Earnings Call: Q4 2019

Feb 18, 2020

morning, ladies and gentlemen, and welcome to Vulcan Materials Company's 4th Quarter and Full Year Earnings Conference Call. My name is Kevin, and I will be your conference call coordinator today. As a reminder, today's call is being recorded. During the Q and A portion of this call, we ask that you limit your participation to 1 question plus a follow-up. This will allow everyone who wishes the opportunity to participate. Now I will turn the call over to your host, Mr. Mark Warren, Vice President of Investor Relations for Vulcan Materials. Mr. Warren, you may begin. Welcome everyone to the Vulcan Materials 4th quarter and full year earnings call. With me today are Tom Hill, Chairman and CEO and Suzanne Wood, Senior Vice President and Chief Financial Officer. Today's call is accompanied by a press release issued this morning and a supplemental presentation posted to our website. Additionally, a recording of this call will be available for replay later today. Before we begin, 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 other legal disclaimers, are described in detail in the company's earnings release and in other filings with the Securities and Exchange Commission. You can find a reconciliation of non GAAP financial measures and other information in both our earnings release and at the end of our supplemental presentation. I will now turn the call over to Tom. Thank you, Mark, and thanks to everyone for joining the call today. We appreciate your interest in Vulcan Materials Company. 2019 represented another year of strong earnings growth and demonstrated the strength of our aggregate centric business model. But before we talk about our accomplishments for the year, I want to spend a few minutes telling you about the good progress we made again in the 4th quarter. Aggregates gross profit was $274,000,000 a 7% improvement versus the prior year Q4. Aggregate shipments increased by 4% with markets in the Southeast and Southwest reporting strong growth. For the quarter, freight adjusted average sales prices increased by 5.5%. All key markets reported year over year price growth. And the 70 basis point benefit from mix was due in part to above average growth in Gulf Coast markets that are served by our unparalleled logistics network. This growth is noteworthy. The Q4 of 2018 made for a tough comparison with a 24% increase in aggregate gross profit, 8% growth in volume and 5% mix adjusted price growth over 2017. Gross profit per ton in the quarter improved to $5.32 and was negatively impacted by 3 things, most of which are timing and mix related. 1st, repair and maintenance costs were higher in the quarter. As we said before, certain types of repairs and maintenance are routine and scheduled. Therefore, the associated costs are more predictable. Other repair and maintenance activities are planned annually, but the exact timing is more difficult to predict with precision. You monitor the situation throughout the year to determine the optimal time to do the work. And as a result, the cost can be lumpier. This quarter included several of these types of repairs. In addition, the rigorous inspection and maintenance protocol that we rolled out as part of our operational excellence initiative in early 2019 drove some of our costs higher in the second half of the year. We expect to continue to see additional repair and maintenance costs in 2020 and have incorporated them in our guidance. Setting high standards is the right thing to do for the long term health of our business. Our employees are highly engaged and they are focused intently on the mobile equipment and fixed which could result in much more expensive repair costs. The second factor that impacted our gross profit in aggregates was actual geographic mix versus our expectations. Our 4th quarter shipments were robust in markets along the Gulf Coast, which are served by rail and water. Remote serve markets carry higher selling prices, but also carry higher cost, particularly if the tons are shipped by rail versus blue water. In the 4th quarter, higher volumes from rail distribution negatively affected margins. The third factor was lower revenue and earnings from certain aggregates locations, which also generate tipping fees on clean fuel. This result was mainly a matter of timing of projects expected to contribute to the Q4. Instead, the projects were delayed, but will benefit 2020. Finally, I'll also highlight our 4th quarter asphalt results, where gross profit increased by $4,000,000 compared to the Q4 last year. This was driven by 10% improvement in shipments and a 3% improvement in average selling prices. In addition, we experienced volume growth in California in spite of wet weather in the 4th quarter. These volume and price improvements, in addition to a 12% reduction in the average unit cost for liquid asphalt, drove a 52% improvement in unit profitability in asphalt. Suzanne will share with you the detailed numbers in a moment. But first, I'd like to summarize our full year 2019 accomplishments and talk about why we're excited about 2020. Let's start with the most important aspect of our business, safety. In 2019, our people led us to another year of world class safety performance despite being busier than ever. We also completed the rollout of all of our strategic initiatives, commercial excellence, operational excellence, logistics innovation and strategic sourcing. We believe these initiatives will help us accelerate growth towards our long term goals. On the financial side, aggregate shipments grew by 7% and average freight adjusted sales price was 5.6% better than 2018. Aggregates gross profit increased by 16% and unit profitability grew by 8%. Cash gross profit per ton was $6.74 another step forward on the path to our longer term goal of $9 per ton. And while our non aggregates segment gross profit was flat year over year, the second half showed signs of improving trends in the asphalt business. Our adjusted EBITDA for the year grew by 12% and importantly, our return on invested capital increased to 13.9%. As a whole, we were pleased with our annual results, but we aren't satisfied with just setting records. Our focus is on getting better every day and reaching our potential. As we enter 2020, we are well positioned to take advantage of supportive markets and deliver another year of double digit earnings growth. Our markets will continue to benefit from both public construction demand led by highways and a resurgence in demand on the private side, particularly residential. The public highway demand is there, as are the revenues to support the investment. As we've seen excuse me, as we said before, it's not a matter of if, but rather when the projects are finally started and shipments begin. To be fair, we've seen we've been a little bit disappointed over the last couple of months with the speed with which the states are letting work. However, we remain confident that these projects are a go in the near to medium term. With respect to residential demand, which we've been a bit cautious, but now we're