Q3 2019 Earnings Call
Ladies and gentlemen, please standby.
Good morning, ladies and gentlemen, and welcome to Vulcan materials Company third quarter earnings Conference call. My name is chicken I will be your conference call coordinator today.
As a reminder, today's call is being recorded.
During the Q and a portion of this call. We ask that you limit your participation to one question touched a follow up question.
This will allow everyone who wishes the opportunity to participate.
Now I will like to turn the call over to your host Mr., Mark Wharton Vice President of Investor Relations for Vulcan materials. Mr. Warn you may begin.
Good morning, everyone and thank you for joining our third quarter earnings call with me today, or Tom Hill, Chairman and CEO , and Suzanne would senior Vice President and Chief Financial Officer.
Before we begin I'd like to call your attention to our quarterly supplemental materials posted at or web site Vulcan materials Dot com.
Additionally, a recording of this call will be available for replay at our website later today.
Please be reminded the comments regarding the company's results in projections may include forward looking statements, which are subject to risks and uncertainties.
These risks along with other legal disclaimers or 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 third quarter results reflected another strong performance with adjusted EBITDA improving 50%.
That's compared to last year.
This was driven primarily by the aggregates segment, which experienced higher shipments better pricing and improve unit margins.
For the quarter aggregates shipments increased by 8% both 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% inline with expectations.
This growth in volume reflects solid underlying demand fundamentals in our markets.
The fundamentals, which include which include growth in population and households, and in jobs or two to three times the growth of other markets over the next 10 years.
Shipments in certain markets in the South East mid Atlantic in Texas.
Equally strong.
Shipments in California, we're also better than last year due to strength.
In southern and Central California.
Freight adjusted sales prices rose by 5.6% and importantly.
The increases were widespread.
On a mix adjusted basis prices improved by 5%.
Product mix and geographic mix were slightly favorable.
Gross profit per tonne grew by 9% in the quarter to $5.87.
We are pleased with the progression of our unit profitability.
In fact, this quarter, representing the fifth straight quarter.
Of high single digit or low double digit youre your improvement.
So for strategic initiatives reviewed at our recent Investor day contribute 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 first nine months, so the year aggregate shipments have exceeded the upper end of our expectations.
Racing has increased in line with our expectations and we have delivered good incremental earnings.
This improved aggers performance will partially be offset by what were non aggregates gross profit.
Our non aggregates gross profit is now expected to be below original.
Original expectations, but in line with the prior year.
That said, we're well positioned to deliver another year of double digit earnings growth.
They should carry good momentum into 2020 in all product lines.
We expect full year 2019, adjusted EBITDA of between $1.25 billion and $1.33 billion on track with our expectations at the beginning of the year.
Looking ahead to next year.
We expect another year or strong earnings growth.
Based on early successes of our four strategic initiatives, we're confident that our margin expansion will continue.
With respect to 2020 aggregate shipments, we anticipate low to mid single digit growth. It 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 stage and it will be a multi year contributor to our future results.
Most of the approved funding is firewalls it can be only used for transportation.
Therefore, it's not a matter of yet 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 nonresidential construction.
And we are in the best position with RG <unk> 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 summer 2019 mid single digit range.
Together with disciplined capital allocation priorities, the compounding effect, a price and unit margin improvement will position us to grow our discussion discretionary cash flows and improve our return profiles in 2020.
We will report out our final 2020 guidance in February .
Now I'll turn call over to Suzanne for some additional comments when it was all Suzanne.
Thanks, Tom and good morning to everyone clearly the third quarter represented another quarter of strong earnings growth for our aggregates business, but we also made progress in our non aggregate segments.
Asphalt segment gross profit was $28 million, an increase of $4 million or 16% as compare to the prior year.
Asphalt mix shipments increased by 18% and average selling prices rose by 3% significant volume increase related to a number of projects across our footprint.
The average unit cost for liquid asphalt was 6% hired this quarter compared to the same period last year. This compares favorably to the second quarter when our liquid asphalt costs were 16% higher year over year, we expect liquid costs to remain stable through out there.
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 million 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 aggregates 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 S. AG 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 continue 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 and 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 eight of the supplemental slide you'll find information on our discretionary cash flow expectation of $825 million 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 close no acquisitions, but we did invest $3 million in share repurchases.
