Earnings Call: Q3 2019

Nov 6, 2019

Good morning, ladies and gentlemen, and welcome to Vulcan Materials Company's Third Quarter Earnings Conference Call. My name is Jake, and I will be your conference call coordinator today. As a reminder, today's call is being recorded. Now I would like to turn the call over to your host, Mr. Mark Warren, Vice President of Investor Relations for Vulcan Materials. Mr. Warren, you may begin. Good morning, everyone, and thank you for joining our Q3 earnings call. With me today are Tom Hill, Chairman and CEO and Suzanne Wood, Senior Vice President and Chief Financial Officer. Before we begin, I'd like to call your attention to our quarterly supplemental materials posted at our website, bulkamaterials.com. Additionally, a recording of this call will be available for replay at our website later today. 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. Finally, you can find a reconciliation of non GAAP financial measures and other related information in both our earnings release and at the end of our supplemental presentation. Now, I'd like to turn the call over to Tom. Thank you, Mark, and thanks to everyone for joining the call today. We appreciate your interest in Vulcan Materials. Our 3rd quarter results reflected another strong performance with adjusted EBITDA improving 15% as compared to last year. This was driven primarily by the Aggregates segment, which experienced higher shipments, better pricing and improved unit margins. For the quarter, aggregate shipments increased by 8%, both on a reported and same store basis. But remember, the quarter did include an extra day. If we normalize the number of shipping days, same store volume increased by 6% in line with expectations. This growth in volume reflects the solid underlying demand fundamentals in our markets. The fundamentals, which include growth in population, in households and in jobs, are 2 to 3 times the growth of other markets over the next 10 years. Shipments in certain markets in the Southeast, Mid Atlantic and Texas were particularly strong. Shipments in California were also better than last year due to the strength in Southern and Central California. Freight adjusted sales prices rose by 5.6 percent and importantly, the increases were widespread. On a mix adjusted basis, prices improved by 5%. Both product mix and geographic mix were slightly favorable. Gross profit per ton grew by 9% in the quarter to $5.87 We are pleased with the progression of our unit profitability. In fact, this quarter represented the 5th straight quarter of high single digit or low double digit year over year improvement. The 4 strategic initiatives reviewed at our recent Investor Day contributed to this outcome and offer further opportunities for margin enhancement. On a trailing 12 month basis, the aggregate same store incremental flow through rate was 60%, which is in line with our long term guidance. Through the 1st 9 months of the year, aggregate shipments have exceeded the upper end of our expectations. Pricing has increased in line with our expectations and we have delivered good incremental earnings. This improved Aggregates performance will partially be offset by lower non Aggregates gross profit. Our non aggregates gross profit is now expected to be below original expectations, but in line with the prior year. That said, we are well positioned to deliver another year of double digit earnings growth and should carry good momentum into 2020 in all product lines. We expect full year 2019 adjusted EBITDA of between $1,250,000,000 $1,330,000,000 on track with our expectations at the beginning of the year. Looking ahead to next year, we expect another year of strong earnings growth. Based on early With respect to 2020 aggregate shipments, we anticipate lowtomidsingledigitgrowth at this time. Vulcan served markets should continue to benefit from public construction demand led by highways. State and local level transportation funding has increased significantly in our key states, and it will be a multiyear contributor to our future results. Most of the approved funding is firewall and can be only used for transportation. Therefore, it's not a matter of if, but when. The demand visibility is there, but the timing of shipments is not precise given the number of state and local transportation agencies involved and the relative complexity of large projects. On the private side, which accounts for the other half of our aggregate shipments, we continue to have solid shipment momentum in most of our markets. It's important to remember that over the medium to long term, the underlying demand fundamentals, including population and employment growth, remain firmly in place and underpin long term growth in residential and non residential construction. And we are in the best position with our geographic footprint to capitalize on this trend. Now turning to price, we expect a positive environment again next year. The visibility of public demand should help drive sales price increases similar to 2019 mid single digit range. Together with disciplined capital allocation priorities, the compounding effect of price and unit margin improvement will position us to grow our discretionary cash flows and improve our return profiles in 2020. We will report out our final 2020 guidance in February. Now I'll turn the call over to Suzanne for some additional comments on the results. Suzanne? Thanks, Tom, and good morning to