seeing a very positive turn in leading indicators, with Vulcan markets outpacing the rest of the country. Underlying demand fundamentals, including population and employment growth remain firmly in place and underpin our expectations of growth in private residential and non residential construction. These demand characteristics are catalysts for a positive pricing environment in 2020. And demand visibility is also an important contributor. With our geographic footprint focused on the higher growth markets, we are in the best position to capitalize on public and private demand. So what does all of this mean for 2020? We anticipate a 2% to 4% growth rate in aggregate shipments. Aggregate freight adjusted sales prices are expected to increase between 4% 6%. Additionally, we maintain our longer term view of approximately 60% same store flow through rate to gross profit on a trailing 12 month basis. Overall, we are looking at double digit growth in Aggregates segment earnings. Moving to our Construction Products segment, we expect 10% to 15% growth in gross profit collectively. This contemplates relatively stable liquid cost in asphalt. I'll now turn it over to Suzanne for further comments on our 2019 full year performance and 2020 guidance. Thanks, Tom, and good morning to everyone. In 2019, our aggregates volume growth reflected the solid underlying demand fundamentals in our market, including growth in population, households and jobs that is 2 to 3 times that of other markets over the next 10 years. Shipments in certain markets in the Southeast, Mid Atlantic and Texas were particularly strong. Average sales prices and aggregates increased and higher prices were widespread with all major markets reporting improvement. For the full year, our costs were up 4%, contributing to a 48% same store aggregates flow through rate. As Tom mentioned, there were several factors that affected this rate, particularly in the Q4. Our segment gross profit increased by 16%. This continued progression underpins our ability to deliver attractive earnings growth. SAG expenses, while higher in absolute dollar terms, decreased as a percentage of total revenues. Moving on now to the balance sheet, cash flows and return on investment, we made progress in each of these areas. Our balance sheet structure remains strong with a weighted average debt maturity of 14 years and a weighted average interest rate of 4.4%. Leverage was reduced from 2.6 to 2.2 times, well within our target range. We generated $820,000,000 of discretionary cash flow and we followed our capital allocation priorities to determine the most shareholder returns enhancing use of that cash. In 2019, this included investments and attractive growth opportunities as well as return of cash through dividends and share repurchases. And as a result, our return on invested capital improved by 130 basis points on an adjusted EBITDA basis. I'll move on now from 20 19 to 2020. Tom has already covered the operational aspects of our segment guidance, so I'll comment on a few other points. SAG expenses are forecast to be approximately $365,000,000 in 20.20. This represents a reduction in absolute dollars as well as a reduction in the ratio of expense to revenue. We already have taken steps to ensure we are efficiently leveraging our overhead. We anticipate that interest expense will approximate $125,000,000 and that depreciation, depletion, accretion and amortization will approximate $385,000,000 in 2020. And our effective tax rate will be approximately 20%. The combination of these assumptions lead us to an adjusted EBITDA range of 1.385 1,000,000,000 dollars to $1,485,000,000 for 2020. The midpoint of this range represents a 13% increase as compared to 2019. Moving on to our cash flow expectations. Remember that our business is an inherently cash generative one and 2020 will be no exception. We anticipate discretionary cash flow of approximately $800,000,000 As you model our cash flows, I'll share some thoughts to help you fill in the blanks. As guideposts, we will continue to adhere to our unchanged capital allocation priorities in directing our uses of cash and we will stay within our target leverage range. We expect cash interest expense of $120,000,000 operating and maintenance CapEx of $275,000,000 and finally, cash taxes of $180,000,000 The discretionary uses of our cash involve returns to shareholders, internal growth capital and acquisitions. Let me cover each one of those. 1st, we expect to maintain a progressive dividend, generally growing it in line with earnings to a level that is fully sustainable through the cycle. 2nd, we expect to spend approximately $200,000,000 on growth CapEx for projects that are already largely underway, as we did not spend the full amount of growth capital we projected in 2019. These projects include the opening of a new quarry in California, capacity expansion at other quarries, as well as improvements to our logistics and distribution network and sales yards. And third, we will continue our disciplined evaluation of acquisition opportunities as they arise, only investing in those which fit our strategy and offer superior returns and synergies. And last, we will continuously evaluate the use of opportunistic share repurchases as a means to return excess cash to shareholders. And now I'll turn the call back over to Tom for closing remarks. Thanks, Suzanne. Now before we go to Q and A, I want to take this opportunity to thank the men and women of Vulcan Materials for their hard work and their dedication. They have taken good care of our customers and have improved our business processes and disciplines. Importantly, they have promoted our strong safety culture and are responsible for delivering our industry leading safety metrics. As we move forward, we will continue to capitalize on our strengths, our aggregates focus business, our outstanding geographic footprint and our local execution capabilities. We will also remain focused on compounding our unit margins through the cycle and improving our return on invested capital. Now we'll be happy to take your questions. Thank you. Our first question comes from Stanley Elliott of Stifel. Please go ahead. Good morning, everybody. Thanks for taking the question. Tom, could you talk a little bit about the cost structure, kind of the puts and takes as we're heading into 2020? You mentioned some of that being planned in the current guide. Does any of this roll off? I'm just trying to curious to see how you guys are thinking about the cost piece. Sure. If you look at the Q4, the average cost or unit profitability was, as I said, was impacted by 3 unique items and pretty much equally, all three of those items are somewhat a combination of mix and timing. The first one is a large clean fill project, which we will take dirt into the quarry for a tipping fee. The job was temporarily stopped, but it will start back up in 2020. So will see that again. We will get that back. The second item was really geographic mix. It was increased volumes to remote distribution rail yards on the Gulf Coast, which is a