For the full year, we reiterate our expectation of spending approximately $250 million on operating and maintenance capex and approximately $200 million 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.
Now 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 $1.29 billion.
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, Dan.
We'll go to cumin A. I want to take this opportunity the thank the men and women of Balkan for their hard work dedication.
The of taking good care about customers.
Have improved our business processes and disciplines.
Importantly.
They have promoted our strong safety culture, and responsible for delivering our industry leading safety metrics.
As we move for well continue to capitalize on our SPRIX.
Our aggregate focus business.
Our outstanding geographic footprint and local execution capabilities, particularly around.
Those things we can control.
Our fourth strategic initiatives will ensure continued improvement and unit margins.
Now, we'll be happy to take your questions.
Ladies and gentlemen, if he would like to asking question you consider by pressing star one on your telephone keypad keep in mind, if you're using your speaker phone make sure that meet functions released so that signal can reach our equipment.
A reminder, please limit yourself to one question and one follow up question to allow everyone an opportunity to participate once again star one for questions.
I'll start with Stanley Elliott with Stifel.
Morgan Stanley .
Good morning, everyone. Thank you guys for taking my question.
Can you comment on what you're seeing on the cost side I know you you like to talk about the incrementals on more of a trailing basis as opposed from quarter to quarter, where there any one off you know stripping costs or anything else that might have popped up just curious.
Yeah, I'm third quarter cost increase really based in two areas. One was planned higher repair and maintenance owned stationary equipment, particularly some big crusher repairs. We did a rebuilds that we did and also we took one of our big drag lines down in Florida and made some major repairs on yet.
The second area was extra blue water shipping costs as we took our older ship a into dry dock and we're using contract ships at much higher cost that ship is back in our back in the fleet at this point so that's behind us.
And as 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.
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 talk about if you look at what we were God you do the trailing 12 months same store flow through was at 60%, which is where we would guide you'd be.
Got it her freaking out on just picking up on Tom's point I'd also add that you know as he said, we almost always guy toward 60% on a trailing 12 month basis and if you look at you know just pick the last eight quarters, we've got quarters ranging flow throughs. Indeed.
Specific quarter, ranging from 41% to just over 100%. So it it's really difficult to look at a particular quarter when you've got 350 mines and lots of different things going on that's why we always guide to the trailing 12 month to smooth out some of those things out Stan.
Right.
Perfect I understood and then just as a funds a second question you kind of looking out to 2020 on the low to mid single digit volume growth and I know you'd want to give too much color here, but you know maybe a a couple of states. It maybe you're most excited about looking at the upcoming here.
Yeah, you know I would point you to the really pretty much across footprint, but the mid Atlantic southeast will be strong parts of Texas will be strong, California would this be one kicking in shouldn't should be good you know as you said is you know we're actually right in the middle of the planning for 2020. So it's early.
On the private side, we still see growth and ship most resin nonres sectors and they've been strong group, we strongly my team.
You know if you got to sort of what do you <unk> some watches there, which we called out San Francisco, Dallas, Miami, Chicago, but you know we've talked about national but Nashville, we actually think has gotten a second win is doing quite well on the private side.
We've got most of our mortgage trip and really strong on private how would the man and shipments we talked about is gonna be very good well could do you really not just 2020, but year to number of years to calm.
You know, we try to be thoughtful in that low to mid single digit and tweak because it's really early in the process. It will obviously give you a much better look at this in February .
Understood. Thank you all the time desolate. Thank you.
Ladies and gentlemen, if you find your question is answered it during the question answer session you can remove yourself from the Q by pressing star to.
Ill now move to the next question Kathryn Thompson with Thompson Research Group. Please go ahead.
Well I guess he keeps taken this morning.
Thank you for taking my questions today are shifting to California, no that.
Oh I see one it's been great would love to get an update on progress and give any color.
What if any impact the fires that Pat on construction projects. Thank you.
Yeah [noise].
SB one continues to be well we saw what.
Double and up through from when it was passed in 17 through this year. The next year they'll add another billion dollars to it as you know we got a slow start this year because we just got rained out in the first five months, but now we're shipping strong both with aggregates and asphalt.
So things are you know picking up in California on the fires.
We've recently seen some delays from bars.
And you know I think.
We'll have we'll have those and we will have those but remain as your <unk> as you know the work.