everyone. Clearly, the Q3 represented another quarter of strong earnings growth for our aggregates business, but we also made progress in our non aggregates segments. Asphalt segment gross profit was $28,000,000 an increase of $4,000,000 or 16% as compared to the prior year. Asphalt mix shipments increased by 18% and average selling prices rose by 3%. The significant volume increase related to a number of projects across our footprint. The average unit cost for liquid asphalt was 6% higher this quarter compared to the same period last year. This compares favorably to the 2nd quarter when our liquid asphalt costs were 16% higher year over year. We expect liquid costs to remain stable throughout the remainder of the year. As a result, asphalt material unit margins were slightly lower than the prior year, and therefore, the gross profit improvement was driven by volume. Concrete segment gross profit was $15,000,000 or 3% higher than the prior year quarter. Both volume and average selling prices improved. As Tom said, for the full year, we now expect our gross profit from the non aggregate segment to be in line with the 2018 level. This change in our outlook is due mostly to the timing of shipments in our asphalt business. With respect to SAG costs, our trailing 12 month expense as a percentage of revenue declined by 40 basis points. Similar to last quarter, we incurred higher compensation related expense, including incentives that are tied to earnings expectations and the share price. We also continued to make investments to accelerate the benefits derived from our sales and operational initiatives. For the full year, we remain on track with our expectations and we'll focus on further leveraging these costs in 2020. Turning to the balance sheet, our leverage position and debt structure provide us with significant flexibility as we continue to execute our business plan. Our leverage ratio at September 30 was 2.2 times, well within our target range. The weighted average maturity of our debt is 14 years and our weighted average interest rate is 4.4%. On Page 8 of the supplemental slide, you'll find information on our discretionary cash flow expectation of $825,000,000 for the full year. As a reminder, we define discretionary cash flow as mid range adjusted EBITDA guidance, less working capital change, interest, taxes and operating and maintenance capital. During the quarter, we closed no acquisitions, but we did invest $3,000,000 in share repurchases. For the full year, we reiterate our expectation of spending approximately $250,000,000 on operating and maintenance CapEx and approximately $200,000,000 on internal growth projects, which will further strengthen the footprint and generate future earnings. Our return on investment continued on its positive trajectory. For the trailing 12 months ended September 30, our ROI was 13.8% on an adjusted EBITDA basis. This compares to 12.6% for the 2018 fiscal year. Before I hand over to Tom, I'll make one comment on our guidance. With a quarter to go, we remain on track with our full year expectations, the midpoint of which has remained unchanged at $1,290,000,000 When we gave our initial 2019 annual guidance, we tried to be thoughtful about it. That approach served us well, because we have consistently performed within those parameters and therefore expect to deliver another year of double digit earnings growth. And now I'll turn the call back over to Tom for some closing remarks. Thanks, Suzanne. Before we go to Q and A, I want to take this opportunity to thank the men and women of Vulcan for their hard work and 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 focused business, our outstanding geographic footprint and local execution capabilities, particularly around those things we can control. Our 4 strategic initiatives will ensure continued improvement in unit margins. Now we'll be happy to take your questions. We will start with Stanley Elliott with Stifel. Good morning, Stanley. Hey, good morning, everyone. Thank you guys for taking my question. Can you all comment on what you're seeing on the cost side? I know you like to talk about the incrementals on more of a trailing basis as opposed from quarter to quarter. Were there any one off stripping costs or anything else that might have popped up? Just curious. Yes. On 3rd quarter, the cost increase really based in 2 areas. One was planned higher repair and maintenance on stationery equipment, particularly some big crusher repairs that we did or rebuilds that we did. And also we took one of our big drag lines down in Florida and made some major repairs on it. The second area was extra Bluewater shipping costs. As we took our older ship into dry dock and we're using contract ships at much higher cost, That ship is back in the fleet at this point, so that's behind us. And you pointed out year to date, we've also not so much in the quarter, but year to date, we experienced some higher stripping costs in preparation for higher volumes from highway demand. You think about all these costs are planned long term investments in anticipation of improving volumes. But again, as you talked about, if you look at what we always guide you to the trailing 12 month same store flow through was at 60%, which is where we would guide you to be. Got it. And just picking up on Tom's point, I'd also add that, as he said, we always guide toward 60% on a trailing 12 month basis. And if you look at just pick the last 