good thing. It just comes at a higher cost for the simple reason that you experienced not only the quarry cost, but also the yard cost. And you couple that with we had a little bit lower volumes in the mid Atlantic states really due to timing of work. And then the third item was increased equipment maintenance cost. It was really driven by our equipment inspection efforts as part of our operations excellence efforts, which we kicked off in February of last year. And this is really to prevent catastrophic equipment failure. It improves operating efficiencies. It actually improves customer service. And while the costs were higher in Q3 and Q4 because of these efforts, a long term focus on maintenance is just the right decision for the company. Now, those efforts will benefit us later this year as over time it improves costs by helping to eliminate expensive failure costs and really the expense of downtime. And I would expect some of these costs to continue for a bit into 2020, But all of that's built into our full year 2020 guidance. And I got to tell you, I'm very pleased. This takes a lot of work and a lot of effort and I'm pleased with operators performance here. No doubt. And then sticking on the cost side, can you guys speak to the leverage you're seeing on the SAG line? I wanted to call it SG and A, but I feel like that tracking below 7% of sales maybe one of the best in the company's history. Talk a little bit about how you're driving that down when your revenues are going to be up double digits? Yes, sure. I'm happy to do that and good morning to you. Yes, the SAG area, which is predominantly corporate and administrative type costs is an area where we are continually focusing our attention. If you look at the Q4 and you look at the full year of 2019, while the absolute dollar amount is higher, we did reduce it as a those costs as a percentage of revenue. And that's something that we have been really focused on as part of our budgeting process and as we move into 2020. I mean, look, we want to make sure that we are delivering the appropriate services to our operational folks. And we have looked across the footprint, particularly in those corporate and admin functions for ways to be more efficient and effective in delivering those important services to people. And sometimes that is just finding more efficient ways to do things. Sometimes it's using technology. You just use a number of things at your disposal to try to effect some change. So you'll see those efforts, which already begun, some are completed as we speak. You'll see that reflected in the 2020 guidance. And we are absolutely driving toward not just a reduction of those costs as a percentage of revenue, but also a reduction in the absolute dollar amount and we have plans in place to do that. Perfect. Thank you very much for the time and best of luck. Thank you. Our next question comes from Trey Grooms of Stephens Inc. Please go ahead. Good morning. Good morning. Good morning. So I guess I'm going to talk more or my first question is more around the volume. So on 4Q, the 4Q volume, you did see a little bit of a deceleration there relative to what we saw in some of the other quarters. And then seeing the volume going from 7% or so, I guess, that you put up in 2019 in aggregates to the guidance this year of 2% to 4%. It's my first question. Can you talk more specifically about how we get there? What your end market expectations are or your assumptions for your end markets, public, private, non res and then residential that you have baked into that? Hi, good morning. That's a good question. I'll just start off with a gentle reminder about the tough comp that we had year over year in Q4 and then Tom can address some more specific comments. If we look at the Q4 of 2018 from the revenue perspective, it was just a really strong quarter. We had an 8% growth in volume, which led to a 24% in aggregates gross profit. So, I think with the volume increase of about 4% in the quarter this year, I mean, frankly, that's I think that's pretty decent growth. It's well within our guidance range that we set forward at the beginning of the year and coming off the very good Q4 we had last year, I'm not completely surprised by that. Yes, I would add to that. The 2% to 4% growth in 2020, I think is our trying to be thoughtful about taking everything into account, demand, timing of shipments, weather, comparing it to 2019. So remember that we saw a little bit slower starts and leading indicators on the private side in the Q3 kind of July to October. That has now picked up and picked up dramatically. And it could flow through in part of 2020 as a short lull or it could just what we're seeing right now could blow through it. We just don't know quite know yet. On the highway side, funding is up, demand is up and public works for the first time, non highway public works is picking up. Still there is quite a bit of unknowns about again about how fast the DOTs can get jobs let and to work. The funding is there, but it will be about timing, I think. We're also not going to have, as Suzanne said, we're not going to have a Q1 of 2019. Last year, we had a windfall. We were up 13% as we had pull forward from the prior year. And then 2019, we didn't have any hurricanes or tropical storms that impacted us in any material way. I think the 2% to 4% volume growth in our guidance is a thoughtful approach as we pull all those factors together. I would point out in all of this that we will see growth in all 4 end markets and the one that's coming on and we're pleased to see is that the non highway infrastructure pieces is now growing. Got it. Okay. And Tom, you mentioned the 1Q of 2019 having a pretty good showing there with some windfalls. How should we be thinking and maybe this is Suzanne, but how should we be thinking about the cadence there, the volume as we look in 2020, in light of things like tough comps and things of that nature? I think as always, it's going to be timing related. It will be the we'll have ebbs and flows with that, but the it will be timing of weather and timing of large projects. Okay, fair enough. Thank you. I'll pass it on. Thank you. Our next question comes from Catherine Thompson of Thompson Research Group. Please go ahead. Good morning, Kathryn. Good morning. Thank you for taking my questions today. First focusing on Illinois. We are seeing a pickup at Lettings in Illinois. I know you talked about Lettings in the prepared commentary, but focusing on that. How do you expect towards your senior work? What type of projects and how big of an impact could rebuild Illinois have in the state that has relatively underperformed over the past several years? I think it was hard for me to hear you. What's your question? First of all, how is it in Illinois? What should we expect from highway work and what type of work? Yes, really. What we've seen lettings. Are you starting to see work come from Rebuild Illinois? And what are your expectations for future volumes at the state from this past act? So I think that Illinois, I wouldn't we're not expecting a lot of