Doesn't go away and we will be there. Most importantly, our people are okay and their homes were 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 too are ready mix operations, but no impact from that at this point.
Okay. Great then it really this is more abroad downstream question for you.
Just a little bit more color in terms of the region marked impact with the asphalt timing and then with concrete gross profit on the had great volume and pricing, but at the gross profit as a percentage, it's definitely off year over year, maybe a little color on that thank you very much.
Yeah, as we talked about with asphalt we would've thought it would have done a little bit better. This year, we actually had a good quarter in that goes public was up 60, we certainly driven by volume.
The what we would tell you where we the the shortfall in asphalt would've been volume in California, just because rains in the first part of the year, but the demand is there and that'll flow into 2020.
We were a little slower on catch up on unit margins that we would've anticipated, but I think what we saw good news as we saw in the second and third quarter that unit margins were virtually flat. So price has called <unk> 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 cost to be flat. So I think as we look forward to 2020 really good news product line.
The highway demand will drive volume's up an asphalt and I think that now that liquid is stabilized we'll see unit margin structure improves. So I look forward to this problem 2020.
Thanks very much.
Okay.
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 and enacts it sounds like a sounds like they were a bit lower than your internal plans, but then Tom that the comments you made around planned maintenance and add a 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 costs versus your internal expectations or just any additional puts and takes there that you may not have contemplated.
Yeah that both of those were all of that was planned but it was what was it was an increase over prior year, but it was planned I think is you as you kind of look at two Suzanne point. If you look at the cost profile. The agro business. It's it's gonna be lumpy quarter to quarter is just the nature of the Beast you have.
You know through picks facilities, you have to do the right thing at the right time at each of those whether that stripping or whether that's a big repair on a crusher or by as we did pull no drag wind down.
And if you if and you, though so the timing always is isn't big flux because you all three of those 50 million or may not hit it wants to me it a different times and you can't really procrastinate those things you need to do it when you need to do it all the real cost to more Italy, the downtime in little bit failures. So for the.
So for the long term nature of the business you inspected and fix it when do these fixed or you strip one of these to be fit it wouldn't be strip, we talk about that a lot in Tampa with.
You know inspecting the maintenance and timely owned equipment, but if I step back and look at it and put them operators had on I'm very confident our ability to pull through that 60% on a regular basis for the long haul, but you won't do a quarterly and if you look at probably 12 month, we've done that I mean, that's our track record and that's what we'll.
Got you tube quarterly because of the nature of the long term makes for the Beast and just doing what you got to do in each one of those individual months is gonna be lumpy by nature.
Okay understood.
Second question is just around the guidance and sent to appreciate the thoughtfulness through throughout the year I guess, just a press on the.
Implied Fourq you guide of bad debt.
The low end of the implied guide would have you down year on year on EBITDA. So I guess just to be it just want some clarification of whether it doesn't seem from the outside that theres anything that would produce that type of outcome given volume and price, but is there anything or 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 are better, but just didn't feel the urgency to take up though and I think I think I'll comment on the market millet, let Susan comment on the financials.
The works there.
I think we feel good about our backlogs in our booking pace it will support.
Our outlook both for the full year in for 2020, but as always in the fourth quarter. It's just a matter of how many shipping days, you're going to have before the years out and you saw that last year, we actually ran at a time pool, we pull work into the first quarter of 2019. So its first in first fourth quarter in first quarter oil.
Just if you because of the time of year. It is but the underlying fundamentals the the pricing the the demand all those fundamentals are there we feel very good about it yeah and now I would just add onto that that we did that's the guide that's been in place all year, we're still.
Comfortable within that range is as you indicated and yeah. You know you hopefully a you know at though you know at or around the midpoint of the range, but it depends on the you know the number of shipping day, So I wouldn't I would not read anything into the fact that we didn't raise the lower end at the range. It.
We just decided to leave it in place, but but nothing in our outlook for the year has changed and indeed, if you look at the you know results that we have produced year to date I mean, we are you know on a good pathway to achieve that.
Okay, great. Thank you both.
Sure.
Now moving to a question from Jerry Revich with Goldman Sachs merger.
Hey, good morning taxes, and Mark how are you.
Good.
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 you know more or less mid single digits across the board or is there more variability by market and in terms of the pricing actions, you're taking or are they more.