8 quarters, we've got quarters ranging with flow throughs in the specific quarter ranging from 41% to just over 100%. So it's really difficult to look at a particular quarter when you've got 3 50 minutees and lots of different things going on. That's why we always guide to the trailing 12 months to smooth some of those things out, Stanley. Perfect. Understood. And then just as a second question, kind of looking out to 2020 on the low to mid single digit volume growth. I know you don't want to give too much color here, but maybe a couple of states that maybe you're most excited about looking at the upcoming year? Yes. I would point you to the really pretty much cross footprint, but the Mid Atlantic Southeast will be strong, parts of Texas will be strong, California with SB-one kicking in should be good. As you said, it's we're actually right in the middle of the planning for 2020, so it's early. On the private side, we still see growth in shipments to res and non res sectors, and they've been strong, particularly strong in 2019. If you kind of said what are you some watches there, which we called out San Francisco, Dallas, Miami and Chicago. But we've talked about Nashville, but Nashville, we actually think has gotten a second wind is doing quite well on the private side. We've got most of our markets shipping really strong on private highway demand and shipments we talked about is going to be very good. We'll continue to grow not just 2020, but years to number of years to come. We've tried to be thoughtful in that low to mid single digit in 2020 because it's really early in the process. We'll obviously give you a much better look at this in February. Understood. Thank you all for the time. Best of luck. Thank you. We'll now move to the next question, Kathryn Thompson with Thompson Research Group. Please go ahead. Good morning, Kathryn. Thank you for taking my questions. Good morning. Good morning. Thank you for taking my questions today. Shifting to California, I know that SB 1 has been great. Would love to get an update on progress and give any color of what is the impact of fires have had on construction projects? Thank you. Yes. SP1 continues to be well. We saw it double and up through from where it was passed in 2017 through this year. Then next year, we'll add another $1,000,000,000 to it. As you know, we got a slow start this year because we just got rained out in the 1st 5 months. But now we're shipping strong both with aggregates and asphalt. So things are picking up in California. On the fires, we've recently seen some delays from fires. And I think we'll have those and we will have those. But as you know, the work doesn't go away and we will be there. Most importantly, our people are all okay and their homes are all okay. We as far as power outages, which is another part of that, we've not seen any to our aggregates operations. We've seen a little bit to our ready mix operations, but no impact from that at this point. Okay, great. And really this is more a broad downstream question for you. Just a little bit more color in terms of the regional market impacted with the asphalt timing and then with concrete gross profit, it had great volume and pricing, but the gross profit as a percentage of sales was off year over year. Maybe a little color on that? Thank you very much. Yes. As we talked about with asphalt, we would have thought it would have done a little bit better this year. We actually had a good quarter and the gross profit was up 60% percent, driven by volume. What we would tell you where we the shortfall in asphalt would have been volume in California just because of the rains in the 1st part of the year, but the demand is there and that will flow into 2020. We were a little slower on catch up on unit margins than we would have anticipated. I think what we saw good news is we saw in the second and third quarter that unit margins were virtually flat. So price has called out liquid costs. As we look forward to 2020, we would see, based on backlogs and booking pace, our prices in hot mix going up, and we would expect, at worst case, liquid costs to be flat. So I think as we look forward to 2020, really good news for this product line, the highway demand will drive volumes up in asphalt. And I think that now that liquid is stabilized, we'll see unit margins start to improve. So I look forward to this product line in 2020. Thanks very much. Now we'll take a question from Mike Dahl with RBC Capital. Good morning. Thanks for taking my questions. Good morning. First question I had and I might not have heard properly, but just around the costs and margins in the quarter in ags, it sounds like they were a bit lower than your internal plans. But then, Tom, the comments you made around planned maintenance and added blue water shipping, I wasn't clear if those were increases that you had contemplated in your plan, or if those were the reasons for the increased cost versus your internal expectations or just any additional but it was an increase over prior year, but it was planned. I think as you kind of look at to Suzanne's point, if you look at the cost profile in the Aggregates business, it's going to be lumpy quarter to quarter. It's just the nature of the beast. You have 300 facilities. You have to do the right thing at the right time in each of those, whether that's stripping or whether that's a big repair on a crusher or as we did pulling our drag line down. And if you