that funding to flow through in 2020. I think it's going to be more 2021. We still have some of the toll work and airport work, which will benefit us in Illinois in 2020. On the private side in Illinois, it's probably not one of our strengths. It's probably one of the few places we're probably seeing some weakness on that. So while the team in Illinois did a good job improving unit margins, they're not getting the benefit of big volumes. And I don't think we're going to see the highway work in Illinois much of it until 2021. Am I answering your question? Yes, perfect. Yes, yes, yes. No, that's helpful. That's helpful. And then also just following up on the rail network, assume that most of the volumes are out of your South Georgia ops, could you give us confirm just any more color in terms of the type of projects that you're seeing that are driving demand in the Gulf? Thank you. Yes. So it was in the Q4, the rail work was really widespread and it was really more timing. We are pleased with it. It's good work. It just comes at a higher cost, but it was across the board. I mean, it was Texas, it was the Mississippi, Louisiana, excuse me, Panhandle out South Alabama, even into Florida. We really just had a good solid Q4 and weather helped it. All right. Thanks very much. Our next question comes from Jerry Revich of Goldman Sachs. Please go ahead. Yes. Hi. Good morning, everyone. Good morning. Good morning. Hi, Jared. I'm wondering if you could talk about the pricing cadence as we think about 2020 versus 2019, any differences in timing of price increases that we should keep in mind? And can you comment on how broad the price increases is in terms of breadth of markets as we think about 2020 versus what you put through in 2019? Yes. I would describe it as very similar 2020 will be very similar to 2019. We're continuing to see solid price improvements at this point in 2020. We're very confident in guiding that 4% to 6% price improvement for the year. Our bid work, our backlogs would support this and our discussions with our fixed plant customers would support this kind of pricing momentum. Again, and we always point this out, but we'll do it again. It's really underpinned by that visibility of the rapidly growing highway work and a solid we think a solid performance will be seen in growth in the private side. And then again, now we're starting to see growth in the non highway infrastructure, while it's the smallest piece of it, it's healthy. And I would tell you that we're going to see price increases across it's really widespread, it's across every one of our markets. As it was in 2019. Yes. And we'll have if you hit the pricing guidance, we'll have 2 straight years of 5% or so pricing gains. Is that sustainable in the medium term? And obviously, you're looking for lower volume growth in 2020 than in 2019. I'm wondering as we think about the medium term outlook, how would you counsel us to think about sustainable level of long term pricing gains? Obviously, we're not going to give guidance past 2020, but you saw it in 2019, you're going to see it in 2020. I think the again, we've got long term substantial highway funding coming and that visibility will continue to grow. So that just supports the kind of pricing we're seeing. Okay. And lastly, in the past, when you had pricing momentum in aggregates in your asphalt markets, you were able to achieve gross margin expansion, I think, at a faster rate than we've seen so far in the cycle. Can you just comment on what's holding you back from achieving historical levels of gross margins in asphalt in this cycle compared to the past? Yes. Well, I think in as far as asphalt is concerned, we are guiding to non air product lines being up 10% to 15%. Asphalt prices and unit margins are going to drive the big improvement in that asphalt. We would expect gross profit in asphalt to be up double digit. That would be probably a slight improvement flat to a slight improvement in liquid costs. I think the good news is that the good highway work where we experienced the big funds and the timing of that line up with our asphalt business. So the story in asphalt, I think, is this is we said all last year we would catch and bypass liquid prices or liquid cost to improve unit margins. You saw this happen in the Q4, more to come. Okay. Thank you. Thank you. Our next question comes from Anthony Pettinari of Citi. Please go ahead. Good morning. Good morning. Good morning. Tom, I think you mentioned being disappointed over the last couple of months with regards to the speed with which some states are letting work. I was wondering if you could just give a little more color on which states you're seeing this and maybe the magnitude of the delays relative to what you were initially expecting? Yes. I would describe it this way. I think at this point, where we are in the year right now, we would expect highway demand at this point be up, predict low single digit. Now that could move to mid single digit depending on the timing of large projects and really state's ability to get work left and get work started. As I said earlier for asphalt, the good news is states where we have asphalt probably have the strongest demand going into 2020, Texas, California, Virginia, Florida, Tennessee. But if the flip side of that is places like Georgia and South Carolina, they struggled at the end of last year to get work to get fundings let and work started. If you look at Georgia, we're still shipping 3 mega projects in Georgia, so that's helping. But I would tell you that highway awards data starts have been a little slower, but then again lettings, they do ebb and flow. They come and go. All that said, I think that single digit, that low single digit could turn quickly to push us to mid single digit. You got Georgia in the second half of twenty nineteen where lettings were slow, now Georgia in the first half of twenty twenty is going to let $1,000,000,000 worth of work. Texas is looking to double their lettings going into 2021. That's already healthy. It's at $7,000,000,000 going to 14. California, we'd expect fund spending to go up some 13%, embedded in that is a 25 percent increase in maintenance funding and that maintenance funding could go very fast. All in all, we'll experience growth in highways in 2020 and for years to come. And then I will give you a reminder that highway starts right now, while they've been maybe a little bit slower or up 20% versus where they were 2 years ago. So it's growing. It's just how fast can the states get it to work. Got it. Got it. That's very helpful. And then in the release, I think you made some reference to concrete project delays. Can you talk about where you saw these project delays and the magnitude and whether you expect this to kind of continue into 2020? Yes. We got delayed 2 places. It was timing of big projects in Virginia and then it was both weather and fires in Northern California where we got hit with on the volume piece of this. I would expect volumes in concrete in 2020 up mid single digit and recovering in both those markets. I would expect prices