Q3 2019 Earnings Call
Greetings and welcome to somewhat materials third quarter 29, <unk> earnings conference call.
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Question answer session will follow the formal presentation.
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I would now like to turn the conference over to your host Karli Anderson, Vice President of Investor Relations. Please go ahead.
Welcome to somewhat materials third quarter 29, <unk> results conference call. We issued a press release. This morning detailing our third quarter with all this call is accompanied by our third quarter 2019, investor presentation at an updated supplemental workbook, highlighting key financial and operating data both of which are posted on the investor section of our website.
To differ please see the risk factor section so of material latest annual report on Form 10-K , which is filed with the FTC you can find reconciliations of the historical non-GAAP financial measures discussed in today's call in our press release.
Today's call will begin with remarks from Tom Hill, who will provide an update on our business and then Brian Harris will provide the financial review and Tom will finish with an update on our management outlook at the conclusion of these remarks, well open the lines for questions with that I'll turn the call over to Tom.
Good morning, everyone and thank you for joining our call turning to slide four of the presentation. Today summit is reporting higher organic price increases and higher volumes in all lines of business on solid demand and improved weather conditions. The third quarter is typically the strongest of the year and we set records with the higher.
Quarterly net revenue operating income and adjusted EBITDA in the company's history.
Furthermore, I'd like to draw your attention to the record free cash flow of 119 million, which is more than double what we generated a year ago.
Net revenue grew 6.5% in the third quarter and 4.1% year to date as a result of both organic and acquisition related gross from deals completed in 2018.
Adjusted EBITDA grew from 12.4% in the third quarter and 8.8% year to date supported by organic price and volume growth as well as more favorable weather conditions on a year ago.
Our aggregates business continues to excel was 11.4% organic volume growth in Q3, and 7.7% year to date, driven impart by contributions from our Missouri, Kansas and Texas operations.
Cement volumes increased 3.8% in Q3, and 2.9% year to date, despite unprecedented flooding on the Mississippi River.
Continued strong performance is expected through the remainder of 29 team and as a result, we've narrowed the 2019 adjusted EBITDA guidance range to 440 to 460 million.
Turning to slide five record Q3 results were anchored by the aggregates business, where there was double digit volume grows over the last year in Kansas. The growth was driven by summer road repair and strengthen the residential market in Missouri, we ship significant aggregate volumes associated with floods.
Related levy repairs in Texas entry level residential demand and public infrastructure work remains strong.
Third quarter organic or aggregates pricing increased 6.9% over the year ago quarter. This is a function of the robust demand environment as well as a catch up to offset industry wide cost increases that occurred in 2018 based on prior experience. This is typical after the industry suffer a sudden.
Cost increases and margin contraction.
Our aggregates gross margin of 69% is steady from a year ago and higher sequentially from the prior period.
Turning next to the cement segment on slide six.
There has only recently been a return to normal shipping conditions on the Mississippi River when the river reopened in late June many of the barges were already full it took some time for barges to become available and for us to be able to build inventory.
Cost continued to be incurred until this overhang cleared the some men adjusted EBITDA shortfall for the full year should however be mitigated by the once all flood related levy work.
Turning to slide seven.
You'll see an image or one of our greenfield aggregate sites, where we recently commissioned a new crushing plant in Georgia.
Aggregate Greenfields provided an avenue for summit to enhance its position in high growth markets add reserves and generate higher returns in areas, where there are limited acquisition opportunities.
We continue to target attractive markets that enhance our geographic footprint in the southeast and Western U.S.. We currently have eight projects either completed or in development.
It is estimated that these projects will add 450 million tons of reserves and one on annualized basis generally shipments of 7 million tons.
Approximately 45 million of adjusted EBITDA and mid teens free cash yield by 2024.
Spending on Greenfield since 2014 has been 90 million and we expect to spend an additional 130 million on these projects over the next few years. This total expenditure of 220 million represents less than six times EBITDA for these pure play aggregates operations.