and those so the timing always is in big flux because all 3 of those 50 may or may not hit it once, they may hit at different times. And you can't really procrastinate those things. You need to do it when you need to do it or it will cost you more. It will lead to downtime. It will lead to failures. So for the long term nature of the business, you inspect it and fix it when it needs to be fixed or you strip when it needs to be fixed when it needs to strip. We talked about that a lot in Tampa with inspecting and maintenance and timely on equipment. But if I step back and look at it and put my operator's hat on, I am very confident in our ability to pull through that 60% on a regular basis for the long haul, but you won't do it quarterly. And if you look at the trailing 12 month, we've done that. I mean, that's our track record and that's what we'll always guide you to. But quarterly, because of the nature of the long term nature of the beast and just doing what you got to do in each one of those individual mines, it's going to be lumpy by nature. Okay, understood. Second question is just around the guidance and, Stan, appreciate the thoughtfulness throughout the year. I guess just to press on the implied 4Q guide a bit. The low end of the implied guide would have you down year on year on EBITDA. So I guess just to be just want some clarification of whether it doesn't seem from the outside that there's anything that would produce that type of outcome given volume and price. But is there anything you're seeing there? Or is it really just you've had this annual guide out now and you may be tracking towards the midpoint or better, but just didn't feel the urgency to take up the low end? I think I'll comment on the market and then let Suzanne comment on the financials. The work is there. I think we feel good about our backlogs and our booking pace and will support our outlook both for the full year and for 2020. But as always in the Q4, it's just a matter of how many shipping days you're going to have before the year is out. I think you saw that last year, we actually ran out of time, we pull work into the Q1 of 2019. So it's 1st and 1st Q4 and Q1 always just iffy because of the time of year it is, but the underlying fundamentals, the pricing, the demand, all those fundamentals are there and we feel very good about it. Yes. And I would just add on to that, that's the guide that's been in place all year. We're still comfortable within that range as you indicated. Hopefully, at the at or around the midpoint of the range, but it depends on the number of shipping days. So I wouldn't I would not read anything into the fact that we didn't raise the lower end of the range. We just decided to leave it in place. But nothing in our outlook for the year has changed. And indeed, if you look at the results that we have produced year to date, I mean, we are on a good pathway to achieve that. Okay, great. Thank you both. Sure. Now moving to a question from Jerry Revich with Goldman Sachs. Good morning, Jerry. Hey, good morning, Tom, Suzanne, Mark. How are you? Good. So I'm wondering if you could talk about the pricing announcements that you've made for 2020, what's the breadth of pricing actions? Or is it more or less mid single digits across the board? Or is there more variability by market? And in terms of the pricing actions that you're taking, are they more significant than what we've seen in those comparable markets in 2018 in areas where you're pushing pricing above the company average for 20 As always, they're going to be there'll be variability and that's just because different markets have different cadences of you push price for a while and then you let catch up and you push price for a while. So those will all be a little different. I think that the pricing dynamics in all markets is good. I believe we'll see price real price increases in the vast majority, if not all of our markets. Our backlog, our booking pace would support that mid single hour conversations with our fixed plant customers, I think would support that. Again, we're still we're in the middle of this, so we're still early in the process. That's our best thoughtful guide at this point. We'll give you a more educated view of this as we will with volume in February. But the very strong shipments on the private side, coupled with the visibility of the dramatically growing highway work really support pricing throughout the sector, not just aggregates, but I think all Construction Materials and Construction will end this year strong and I think we'll start into 2020 with very good momentum. And Tom, I'm wondering if you could expand on your prior comments you had made in your prepared remarks on infrastructure project cadence. So clearly, the backlog is healthy. We've seen some lumpy awards activity. California, in particular, comes to mind. Can you just talk about over what time frame would we see would we need to see a reacceleration in lettings to have a steady project cadence and avoid holes in the schedule, if you will? It's really hard to predict holes in the schedule. I think that if you look at starts, for example, which is been if you look at starts, which looks kind of like they would be down a little bit, you got to remember that the value of those starts is up 20% over 2 years ago. So number 1, we're playing at a much higher level. And then you've also seen with these big increases, massive increases in funding, you're