the next, call it, four quarters to six quarters?

I believe the improvement of 15% to 20% that Suzanne mentioned in other products is largely due to Asphalt. Looking back, 2018 was a particularly challenging year for us in the Asphalt product line. We faced difficulties with wet weather and were significantly affected by the rapid rise in liquid costs, which led to losses exceeding $50 million. However, with new public funding coming into our markets, we anticipate double-digit growth in volumes for 2019. This is supported by backlogs and strong bidding in highway lettings for this year. We expect liquid prices to stabilize, which should result in modest improvements in unit margins as we progress through 2019. It's important to note that we raised prices significantly throughout 2018, so we are beginning to catch up now. We should see a much improved performance in the Asphalt product line this year compared to last year, driven by demand, price improvements, and stabilization in liquid asphalt costs.

I would like to point out that we increased prices by about 6% in the Asphalt sector for the full year. In the fourth quarter, this increase was about 7%, indicating an accelerating trend as we work to align with rising costs, most of which were driven by significant spikes in the second half of the year.

Got it. Okay. Thank you both very much and nice results.

Thank you.

Thank you.

Hi. Good morning.

Thank you. I wanted to ask about the cost performance in Aggregates, you obviously had good fixed cost leverage and cost outs enough to offset rising prices, for example, diesel and other costs. As we look ahead into ‘19, should we look at the efforts in ‘18 as being more one-off efforts that might not be repeated or can you keep up the kind of pace of the cost outs in ‘19?

Yeah. Look, Suzanne and I are very proud of our operating teams and their performance improving their operating disciplines in the fourth quarter and actually throughout 2018. As I mentioned in my remarks, they finished the year with a world-class safety performance, which just speaks to the discipline in operating side of the business. And they actually lowered their cost in the fourth quarter and the full year in the face of dramatically rising fuel costs and probably some pretty wet conditions. I’d just say that’s just a job well done and great momentum that we carry into ‘19. As you guys know, this operating discipline is a key part of our continuous quest to improve our unit margins. It’s just part of that formula and the good news I would tell you is, I don’t think our operators are done. I think they still have potential out there and I kind of know this; they are working hard to implement their 2019 execution plans, while they build on that ‘18 performance. So I just tell you, I am really pleased with our operators and encouraging them that we are not done that we will keep the momentum and improve on it in ‘19.

And I will just add to that too. I mean when you think about our business, you can really drive it down to something pretty simple that sets us apart from others, perhaps, and that is our unit profitability. Our main goal is to drive that unit profitability, that’s something that isn’t a one-year initiative, as Tom said. It’s going to be something that’s ongoing because you can’t stand still with that. You have got to continue to move it forward and we have got three ways to do it, you focus on pricing, you focus on volume, and then you focus on operating efficiencies, and the discipline and the accountability in each of the plans. And like Tom, I am very proud of what we have accomplished here for the year and in particular for the last few months. I especially like focusing on the operational efficiencies and driving costs at the plant level because I call that self-help. It’s something that’s within our control. It’s not something that you are waiting for that could be impacted by a number of things, not least of which is weather. So, yes, that’s an ongoing effort and it’s something, I can tell you, we think about and talk about here every single week.

Got it. No. Appreciate the color there. Second question I just wanted to ask about the volume-price relationship. I mean, obviously, there’s a pretty well-established relationship there and we are seeing it in effect, but as volumes are accelerating pricing is as well. My question is we have had a much choppier environment for Aggregates volumes growth over the last couple of years versus let’s say earlier in the recovery. Does that affect the relationship between volume and pricing in any way? I mean, we have heard arguments from investors both ways, it might depress the relationship or it might enhance it. What are your thoughts on that, if there is any change from the choppiness?

