Earnings Call: Q3 2018

Oct 30, 2018

morning, ladies and gentlemen, and welcome to the Vulcan Materials Company Third Quarter 2018 Earnings Conference Call. My name is Matt, and I will be your conference call coordinator today. At this time, all participants have been placed in a listen only mode to prevent any background noise. And now I'd like to turn the call over to your host, Mr. Mark Warren, Director of Investor Relations for Vulcan Materials. Mr. Warren, you may begin. Good morning, 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 would like to call your attention to our quarterly supplemental materials posted at our website, fulcanmaterials.com. You can access this presentation from the Investor Relations homepage of the website. A recording of this call will be available for replay at our website later today. Additionally, you can sign up to receive future news releases under e mail alerts found in the quick links of the Investor Relations homepage. 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 our other filings with the Securities and Exchange Commission. Additionally, management will refer to certain non GAAP financial measures. You can find a reconciliation of these measures and other related information in both our earnings release and at the end of the supplemental presentation. Now, I'll turn the call over to Tom. Tom? Thank you, Mark, and thanks to everyone for joining the call today. We appreciate your interest in our company. I'm very pleased to have Suzanne Wood on the call today. Suzanne joined us as our Senior Vice President and Chief Financial Officer in early September and has quickly proved to be a strong addition to our senior leadership team. Welcome, Suzanne. Let me get right to the notable things about the quarter. We saw strong aggregate shipments underpinned by growing public demand and in the face of bad weather, our operating disciplines were extremely good and I'm proud of our people's execution. Aggregates pricing continued to march higher. This, coupled with our disciplined cost control, resulted in same store unit profitability increasing 8% to $5.45 per ton. We achieved a 15% same store increase in gross profit, while delivering same store flow through of incremental aggregates revenue of 65%. The extreme bad weather we experienced was and is a short term disruption. These disruptions have had no long term impact on underlying demand, on pricing dynamics or on flow through of incremental revenue to gross profit. The Q3 bodes well for the future. Prices continue to escalate with improved flow throughs, all of which is supported by growing demand. Total revenues increased by 13%, reflecting growth in aggregates volumes and average selling prices. All of this contributed to a 65% increase in net earnings and a 13% increase in adjusted EBITDA. We obviously had extreme wet weather and flooding in the Carolinas and Virginia from Hurricane Florence and Tropical Storm Gordon caused record rain days in Dallas and San Antonio. We believe the severe weather negatively affected 3rd quarter results with a loss of some 2,500,000 tons of aggregates and related flooding costs. We estimate that the pre tax loss due to weather to be approximately $27,000,000 in the quarter. Now, I'd like to move on to the core drivers of profitability in the business ex weather. We continue to see growth in private demand, but we're really excited about the strengthening public sector. Highway construction demand is strengthening across the country, but much more so in our markets. We are now seeing the conversion of public funding into shipments and this showed up in 10% growth in our quarterly aggregate shipments and a 6% on a same store basis. While these are strong growth numbers, they are particularly strong given the severe weather we experienced. However, we are still below normalized demand levels, much less the next peak. As we've said all along this year, price increases will continue to climb throughout the year and throughout 2019. Average selling prices in the quarter adjusted for mix rose more than 3% on a year over year basis and approximately 50 basis points over the 2nd quarter. As we look at our booking pace and backlogs, we will continue to see good upward trends in pricing. Our discussions with customers on price increases for 2019 are encouraging. Our preliminary view is that the pricing will improve mid single digit in 2019, reflecting the positive momentum we're seeing today. Turning to same store costs and flow throughs. Our freight adjusted unit cost per sales declined 2%. Fixed cost leverage and other operating efficiencies more than offset a 28% increase in diesel fuel and operating inefficiencies caused by bad weather. Again, we're very pleased with the way our operating disciplines enable solid improvement in unit gross profit despite difficult conditions. Regarding outlook for the Q4, we would expect 3 things. 1, shipment growth similar to that of the 3rd quarter 2, prices to continue improving and 3, we expect the operating disciplines you saw in the Q3 to continue, allowing for over 60% flow through consistent with our long term trends. Given what we accomplished in the Q3 and how things are going in the Q4, we've set ourselves up well for 2019 and here's why. I am pleased with underlying demand growth and corresponding volume growth driven by growing public demand in our markets. And as we approach 2019, our DOTs continue to pull tax revenues into job starts, which is translating into aggregate shipments. Our backlogs and booking pace continue to grow. The fact that pricing in our backlog and bookings continues to increase along with positive 2019 fixed plant pricing conversations gives us confidence in the continued accelerating pricing trends into 2019. The progress we made in our operating and cost execution also reinforces our confidence in realizing continuous compounding improvements in unit margin and 60% flow throughs in 2019 and beyond. And now, I'll turn it over to Suzanne for a more detailed review of the numbers. Suzanne? Thanks, Tom, and good morning. Let me begin by saying that I am delighted to be part of the Vulcan team. In the 8 weeks that I've been on board, it's clear to me that this is a great company, a market leader with strong culture and business model. I look forward to working with Tom and others as we continue to improve our business and to sharing that progress with you. Today, I'd like to cover several topics, starting with an overview of Q3 results. You've heard some of the highlights from Tom, but I think a few are important enough to reemphasize. Next, I'll touch on our aggregates flow through of incremental revenue to gross profit and that improving trend. 