seeing much larger projects. So the starts metric is now very lumpy where shipments, those big projects will ship over a number of years. So the nature of that leading indicator has changed a little bit. Let me give you an example. If you look at the job that we're shipping today, which is I-sixty six in Northern Virginia, it dropped into the starts in April of 2018 at $2,300,000,000 So it just skewed the value of the starts as you compare it to April year over year, but that job is shipping and it will ship for 4 years. So that the big projects has made that a little bit lumpy. I think if you look at overall, you just look at value of what's going on in the states and I'll just run through 8 or 9 of them for you, Florida. It will be up lettings will be up 25% this year. Georgia lettings will more than double over the next 2 years from $1,400,000,000 to $3,000,000,000 Texas' budget goes from $26,000,000,000 to over $31,000,000,000 Virginia DOT and regional authorities goes from 4 point 5 $5,000,000,000 to $5,500,000,000 from a budget perspective, highway lettings and highway spending in South Carolina will be up 10%. Tennessee is up 40% over 2 year timeframe. And California, as I said earlier, it's up since 2017, dollars 1,700,000,000 increase another $1,000,000,000 in 2020. So there's a lot of work out there and a lot of work to come. Timing, we'll just have to see what happens. But it's again, as I said in my prepared remarks, it's not if, it's when. Okay. Thank you. Thank you. And now we'll hear from Trey Grooms with Stephens Inc. Good morning, Trey. Good morning, Tom, Suzanne and Mark. Thanks for taking my question. So just looking at the elevated cost or planned cost that occurred in 3Q, is there anything we should be aware of as we're looking into 4Q when it comes to any of these costs that might be occurring in that time? Not dramatic. I think it's again, it's the timing of when those fall in individual plants, but I wouldn't nothing's changed in our fundamental cost structure. Again, it's going to be lumpy. It's going to be lumpy by quarter. But and I'm actually pleased with the disciplines that we're instilling for the long term of what happens in operating efficiencies. I mean, you got to rebuild crushers, you got to rebuild draglines and those are going to come at different times. But the underlying fundamentals that really drive across cost of efficiencies of tons per man hour, tons per hour, downtime, those kind of things, I think we continue to push the ball forward and improve on it. Okay. And with the asphalt business, unit margins taken margins improved, I guess, but it was on volume. And just and it sounded like most of the down side to your guide on that side of the business was due to volume and timing there. So, did I if I didn't understand that correctly, but Yes. So let me see if I can explain it to you. There's a mixed bag in the shortfall of guidance was volume and volume in California. We just got a we just shortened the year with the rain in the 1st 5 months. That was one piece of it. The other piece of it is we thought we would start improving unit margins faster than we have and that's really price of hot mix catching the cost of liquid. I think the good news to that is what we saw in Q2 and Q3 was we caught it. We're virtually flat. Now as we look into 2020, we know that based on our backlogs that our prices are up. We believe that at worst case, liquid will probably be around flat. So you should start seeing unit So as you look at 2020, we think we'll see unit margin expansion because we're not chasing that oil anymore and we've continued to be able to raise prices on the hot mix side. If you look at demand going into 2020, it's pretty simple. We know what's happening with lettings and highway spending, and that's a big driver of asphalt volume. So again, we're doing the plan right now. We can't give you guidance, but we'll be clear on that when we talk to you in February. Okay. Sounds like improvement nonetheless. Yes. And last one for me is just on the FAST Act expiring next year. What's your expectation for I guess right now, any update on your kind of thought of how it shakes out and what the response is from the Fed and then at this point, I guess. And then do you expect states to hit the pause button at all as we move closer to that expiration date? I'll take the second part of that first and the answer is absolutely not. The states will move forward. They have a substantial amount of funding and they will have political pressure to spend that funding and improve their roads, improve their infrastructure because their voters said we're voting on this to make our roads better. So they'll make sure that happens. Again, timing, we'll see. If you look at the highway bill, the simple part of that is the funding is not going to go down. If we don't get a bill, which I don't think we will, in election year, then they'll we'll have extensions. If you look and so I don't I have faith in that, that spending will continue and infrastructure will be supported. If you look a little further out to the highway bill, you've heard me say this, the House and Senate are actually working on a bill right now. Policymakers are working on reauthorization package as we speak. The Environmental Public Works Committee is working on a bill which would increase funding by roughly 28%. Again, we'll see what happens. But the feds are not going to let it go down and our