I think it’s really the visibility to the future that impacts price and so that people know that there is volume coming and jobs coming they can take risk on the jobs they are bidding at that point. And that’s really important because as we move through the recovery, the public side moving up rapidly is much clearer, those jobs are very public. The DOTs, everybody knows within six to 12 months of what’s going to let and how it’s letting and those lettings are increasing dramatically in our markets. That does a whole lot to give our customers and entire segment visibility to what’s coming to be able to risk price.

Yeah. And I would just add to that with respect to the highway shipments, I mean, the timing might not always be precise and crystal clear on those, but the direction of travel certainly is. It’s something that we and our customers and others in the space can get their minds around. And I think that the sales folks here really did a good job in the early fall kind of setting the tone for price increases upcoming volumes by sending out price increase letters and talking to our customers really, really early on that. Because that, if you have that conversation with your customers and everyone understands what the expectations are prior to our customers speaking to their customers and going down the chain, it just gives them the time to do what they need to do and it just creates a much better pricing environment and I think with the sequential and year-over-year pricing improvement that we saw Q3 and Q4, I think it really that was a good starting point for it.

Got it. Thank you.

Hi. Good morning.

Good morning, Jerry. Good morning.

Hi. Good morning.

Really nice to see pricing cadence, it’s not normal seasonality for pricing to really accelerate into the fourth quarter. So I am wondering, if you folks can expand on just the comments you made on the drivers of price acceleration into the fourth quarter of ‘18 and as I think about what ‘19 could look like as a result relative to the guide, the starting point is plus 5 and we have price increases coming over the course of ‘19. Seems like it’s pretty easy to get toward the higher end of your guidance range for pricing if that’s the cadence, I am wondering if you care to comment on that please.

I believe we are very pleased with the momentum and growth we're experiencing. This aligns with our expectations for the second year, reflecting the visibility I mentioned earlier regarding bid work and backlog pricing. This is further supported by the fixed plant pricing observed in January and anticipated in April. We've successfully navigated similar situations before, and we anticipate continued progress over time. Last year was heavily weighted towards the second half, but I expect pricing to increase throughout 2019. It shouldn't be as inconsistent as in 2018; instead, it will likely be more stable. As we complete older projects and take on new ones, pricing will rise accordingly. However, it's important to remember that comparisons will become more challenging as the year progresses. Overall, while I expect to see some easing in prices throughout the year, I don't foresee it being as erratic as it was in 2018.

Yeah. That’s helpful, Tom. Thank you. And just to take a step back in the early phases of this recovery, you folks have certainly been leading the markets from a pricing standpoint and you have highlighted at your Analyst Day that that had come at the expense of some share. Are we at a point where your share you view as normalized and we are now back to the point where we could lead the market in pricing beyond ‘19, I guess it feels like you have got pretty good momentum heading into ‘20 and I just want to make sure I understand your view of the competitive landscape, as well as we exit ‘19 at a pretty healthy pricing clip.

I think whether it’s the competitive landscape or our customers, I think, what’s really going to support pricing and I am kind of repeating myself is the visibility and the clarity to the growing public work and while we will see big growth in public demand in ‘19 and solid in private, ‘20 will be more public work and ‘21 will be the more public work. Because remember in all of these states where we have seen increasing funding they have got to mature through the process and so the jobs and work are going to build as we are able to take those funds and put them to work and hopefully put them to shipments of stone. So that visibility and that growing demand will really support price increases throughout Vulcan-served markets.

Heading into ‘20?

Yes. ‘20 and ‘21.

Perfect. Thank you.

Thank you.

Hi. Good morning, Scott.

Hi. Good morning. I want to start off with a broad-based question on the guidance and understanding the components that go into it, volumes, price or incrementals. I am curious you have been talking about it in the past several months that we are going to be a little bit more thoughtful about the way we model weather in there that not every day is going to be a blue sky. So, with that in mind, if we have more normalized weather this year, does that mean we hit the midpoint of guidance straight and when I say normalized, I mean maybe a little bit less of the rain that we have had. Does that mean we hit the midpoint of that guidance or does that mean we are more at the high-end? I just want to see how you thought about that in the context of your guidance.