3rd, I'll review our full year outlook as well as share some preliminary thoughts on 2019. And finally, I'll give a quick update on our strong balance sheet, cash flow generation and capital allocation priorities. Now, as Tom mentioned, despite the challenges of the quarter, we realized double digit growth in earnings. Our aggregate shipment volume, average selling price, flow through rate and unit profitability improved. Shipments of aggregates were strong in many of our key markets and our mix adjusted price improved both year over year and sequentially. Our strong same store aggregates flow through rate in the quarter helped to drive gross profit per ton higher. These results demonstrate the strength of our aggregates focused business even when we experience cost pressures and wet weather. And unlike most industrial businesses, our main raw material is the rock in the ground, which is unaffected by inflation. Our operating leverage and efficiencies drive profitability by helping to offset cost pressures like diesel fuel. For example, during our Q3, our unit cost of diesel fuel rose by 28% compared to the prior year and impacted the results by $8,000,000 Despite this, same store unit cost of sales for aggregates declined by 2% and unit profitability increased by 8%. Now with respect to bad weather, as Tom stated earlier, we estimate that this quarter's results were negatively affected by approximately $27,000,000 on a pre tax basis. As a reminder, we had about $30,000,000 of storm related costs in last year's Q3. Since the impact from weather in the comparative quarters is broadly similar, the effect on this year's flow through is not particularly significant. Our same store flow through target is 60% on a trailing 12 month basis. It was therefore pleasing to see our year to date same store flow through rate move up to 52%, another step in the right direction toward our goal. Given the underlying and ongoing improvement in our business, we expect continuing margin growth and unit margin improvement. We remain keenly focused on the cost control, efficiencies and operating leverage that drive this flow through number. While there are a number of things in our business that we can't control, like weather, diesel prices or the exact timing of when a large highway project starts, we can control our costs and we can drive our per ton margin metrics higher. The next topic I'll touch on relates to our 2018 outlook and some preliminary thoughts for 2019. First, 2018, we now expect adjusted EBITDA of 1,125,000,000 dollars to $1,135,000,000 In our core segment, Aggregates, same store volume growth in the 4th quarter should be similar to the level of increase experienced in the Q3. Additionally, as Tom emphasized, there will be upward movement in pricing. Aggregates unit profitability will continue to improve. Moving on to the asphalt segment, we now expect full year gross profit to be $25,000,000 lower than the prior year as a result of liquid asphalt prices, which rose sharply again in the 3rd quarter, up 29% versus the prior year. Average selling prices in the asphalt segment are moving up, but will only partially offset the impact of more expensive liquid asphalt for the balance of the year. Our full year expectation of profitability for the Concrete segment remains unchanged. And finally, the outlook for other major expense lines such as SAG expense, interest expense and DD and A expense remains unchanged. After further review of our 2018 rather than $250,000,000 rather than $250,000,000 Our growth CapEx will reduce from $350,000,000 to $300,000,000 These capital spending reductions are part of our ongoing view to reevaluate the merits and timing of the individual projects. Using these assumptions, we now expect our 2018 after tax cash flow from earnings to be approximately $810,000,000 Moving on to 2019, please keep in mind that we are in the midst of our planning and budgeting process. As we have in the past, we'll provide more specific guidance when we report 4th quarter earnings. Before today, felt it would be appropriate to share some early thoughts. Tom has already commented on the attractive public and private demand picture, and we anticipate mid single digit growth in both aggregates, volume and pricing. Our views here are supported by what we are seeing both in backlogs and the pace at which we are booking new business. In conclusion, I'll address our balance sheet strength and capital allocation priorities. We are committed to maintaining our investment grade credit rating, strong balance sheet structure and debt leverage between 2 and 2.5 times EBITDA. Currently, our weighted average debt maturity is 16 years and our weighted average interest rate is 4.5%. This debt profile together with our strong cash flow gives us the flexibility to sensibly manage our business. Our capital allocation priorities are unchanged and we will be disciplined in the use of that capital, always seeking to improve our returns and shareholder value. And now I'll turn the call back over to Tom for some closing remarks. Thanks, Suzanne. I'm proud of our people's performance in the Q3. They delivered impressive results under tough circumstances. We continued our sharp focus on all aspects of operational excellence, including our safety performance where our year to date injury rate is 0.91 per 200,000 employee hours worked, which is world class. In the Q3, we made solid progress toward our longer term goals. And as we look to 2019, we're confident that we will continue to gain momentum in compounding improving price increases and in our operating disciplines that drive cost improvements, both of which continue to grow unit margins. Now we'll be happy to take your questions. Thank And we will first hear from Trey Grooms with Stephens Inc. Hey, good morning, Tom and Suzanne. Good morning, Trey. Good morning. Quick question on the price acceleration that you've been seeing. I mean, you guys have been calling for that for most of the year. And here, we're starting to see that come through. And it sounds like that's going to continue into 2019. Can you just kind of talk about some of the drivers you're seeing there that's behind some of that acceleration? Sure. If you step back and look at our pricing momentum in our business, it's clearly improving. We'd like the continued growth that we're seeing in price increases. We expect as we talked about all through the year, we expect pricing increases to continue to step up quarter over quarter and you saw that between Q2 and Q3. And it's really that's really the basis of that is the continued improvement on price increases on bid work. We can see it in our backlogs. We see it in our booking paces. And as you kind of go through the individual markets, you can watch it just inch up week over week, month over month. Now, Trey, we'll see a bigger jump in January as most of our price increases for fixed plant work go into effect at that point. Those conversations are happening as we speak with those fixed plant customers for 2019. We're very encouraged by those conversations. The preliminary view, as we said, would be mid single digit. Obviously, we'll give you a lot more clarity to that in February. But underpinning all of this and we talk about this a lot is the visibility to big and more and more public work that's coming. We're starting to ship a lot of those jobs, so people are feeling good and have confidence in the market. They had good visibility. Diesel prices and logistics costs, we're starting to overcome those and that just widens our moat. So as we step back and look at it, our price increases are clearly moving up. All right. Thanks for that, Tom. That's helpful. And then you're looking for volume and it sounds like demand trends in 4Q to look similar to 3Q. Can you give us any ideas what you guys are seeing specifically in October with that kind of at least coming close to a close here? Sure. I would tell you that the momentum we have had in Q3 is carrying right into Q4. I'll say upfront, we try to be thoughtful about how many shipping days are available in Q4 to make up the postponed work from the weather in Q3. Texas continued to be wet all through October, But when the sun came out in Texas, we've shipped strong. Now the rest of the country has been very strong and it just underpins the strength of our underlying demand in our markets. When we got dry weather, we're shipping. Prices on bid work continue to move up. I think the operations execution we saw in Q3 clearly carried into October. So we should see not only that volume momentum go into Q4, but we should also carry that unit margin improvement momentum into Q4. And this