Turning to slide eight.
Adjusted cash gross profit margins rebounded in the products and services lines of business in the third quarter due to better weather and more working days in the same period in 2018.
On a product side organic prices increased 2.7% and 7.2% in our ready mix and asphalt businesses respectively.
Ready mix pricing was higher, particularly in Utah, Texas, and Missouri higher volumes drove better operating efficiencies and resulted in a margin expansion of 190 basis points over third quarter 2018.
Services experienced a 150 basis point expansion in gross margin more selective bidding resulted in improved job mix, which helped boost margins for the quarter.
With that I'll turn the call over to Brian for a discussion of financial results.
Thank you Tom.
Turning to slide 10, we have our quarterly revenue bridge comparing the third quarter 2019, So the same period 2080.
Net revenue increased 6.5% Andrew is led by our aggregates business, which contributed 25.5% more net revenue than in the third quarter of 20 aging.
Geographically the east segment drove the improved year over year revenue.
Contributing an incremental 33.7 million from the third quarter of 2018, much of which can be attributed to levy repair work in Missouri.
In the West segment organic net revenue increased by 12.1 million, but was offset by the sale of a non core business in the third quarter of 2018 of roughly the same proportion.
There was also a 5 million dollar incremental net revenue contribution from cement related to 3.8% increase inorganic volume.
Turning to slide 11, you'll see the year to date adjusted EBITDA Bridge.
It's up 8.8% over the first nine months of 2018.
The increase was driven primarily by price and to a lesser extent by volume.
The higher prices have more than offset increases in variable costs.
Turning to slide 12.
You'll see the key GAAP financial metrics.
Net revenue increased 6.5% on higher volume and price in all lines of business with aggregates being the largest incremental contributor.
Operating income increased 21% to 130.9 million in the third quarter of 29 team as compared to 108 million in the third quarter of 2018 as revenue gains at pace the cost of revenue.
DNA expenses increased in the third quarter of 2019 relative to Q3 2018 as incentive compensation in the third quarter of 2018 was reduced to reflect lower oil oil.
Please standby for a moment please standby.
Thank you for your patience.
Call resume now.
Okay.
Ladies and gentlemen, please standby what does a great to.
Slide 11.
You will see the year to date adjusted EBITDA Bridge, it's up over 8.8%. So the first nine months of 2018, the increase was driven primarily by price and to a lesser extend by volume higher prices of more than offset increases in variable costs.
Turning to slide 12, you'll see the key GAAP financial metrics net revenue increased 6.5% on higher volume and price in all lines of business with aggregates being the largest incremental contributor.
Operating income increased 21% to 130.9 million in the third quarter of 2019 as compared to 108.2 million in the third quarter of 2018 as revenue gains at pace to cost of revenue.
DNA expenses increased in the third quarter of 2019 relative to Q3 2018 as incentive compensation in the third quarter of 2018 was reduced to reflect lower levels of earnings.
Reported net income attributable to summit Inc. was 55.8 million or 50 cents per basic share in Q3, 2019, which was lower than Q3 2018 net income of 71.3 million or 64 cents per share net income declined due to an IND.
Accretion income tax expense related to propose us tax reform regulations that limit interest deductibility.
Turning to slide 13.
We've presented several non-GAAP financial metrics adjusted cash gross profit margin for the third quarter improved by 170 basis points to 37.4% in Q3 2019 compared to 35.7% in Q3 2018, as we operated under more favorable.
Weather conditions, and our average selling prices and volumes expanded in all lines of business.
Adjusted EBITDA margin was 29% in Q3, 2019, which is a two year high on better overall weather pricing and volume and is 150 basis point improvement over the year ago quarter.
Turning to slide 14, you'll notice that our year to date average selling prices in the aggregates line of business improved 7.3% organically relative to the same period in 2018 and increased 7.9% including acquisitions.