I believe that when we established our guidance, we carefully considered the impact of weather, especially given the wetter conditions we've experienced in recent years. Looking at the last two quarters, I'm quite confident in our guidance for several reasons. First, our price increases are continuing to gain momentum, and we are very confident in that direction. Second, our sales volumes in the fourth quarter were robust, despite the wet weather, indicating that contractors have significant backlogs they need to address. When conditions improve, they will need to act quickly, and we observed some of them effectively doing so in Q4. Third, as previously mentioned, our operators demonstrated strong discipline despite facing higher fuel costs and challenging wet conditions in the fourth quarter, and we plan to carry this approach forward. So, as we approach 2019, I believe we have thoughtfully considered the impact of weather and other potential challenges, which will help us achieve our guidance.

Got it. That’s helpful. For my follow-up, I want to revisit the cost question. Clearly, you had very strong results for the quarter, with a 75% incremental increase. It was a relatively easy comparison, and you mentioned the diesel aspect. Even considering that, you are ahead over the past two and three years in your cash gross profit per ton, with a 5% like-for-like pricing boost. I am curious if there’s anything else to consider this quarter, like any inventory buildup. Looking ahead to 2019, should we factor in any unusual considerations regarding inventory builds or stripping costs?

Sure, I'll address your first point about the comparables. We've previously discussed the various cost pressures we faced this year, which persisted into the fourth quarter. Notably, our diesel fuel costs in the fourth quarter were actually higher than the previous year. While we didn't specifically highlight some smaller factors, we tend to avoid emphasizing minor items unless they are significant or indicative of a trend. We didn't conduct a detailed analysis of the weather in the fourth quarter, but those who follow the weather closely would know it was quite wet. With an additional $5 million in diesel fuel costs and some disruptions in rail transport that required trucking items, I believe the $53 million increase in EBITDA was significant. I wouldn't categorize this as an easy comparison. Regarding your question about inventory in the fourth quarter, our inventory levels are determined by our weekly production planning, which is guided by demand, backlog, and projected near-term shipments. For the quarter, we experienced a slight inventory build of around 3 million tons between Q4 ‘17 and Q4 ‘18, which had a minimal impact, certainly less than $10 million, as it primarily involved fixed costs. Overall, this was based on our expectations for near-term shipments, and I believe it was the right move. Tom, do you want to add anything?

No. I think you covered that well. Thank you.

Great. Thanks a lot. I appreciate all the detail and the color, and then, obviously, congrats on a strong finish to a challenging year and good luck.

Okay. Thank you, Scott.

Hi. Thank you for taking my questions today.

Hi Kathryn.

Good morning.

Good morning. One is just a follow-up on California, and it really has to do more with conversations that we have had with a variety of different industry contacts in the state certainly are seeing a good flow of infrastructure projects, but leading into the November it’s our impression that we are really now seeing more the benefits of local measures and haven’t really seen the full effect of SB-1, would love to get your color on that commentary and your thoughts on the local measure versus seeing the SB-1 momentum right now. Thank you.

Yeah. I think your question was, are we seeing the impact of SB-1 and the local measures or either, what’s the question?

Are you experiencing a greater impact from local measures at the moment and is there more to come with SB-1?

We are experiencing the effects of both local measures and SB-1. In our backlog, we have identified around 30 projects, with 15 to 20 of them slated for bidding in the next few months. While both local measures and SB-1 are contributing, the more significant impact on our backlog has been from SB-1. However, it's important to note that $46 million of that is from local measures that are on the way. You are correct to point out that these local measures will begin to have an impact in 2019, but the more substantial effects will be seen in 2020 and 2021, alongside SB-1.

Perfect. Thank you. Just wanted to get an update on Aggregates USA integration and really focusing on what progress you are seeing with the revenue synergies that you had outlined previously really realistically would be fitting in ‘19 into ‘20, but if you could you just give an update on revenue synergy progress with Aggregates USA? Thank you.