up probably mid single digit and I would expect unit margins in concrete up double digit. Okay. That's helpful. I'll turn it over. Thank you. Our next question comes from Mike Dow of RBC Capital Markets. Please go ahead. Good morning. Hi, thanks for taking my questions. Tom, just to follow-up on one of the prior questions around the state lettings. What's your sense of just the underlying fundamental cause for the slower pace of lettings? Is it a worker shortage? Is it something in terms of the just getting things through the regulatory bodies? Just a little more color on the underlying root cause there. Yes. I don't think it's external factors outside of the DOTs. It's really them being able to they got a huge slug of funding. They got to mature into that and they got to have you got to get it estimated, permitted, let, we got engineering that goes into it. So there's a lot of work for those DOTs to put projects out. While everybody has the pressures of workers and employment, this is not what's holding up the lettings. It's just it's holding up the states. It's just their ability to get that work planned and out and let and put to work. Particularly as some of the projects are larger perhaps than they have been in the past. The larger the projects that just adds a degree of complexity to the process. We'll see. Okay, thanks. Second question, just thinking about the incremental margins, if I look at 2019 on the whole, the difference, if my math is right, in terms of the incremental margin and what you would target on 60 percent would be about $60,000,000 in EBITDA. And so understand some of the one time issues or transitory issues that you've been talking about, but it's a pretty big number. And this is in a year where you had everything kind of working for you in terms of volume, price and your internal initiatives. So as we go into 2020, I guess what I'm getting at is really just what's giving you the level of confidence that you can get back to the 60%? Is it actually volume was too hot in 2019? And so like as you go into 2020, the stripping costs aren't as high or just trying to understand that bridge a little? Yes. I will comment first and then I'm sure Tom will have a follow-up comment. I can't say I'm quite sure about your math on the $60,000,000 but with respect to the 60%, that is we say this often, that is a long term average. You're going to have some quarters and some years when you hit it, some quarters you're below it. We have had a couple of years where we were just above that. In fact, if you just look at 2019, for the trailing 12 month period ended in September, we were right at 60%. So I think when you look at the flow through for this year, it really does revolve around those three items that Tom called out. Had it not been for those, we would have been much closer to that number. And some of those were timing and mix related. And to the extent it's timing and mix related, you won't have that pressure into 2020. Yes. I think fundamentally, this is not an inflationary issue. It's more about timing. We talked about the remote distribution. That's a good that's really good because there's more volume for us. The field work will come in 2020. As far as what we did in Q3 and Q4 with stripping and preventive maintenance. I think those are just good operating disciplines. First of all, the stripping is an investment and it's while it's cost, it's a one time thing for a while as you develop pits and get ready for future volumes, which we think are going to grow. On the maintenance side, it's really about we want to control our equipment, don't have the equipment to control you and make sure you do it in a timely manner. Let me just give you like a real life example of that. If you were to take a 7 foot cone crusher down due to oil samples, it cost you $50,000 If you wait till it failed, it cost you $150,000 and that's just tip of the iceberg cost because now you're taking the plant down, which is very expensive. And if you look at underneath that where we are from really important metrics like tons per hour through a plant downtime or tons per man hour, you are seeing improvement. It's an investment. We started favorably with investment in our people operations through this operations excellence program. It allows us to maximize the long term efficiency of operations. And I'd tell you that I'm confident that these efforts will improve our profitability of the company. And I think we our folks have taken those into account as they created their plan and their guidance for 2020. Okay. Thanks for the color. Our next question comes from Rohit Seth of SunTrust. Please go ahead. Hey, thanks for taking my question. Just curious on Good morning. If residential construction grew faster than expected in 2020, would there be any ASPs mix benefits or maybe on the cost side? No, I think it would, Joe. Residential has a good mix of both base and clean stone. I think it would flow through like everything else, although and that is something we'd love to see. So we got our fingers crossed, but I wouldn't expect any big price mix change or unit margins mix change. Okay. And then on your incremental margins, just kind of building on some of the things you've already said, but I mean, the last 3 years, it's come under the 60%. I'm curious how much of equipment failure has been part of that issue? Well, I think as we do that, we talk about same store and same store in 2018 finished 65%, 2019 was so we have years that are up, we have years below, I think as you look at it. And I would point out to you at the same store, and you're going to have times when it's higher, you're going to have times when it's lower, we will guide you back to the 60. Right. I mean, I think the other thing I'm sorry, I was just going to add. I think the other thing for us is, the real question as we look through some of these 4th quarter cost is, is there something there that is indicative of a significant shift in the cost performance of the company is something going on there that has materially changed the cost structure of the company. And that to me would be the real important sort of carry forward question into 2020. And again, as we go back through those items, our view internally as we've talked a lot about them is no, that there isn't something that is a significant change in the cost structure of the company. And for that reason, even though there can be some volatility in it between quarters or years, we on the long term basis guide back to a trailing 12 of 60. Okay, understood. And then on the M and A pipeline, can you maybe provide any thoughts on what you're seeing out there and maybe your appetite? Yes, as always, we've got some projects, both large and small that we're working. Again, as we'd always tell you, it's discipline. Everything does not fit us. It's got to be unique to have synergies for us, have the discipline that if it's too expensive, we won't be able to walk away from it. And really importantly is once you get it, make sure you integrate it very fast and very accurately. So we've got a number of them