On the last earnings call in August we told you that has the mix of our business shifted towards the northern markets in the second half of 2019, we expected some upward movement on average cement selling price and on a full year basis, we are still expecting pricing to improve over the prior year.
Thats upward movement has occurred to some extent as Q3 2019 cement price increased 1.4% relative to the same period last year. However, cement pricing continues to reflect to competitive environment.
And our product lines of business, we reported volume declines in ready mix of 3.7%, reflecting wet conditions in Texas at the end of Q3.
Asphalt volume grew 2% over the prior year period, despite more competitive bidding in Utah.
Organic average selling price increases were both positive at plus 2.2% on ready mix and plus 6.8% on asphalt.
Turning to slide 15.
On the August earnings call. We told you that as we move into peak selling season, we were encouraged by positive volume and pricing trends, which we believed would drive margin expansion in the second half of the year.
Although we have seen a quarter on quarter sequential improvement in margins in all lines of business. We remain below historical highs and believed that there is scope for further margin expansion.
In aggregates costs in Q3 were elevated due in part to the loss of the dredge, which was reported in Q2 and delays in commissioning on a number of large aggregate projects.
We believe these productivity issues are behind us.
Cement the higher cost of shipping or the main factor.
As anticipated the leverage ratio decreased in Q3 to 4.2 times compared to 4.7 times at the end of Q2 due to very strong operating cash flow, we reduced our leverage by half a turn.
At the midpoint of our adjusted EBITDA guidance, we continue to expect our net leverage at the end of the year to be below four times.
For quarterly modeling purposes in the remainder of 2019 SGN a should be in a range of 65 to 68 million.
DNA should be in a range of 53 to 55 million and interest expense should be in a range of 28 to 30 million, we anticipate paying minimal state and local cash taxes and know us federal income taxes, our effective tax rate should be modeled in high fortys.
Finally, with regards to total equity interest outstanding as of September 28, we had a weighted average of 112.1 million class a shares outstanding and 3.4 million LP units held by investors, resulting in total equity interests as standing of 115 point.
5 million and this is the share count this should be used in calculating the adjusted diluted earnings per share.
With that I'll turn the call back to Tom for his closing remarks.
Thanks, Brian turning to slide 17, any outlook for our end markets. Our view on the U.S. construction cycle and anticipated demand across all end markets remains relatively unchanged from our augusts update as we continued to be encouraged by underlying demand trends on the residential side, we see slow and steady growth in.
Our markets supported by high employment low interest rates and reasonable affordability, we're positive on the residential markets in Houston in Salt Lake City, which continued to exhibit good entry level demand.
These two markets, which represent two thirds of our ready mix volume are underpinned by low unemployment and net in migration.
Nationally at 1.26 million units were still below the long term average of 1.4 to 1.5 million units. We believe most of the cements markets are still mid cycle, whereas other U.S. markets appear to be later in the cycle.
In nonresidential markets, we primarily participate in low rise commercial which follows residential by 12 to 24 months. This includes distribution centers schools movie theaters and strip malls and most of our markets are still reporting solid activity in these segments, we don't participate in the more volatile segments.
Such as office high rise and large industrial.
With respect to overall non res demand the growth over the last few years has continued into 2019 as expected over the longer term FMR forecast growth of 2.3% per annum through 2023.
On the public side, we continue to expect to see multiyear growth in highway construction funded at both the federal and state level. We remain optimistic that the fast act will be expanded or replaced prior to its October 2020 exploration and are encouraged that the bipartisan Americas.
Structure Act was unanimously voted through the Senate.
Committee on environmental and public works to the Senate floor. In August . This proposed legislation would authorize 287 billion in highway funding, 28% above fast levels between fiscal years 2021 and 2025.
Several states have implemented their own funding mechanisms during the last few years, allowing them to significantly increase their DRTV budgets. For example, Kansas Highway funding is expected to increase approximately 30% year over year in 2020.