really sets us up good for 2019 kind of along all those disciplines. Yes. I'll just add a couple of comments to that on Q4. You're right. The guidance does imply an uplift of about 22 percent year over year. And obviously, that's going to be driven by the things that Tom mentioned. When we looked at the volume in the quarter, it's about in line with what we experienced in the Q3 in terms of sort of 6% same store volume in the aggregate segment. We've got the gradual step up in price and we've also we are assuming that flow throughs will be good and unit profitability will improve. As Tom said, I think the key word here is thoughtful. We're sitting here at the end of October talking about guidance for the full year and giving some preliminary view to next year. So we tried to really be thoughtful about the guidance we were given. We've got pretty much of October behind us. We only have one more day to go. So any of the trends that we saw strength across the country, perhaps a little bit of wetness in Texas early in the quarter or early in the month, we have already factored that into the guidance. Great. Thanks for that color, Suzanne. That was good. And then lastly for me, and I'll pass it on, is you mentioned, Suzanne, capital spending, operating and maintenance CapEx, dialing that back a little bit from $250,000,000 to $225,000,000 And I think growth from $350,000,000 to $300,000,000 And do you have any preliminary view? And I know there was some commentary maybe a quarter or 2 ago, but just any update on how to think about those two pieces of CapEx as we look into 2019? Not really. I mean, we are still in the early stages of our planning and budgeting. I guess if I had to say something on a very, very preliminary basis, it would be in terms of the operating and maintenance side that will probably be relatively in line with what you will have seen us spend this year. With respect to growth CapEx, I'm actually we're actually having a big roundtable discussion about that here next week. So I think it would be a little bit preliminary to give you a guide on that other than to say that as we had indicated, we had a number of projects online for growth spending this year. And if I had to give you a directional comment one way or the other, I would not expect it to be quite as high next year. But we'll firm that up when we give Q4 guidance. Does that help? Yes, absolutely. Thanks a lot, Suzanne. Thanks, Tom, and I'll pass it on. Look forward to seeing you guys next week. Great. And our next question will come from Jerry Revich with Goldman Sachs. Good morning, Jerry. Good morning. Hi. Good morning, everyone. And Suzanne, welcome. Yes. Thank you. I'm wondering, Suzanne, I'd love to hear, as you step up into your new role, can you just talk about the strategic priorities that you see for the organization over the next 12 months? I guess, how should we think about the opportunity set relative to the items that you're most focused on over next year? Yes, absolutely. That's a fair question. And I'll try to give you a couple of examples of that. I mean, 1st and foremost, our strategic focus needs to be on improving our business. And when I say that to be specific, that means improving our unit profitability. So all the actions you see us take with respect to pricing improvements, with respect to improving efficiencies across all of our plants with respect to any other initiatives we put in place. It's all around driving that unit profitability. And in addition to that, making sure that when we are deploying our capital, we are doing it in a very disciplined and thoughtful way to drive an appropriate return on that. So really getting sort of into things with operations is something I love doing and I plan on working hard to try to help the field identify some of those profitability improvements and getting those into place. And then in addition to that, just making sure that all that hard work converts into a good cash flow stream, I think is key. So those are the priorities. I hope that's helpful and I'll look forward to updating you on those and talking about those as we go through the year. Sure. I appreciate it. And then in terms of as you look across the business performance in the quarter, really strong organic growth despite the storms. Can you just give us a flavor for the breadth of disparity in markets that you're seeing? What's the low end of the growth curve look like? And are there any significant outliers on the high end that are contributing to the strong shipment growth on an organic basis? Yes, I'll take a shot at that. We talked a little bit about that in the geographic mix and price. And so we saw big shipments on large, particularly public work jobs in Arizona, Alabama and Illinois. We would take those jobs every day, but they are at lower prices and therefore lower corresponding unit margins. At the same time, we got hit a little bit with weather in Virginia and North Carolina, which are both higher priced and higher margin. So all that mix was in there. But you can have mix at any time in this, I think. But if you look across our footprint, Jerry, we're seeing prices go up pretty much across our footprint. I think in the Q3, I was very pleased with the breadth of operating improvements and kind of everybody's unit margin improving. And to make this thing happen, you want the whole group to go up at the same time and just move everything up a notch. And you've seen us do this before and I think you saw the beginning of that in Q3 and we look I think we've taken that right into Q4 'nineteen. Okay. And Tom, you folks have been prudent in not assuming SB1 as part of the business outlook in California until the money starts being spent. If SB 1 stays in the mix after Election Day, what sort of magnitude of upside should we be thinking about to the preliminary volume guidance that you folks are laying out here? Well, as you know, that's more than a doubling effect of funding in California for highway funding is what SB-one is. We're already seeing that work is already being let. We won't see any of those jobs this year, but we'll see a fair amount of that flow through in 2019, both in Aggregates and in Asphalt. I remind you, we have the leading positions of both product lines. But I'll just address SB-one if you want me to. We're really encouraged by the support we see of SB-one. There is an enormous effort to defeat Prop 6 in California. And if you watch the World Series, you even saw TV ads for defeating Prop 6 in California. People in California want their roads fixed and they're tired of it. There are ironically, there's 15 local ballot initiatives in California on right now in November for increasing infrastructure funding. So supporting SB-one is just the right thing to do. Remember, we've already collected almost $5,000,000,000 in taxes that will flow through in 2019 2020. On top of that, there's another $1,500,000,000 per year in local funding. So as we've heard us say before, California is growing. It's going to grow with or without SB-one. SB-one is the right thing to do and we're very encouraged by the support we've seen from Californians for SB-one. And Tom, just to clarify, so if the repeal effort is defeated, that would be a significant tailwind. In other words, it's not already assumed in your guidance, correct? Yes. Thank you. Thank you. And next we will hear from Phil Ng with Jefferies. Hey guys. Good morning and welcome to Dan. Looking forward to working with you. Thank you, Alan. Appreciate the outlook on pricing and volumes for 20 19. Can you kind of provide some color on the buildup of how you're thinking about public versus private? And could you see some upside in some of