We are very pleased with the acquisition. It fits strategically with the alignment of our distribution networks and quarries. Our execution has been highly successful, and we are ahead of our plans regarding unit margins. Although we faced some rail service issues in 2018 that impacted us, we believe we have mostly overcome them. Looking ahead to 2019 for Ag USA, we see it as a strong opportunity to leverage the synergies from all our operations.

Great. Thank you so much.

Thank you.

Good morning, Garik.

Good morning, Garik.

Hi. Good morning. Congratulations on the quarter.

Thanks.

I want to discuss the volume guidance of 3% to 5%. It's slightly lower than the 6% same-store volumes reported in 2018. I'm trying to understand the positive outlook you're expressing, especially on the public side, compared to the expected volume growth in 2019. I'm curious if the large project shipments in Illinois and Arizona might be causing any timing issues that could impact growth in 2019, or if there are any labor constraints or other factors influencing the guidance.

As I mentioned earlier, we approached 2019 with careful consideration of weather conditions, especially the potential for wetter weather, as well as the timing of large projects to avoid significant fluctuations. We are confident in our guidance and feel positive about it. The private sector remains strong, and we are seeing growth in both our private and public sectors. This reflects our best, educated estimate of when new projects with funding will commence. However, project timelines may change, which could impact our forecasts. Additionally, we've experienced wet weather over the past two years and have taken that into account as well.

Okay, understood. And just a follow-up, just on volumes and just the cadences as you expect it to progress over the course of the year, understanding you don’t provide quarterly guidance. But you do have some tougher comparisons in the middle of the year. So just wondering if maybe you can maybe help us with expectations on how the volumes are expected to progress.

I don't see 2019 as being any different from previous years. The first quarter is always unpredictable and heavily influenced by weather. In the second quarter, we start to see growth as the construction season begins. The third quarter is typically our strongest, although we've faced some disruptions from hurricanes in recent years. The fourth quarter can also perform well if weather conditions are favorable. Overall, I don't anticipate any changes in this pattern. We have a solid backlog of both public and private projects, some of which are large and already in progress. I believe we have better visibility on the timing of these large projects compared to 2017 or 2018, but I expect the shipment cadence throughout the year will remain consistent.

I agree with what Tom mentioned earlier. As someone who is relatively new here, I took the time to examine our business not only in terms of revenue but also from an EBITDA perspective, particularly regarding how our performance phases throughout the year. While we don’t provide quarterly guidance, I found it noteworthy that when looking back over a three or five-year historical period, our business tends to phase by quarter in a much narrower range than one might expect. I encourage you to review that historical data. Although there will always be fluctuations between quarters, the variability is tighter than it seems.

Okay. We will do that. Thanks again and best of luck.

Sure. Thanks.

Hey guys.

Hi. Good morning, Phil.

Good morning.

Good morning. You are expecting a pretty noticeable uptick in pricing for your Aggregates business. But if pricing falls let’s say a little short, closer to the lower end of the range that you have highlighted. Do you have enough levers on the efficiency front to kind of deliver your 60% incremental margin target?

The short answer to your question is yes. I feel much more confident about that based on the performance of our operators and their improved efficiencies in the second half of 2018. They worked hard on focusing on those efficiencies, especially in our larger operations, and now we are applying it across all of our operations as we head into 2019. We are very confident that our costs will meet expectations, regardless of any challenges we might face, and our operators would agree that ensuring this is part of their role.

Okay. That’s excellent. And I guess, when you think about government shutdown risk, that’s obviously dissipating right now, but how do you think about the prospect that the two parties come together and get an infrastructure bill negotiated this year and what’s the risk that projects get delayed on the public side next year with funding winding down on the federal side by 2020 if no new bill gets passed? Thanks.