Significant other than what we've seen in those capital markets in 18 and areas, where you're pushing pricing above the company average for 20.
As is always they're going to be you know there will be variability and that's.
That's because different markets have different cadences of you push price for a while new let catch up in the 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 increase real price increases in the vast majority if not all of our markets.
Our backlog our booking pace would support.
That you know mid single our conversations with our fixed by its customers I think would support that.
Again, you know we're still we're in the middle distillate still early in the process, that's our best thoughtful.
You know guide at this point, we'll give you you know a more educated view of this.
As with volume in February , but you know the the very strong shipments on the private side, coupled with the visibility of the you know the dramatically growing highway work.
Really support pricing throughout the sector, not just aggregates, but I think all construction materials and construction.
Well in this your strong and I think we'll start into 2020 with with very good momentum.
And Tom I'm wondering if you could expand on your prior.
Common share many are 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. Good can you just talk about over what timeframe would we see a read what do we need to see a reacceleration.
Lettings Pavel study project cadence and avoid.
Holes in the schedule if you will.
You know, it's it's really hard to predict holes in the schedule I think that if you look at starts for example, which is is is there's been no. If you look at starts which looks kinda like that would be down a little bit you got to remember that the value of those starts is up 20.
<unk> percent over two years ago.
So we're number one we're playing a much higher level and then you've also seen and with these big increases massive increases in funding you're seeing much larger projects.
So the starks metric is now very lumpy where shipments those big projects will ship over a number of years. So the nature of that leading indicators changed a little bit. Let me give an example, if you look at the job we're shipping today, which is 66 in northern Virginia.
It dropped into the starts in April of 2018 at $2.3 billion. So it just skewed the value of the starts as you compare to April your year over year, but that job is shipping it'll ship for years. So that the big projects is made that will a little bit lumpy I think if you.
You look at.
Overall, you just look at value of what's going on the states and I was one through four to eight or not I'm 40, Florida.
The it'll be up Lettings will be up 25%. This your your.
Georgia, Lettings will more than double over the next two years from 1.4 billion the 3 billion.
Texas is budget goes from $26 billion over 31 billion.
Virginia deal T. and regional authorities goes from four to have to five and have the and from a budget perspective, how we lettings and how we spend exacloud to be up 10%.
Tennessee's up 40% over to your timeframe and California as I said earlier, it's up since 2070 1.7 billion increase another billion in 2020 so.
There's a lot of work out there are lot worldcom timing, we'll just have to see what happens, but you know it's again, it's I said in my prepared remarks is not is when.
Okay. Thank you.
Thank you.
Okay.
And now we'll hear from Trey Grooms with Stephens, Inc.
Why don't drive.
Good morning.
So mark Thanks for taking my question so.
Looking at the elevated cost or planned cost that that.
Occurred in Threeq you is there any.
Any the anything we should be aware of as we're looking into Fourq you. When it comes to you know any of these costs that.
Occurring that time.
I'm not dramatic I think I think you know it's again, it's the it's the timing of when those fall and 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 talking about quarter.
But and I'm actually pleased with the disciplines that we're instilling for the long term or what happens in operating efficiencies. I mean, you got to rebuild crushers, you got to rebuild drag lines and those going to come at different times, but.
<unk> fundamentals that really draw the cross cost of efficiencies of tons per man hour tons per hour downtown those kinds of things I think we continue to push the ball forward and improve on it.
Okay and <unk>.
With.
The asphalt business unit margins.
Taking a.
Margins improved I guess, but the it was on volume and just in it sounded like most of the down.
So to your guide on on that side of business was due to volume and timing there.
So somebody.
If I didn't understand that correctly, but yeah. So let me see back even see if I can explain it to you. The there's a mixed bag in the shortfall of guidance was volume and volume in California. We just got a should we just shortened the year with the rain in the in the first five 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 of hot mix kitchen, the cost of liquid.
The good news to that is what we saw in Q2 and Q3 was we've caught it were virtually flat now as we look into 2020, we know that based on our backlogs that our prices are up we believe that a worst case lick will probably be around flat.
So you start seeing you. So if you look at the 2020, you. We think we'll see unit margin expansion because we don't we're not chasing that all anymore. We've continued to be able to raise prices on a high on the hot mix side. If you look at demand you want to 2020 is pretty simple, we know what's happening with weddings and highway spending and that's a big driver of asphalt volumes.