this pent up demand given the weather drag you've seen this year? Yes. So, I think I would characterize that as solid private, very much growing public. And the public is really driven by highway funding, which we have a lot of visibility to. And we're just starting to touch the ice the tip of the iceberg on flow through of all that funding. Because remember, it always takes 2 years for it to flow through. So the demand we see is really public driven. But if you'll allow me to, I'd like to just kind of cover 2019 while we're on it. If we step back and look at it from a broad point of view, remember, we're still as I said earlier, we're still in the we have a long way to go to normalized demand, much less peak, particularly with this much public funding coming on. We gave you mid single digit price and volume. The business performance in Q3 gives us a lot of momentum going to Q4 and into 2019. Backlogs are at much higher levels and at higher prices. So is our booking pace. As we said earlier, the conversations on fixed plan increases for January of 2019 have gone very well. And I would summarize and say that our you're really seeing our profit engine start to accelerate. I would kind of to Suzanne's point about strategy, I'd point to 4 key factors. 1, our markets are going to grow faster than the rest of the country really because of our geographic advantage, but also our customer service and what our visibility to backlogs and very large jobs that are booked are coming. 2nd point is, as Suzanne said, we expect to deliver expanding unit margins with good flow throughs, drivers of which will be: a, compounding price improvements b, operating leverage with higher volumes and c, our operating efficiencies that you saw in Q3 3rd one is you talked about conversion of earnings into cash flows. And the 4th one was our disciplined approach to capital deployment. We're really focused on getting the full value out of our acquisitions and capturing the synergies that are available. We'll come back with guidance in February and a lot clearer view from your volume perspective. As we get kind of through the Q4, we got a better view of where these projects stand, particularly large highway projects and large non res projects. And so we'll just have a clearer picture at that point. But this is our core structure is clear and it's really the same model we've seen from us deliver before. Yes. I'll add just a little bit to that as well. I mean, coming in new, I try to look at it from what are we hearing on the macro front. We look at some of the same drivers that all of you on the call do, the ABI, the Dodge Momentum Index and various other measurement points. I would call your attention to one slide that is in the supplemental information we prepared. It comes from Dodge Analytics. I'm impressed with their with the information they provide, having used it a lot in my past life. But on Page 8 in the slide deck, it shows the year over year change in trailing 12 months in terms of highway award dollars and it separates that into what that picture of improvement looks like in the markets that we serve versus all the other markets. And as Tom mentioned, in the markets we serve, there is a significant increase in highway award dollars there. So where we are geographically does help us quite a bit from the macro perspective. And I think that we have many touch points on the ground, our plant managers, our salespeople, other employees, our customers. And so we want to make sure that we listen to what they're telling us. I think that as a complement to the macro data, you can't overlook what you're hearing on the ground and that provides you with a lot of intelligence as well. And so we're getting good indicators from those people as well. So what we have heard on the ground isn't inconsistent in any way with macro. That's really helpful color. I mean, I think your stock is unfairly being kind of being beat up a bit on housing concerns. So, Tom, if there is a view out there that housing moves sideways and just given the backlog and visibility you have on public, how do you think about growth the next few years? I mean, how confident you are in terms of kind of sustaining that mid single digit run rate the next few years in light of maybe some softening on the private side of things? So let's back up. Q3, we saw that momentum. Q4, we're in October, we're seeing that kind of that growth momentum. I would describe the private side is solid. I would describe the public side is growing and returning those rapidly growing public funding and aggregate shipments now, which we've been waiting for a while. But if you look at states like Georgia, Texas, South Carolina, Tennessee, California, just to name a few, there's big, big public demand growth. So I think if we step back and let's put it in a little different perspective. If you look at 9 of our states, which constitute over 80% of our revenues, the highway funding and local initiative funding in those states is up $20,000,000,000 per year. And most of those shipments haven't hit us yet. We haven't converted those tax revenues into shipments. And if you put that on a flag compared to a federal bill, that would be an increase of almost 50% in a federal bill in just 9 states. So that's a sea change in public funding. And its government is just now starting to flow through. So it will flow through it will continue to increase in 2019, 2020, 2021, 2022. But this is a big deal and it underpins our confidence in the markets and the demand in those markets. That's really helpful. And just one last one for me. Some of the mix headwinds you called out in 3Q, do you expect some of that dissipating in the Q4? And how should we think about mix going into 2019? And obviously, early in the year, you called out some lag between pricing for ship and quoted pricing. Is that kind of largely behind you at this point? Thanks a lot. I'll take big jobs in any market I got anytime. I think what you're seeing though is with good weather in Virginia and North Carolina in October, we've shipped very well. So those are not a matter of I don't want to see a decrease in shipments in Alabama, Arizona, Illinois, but I think you're starting to see that volume that pent up demand ship in places like North Carolina and Virginia and even in Georgia. And our next question will come from Mike Dahl with RBC Capital Markets. Hi, thanks for taking my questions. Sure. So I wanted to ask a question around the 2019 guide and more conceptually major storm impacts. Major storm impacts, this year having some major storm impacts. As you're looking at the guide for 2019, what are you taking into account as far as weather? Is it status quo, which would be kind of the new normal in terms of you're going to have some extreme weather year to year? Or is there some different way that you're thinking about it looking into next year? How do you know the conversations we're having right now? Actually, we're just working through that and that's a great question and one that if you look at the mid single digit volume, I would tell you we have solid confidence in that. How we vary from that will be timing of as I said earlier, timing of large jobs. We still got to step back and look at weather effect and how that works, which is extremely hard to do. But we'll get through it and I think we'll give you a much clearer answer in February. I'm not trying to dodge your question, but that work is going on as we speak. Got it. Okay. That's helpful. And then the second question, I guess, just more of a clarification around how some of the affected regions have progressed over the course of September October. Are there any areas where you're still