The 2020 unified Transportation program was approved by the Texas Transportation Commission in September 2019 at 77 billion to fund transportation private projects from 2020 through 2029. This is an increase from 71 billion in 2018 and 75.
5 billion in 2019.
Looking ahead, the American Road and Transportation Builders Association forecasts U.S. Highway bridge and tunnel construction spend to grow at a 2.4% CAGR through 2023 without any additional help from Washington.
So wrapping up on slide 18.
We expect 2019 adjusted EBITDA to be in line with the original outlook with two months remaining in our fiscal year. We are narrowing our full year 2019, adjusted EBITDA guidance to 440 to 460 million.
We estimate that approximately 70% of our full year adjusted EBITDA will be derived from materials.
We've also narrowed our capex guidance to 160 to 170 million, bringing down the original top of the range, which was previously 175 million on.
An additional 20 million of possible Greenfield projects that may happen before the end of that 2019 is not included in Capex guidance, because the timing is uncertain.
We continue to allocate capital carefully and are focused on reducing leverage at year end to be below four times efforts to expand our business through Greenfield development activity continue.
The M&A pipeline is also very active and we continue to evaluate opportunities where the rate of return makes sense for our shareholders.
With that I'd like to turn it over to the operator for questions operator.
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One moment, please while we pull for questions.
Our first question today comes from Rohit Seth of Suntrust. Please go ahead.
Hey, Thanks for taking my question.
On the cement business.
It looks like the most of the Mississippi River issue is behind you.
Once a reasonable timeframe you thinking get the unit profitability backup to where it has been historically I guess you'd have to go back to 2017.
Like the most normal year is that fair to say, it's fair to use 17 is as the bar as opposed to what happened over last couple years.
Yes, certainly.
I think that we should be able to get back to 17 levels. Bryan do yes. If you look at the is the last two quarters 45.8, and 46 those are the ones that were really into impacted by 3% to 4% you know that three or 4 million that we talked about last time on the.
For the extra shipping costs I didn't know being for those we would have been back in to closer to 50%, which is where we were in.
Threeq you have 18, and then you know this further opportunity for a little bit more expansion there as.
Selling prices improve so I think so.
Okay and then on ASP is you had really good is fee traction this year coming off.
Tough year cost inflation last year.
It is sort of the expectation into 2020 do you think that momentum continue or we'll see some deceleration back to normal trend.
Next year.
Rohit, we would do focus on the mix adjusted number which year to date is about 4.5% and.
So far we have started our 2020 pricing process and so far it's going quite well very similar to last year. So we would think that the trend would be at least where we are today and perhaps better.
Okay, and if I can just squeeze one last one on one of the prior conference calls.
We heard reports of that contractors are talking about.
Dancing projects into third quarter anticipation of early shut down to the season in the northern markets is that something you you guys.
We're hearing as well.
No in fact.
Probably the only sort of change in quarterly shipments would be.
On our Levy work in Missouri, where actually the Missouri River I think twice in the last few weeks has ER in in the in September excuse me.
Actually flooded again and actually push some of those volumes that we would have expected in.
Q3 into Q4.
Okay. So Q4 is going as a normal with normal seasonality is correct.
All right, that's what I think.
The next question is from Trey Grooms at Stephens. Please go ahead.
Hey, good morning.
Right.
I guess on the kind of looking at the aggregates business here on the Incrementals you guys put up.
Pretty strong incrementals here in the quarter as we're looking into next year and Tom you mentioned.
Yes look for price there.
As good as this year, if not maybe a little better how are you thinking about the profitability on that side of the business as we look into 2020.
Again, putting a very nice incrementals in the third quarter.
Well with with pricing say at the same if not better than this year. We did have some we believed to be once off cost issues in 2019.
We had the dredge that we mentioned last quarter that sank and and the Red River in Texas.
And then we've also had a number of large capex projects that had been delayed and that in that did increase our costs. This year.