working. We'll just again, all of them don't fit us, so we'll be picky about what we buy. Any deals of size out there? It's both some large ones and small ones. I don't think there's any mega ones out there, but I would this is full gambit. Understood. All right. Thank you. Thank you. Our next question comes from Michael Wood of Nomura Instinet. Please go ahead. Hi, good morning. Hi, Michael. I was hoping you could quantify the repair and maintenance a little bit more. Curious if you could tell us how much it is as a percentage of COGS? And we think about this as a purely variable next year in terms of increasing alongside volume? Or could it maybe decline after being elevated this year? I think what we would guide you to that this is that I think you may see a little bit more of this in the 1st few months of the year and then I would expect it to level off to meet the guidance that we've given you. And I would call that out as both some stripping and some repair and maintenance. But I think we're confident as we look at our hand for the full year guidance of how that flows through, our cost flows through for the year. Okay. In 2019, I know you were talking about throughout the year or earlier in the year, some lower mixed stone going in on some of the larger highway projects. So I'm curious if you can give us an update on that. Has that continued? Are you seeing kind of mix up as those projects mature? I think what we saw in the mix that we saw in the quarter was a little bit of geographic and a little bit of product mix. As we what we called out, I think was that for the year, our performance was right in line with guidance. Full year was 5.5%, mix adjusted 4.8%, and it was an impact of asphalt sizes really driven by highway work. Geographic mix, a little bit higher volumes on the Gulf Coast and the Southeast. Okay. Thank you. Our next question comes from Phil Ng from Jefferies. Hey, guys. Good morning. Good morning. Good morning. Appreciating that there's some delayed lettings and potentially some downdraft from private, a couple of tougher comps. It'd be helpful, Tom, if you give us some color how to think about the shape of the year from a growth standpoint? Yes, good question. I would expect first of all, you got a really tough comp in Q1 because volumes last year were up 13% and it was really that you had to pull forward from 2018 into 2019. And other than that, I would call it one of timing of large projects and timing of weather. And we also had a very the weather in the Q1 of last year was with the exception of California was quite good. So you guys can look outside and see what's happening right now with the weather in the Q1 this year. So all in all, I think it's timing of weather in large projects. And Tom, you're not calling for any delay of larger project at this juncture, which we just can't predict at this juncture, if I'm interpreting your kind of Yes. So we're shipping a lot of big projects right now. We called out 3 in Georgia. We've got a number of going different places. I believe it's going to be how fast the highways can get the jobs let into work. Okay. And we talked about that a little bit whether it was fast and it was slow and what we called out was Georgia and South Carolina, which saw the second half of last year's lettings, which flow into 2020 is slow, but the first half of this year, they got huge lettings. So we'll see how fast the work gets started. Got it. And then based on your guidance for your downstream business for 2020, it's a touch below what you thought actually coming into 2019 initially. Just given some of the project delays you saw last year and frankly a more manageable liquid asphalt price environment. I'm a little surprised you're not expecting more strength. Can you give us some of the puts and takes? Yes. I think what we see is real strength in unit margin improvement in asphalt and up double digit. We're calling for liquid being flat to slightly down and our volumes are just up slightly and the that again will be determined by the timing of this DOT work and how fast it gets started. You got to remember, we had 2 we had big projects in asphalt in Tennessee and we had the big 202 project in Arizona, which neither one of those are repeating going into 2020. So there were windfalls in 2019, they're not going to repeat. Even with that, we're seeing slight improvements in volume. And for that to get much bigger, they'll have to accelerate work is in some of the lettings that I talked about. Got it. I think the thing I'm encouraged about, I said in asphalt is, you saw those margins turn in the Q4. We have been predicting that kind of chasing that through the year 2019. Now we see we carry that momentum into 2020. And just one cleanup question, Tom. When you said flat to down liquid costs, are you calling sequentially or is that more on a year over year on a full year basis? As a comparison year over year. But I think importantly with that, we're going to manage what a number of what happens with asphalt, we're going to manage that unit margin in asphalt appropriately. So if the liquid prices fall, we'll see that accretive to unit margins. And like I said, the good news is if we caught it and keep growing it and I think we'll see that as we continue to perform in 2020. Okay. Thanks a lot. Thank you. Our next question comes from Seldon Clarke of Deutsche Bank. Please go ahead. Hey, thanks for the question. Thank you, thanks. Could you just give us a sense of how the margin differs on your shipments by rail? And is this a dynamic that's coming solely from higher demand in these particular areas? Or has the cost or service provided by the rails change with some of the ongoing initiatives that they've been putting into place? Okay. I would point out this way. In general, the rail tons is usually going to be a little lower margins, where and that's and higher price, higher cost, a little bit lower margins, but very good margins. So it's good work. I mean the volume being up is a good thing. I would point out that in contrast the Blue Water tonnage is at much higher margins. It would be higher price, higher cost and higher margins than the whole. So and what we saw in the quarter was just the timing of good work along the rail that happened to ship at a high rate. Okay. So nothing to do with them putting precision No. And the simple thing with quarry cost versus rail distribution, you have the rail distribution plus the quarry cost. It just comes at a higher price and a higher cost. Got it. Okay. And then, just a question on the 2020 guidance. There's about 700 basis points of differential in the high and low end as it relates to year on year growth. Could you just give us a sense of maybe what's embedded in the low end of guidance and what would you really need to see to hit the higher end of that range? I think I would tell you it's probably going to be mostly volume. I go back to timing of shipments. I go back to do we get hit with a tropical storm or 2 or 3. Those would be the big variables I think between the high end and the low end and how it lines up