seeing facilities that are unable to ship into or either unable to ship or unable to ship into major regions or for the most part? I know you called out Texas as still being an issue, but have things returned to kind of pre storm activity? That's a great question. The characteristics of the storms this year are quite different from last year. We don't see the lingering impacts that we saw in both in shipments and in cost in general. Now, as you call that wet weather in Texas has been an issue. I'd also tell you when the sunshine in Texas, we're shipping very strong. We still got pumps and some quarries pumping lower levels, but we're operating all of our facilities. I don't think we have any facilities that aren't back up and running. So I would call us in good shape. On the East Coast, I'd say we're very healthy in Texas. And when it quits raining every day, we ship. So we're I don't see any lingering effects like we saw a year ago. Okay. Thanks, Tom. Sure. And next we will hear from Stanley Elliott with Stifel. Good morning, Stanley. Good morning. Hey, morning. Thank you guys for fitting me in and welcome, Stan. Quick question. When you think about I guess, one, could you help us with how inventories are out in the field? How balanced are you guys heading into next year? And then maybe kind of take that and as we're looking at maybe higher public spend market or public spend environment next year, does that end up making it easier to balance inventories or is there not much of a difference? Well, first of all, I think we were pretty disciplined in the downturn. And I think we've been very disciplined over the last 4 or 5 years in making sure where we had inventories that were long, I. E. Fines are based that we cut into those. And I think we're in much better shape. Always you have sizes that times get short, particularly asphalt. And I think we've done a good job maximizing our efficiencies in our plant, which affects cost, but also inventory. So, as we stand right now, I think we're in great shape on inventories, not too much, not too little and the right amount. I think that our planning process and our coordination has gotten better and we've honed that in the return back to better shipments. So I think we're going in a great shape. I think our plants and the facilities have a lot of flexibility to move up or down and be nimble with adjusting demand, whether that's fundamental or timing of jobs or weather. And I think we've actually gotten better at that. And obviously, we've had good practice with weather over the last couple of years. So I think we're in great shape. As far as the public demand is concerned, it tends to and I would underscore it tends, new public construction tends to support a lot of base also, which is very good for operations, uses up our fines. I think we can adjust quickly off of that. It also uses a lot of the high end pricing of asphalt aggregates and also fits our asphalt business. So I think we're in really good shape. And I think our folks are on a local level have done a very good job being coordinated and ready for whatever comes at them. Yes, I would agree with that. And I would also add, if you look at some of the comparative inventory numbers, either comparing our Q3 number back to the beginning of the year or to Q3 last year, it will appear that it's a little bit higher. But that's as a result of the acquisitions that we've made over the year and really doesn't reflect any significant movement in the inventory levels at our same store quarries. Yes, that was my thought too. And then thinking about kind of the capital into next year, if 2x to 2.5x is the number, I mean, you should be right at the low end, if not below, depending upon assumptions. What is the preference? Is M and A still of interest to you? Is it more organic growth? Is it buying shares back? Obviously, increasing the dividend is something you guys have talked about as well. I'll let Suzanne take this, but I'll start with telling you that our capital priorities haven't changed. As you look at the M and A out there, we are as I said earlier, we're really focused on the capturing the synergies of the acquisitions we've made and the greenfield work that we're working on. Both of those tend to be some of our highest returns. But remember, our biggest engine of growth is going to be the volume growth and growing unit margins. You got to taste that in Q3. It's exciting. We see it flowing rapidly into October November. So, but I'll let Suzanne take capital priorities. Yes, absolutely. I mean, just adding on to what Tom said, which I agree with, the capital allocation priorities do remain the same. You know what they are. We've got a bit of both in there, but they are predicated on the waterfall that shows us making sure that we spend an appropriate amount of operating CapEx to make sure that our existing business that we maintain and grow the value of the franchise. We do have an eye toward a progressive dividend. We've talked about the fact that we want to make absolutely sure that it can be sustained through the cycle regardless of the amount. Whatever we get to, we just need to be able to sustain it. But we would expect that to progressively grow in line with earnings. We look at growth CapEx. We've talked a bit about that. And then we also have in the capital allocation priority, returning excess cash to shareholders primarily via share repurchase. And we have been in the market through the end of Q3. We spent about $100,000,000 with respect to share repurchase. So our job is to balance all those in an appropriate way and be disciplined about the use of capital and make sure that it goes into the areas that will be highest returning. With respect to M and A in particular, obviously, we're going to look at M and A opportunities as they arise. But we will be returns focused. We will be thoughtful about multiples. We certainly don't want to be in a position where we overpay, particularly when there are other competing uses of our capital. And I just want to reiterate the point, as Tom said, M and A is an important part of growth to the extent you get the right fit and the right returns, but always, always same store growth, moving improving the business that you have is always going to be the most profitable business you have and also the lowest risk because you own it and you have complete control over what you're doing. So we'll continue to look, but our principal focus, I think, in the near term is going to be fully integrating those businesses we have acquired, bedding them down to make sure we capture all the synergies that we planned and that we can capture. And then as I said earlier, with I think it may have been the first or second question, we want to focus on making sure in our same store businesses that we are improving that unit profitability. Does that help? Perfect. Thank you very much. Absolutely. Thanks for the time. Appreciate it. Best of luck. Thank you. And our next question will come from Garik Shmois with Longbow Research. Good morning, Garik. Good morning. Good morning. I guess my first question is just as you look out to 2019, can you speak to some of the inflationary buckets in the aggregates group that you are concerned about? Is it mainly diesel that's going to move around and provide less visibility? And I guess as a knock on to the inflationary question, are there any tariffs that you're exposed to that might impact either CapEx or raw materials? If you step back and look at the aggregates business, and with an aggregates focused business, we are just different and I'd call us special in this area. We have clear potential to do quite well in an environment of rising commodity