So we would actually see our costs actually improving next year. So we have good price.
Good costs and we believe underlying demand is going to be steady then you are incremental should certainly improve.
Got it Okay and then.
You mentioned.
Still a fairly competitive environment and cement pricing.
I think you've got it.
Price increase announced in the market for next spring what do you guys hearing in the market around that increase.
Competitive response customer.
Feedback I know, it's early but anything.
Kind of initial thoughts around that.
Yes cement pricing so in our market you know the industry's out with an eight dollar a ton price increase effective April 1st so far so good try. It's it is awfully early to tell it's really need to get into the first quarter of 2020 before you really get a field, but we we are.
Guardedly optimistic we thank our primary competitors are are getting close to capacity and that should make for a positive pricing environment.
But you know we're coming off the two years of disappointing.
Pricing in that market. So all I can say, we're guardedly optimistic.
Understood. Thanks for taking my questions I'll pass it on thank you.
Thanks, Jeff.
The next question is from Kathryn Thompson of Thompson Research Group. Please go ahead.
Hi, Thanks for taking my questions. Today first is just a follow up on for Matt and a clarification from.
Your prepared commentary do you feel like you are where you need to be today with logistics and the river system and then that you felt from inventory just as you.
You are dealing with some of the flooding issues from earlier this year. He could just get some color on where cement inventory is and if you feel okay with it so thank you.
Yes, the rivers.
The rivers basically back to normal Catherine.
It took a little longer than than we thought most most certainly.
As far as inventory levels, our plants are running quite well I think organovo would end the year with what we think is.
A reasonable.
Level of inventory not not too low and im not going to be too high sometimes the weather in the last in December can make a big difference and what your inventory levels are but we have enough flexibility in our system.
Between rail rail and barge terminals that we can we can even things out if we if we do have a.
Poor December otherwise, but I don't see any problems in our.
Cement inventory levels.
Okay, Great and then following up on aggregates and.
Helpful detail that you gave on Greenfield investments, we think we're strategically not just into 2020, but they have to the next.
Two to three years.
How do you how should we think about putting in pockets your capital spend towards targeting greenfield opportunities versus acquisitions and the aggregate space in particular, thank you.
One thing Greenfields are so unpredictable, they're probably even less predictable than acquisitions, just because they rely on permitting and zoning and some things that are completely out of your control. We do have a number of greenfields that what are some that have been permitted and are in process.
As we've said in our prepared remarks.
And we have another of a number of other opportunities that we're working on.
So I could see greenfield spending in.
$30 million to $40 million range, but that's a that's really Kathryn true guess, but it will be a.
A.
A part of our capital allocation going forward.
We would like to get back into the acquisitions also.
And.
The activity is quite strong right at the moment on the M&A side.
Okay. Thank you very much.
Yeah.
The next question is from Stanley Elliott of Stifel. Please go ahead.
Hey, good morning, everyone. Thank you all for for taking my question.
Brian you mentioned, a little bit about kind of the cost environment setting up into next year. You also have your hedge program on diesel if I remember correctly is there way the kind of ballpark or bucket kind of what sort of cost savings you might be getting from all the things that you all mentioned into next year.
Thanks Stanley yet.
We do actually have hedging program.
These forward purchasing for diesel.
A moment, we're expecting to see.
The cost of diesel to be a slight tailwind in 2020 compared to the actual cost of diesel.
This year based on the 60 or so percent that we have hedged.
At this point, so that should be a slight tailwind other major cost.
Elements, we think of as labor is probably going to run in a 3% to 4% inflation.
Range, they'll probably be a little bit of.
Price increase on on utilities as normal.
I noticed that natural gas is actually although not a huge spend far as natural gas is actually up.
Little bit more than normal this year.
So we would expect there to be just kind of more of the same in terms of.
In terms of underlying cost deflation and then what we talked about was us.
Capital projects that we've had.