would be the delta. That's right. And that's a very similar approach to what we took at the beginning of 2019 when we gave the volume guidance then a range of 3 to 5. And luckily and happily, we wound up being ahead of that for the year. But Tom is right, it really comes down to what happens with the timing of shipments and whether as to whether you're at the lower end or the higher end. And as Tom said, we'll continue watch with interest how residential how those starts continue to improve throughout the year. All right. Thanks for the time. Thank you. Our next question comes from Garik Shmois of Loop Capital. Please go ahead. Hi, thanks. Just one more. Good morning. Good morning. Hey, good morning. So just wanted to follow-up just on the highway outlook, this being in an election year with the fast stack expiring in the fall. Do you think that could lead to additional letting delays in 2020? Just curious as how these factors may play into the highway outlook and some of the sluggishness that you've been seeing? Yes. We've talked about the cadence in the highway lettings and some that have been slow and now coming on strong and the timing of it. I wouldn't think the election year would have any impact on state DOT lettings in the least. I don't think it's going to have it won't for sure won't have any impact on the FAST Act or funding from the Feds. I think people in Washington are working hard towards the highway bill, a lot of progress made on that, both on the bill side and the funding. I don't expect to get a highway bill in 2020. At the same time, when the FAST Act expires, I don't expect any of that funding to go down. We'll just see extension. So I don't see a big impact on I don't see any impact on state DOT lettings due to it being an election year. Okay, thanks. And then just given some of the repair and maintenance costs here and some of the other items you called out, is this all just to be clear within your plan as you think about your $2,000,000,000 EBITDA target you laid out at your Investor Day and thinking about how that could be potentially achievable once you reach 230,000,000 to 240,000,000 tons of volume? Yes. If anything, I think that the 4 strategic initiatives, including the operations excellent initiative are give me more and more confidence in our ability to get to the $9 that we planned. I think that our operate if you look if you were to look beneath the surface in our operations, while the headline is higher stripping and repair and maintenance costs, Behind that, I think you're doing the right things in investing in the business for the long term. Really importantly though is you're starting to see the key operating parameters, which we measure things like tons per hour throughput through individual plants, downtime in individual plants, tons per man hour in individual plants. We're starting to see improvement. I think we are teaching our young people the right things to do. We are leveraging the collective knowledge and experience of Vulcan across 350 plants. So while we see some headline things, the ultimate work that goes into this from those initiatives is starting to gel. The commercial excellent initiatives is mature. It is working and we're very pleased with our progress there. Great. Thank you. Our next question comes from David MacGregor of Longbow Research. Please go ahead. Yes. Good morning. Good morning. Good morning. Good morning. Just getting back to the 2% to 4% volume guide and just a question I guess on construction capacity. And if we get a large increase in awards and lettings, what are the downstream bottlenecks that most concern you as a constraint to your volume growth and how have you accounted for that as a potentially conservative element within your guidance? Well, first of all, for Vulcan internally, I don't think we see any bottlenecks we can handle it. We'd love to see it grow as much as it could and we'll be there both from an aggregate perspective and asphalt perspective or a concrete perspective. On as far as if lettings were to increase dramatically, I think what you see is the work would happen. The big bottleneck is always that people ask about is labor and are the labor shortages? The answer to that question is yes. I don't think it's going to hold up work and what I think it will hold up is ability to catch up once work gets delayed. So if you had a month in the wintertime, which was all raining really cold trying to catch that up or if you had a big tropical storm come through, it's going to take you a little longer to catch it up just because they don't have the firepower to do it fast. That's how I would describe it. Okay. Have you factored that in your guidance? Is that an element in potentially the discrepancy between 2% to 4%, which seems fairly conservative versus the story, which seems pretty bullish? I think that I think when it comes to volume, as I said, we tried to pull all those factors in as comparing last year, the pull through, the weather aspect of it, a little bit of an air pocket leading indicators in the res side and then timings of highway lettings and state's ability to get that work. And when we put all that together and the upside potential, the risk piece of it, that's what we got. We're trying to be thoughtful about the 2% to 4%. Yes, that makes sense. And then just second question on mix and just if you could talk about the pace of growth in your backlog and is your backlog building faster in your higher margin products and geographies? I think how I would describe this, I think when we looked at the 4% to 6% as best we can, if you take mix of products of when I say mix, both geographic and product mix together. I think we have seen good improvement in base in our backlogs. We've seen good improvement in clean stone in our backlogs and our booking pace right now as we look at it both in price and in volume will support our guidance. Thank you very much. Thank you. Our next question comes from Adam Thalhimer of Thompson Davis. Please go ahead. Good morning, Adam. Hey, good morning, guys. Would it shock you if EBITDA was flat to down in Q1? Well, we can't give Q1 guidance. I think as we said, we are comping over a year in the Q1 of 2019 with which was very good weather and we had the windfall pull forward of 13% volume from the year before. I don't think you'll see that pull through. You guys can look outside and know what the weather is doing in the 4th in the Q1. So again, it will just we're halfway through it. We'll just have to wait and see. And then Tom, can you walk us through the demand you're seeing right now in California and Texas? Sure. I would describe California this way. I think that the well, let me start with Texas. The public side is very strong. The TxDOT has done an excellent job of lettings and getting work out. There's big work this shipping right now, there's big work on the horizon. And as we said, next year, they're going to go from a wow factor of $7,000,000,000 to $14,000,000 On the private side, I would describe North Texas is being driven by non res. I'd say res is fairly flat with