The short answer is that the shutdown had no real impact on us. A few states delayed jobs by a few months, but overall, it didn't affect us, especially since the federal funding for 2019 has already been distributed. House Transportation and Infrastructure Chairman Peter DeFazio is making efforts on an infrastructure bill, and he aims to address the Highway Trust Fund issue, which we fully support as it is necessary for our country. There is a mutual desire from both parties for this to happen, but it's hard to predict the outcome at this point. As we approach 2020, I don't foresee any setbacks or issues with the FAST Act. When it reaches its conclusion, the federal government won't allow funding to decrease or remain unfunded. In 2021, there may be some short-term challenges for Departments of Transportation, but it's important to remember the significant state and local funding improvements available. As mentioned earlier, the federal highway bill is $45 million annually, and that won't disappear. In our markets, there is an additional improvement of $20 billion per year that is just starting to flow through. I remain concerned about the Highway Trust Fund, as it is critical for everyone, but I believe we will be okay as long as the federal government diligently works to resolve this issue, even though it may take time and effort.

Okay. Thanks a lot.

Thank you.

Hi. Good morning.

Good morning, everyone. Thank you for accommodating me. I have a quick question regarding the capital expenditure. When you mentioned the additional $200 million allocated for growth CapEx, how long do you expect those plans to be in effect moving forward? At some point, you will likely be nearing the lower end of your leverage target by the end of this year, certainly by next year, and depending on how the flex in CapEx plays out, it may put you in a rather intriguing position.

No, that's correct, and congratulations on quickly grasping the math. You are right. If you calculate that, we will be comfortably within the 2 to 2.5 times adjusted EBITDA debt range that we frequently discuss. It's our responsibility as management to ensure we maintain a solid balance sheet and set responsible, somewhat conservative leverage targets. I believe we have those measures in place. Additionally, we aim to create as much flexibility and optionality for the company as possible, and being well within that leverage target certainly aids us in achieving that. If we find ourselves nearing the low end of the leverage band or even outside it in the future, we will revert to our capital allocation priorities. That is why we have established them, and they follow a prioritized sequence, starting with investing in our same-store growth, which is the least risky and most profitable for us. Next, we consider internal growth projects that offer high returns. We may also explore mergers and acquisitions, but we approach that very cautiously; it must be strategic, add value to the company, and have a high return. If those options are not viable, we can return excess cash to shareholders. Our current perspective is to set ourselves up for that flexibility and optionality with our cash, and as we near that point, I am sure we will have discussions at the board level about how to best invest that cash and distribute it to enhance shareholder value. I would describe this as a favorable challenge to have.

Yeah. No doubt. And then last one, do we still think about kind of the business kind of the 255 million tons kind of a mid-cycle number or normalized number that equates to $8.25 cash gross profit per ton or have those numbers changed either through internal efficiencies, better logistics, a larger footprint, anything like that would be helpful.

Fundamentally, we still think about it the same way. I think if you would ask us five years ago, where are you on that curve, I would tell you a tale of two different answers. One I think we would have thought that some of the public would have come on earlier and we may be a little ahead, we would have been a little bit ahead of volume. If you look to unit margins, based on where we are with these volumes, we are ahead of the curve I think and moving up rapidly. So, but fundamentally the answer to your question is yes that’s still the way we look at it.

Perfect. Thank you. Appreciate it. Best of luck.

Thank you.

Good morning Adam.

Thanks guys.

Good morning, Adam.

I wanted to zero in on the M&A pipeline first, Tom, do you think this is a good environment, I mean the privates want to sell right now and then are you seeing large companies for sale small companies for sale or both?

The timing of these projects is unpredictable, as it depends on various factors that we cannot control. We are aware of the possibilities out there and actively exploring them. However, our approach remains grounded in discipline. We choose the markets wisely, consider the unique synergies that align with Vulcan, ensure we acquire at a fair price, and focus on effective and efficient integration post-acquisition. There's always potential activity in the market, but timing and maintaining our disciplined approach are crucial.