state's funding in our state is up $20,000,000,000 a year. So and that is now flowing into shipments. So high demand is going to continue to grow over the next 7 or 8 years. But what we know right now, now and I believe we'll right after election, there'll be a drive to get another federal bill done. All right. Well, thank you very much for that and good luck with the rest of the quarter. Thank you. And our next question will come from Michael Wood with Nomura Instinet. Good morning, Michael. Hi, good morning. Good morning. Appreciate the comments that you made in the Q and A session here on asphalt and non aggregates. But I'm curious with you're essentially flat in the non ag businesses year to date. And curious why we wouldn't start to see an improving trend in Q4? Does that give you any concern at all for the ability to grow those non aggregates into 2020? Well, I've 4th quarter is just tough to predict on asphalt. And again, it's remember asphalt, you've got to lay it at 45 degrees and rising. So you just don't know when in different all the different markets we're in, when you got to stop laying asphalt. I think the fundamentals, so that's kind of why I look forward to 2020. I think that the fundamentals for 2020 are very good. And we don't give quarterly guidance, but the 4th quarters are just hard to call anyway, particularly with asphalt because of the temperature sensitivity of the product line. That's right. And if you go back to when we had some similar discussions around this in the Q1 on asphalt, we would have said exactly the same thing, Michael. It's just Q4 and Q1 are just iffy because of the temperatures. Understood. And as a follow-up, the aggregates freight adjusted selling price, there's not a lot of movement quarter over quarter. I'm curious if there's any mix impacts that you didn't call out besides the geographic, Because I would think as projects roll off given your success with prior price increases, you would see at least a steady upward drift? So I think we did have a little bit of mix and it was 5.6 dollars up $0.75 but mix was mix adjusted went up 5%. It was about half product and half geographic. The product was more clean stone sizes, particularly asphalt sizes, again driven by the highway demand and then the geographic mix was higher volumes in Mid Atlantic and Southeast. I think if you look at our backlogs, booking pace, again, it would support that mid single digit. And I think that's not all markets are created equal and the timing of those is different. But again, early to tell, we got work to do on that. We'll give you a lot clearer guidance in February. Got it. Thank you. Thank you. Now moving to Paul Roger with Exane BNP. Hi, Paul. Yes. Good morning, everyone. Hi. Nice to be on the call today. I'll just move away from the trading, if I may, and focus a little bit on capital allocation. Obviously, your balance sheet is in quite a nice position now. Actually, some of your competitors have also talked about increasing the sort of M and A pipeline. Is that the type of thing you're seeing? And are you on the lookout for deals at the minute? Yes, we will. I mean, our capital allocation policy is unchanged. We've talked about that a number of times. So I'll just speak specifically to the M and A part of your question. I mean, look, we certainly like and prefer same store growth. It's the most profitable and the least risky. But deals come along, we look at those all the time. We've looked at a number of them this year, but we are very picky about those we do. They have to hit a certain very specific set of criteria. They have to fit well in terms of geography, product to move us forward. We have specific returns, characteristics. So we continue to look, and we pass on a fair number because they don't hit those very high hurdle rates. But there are a few in the pipeline and we will see, which ones get to the finish line. Okay. That's very clear. And then just going back to the asphalt business, I mean, you've obviously given some color on your expectations for 2020 anyway. I'm just wondering, is there any sort of structural reason why this can't be a sort of mid to high teens margin business again? And also, do you expect any impact from IMO 2020 in terms of deflation on the cost side? I think as far as the unit margins, that may be a little bit aggressive. Obviously, I agree with you, I'd love to have that, but maybe a little aggressive on double digit margin improvement without help from liquid. Now if you get help from liquid, it's a different story. As far as IMO 2020, I think, again, we're early in the planning. I think we would be the mindset that right now liquid at worst case is flat to slightly up at worst case. But again, I don't know that we have clear enough visibility in 2020 at this point to make a call on liquid. Got it. Thanks again for taking my questions. Thank you. And now we'll hear from Rohit Seth with SunTrust. Hey, good morning. Thanks for taking my question. Good morning. Good morning. We've talked a lot about the public, but on the housing side, builders are benefiting from lower rates. Their orders have been really strong. Just curious if you've seen a pickup on the housing side for your business and maybe what you could share what the growth was like across the footprint during the quarter? Yes. For the year, shipments to residential market have been high single digit. We're carrying really strong shipment momentum into 