some exceptions, some big development North Fort Worth. South Texas housing strong, non res a little bit soft, Coastal Texas everything is strong. And you could see some LNG work start on Coastal Texas in the second half of twenty twenty, a little bit going now. California, Northern Cal, public is very strong both for aggregates and asphalt. Private side looks good, maybe a bit flat in the Bay. Non res is a bit soft, but leading indicators were improving. Publics on Southern California, again, public very strong, highway strong, non highway is strong. On private single on private in Southern California, probably a little bit of watch for us with leading indicators a bit we're a bit soft, but the last 3 months of indicators were up over 20%. So all in all, I think pretty healthy growth in both states and I would tell you that I would expect good margin improvements, unit margin improvements in both locations, both in aggregates and in asphalt. Good color. Okay. Thanks, Tom. Thank you. Our next question comes from Adrian Huerta of JPMorgan. Please go ahead. Hi. Good morning, everyone, and thank you for taking my call, Tom and Suzanne. Good morning. Good morning. Quick question. On cash taxes, can you tell us how they ended last year? Because I believe they probably ended way below what you were expecting early last year. And why now you're back into expecting a $200,000,000? And if there's any chances that that could be lower than your guidance? Sure. And the main reason for the reduction in cash taxes through the year was that as we started the year, we had not made a determination as to whether we were going to take advantage of the bonus depreciation or not. That's a calculation that we have to go through each year because there is some interplay between it and a depletion allowance that we get when we file our tax returns as well as some other things. So there's an actual while it might seem obvious, you would want to take advantage of the bonus depreciation. There's actually a calculation that you need to go to to ensure you are selecting the calculation methodology that gives you the most tax benefit. So we started out the year under one assumption. We determined in the Q2 and called this out at the time that we were indeed going to take the bonus depreciation that resulted in for 2019 us paying quite a bit less tax than we had initially intended. And the estimated the cash tax rate was between 7% 8%. As we start off in 2020, we are guiding to an effective tax rate of 20%. We'll go through the same process again and make a determination as to what depreciation methodology we're going to use. So there's some chance the cash tax may be lower, but we will work through that process in a similar fashion that we use this year. Even under the assumption of having higher cash taxes in 2020 as compared to 2019, I just point out we still would throw off about $800,000,000 of discretionary cash flow. So very, very healthy, very substantial and that 800,000,000 dollars could be put on a discretionary basis toward growth projects, potentially M and A, if something comes along that meets all the criteria that Tom outlined, dividends and share repurchases. That was very clear, Susan. And if I may ask another question. Can you share with us any details on the quarry that is expected to open in California in terms of when and the size and potential volumes on an annual basis that that quarry could take? Yes. So it's in Frisco, we're not going to we probably won't open until beginning of next year, probably 1st or Q2 of next year. Size, we're not going to actually disclose that at this point. We get a little closer to it. We'll talk about those things. It's in a very good market. It has taken us some 10 plus years to get this done. The team has worked very hard and now they're working hard to build it out into a market that is very healthy and quite profitable. Excellent, Tom. So it's a totally new market for you? No, it's a market we've been in before. Okay, excellent. Thank you so much, Tom and Susan. Appreciate it. Thank you. Thank you. Our next question comes from Paul Chabran of On Field Investment Research. Please go ahead. Hello, everyone. Good morning. Thank you for taking my questions. First of all, I can't think the rail deliveries, I think you talked about that extensively already. So my apologies if you already answered. But how should we think about it for 2020, the evolution of rail deliveries? Is there any chance that it could impact your margins as it did in Q4 2019? I'm sorry, the beginning of your question I couldn't hear. Sorry. The question was related to the evolution of rail deliveries in 2020. How should we think about that? Is there a change that it could impact your margin as it did in Q4 2019? The repairs and maintenance, is that what you're asking about? The connection was a little poor. I just couldn't hear, I'm sorry. Yes, I apologize. It's concerning the rail deliveries, the long distance rail deliveries that had an impact on your margin in Q4? I wouldn't expect the rail happened to be a timing issue of big shipments in the Q4 and I would not expect I think we've got those the volumes that we do out of those that rail distribution network embedded in our 2020 guidance and I would see very little impact. Okay. All right. Thank you very much. Thank you. Thank you. Our next question comes from Brent Thielman of D. A. Davidson. Please go ahead. Good morning. Good morning. Hey, good morning. Hey, this one is just for I think for you Suzanne, just on the SAG expense. Can you help us understand the sensitivity to growth this year? In other words, if things really line up well through the year, you start seeing 5%, 6%, 7% volume growth. Can you sustain SAG below 2019 levels? Yes. I think we can. As I said, this is a matter of what's driving that cost reduction year over year or the changes we talked about, some of that is being more efficient in the way we do things. So it's not like it's a variable kind of expense. It's more, what I would call on the fixed side that we are making some changes. And so I think that that would be sustainable, yes. Thank you. That's all I had. Our next question comes from Michael Dudas of Vertical Research. Please go ahead. Good morning. Good afternoon. I think it might have gone into 12 So in light of that, you've done a very good job in answering and being very descriptive. So all my questions have been answered. Appreciate it. Thank you. Good luck. Yes. Thank you. There are no further questions at this time. I would like to hand the call back to Tom Hill for any additional or closing remarks. Well, thank you for your interest and support of Vulcan Materials. We've enjoyed talking to you today. As you can tell, Suzanne and I are very excited about 2020 and we look forward to sharing the team's news of how we continue to make progress towards our longer term goals of $9 a ton cash gross profit per ton. We'll talk to you throughout the months to come. Thanks. Thanks. Goodbye. This concludes today's call. Thank you for your participation. You may now disconnect.