So again, we're doing the plan right now we can't give you guidance, but when you clear on that we've talked in February .
Okay sounds like improvement Nonetheless.
Yes.
And then last one for me and just on the Fast Act expiring next year.
Yeah, what's your expectation for you know I guess right now if any update on your kind of thought of how it shakes out and what the responses.
You know 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 all the states or we'll move will move forward. They have a substantial amount of funding and they will have political pressure to spend that funding improve their roads improved infrastructure because they're voters said we vote on this topic I roads, better so they'll they'll make sure that happens.
Again timing was C.
For the highway Bill I'm the civil 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 election year, then they'll will have extensions.
If you look and so I don't I have faith in the that spending will continue and infrastructure will be supported.
If you look a little further out to the highway Bill.
I know you've heard me say this the houses in are actually working on a bill right now policymakers are working on reauthorization pack is as we speak.
The.
Environmental Public works Committee is working on a bill which would increase funding by roughly 28% getting we'll see what happens.
But.
The feds are not going to let it go down and our states funding United States is up $20 billion a year. So.
And that's that is now flowing into shipments so I'd demands going to continue to grow over the next seven or eight years, but what we know right now no and I believe will you know right after election, there'll be a drive to get to get another federal build on.
Alright, Thank you very much for that and good luck with the risk corridor.
Thank you.
And our next question will come from Michael Wood with Nomura Instinet.
Well, Michael Hi, good morning.
I appreciate the comments you made in the Q and a session here on asphalt and I know in aggregate, but I'm curious with a you know you're you're essentially flat in the non AG businesses year to date and I'm curious why we wouldn't start to see an improving trend in fourth quarter does that give you any concern at all for the ability to grow those non.
Aggregates into 2020.
Well I have two full quarters just tough to.
Calcs too tough to.
Predict on asphalt and again its member asphalt you've got to layer that 45 degrees and rising. So you just don't know win in different elder different markets were in when you got to stop land asphalt I think the fundamentals less kinda, while look forward to 2020.
I think that the fundamentals for 2020 are very good we don't give quarterly guidance, but the.
Fourth quarters is hard to call any way, particularly with asphalt because of the temperature sensitivity of the product line, that's right and if you go back to you and yeah. When we had some similar discussions around this in the first quarter on asphalt we would've said exactly the same thing Michael It's just Q4 and Keyuan or just you know if he because it there.
Temperatures.
Understood and as a follow up the aggregates freight adjusted selling price, our there's not a lot of movement quarter over quarter I'm curious if there's any mix impacts that you know you didn't call out besides the geographic odd because I would think as projects roll off given your success with prior prior.
Nice increases you you would see at least the steady upward drift.
So I think you we did have a little bit of mix and we ended the it was.
5.6 up 75 cents, but mix was mix adjusted were up 5%. It was about half product about geographic the product was.
Well clean stone sizes, particularly asphalt sizes.
Again, driven by the highway demand and then the geographic mix was higher volumes of mid Atlantic in southeast.
I think if you look at our.
Backlogs booking pace again, it would support that mid single digit and.
I think that's is not all markets, we created equal in the timing of those is different but again early the till we got work to do on that we give you a lot clearer guidance in February .
Got it thank you.
Thank you.
Now moving to Paul Roger with Exane BNP.
Hi, Paul.
Come on at one high night nicely on the call today I was just a there's a late Sunday the trade and if I may end and focus a little bit on capital allocation.
Obviously, you all your problem she's in quite a nice position now Oh I see some of your competitors as opposed to talk Scott's an increase in the deep sort of M&A pipeline.
The type of thing you'll see it I know you want to look out for deals other than that.
Yeah, we will I mean, our capital allocation policy is is unchanged. We've we've talked about that a number of time. So I'll just speak specifically to the M&A part of your question I mean look we and we certainly like in prefer same store growth. It's the most profitable in the lease risk.
He but deals come along we look at those all the all the time, we've looked at a you know a number of them. This year, but we are very picky about though is we do they have to they have to hit us a certain very specific set of criteria. They have to fit and you know fit well in terms of.
Yeah, I Griffey product you know to move US forward, we have specific returns <unk> characteristics and so we continue to look and we we pass on a fair number because they don't hit those very high hurdle rates, but you know there there are few in the pipeline and we will see which.