2020. Most recently, if you look at the trailing 3 month permits and starts and our markets are up. As you said, the fundamental drivers for housing is still very good population growth, employment growth, low interest rates on houses and low inventories of houses. I mean, there's just most of our markets, there's just not much inventory or all time low. So, if you look at residential demand, we should carry pretty good momentum. At this point, we believe we'll carry pretty good momentum into 2020. Okay. And maybe you can talk about what you where the shipment growth was this quarter by geography? Yes, it was actually pretty good throughout our footprint, particularly strong in Mid Atlantic Southeast, Coastal Texas was very strong, South Texas was strong, Southern and Central California was strong. Tennessee was East Tennessee was very good. And although you didn't ask, I'll offer up that on the pricing side, very widespread virtual well, every one of the key markets experienced year over year price increases. So that was nice to see as well. Okay. And then last one, if I can hear. At the Analyst Day, you talked about gross profit unit profits rising to about mid-8s. And then we saw like incrementals come in here, remind us that the best incremental margin for us to model is about 60%. There was no intention there to suggest that maybe incrementals would be better as we go forward into over the next few years. Is that right? No, I think we would take you right back to 60 over the long haul. And again, in any quarter, you're going to have quarters that will be much above 60, you have quarters that will be way below 60. But on a long and I talked about that because of the lumpy nature of the cost and the timing of that is you have to do it when you need you need to do it when you need to do it for the good of the business and the long term profitability of the business, but I think we'd always bring it back to 60%. Understood. Thank you for taking my question. Thank you. And our next question will now come from Garik Shmois with Longbow Research. Good morning. Thank you. Hi, good morning. Competitor of yours talked about the shift in the mix of business moving towards large scale highway work and less away from bridge work at this point in the cycle. So just curious if you're seeing that? And if so, how does that impact your outlook from an aggregates intensity standpoint for volumes and potentially from a price mix standpoint moving forward? I think you're going to see more what you'll see is constrained. Obviously, there'll be maintenance in there, but that is very good news for us because lane capacity is the most intensive demand use for aggregates of any we have, including just within highways. So, as we look forward, I think we would see improved maintenance, but most importantly and most of the money is going to be with lane capacity, which is the most aggregate intensive. Okay, thanks. And just a quick one, there were some concerns around Hurricane Dorian impacting the timing of volumes in the quarter. I was wondering if you ended up seeing any of that and if that delay in floor in the Southeast might end up being shifting some project work into the Q4? We didn't see a lot of that. And if you noticed, this is we've not used the W word once in this call. So we're pleased with that. But I don't know that we saw a lot of impact from Dorian. If it was, it was fairly brief, but it didn't really hit our radar. Okay. Thank you. Best of luck. Thank you. Timna Tanners with Bank of America will have the next question. Good morning, Timna. Yes. Hey, good morning, guys. How are you? Good. I was wondering if you could discuss a little bit some of the other cost trends like labor in particular and any other freight costs, just for starters, if you could discuss that and any other major components we should be thinking out about? I think the buckets I would put cost in was fuel was slightly down. Labor costs as far as cost per hour, I wouldn't not a big change minor, but not a big change. The shipping costs we talked about was that we had one of our ships in Blue Water and that's behind us and that our the Vulcan ship is back in service. But the primary cost driver for us in the quarter as far as the delta was the higher plan repair and maintenance on stationary equipment. That was the big one besides the ships. Okay. So I didn't mean to make you repeat that. I was thinking more going forward. Are labor costs going forward a big issue or do you think that's been contained? Because I know that's something that you've been talking about for a while. I think there's pressures on labor costs going forward. I think what we're focused on is the disciplines and efficiencies to mitigate labor costs and those are how we run those plants and how we best utilize our men and women that run the quarries. Okay, super. And then circling back on the capital allocation discussion, you have had a nice step change in returns and just trying to think about what are your priorities in terms of organic growth. I know you talked about M and A already, but organic growth versus repurchases, you did a few and also dividends? Thanks. I think our biggest growth engine will as always will be our organic growth and the change of high single digit to low double digit to our unit margins in those 4 strategic initiatives where we are actively trying to improve those and with a lot of discipline and process. Obviously, we're