Which have been a little bit delayed this year for one reason or another we should see some cost reduction.
From those capital projects I think most of the.
Commissioning issues are now behind us and we should be getting the full benefit of those in.
In 2020 of a little early to give you a hard numbers on that.
Understood and could you remind us again kind of the benefit that youre seeing from this levy work does that continue through next year or just kind of ballpark to help us with the volume came into as we're looking ahead.
You know, it's very hard to to.
To estimate going forward, we've we had good volumes in.
Over the last three or four months, that's continuing into Q4.
We believe it will at least carry forward to some extent into 2020 and it's not just in levies. Its you know there's hundreds of miles of.
Of roads that had been washed away and also in that part of the world railroads tend to run next to the to the Missouri River and so there's no miles and miles of of rail what needs to be repair that takes ballast material.
So I am optimistic.
That it will continue at least into 2020, but it's very hard to sort of give you a quantity.
Or any financial metrics around that.
Understood. Thanks, very much for the time that's like.
Thanks, Tim.
The next question is from Paul Rogers of Exane BNP Paribas. Please go ahead.
Hi, I come on everyone. Thanks for taking the call. So first question then said one of your competitors yesterday was let's giving a relatively detailed preliminary view on a few one 2020 .
Experts and I've got the volumes to be up sort of low to mid single digit sent on pricing in the mid single digit range are you able to come in is that something that you would be a in agreement with all deals do you think slightly differently.
Yeah, I mean, I think that's roughly where we'd be I mean, it's awfully early.
In in my opinion to be giving detailed.
You know.
Guidance for next year.
Certainly when I look at next year.
Right.
Certainly on the volume side 2019 was flattered by extremely easy comps because of the weather we had in our markets in 2018, and then on the Levy work, which we were just discussing its unclear how much of that levy and flood work will carry forward into the prior.
Prior year.
Or into next year. So it's it's in on the volume side, we're we're pretty bullish on on all of our markets you know raz nonresident highways, we think are.
Our are going to be steady.
And.
You know when when the only real forward looking information we have as in our backlogs.
Which you know these backlogs are at the end of September compared to the prior year, our Ags backlog is up 8% our asphalt backlog is actually up 46%.
And our RMC are ready mixed concrete backlog is up 80%.
And our paving construction.
Backlog is up 30% so good strong backlogs.
Really good underlying economy, a bit offset by some of the.
The the things I mentioned as far as easy comps and the Levy work in Missouri, but overall, we're very optimistic on volumes and price, we do focus on our mix adjusted number and.
Were about 4.5% year to date, and we see no reason why that shouldn't continue and perhaps.
A little bit of upside. So you know overall when you mix all that up it's not that much different.
Then what you heard yesterday.
But it's still awfully early.
Yeah Fair enough and also just say just a follow up they then I'm, particularly on the pricing environment in Texas.
You know ready mixed concrete and Usten we've gotten.
Good.
So it's really when I when I look at our markets compared to some of the other markets, whether its Denver, California, whatever I just think we have more of a runway as in total were lower we're certainly earlier in the cycle.
Greenfield plants. The thank you for sharing the details there I'm wondering if you could talk about.
What's your location versus your biggest competitors in those markets because typically we see greenfields that are at our transportation disadvantaged versus existing market participants and can you flesh that out and talk about.
Do you need to market to grow substantially to absorb your volumes or is there.
And natural reserve erosion in in the appropriate markets. Thanks.
Yeah I mean.
Our.
We've had a couple of Greenfields earlier I'm, a few years ago in in Texas, specifically outside of Houston, and they have been very successful and they were.
In an area where reserves were.
Depleting.
We just have a new greenfield actually a brownfield site that we have outside of Kansas City.
Which is why is fully permitted and we're putting a plant in there as we speak we think thats a great market.
You know very well structured market.
But the growth in markets that we were talking about in the prepared remarks, you know in Georgia.