cost And that's really driven by 3 things, improving pricings, compounding over time, which we talked about. And remember, higher fuel and logistics only widens the moat and now you're starting to see us starting to capture the widening of that moat. You saw the tip of that in Q3. We own our major input, which is the rock in the ground. And the third point is there's plenty of room for improving unit margins with prices, better operating execution and seeing fixed cost leverage. I'd take you back as a reminder over past 5 years since the recovery began, our total cost of sales is up less than 1% per year with diesel being up 7% per year. So if you talk to our folks, they tell you that improving unit margins no matter what happens at the outside world is our job, is what we do. You saw progress to that in the Q3. You've seen us do this before and you see us take great momentum on this into Q4 into 2019. So I have great confidence that we'll continue to grow unit margins regardless. Yes, I would just add there also referencing back to the slide deck when you get a chance. On Slide 4, we have put in some longer term trend data where we actually calculate our compound annual growth rate. And we measure that as against trailing 12 months Q2 2013, sort of really the start of the recovery. I like this slide because it shows that the improvements we made are not sort of 1 quarter, 1 year type improvements. These are incremental compounding improvements that we need to stay focused on and continue to drive. On that slide, it specifically calls out the one measure, which I think is a great one and says a lot about how nimble and flexible Vulcan is when it comes to managing through sort of whatever comes at you over a 5 year period. And that unit cost of sales, has increased less than 1% over that 5 year period. And also on the slide is what I think is one of the most exciting numbers on the page. And that is that through some compounding pricing improvement over that 5 year period through managing our costs and efficiencies at the plant level, over that same period, our compound annual growth rate in gross profit per ton is 13%. That's a pretty strong business model to take us forward. Of course. Thanks for that color. Thank you. Just wanted to ask also on if you think about pricing into 2019, I think as we're coming into this year, Tom, you were pretty bullish about pricing accelerating, particularly in the Southeast. I'm just wondering if there's any additional markets that you can call out when you look into next year that are kind of on the cusp of this breakout, whether it's from overly tight supply and breaking out? I know there's been fits and starts and mix this year that's impacted reported pricing, but nothing you're too far ahead of yourself. As I look back, pricing really picked up in 2015 into 20 16. Demand was very strong. Any regions that could maybe mimic that type of performance into 'nineteen, 'twenty? Yes. Let me just kind of take you through the haves and have nots on that. California demand solid private, really big growth in highways. We've seen really good unit margin improvement in California. You've heard us talk about prices with a step function in California over last year and this year, and I think that continues. They've also done a really good job of improving their cost and a lot of their operating efficiency. So I think that issue and I'm really looking at it from a growth in unit margin perspective, and I'll give both price and how I see that. So very healthy in California. Texas, solid private growth, big growth in public demand with highways. Remember, Prop 7 again kicks in this year with an additional $3,000,000,000 Prices in Texas, I would call out, is energized. That started kind of in the second half, but it's really going to hit in January 2019 with fixed plant price improvements. Costs have been improving, solid margin growth. And you're going to have upside in Texas potentially in 2019 2020 in energy projects and we'll come back to that later. Gold Coast, I would tell you a little slower and kind of not little bit of growth in volumes, some price increases, but I would tell you a little bit harder, but they're doing a good job with it just because the volume big public is not there. Southeast, very healthy, good private, good public, big funding South Carolina, Tennessee, Georgia. Pricing is very good, continues to be very good, improving operating discipline. So you'll see another jump in margins in 2019. East Coast, again, very, very good, growing private, growing public, much better pricing, I think, right now in bid work and going into 2019. And I think we've seen their operations break out in the Q3. So as in the end overall, I think our business model is on track. Solid summary, solid private, growing public, prices moving up sharply in a lot of places, good operating disciplines, driving expanded margins. I think we feel really good finishing this year and going into 2019. Okay. Thanks. And then just my last question on asphalt. Can you give us some perspective on how quickly can you actually raise pricing to offset inflation into next year? Or maybe another way to ask that, how many what percentage of your markets have real time escalators that could provide? Let's step back. I'll let Suzanne kind of talk about what happened because I think it's important important visibility to what happened in asphalt in Q3 and then I'll touch some on the markets and what to expect. Yes, sure. I mean, Tom is right. I mean, the liquid asphalt is where we saw a pretty significant acceleration of price in the Q3. We had some price increases leading in before that and had raised our prices to take that increase into account in combat. So our prices actually went up about 8% in terms of what we were able to pass along to customers in the Q3. But liquid asphalt cost in the 3rd quarter went up 29% and that had an impact that 29% had an impact of about $16,000,000 in the Q3. So that's a pretty tough number to overcome, particularly when it happens quickly like that. But just as you saw us be able to raise prices 8% going in, we will continue to raise prices to offset this 29% increase that we saw. I mean, there's always just a bit of a time lag on the front end as you try to catch that upward curve. Yes, I think that's well explained. So our prices went up $4 and sequentially quarter over quarter asphalt went up about $40 which is $2 a cost. Our unit margins were down $2.50 So you can see we were going to catch it except for we got caught again with an increase in liquid. This is the one place in our business where commodityenergy can hit us hard and fast. Remember, it's only 10% of our business, but it is also only temporary. Unit margins will catch up. They always do. I think our asphalt business has a very bright future, particularly with all the highway funding, which is a big driver of asphalt demand. And it's really exciting if you look at where that money is and where we're in the asphalt business or a leader in the asphalt business in Texas, Tennessee and California. So this will fix itself. It always does. And by the way, when it turns down, we'll put much of that in our pocket. Understood. Thanks again. Best of luck. And our next question will come from Kathryn Thompson from Thompson Research Group. Good morning, Kathryn. Good morning. Good morning. Thanks for squeezing me in. Sure. First color is first question is really just circling back on the rails. Were you to give any color on rail line transportation bottlenecks using? And also just to know that there were several rail lines that were washed out post Hurricane Florence and wanted to get any color you have on recovery