Ones get to the finish line.
Okay cycling and then just couldn't about so they asked felt this doesn't mean you obviously given some color all your expectations for 26, when she anyway I'm just one day, so any sort of structural reason why there's cod, they're sort of mid to high teens margin business again.
I'd also two aspects and the impossible I know 2020 intends that deflation on the cost side [noise].
I think as far as the unit margins that may be a little bit aggressive obviously I agree we I'd love to have that but maybe a little gross on on on double digit in your margin improvement. It if without help from liquid now if you could help liquid.
That's a different story as far as IMO IMO 2020.
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 and 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 quick morning, good morning.
Yeah, we've talked a lot about the public but on the housing side, you know builders are benefiting from lower rates out there or is there have been really strong just curious if you.
Have you seen a pick up on the housing side for your business and and maybe what you can share you know what growth was like across the footprint during the quarter.
Yeah.
For the year shipments to residential market have been high single digit [noise].
We're carrying really strong shipment momentum in the 2020 you know most recently if you look at the trailing three month permits and starts in our markets. They're up as you said the fundamental drivers for housing are still very good population growth employment growth.
Low interest rates on houses and low inventories of houses I mean, as most of our markets. It is not much inventory, we're all time lows. So.
You know if you look at <unk> residential demand, we should carry pretty good at this point, we believe will cure it pretty good momentum in the 2020.
And maybe you can talk about what you a you know where the shipment growth was this quarter by geography.
Yeah. It was it was actually pretty good throughout our footprint, particularly strong and mid Atlantic Southeast coastal Texas was very strong South Texas was strong southern and Central California were strong Tennessee was leased Tennessee was very.
Yeah, and although you didn't ask how offer up that I'm on the on the pricing side, you know very widespread I you know virtual well every one of the key markets a experienced year over year price increases so that was nice to see as well.
Okay, and then like last one if I can hear at the analyst day, you talked about gross profit unit profits rising to about mid eights.
And then we saw like you know incrementals come in here remind is setting up the best incremental margins and for US a model is about 60%.
No intention there to suggest that maybe incrementals would be better as we go forward into into a over the next few years is that right.
No I think we would take you right back to 60.
Over over the long haul and again in any quarter, you're gonna have quarters that will be much above 60, you've upwards, we were way below 60, but on a long enough talked about that because 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 wouldn't need to do it for the good or the business and the long term profits.
Really the business, but I think we'd always bring you back to 60.
Understood. Thank you for taking my question. Thank.
Thank you.
And our next question will now come from Eric Smit voice with Longbow Research.
Well, thank you hi, good morning.
Competitor of yours talked about shifts in the mix of business moving towards a large scale highway work.
Less away from bridge work at this point of the cycle. So just curious if you're seeing that and if so how does that in pack your outlook from in aggregates intensity standpoint for volumes potentially from price mix standpoint, moving forward.
I think you're going to see more what you'll see is capacity and these large projects or even smaller projects I think they're going to be a lot aimed at it just laying capacity because we're so constrained obviously there'll be maintenance in there, but that is very good news for us because laying capacity is the most into.
Incentive demand use for aggregates of any we have including just within highway. So as we look forward I think we would see him improved maintenance, but most importantly in most of that money is going to be with laying 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'm. Just wondering if you end up seeing any of that if that delay in in Florida, the southeast might end up being shifting some some project work into the fourth quarter.
We didnt see a lot of that and if you notice with this is we've not talk to use the w. word Watson. This call. So we're pleased with that but I don't know that we saw a lot of impact from from Dorian. If it was it was fairly.
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.
Hey, good morning, guys how are Ya.
Good [laughter], if you could discuss a little bit somebody other cost trends like labor in particular and any of their freight costs just for starters, if he could discuss that and any other major components. They should be thinking out about I think I think the buckets I would put cost in was no.
Fuel was slightly down labor cost as far as cost per hour, you know I would not a big change minor, but not a big change.
The shipping costs, we've talked about was we had one of our ships and blue water and that's behind US in that are the Vulcan ship is back in service, but the you know the primary the primary cost driver for us in the quarter as far as a delta was the higher planned repair and maintenance on stationary equipped.
That was the that was the big one besides the ships.