going to look for M and A. As Suzanne said, we're going to be disciplined about it. We look at a lot of those. They have to fit our profile. They have to fit what we want. And the key there is to be disciplined. And so but again, the key here is improving that unit margin day in and day out. And I think you mentioned dividends. I mean, we look at the dividend as a progressive one. It's clearly a Board decision, but our view is that we should, particularly with our cash generation, which is you'll note, we raised our discretionary cash flow guidance by about $10,000,000 for the year versus last quarter. We'll continue to look at the dividend and the plan would be to generally raise it in line with our earnings growth to a level that we're absolutely certain we can maintain throughout the cycle. Got you. Okay. Thanks, guys. Thank you. Now we'll hear from Adam Thalhimer with Thompson Davis. Good morning, Adam. Good morning. Hey, good morning, guys. I wanted to ask first on the what are you hearing from your Washington Group on the risk of rescission, Tom? It looks like Texas might have to repay the federal government $600,000,000 next year. I mean, do you think that actually happens? Or do you think somebody they step in and fix it? No, I think the threat of the FAST Act rescission going to affect is slim to none. I think what this will do is help Congress find a way to pass a repeal of recession. The feds are not going to cut funding. Good. I was hoping you would say that. And then as it relates to incremental margins, we've had a couple of years here with it's kind of trended below 60%. I'm just curious for modeling purposes out to 2020, I mean, would you like us to stick in 60 or is it better to stick in 50 and work it higher as the year goes on? We would guide you to 60. Now in any given quarter, obviously, as I talked about, it's going to be quite volatile. In any given year, you're going to be plus or minus something around 60%, but you're always going to come back over time to that 60% number and that's how we guide you. Well, as an example, for the full year 2018, it was 64%. We would still guide you back to 60. Yes. The year before that was a little below 60. Right. Right now we're at 60. So we guide you back to 60. Okay. I mean to get to 60 for this year implies that margins up in Q4 in Ags? So I just that's kind of why I want to focus on 2020 because I'm just not sure margins can go up in Ags in Q4. Well, I think that we're always trying to drive margin ups on ags, whether it's in a quarter over year. That's fundamentally what we're doing. And that is the thing that we can control there is improvement in unit margins and that's what we're focused on as well as servicing our customers that we are not sure our part of the volume. Understood. Okay. Thank you. Thank you. We'll now hear from Phil Ng with Jefferies. Hey, guys. Good morning. Good morning. Good morning. Sounds like your conversations with your customers on pricing have been pretty constructive and I know it's early. Are there any pockets or markets where you could see like a mid year increase in 2020? I would it's way too early to feel that we're not even through the plan of 2020 and beginning of the year price increases. Usually, there will be normally when you have rising demand, you will have a few markets where you're able to the whole market can accept mid year price increases and that's not just an aggressive kind of flow through. It just depends. But I think so from if you just step back and look what happens in over the last 5 or 6 years, there will be there's usually the vast majority of time, there's a few markets where they'll take midyear price increases. But you got to remember, we're talking about the fixed plant pricing on which is 40% of the business. The 60% of bid work is you're pricing dozens of quotes day in and day out. And in those market and those things, we're always trying to push price forward. And that's part of our commercial excellence and what we work hard on is to earn that to earn to serve our customers where we earn those price increases, but that happens day in and day out. That's helpful color. And I know it's really early and I appreciate you giving us some color for 2020. Your volume outlook seems very reasonable to me, but it's also reflecting some modest deceleration from the last few years. With housing reaccelerating and pretty healthy backlogs in public, just curious what's driving some of that deceleration? And are there any end markets that are a little less strong from your perspective? Thanks. I think I would describe that this way. I think we're just trying to be thoughtful because it's very early and we don't have our plans. This is our best estimate at this time. So, it's not we're not trying to signal at all any deceleration. I think what we're trying to do is just be thoughtful because we don't have the plan yet. Okay. That's really helpful color. Appreciate it. Thank you. And ladies and gentlemen, that concludes our question and answer session. I'll turn the call back over to Tom Hill for closing comments. Thank you. And thanks all of you for your time and your interest in Vulcan Materials. As you can see, the business continues to operate well and we look forward to discussing this with you throughout the quarter. Thank you. Ladies and gentlemen, this will conclude your conference for today. We do thank you for your participation and you may now disconnect.