efforts there? Thank you. Yes. The railroads continue to try to improve. We're still having issues. I think they're slowly getting there, but it's cost us some volume and it's cost us some opportunities in 2018. In fact, we're working on railroad stuff next week to try to make sure that we got behind us as we enter 2019. As far as the storm is concerned, we did have a washout, which cut us off for a few weeks from one of our yards. Bad news is we couldn't get to the yard. Good news was we shipped rock to fill in the washout. So kind of a little bit of good and bad with that. But as far as our facilities are concerned and it's a great question, I think that we're in good shape, including railroad ability to service our yards along the coast. Thanks. I want to focus a little bit on residential. We've noted in this, as you know, we try to have a boots on the ground view of the market and I found that in both Texas and Tennessee in particular, we've seen some larger Greenville residential projects that were either put to the side in the last cycle and are starting up or are being developed to address fast growing markets. What are you seeing in terms of this type of trend, particularly in the light of rising interest rates? And I would love to just get your view on that trend in general? Thank you. Yes. I think we've seen a little bit of that. I'd also tell you we've seen we're seeing some very large ones kick off particularly in Southern California. In fact, one of the largest ever done is right outside of our quarry in San Diego, which we're really excited about and it will start really crank up next year. If you look at res in our markets just fundamentally, ours are stronger than most around the country. And it's the fundamentals are just there. You got population growth, you got continuing employment growth, you still got low inventories of houses. I think so we'd see continued steady growth in res, maybe not as robust as it's been in the past, but steady, maybe probably a little stronger in single than multi, which is okay by us because it's more aggregate intensive. Yes. I'd just add to that, that the states that we called out there that have seen some of that improvement, Texas and California, keep in mind, those are 2 of our largest states in terms of aggregate. So whatever is going on there, we will definitely get our fair share of it. Yes. No, we're definitely aware of that. And then just in terms of, you touched on SB-one in California and starting to see strong lettings out of that state as we've been tracking on our end. Could you talk about other states where you're seeing more of those dollars translating to volumes that perhaps passed legislation, for instance, like in Georgia and Texas, what you're seeing in terms of the pace of real volumes flowing through from the dollars? Thank you. Sure. I'll touch on probably the newest ones. I think Georgia is actually starting to flow through. We're seeing shipments on those big projects that we've talked about. Texas is the most mature. We've got Prop 7, as you know, with an additional $3,000,000,000 in 2019. They've really got their act together and I think they'll get that work out pretty fast. On the IMPROVE Act in Tennessee, which is a 40 percent increase in funding in Tennessee, Tennessee DOT, I would describe, has done an excellent job and one of the fastest to get work out. We're already starting to ship on both asphalt and aggregates on projects. We've got a lot of work, a number of jobs booked for 2019. Like I said, we'll actually see a little bit in 2018, which is quite quick. South Carolina is a little slower. We've not won't see anything in 'eighteen, probably see it begin in 'nineteen. But remember, South Carolina had the big bonds from a few years ago. So we've seen a big slug of big interstate work, which we'll ship on we'll ship it on now and we'll flow into 2019, which will kind of bridge us over to Act 40. Is that giving you some clarity? Yes. No, it definitely does, because it helps to set expectations for California, because the way we've seen it, it simply takes at least 24 plus months for the dollars for the dollars to the volumes to actually get flowing. So that was helpful. Thank you. And then finally, one of the things that we've seen with these big infrastructure projects, it's maybe a little bit different in the past, is they're really they're very large projects. They're multiple years, but they may not be new projects. They're more like I'm adding 4 3 additional lanes to a current project. For the markets in which you serve, are you seeing a similar type trend or are you seeing perhaps more of a mix of just entirely new roads in addition to significant expansions? I would call it a mix. I would also point out that the insight to this is that these large projects, the different DOTs are at different stages of being able to handle them and handle them in a timely manner. Texas, as I said earlier, has done the best job of getting big projects and having them ready and have them flow through smoothly. We are just seeing in a lot of states a big the big design build jobs take substantially longer than maybe what is budgeted or is planned by the DOT or the contractors and we've been talking about this. I think that we have a better handle on that as we plan for 2019 2020 than maybe we did as we planned for 2017 2018 just because we know the right questions to ask. But you're right, it is a mix and it is taking longer to get done. Now once they get going, they're quite efficient. Okay, perfect. And based on the Quarry run you held at Nashville, your inventories look just fine in Middle Tennessee. Thank you very much. Did you win? Not so much. Thanks for participating. Next we will hear from Brent Thielman with D. A. Davidson. Thanks. Good morning. Thanks for fitting me in. Good morning. Notwithstanding the weather issues, pretty good volume growth here. I presume that's helping you work through some of that backlog work. A way for us to think about what's left in that backlog that's, Tom, that's priced well below the ASP, at least we can see today? Is that likely to bleed into the construction season next year? Is there an opportunity with some decent fall winter conditions to work through a lot of that? I think what is what we've been saying is week over week, month over month, the work we're putting in is at higher prices. So and we have put in a lot more work. So I would say that the bid work will continue to step up much similar that what you saw between Q3 and Q4. As Suzanne called out, it was 50 basis points. And so as every day you're working off old work, replacing it with new higher priced work, I think the market gets it. And so there'll be 2 there'll be kind of 2 stages to price increase month over month, week over week, the bid work will continue to march up as and that will just continue through 2019. And then your fixed plant work, you'll see a bigger jump in January as fixed plant price increases go into effect for the year. Does that make sense? It does. Thank you. And then on the outlook for this year, has the expectation for U. S. Aggregates changed at all? Has that been impacted by weather as well? The answer to the short answer to your question, yes, U. S. Agro has been impacted. As I step back and look at it, these assets are a really good strategic fit for us. We'll probably be a little short of our $50,000,000 maybe in the $45,000,000 range. Three issues there and the short term issues, weather as you called out really related to Michael. As we talked about earlier, the rail service have been real for us there. They have cost us volume. They have cost us opportunities in customer service. And then