Okay side, I mean can make you repeat that I was thinking more going no no no.
Going forward it big issue or do you think that's been campaign, because I know that's something that you've been talking about for awhile.
I think there's pressures on labor costs going forward I think what we're focused on is is the the disciplines and efficiencies to mitigate labor costs and those or how we run those plants and how we best utilize our men and women to run the cores.
Okay.
And then circling back on the capital allocation discussion.
And they have had a nice step change and returns and just trying to think about you know what are your priorities in terms of organic growth.
You talked about M&A or any better organic growth versus you know leased purchases you did a few and also dividends. Thanks.
I think our biggest growth engine will as always we'll be our organic growth and the change of high single digit to doubles, the low double digit to our unit margins and those four strykers niches, where we are actively I'm trying to improve those and with a lot of discipline and process.
Obviously, we're going to look for M&A as Suzanne said, we're gonna be disciplined about it we look at a lot of those are they have to fit our profile that fit what we want and the key there is to be disciplined.
And so so you know, but again the key here is improving that unit margin.
Day in day out.
I think you mentioned that dividends I mean, we we look at that dividend as as a progressive one are you know, it's it's clearly a board decision, but but our view is and that we should you know, particularly with our cash generation, which is you'll note a we raised our discretionary cash flow.
I don't fight and by about $10 million for for the year versus last quarter. We'll continue to look at the dividend in the plan would be to generally race. It in line with are our earnings growth to a level that we're absolutely certain we can maintain throughout the cycle.
Okay. Thanks, guys.
Thank you.
Now, we'll hear from Adam Thalhimer with Thompson Davis.
Good morning, and good morning, guys.
Wanted to ask first on the.
What are you hearing from your Washington grip on the risk of rescission.
Looks like Texas, My after repaying the federal government $600 million 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 Gord effect is slim to none.
Well. This will do is hill Congress find a way to pass repeal of the session. The feds are not going to cut funding.
Good how many would say that and then.
Relates to incremental margins.
We've had a couple of years here with its kind of trying to below 60% I'm just curious for a model modeling purposes at the 2020, I mean would you like us to stick in 60 or is it better just stick in 50 and work at higher as the year goes on.
We would we would guide you to 60.
Now in any given.
Quarter, obviously, I've just talked about as can be quite volatile in any given year, you're gonna be plus or minus something around 60, but you're always going to come back overtime to that 60 number that's how we got you well as an example for the full year 2018. It was 64% we would still yeah, we'd still guide you back to back to six day.
Yeah, the year before that was a little below 60 right right now were 60. So we got you back 60.
Okay, I mean ticket to 60 for this year it implies that margins up in Q4 in X.
So I just that's kind of why I wanted to focus on 20, Twond because I'm just not sure margins can go up in acts in Q4.
Well I think that I think that we're always trying to drive margins ups on Ags was in a quarter over year. That's a that's that's fundamentally what we're doing and that is the thing that we can control. There is the improvement in unit margins and that's what we're focused on.
As well servicing our customers. So we're not sure are part of the volume.
Understood. Okay. Thank you.
Thank you.
Well now hear from Phil Ng with Jefferies.
Hey, guys wondering.
Good morning sounds like your conversations with customers on pricing has been pretty constructive and I know it's early.
Are there any pockets or mark markets, where you could see like a mid year increase in 2020.
You know I would it's way too early Joe that we're not even through the plant 2020, and beginning of the your price increases usually there will be normally when you have rising demand you will have a few markets, where you are able to.
The whole market can accept midyear price increases and that's not just snaggers just kind of flow through it just depends and it but I think so from if you just step back and look what happens in the and over the last.
Five or six years there'll be there's usually about more to best enjoy Tom There's a few markets with little take midyear price increases, but you've got I remember you were talking about the fixed plant pricing on which is 40% of the business. The 6% a bid work is you know your pricing dozens of quotes day in day out in those market and those things.
We're always trying to push price for it and that's probably part of our commercial excellence and what we work hard owners to earn.
That earn the serves our customers, where we earn those price increases, but that happens day in and they out.
Hi, Ken.
That's helpful color and I know, it's really early and 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 in pretty healthy backlogs in public just curious whats driving some that deceleration and are there any end markets that are little less trial 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 no. This is our best estimate at this time so.
It's not try 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 thank 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 discuss and this will 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.