We think this is just the it's a great market.
We have one inquiry near Athens.
That we just commissioned.
We have another plant being built right at the moment.
Near Atlanta that should be online later this year and then we have one other site near Atlanta that will be online in the first half of 2021.
And then one other.
Greenfield, which is permitted which we are.
You know going to be building a plant next year and probably be commissioned in 2021, that's on coastal Carolinas. So you know in Georgia and the Carolinas those are very very well structured markets and we think we will be very competitive we're going to have.
No.
Many decades of reserves at each one of those sites and.
We think we'll be very competitive and.
There there are good markets.
Okay, and lastly, Brian in the press release discussion around interest expense deductibility can you just talk about any headwind that we need to keep in mind in terms of operating cash flow over next couple of years as a result or are you able to offset.
That limit thanks.
Yeah, it's certainly not a headwind far as Gerry without limitation is based around interest deductibility. The way. The rules are proposed and this is still proposed legislation.
Which was put into place.
In the fourth quarter of 2018.
When we began to.
Reflected in our financial statements, but it's a 30% maximum.
Of tax EBITDA is the criteria.
And so depreciation which goes through cost of goods. So it doesn't get added bank.
And when you look at those limitations.
In our Enac calculations, we come up with this higher interest expense.
Tax expense.
It has no effect on a cash flow, we still have no federal.
Cash taxes for the foreseeable future.
So you know in many ways for us it's something of a nonevent, obviously, we do have to reflected.
Until such time as that is either.
Reversed or.
As expected under GAAP rules. This is a probability we have to account for it. So we don't expect it to have any impact on a cash flow.
Okay I appreciate it thanks.
The next question is from Garik Shmois choice of Longbow Research. Please go ahead. Thank you I wanted ask on a comment on the slide deck around to return to full plant utilization cement.
Just to clarify does that mean to imply that you are sold on cement.
And as a follow up how are you thinking about.
The need to increase imports to your terminals.
Into 2020.
Yes, we are we're essentially sold out of the cement we produce at Hannibal and Davenport, but we do have the ability to.
Import we will probably import some cement this year.
And one of the interesting things in our cement businesses. The weather in 18, and 19 have has just been abysmal and really up and down the Mississippi not just flooding, but it is just rained everywhere Minneapolis, which is actually our best cement market.
And our biggest cement market.
I think has had the worst record worst whether on record.
So for US we see if we can get a year of anything that resembles normal weather that we should have some catch up volume so.
If we do will will will import cement or by domestic.
I'll cement, that's that's available to its lower margin, but its you know you don't know investment involved in and basically in and selling that so it's still very profitable.
Okay. Thanks, and just wanted to clarify on the implied fourth quarter guidance.
I'm doing the math right implies, 18% EBITDA growth, which would.
Pace, what you've been doing year to date. So I'm just kind of wondering what gives you confidence and that type of acceleration towards the midpoint of the guidance if theres any offsets maybe some lingering cost issues that impacted the fourth quarter of 2018 or anything that might help the comparability.
You know the biggest element was just horrific weather last year in October and an early onset of winter.
And so thats probably the biggest.
Element there.
We have good backlogs.
Pricing is set.
You know I, if we get a decent amount of warm Sunny days will we know we believe will be in that guidance.
Great. Thanks again.
The next question is from Phil Ng of Jefferies. Please go ahead.
Hey, guys.
Well on track bring leverage below four times by year end and when you look at capital deployment going forward, how should we think about debt pay down versus more growth initiatives like M&A I think Tom your tone around M&A in the pipeline was certainly much more upbeat.
Today versus that Ashley orders.
And some of the cost issues behind us so should see a little bit of margin expansion there as well whenever you talk about fourth quarter. It is.
It's weather and.
Acquisitions that we've done in the past and so those will be the things that will drive the lack of a cash.
Cash tax payment for the foreseeable future.
There are going to thank you operator.