there's the 3rd item there would be there's a very large there's some very large project work in Florida. There's backlog. It's to the tune of about 2,000,000 tons. We expected it to ship. And in 2018, it is we'll start shipping in 2019, probably a blessing in disguise with the rail issues we had that it did get pushed back. But one of the things we're really pleased with, with AG GSA is the plant improvements and the efficiency improvements and cost improvements that we implemented this year. It gets us set up for 2019. I think if you look at 2019's plan, we capture the synergies in volume, cost, prices and unit margins. And so far, we're we can't control temporary issues out of your control, obviously, but we are pleased with execution plan and strategic fit. Okay. Okay, perfect. And then one more, I guess breaking up the crystal ball here, but do you guys have a view on liquid asphalt costs as it relates to IMO 2020, possible tightening in the market, any preliminary thoughts there? There's all kind of we've read a lot about it. There's all kinds of theories that it will cause diesel to go up and liquid to go AC to go down. I think what's important about that is, as we talk about all the time, we'll handle what we can't control that, we'll handle what gets thrown at us, we'll adjust accordingly with price and with escalators, and we'll watch it very closely. But too early to tell and I don't know that we need a view as much as we need to be ready for whatever happens. Understood. Okay. Appreciate the color. Thank you. And our next question will come from Scott Schrier with Citi. Good morning. Hi, afternoon. Good morning. Good morning. Thanks for getting me in there. Good morning. I want to go back last quarter, you had mentioned that you were kind of expecting that trend you have in same store shipments to continue. I think you're at 11%. And I'm curious and I understand you had weather in September. I'm looking at Slide 5 that July August was 7%. So is there anything to read in there in the quarter? Was there residential slowness? Was there any kind of project delays or anything in there? Or do you feel that July August on a same store basis met your expectations? Yes, I think July August were meeting our expectations. There's no slowdown. That is really shipping at a pretty good pace. And last quarter same store, if I remember, was or the same store this year this quarter, it was 10 and 6. There was a lot off from what we had last quarter. I think if you look at the underlying demand and the all the leading indicators of what's happened on the ground, we feel really good about volume. We continue to ship strong in October. We called out Texas, but every play even in Texas, we were shipping when it was we had a ray of sunshine and the rest of the country has been strong. So I think we feel really good about underlying demand, project work starting to flow, public funding starting to flow in, kind of steady on the private side. And I think October only gives us more confidence in that. The mid single digit for next year, it's just too early to tell. We got work to do. We have confidence in that, but we've got a lot of work to do on that as we've talked about in the call. Got it. And then again, we I'm sorry, I think again, that mid single digits for next year, my favorite word is thoughtful. We've tried to be thoughtful about putting that together. And as we get more information leading into when we next speak to you guys with Q4 and as we go through next year, you get more and more visibility. There's more activity being booked. And so, we would, as we always would, adjust that as needed as we go forward next year. If things pick up and are strong, we will come back and share with you our latest view on that. Thanks. I wanted to ask a little bit about concrete. It seemed like you had a pretty strong result there, especially considering in Overton you had the weather, but you had pricing, you had the material spread. So I'm curious if you could talk about your expectations in Concrete. Do you see the fundamentals there to continue to expand your material margins? Yes. The short answer is yes, we do. Our concrete businesses are in what I call privileged markets, both the growth profile and the structure of the markets. But we even with volume down, we did better and that was really weather in Virginia. But again, there are prices continue to move up and offset any raw materials costs or fuel costs and we would expect that flowing into 2019. Great. Thanks for that. Thank you. And we will now move to Michael Wood with Nomura Instinet. Good morning. Hi, thanks for taking my question. Good morning. I wanted to ask about the residential side of your private spending. The slowdown according to some of the homebuilders and building product companies seem to have accelerated really near the Q3 end. I appreciate your comments on some of the large projects that are about to get started. But if the slowdown does worsen, when would you expect to see the impact on your business? Like when would your backlog that you have now currently get worked through? As we look into 2019, we don't see the slowdown in the projects that we see out there in our markets. So they'd be further out if it much further out if it happens. And again, the fundamentals are there, our backlogs and talking to our customers, we actually feel kind of good about slowing steady, but we're not seeing a slowdown in our market. So it's hard for me to predict it, but it'd be pretty far out because we have some visibility to it. Is your California mix between private and public relatively similar to your national mix? I would yes, it's probably not too far out in any of our markets, particularly with our asphalt business in California. You got to remember that with public coming on, it really helps the asphalt business and the flow through of aggregates into that business and the base that goes underneath it. So, we are looking forward to more highway projects in California. Great. And just finally, I wanted to ask about the cost control. Beside just managing your operations around the weather, is there anything else that you have to highlight in terms of what's helping you reduce cost at your quarries? If you can give us some details, I'd appreciate that. Sure. It's just core disciplines and we've taken a look at our largest facilities. A number of them had teams look at them for opportunity searches. I think our folks are always doing this. If I took you to any of our plants, they're going to have a conversation about how to improve throughput through the plant, how to improve downtime in the plant, how to get more out of their fuel costs, out of their explosives costs is just is not there's nothing that here that is anything except for really, really good hardcore operating disciplines and attention to detail and sharing knowledge across our footprint. And if you talk to any of our folks, I'd just tell you that's their job, that's what they do. Great. Thank you. Thank you. And that does conclude our Q and A session for today. I'd like to turn the call back over to Mr. Tom Hill for any additional or closing remarks. Thank you. As you can tell, Suzanne and I are excited about our business. It's really fun to watch our profit engines crank up. We're excited with the performance in Q3, really excited as we look into Q4 and 2019. We appreciate the time you spent with us this morning. We appreciate your support of Vulcan. We look forward to seeing you and speaking with you throughout the quarter and we hope you have a great week. Thank you. Thank you. And this does conclude our call for today. Thank you for your participation. You may now disconnect.