Okay. And then also wanted to ask you about the Texas Gulf Coast, you mentioned that quickly, but can you give us some additional color on what you are seeing there and what impact that could have on your business in ‘19 and ‘20?

Houston experienced a downturn in late 2016 and early 2017, but it has since recovered on both the public and private fronts. This recovery has been bolstered by significant funding for highway projects throughout Texas, particularly along the Gulf Coast, including Houston. We anticipate that the economy and demand in both the Gulf Coast and Houston will be quite strong in 2019 and 2020, influenced by both public and private investments. There are numerous projects currently in various stages of development in Texas and Louisiana, especially in the energy sector, focusing on LNG and refinery expansions. We are currently monitoring ten of these projects in Louisiana and Texas. While it is early to predict exactly when these projects will commence shipping in 2019, they are typically large-scale and progress quickly, aligning well with our expertise and capabilities, particularly with our 60,000-ton ships. We expect to see many of these projects get underway in the next two to three years, and there may be some volume growth in the latter half of 2019, though it is too soon to confirm that. Nonetheless, these projects are in the pipeline, and we are optimistic about their prospects as we wait for the timing to unfold; there are promising developments on the Louisiana and Texas coasts.

Perfect. Thanks Tom.

Thank you.

Great. Thanks.

Good morning.

Hi, Brent.

Good morning. May be back on the growth CapEx, if you sort of look at the slate of other internal things you could be doing over the next 12 months. I am curious sort of the sensitivity to that estimate for the year, could it be far too modest if you just pull a trigger on a few of those items, call it, prospective kind of near-term investments?

Yeah. No. It’s a very good question, I mean, again, we went through that thoughtfully, we went sort of project-by-project talking about the ones we might kick off in ‘19. Although, I will tell you a lot of the money set aside for ‘19 is really to finish off projects that were begun in ‘17 and ‘18 because some of those are sort of what I will call long-lived projects, particularly as it relates to opening new quarries in markets that are going to be really important to us like California, South Carolina, and Texas. So we have put together what we think is an appropriate level of guidance in spending $200 million, we will look at if other projects are brought to us to look at that we think might be incredibly meaningful and returns enhancing to the customer, I mean, to our company then we will certainly consider that and we will keep you updated on that as we go forward through the quarter, but we are pretty comfortable with the $200 million that we have given at this point for ‘19.

I’d like to add that the greenfield projects yield some of our highest returns. While they require significant time and investment to obtain permits and develop, once operational, they provide benefits for many years. They resemble an acquisition without the associated high costs. Although there’s a longer ramp-up period, once these quarries are fully developed, the returns significantly improve.

Thank you for that. As a follow-up on Asphalt, Suzanne, you mentioned the gradual effect of offsetting higher liquid asphalt costs as we progress through these contracts. You've experienced this situation before. However, will 2019 differ from previous cycles in terms of cost fluctuations, possibly because the jobs you are working on are larger than usual?

I wouldn’t say they look significantly different from previous cycles. I have experienced enough of these to recognize the patterns. The main issue is that liquids have stabilized, and we anticipate they may remain at this level or potentially increase slightly throughout the year, but we do not expect the major surge in demand that we witnessed in 2018. This situation allows us additional time to adjust prices and improve material margins to appropriate levels, which I believe we are already observing. Our assessment is based on our hot mix and liquid prices, but it’s important to note that the first quarter can be misleading because the Asphalt business typically faces challenges during this period. Cold and wet weather complicates things, so the key will be how this situation evolves in the second quarter. We will have clearer insights once we conclude the first quarter.

Okay. Thank you.

Thank you.

Thank you. Suzanne and I are very proud of the performance our operators and our teams did in the fourth quarter and the second half of ‘18. We carried that momentum into ‘19 and it gives us a lot of confidence in our guidance. But we want to thank you for your interest in Vulcan Materials and we look forward to talking to you throughout the quarter. Thanks for joining us today.

Thank you.