Q4 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to Vulcan materials company fourth quarter and full year earnings conference call.
My name is cabinet.
Conference coordinator today.
As a reminder, today's call is being recorded.
Your into Q when a portion of this call. We ask that you limit your participation to one question plus the funnel.
Hello, everyone, who wishes the opportunity to purchase price.
I will turn the call over to your host Mr., Mark warrants Vice President of Investor Relations for Vulcan materials. Mr. <unk> you may begin.
Welcome everyone to the bulk materials fourth quarter and full year earnings call.
With me today, or Tom Hill, Chairman, and CEO inserts and would senior Vice President and Chief Financial Officer.
Today's call is accompanied by a press release issued this morning, and the supplemental presentation posted to our website.
Additionally, a recording of this call will be available for replay later today.
Before we began please be reminded that comments regarding the company's results the projections and projections may include forward looking statements, which are subject to risks and uncertainties.
These risks along with other legal disclaimers are described in detail in the company's earnings release and in other filings with the Securities and Exchange Commission.
You can find a reconciliation of non-GAAP financial measures and other information in both our earnings release at the end of our supplemental presentation.
I'll now turn the call over to Tom.
Thank you more and thanks, everyone for joining the call today.
We appreciate your interest in Vulcan materials company.
2019 represented another year of strong earnings growth.
And demonstrate the strength.
Of our aggregate centric business model.
Well before we talk about our accomplishments for the year.
Want to spend a few minutes, telling you about the good progress we made again in the fourth quarter.
I agree its gross profit.
Was towards $34 million.
7% improvement versus the prior year.
Your fourth quarter.
I agree shipments increased by 4%.
With markets in the South East and South West reporting strong book.
For the core.
Freight adjusted average sales prices increased by 5.5%.
Oh Gee markets reported year over year price growth.
And the 70 basis point benefit from mix was due in part to above average growth and Gulf coast markets.
There are served by our unparalleled logistics network.
This growth growth is noteworthy the fourth quarter of 2018 made for a tough comparison was like 24% increase in aggregate gross profit.
8% growth in volume.
And 5% mix adjusted price growth over 2017.
Gross profit per call under the quarter improved to 5032 cents and was negatively impacted by three things.
Most of which are timing and mix related.
First.
Repair and maintenance costs, well hard core.
As we said before certain types of repairs and maintenance a routine and schedule. Therefore, you associated cost or more predictable.
Other repair and maintenance activities are planned annually.
But the exact timing, it's more difficult to predict would precision.
Monitored the situation throughout the year to determine the optimal time to do the war.
And as a result costs can be lumpy or.
This court includes several of these types of repairs.
In addition.
The rigorous inspection and maintenance protocol that we rolled out is part of our operational Excellence initiative in early 2019 go some of our costs higher in the second half of the year.
We expect continued you see additional repair maintenance costs in 2020 had been and have incorporated in our guidance.
Setting high standards is the right thing to do for the long term health of our business.
Our employees are highly engaged and their focus intently on the mobile equipment and fixed plant inspection and maintenance aspects of this initiative.
In doing so we can't predict avoid equipment failures.
Which could result in much more expensive repair cost.
The second factor that impacted our gross profit in aggregate.
Was actual geographic mix versus our expectations.
Fourth quarter shipments were robust in markets along the road along the Gulf Coast.
What's her served by rail and war.
Remotes served markets carry higher selling prices, but also carry higher cost.
Particularly if the tons shipped by rail versus World War II.
In the fourth quarter higher volumes from rail distribution negatively.
Hi, good margins.
The third factor was lower revenue and earnings from certain arguments locations, which also generate tipping fees on putting Phil.
This was all was mainly a matter of timing of projects expected to contribute to the fourth quarter instead the projects were delayed.
It will benefit 2020.
Piling.
I'll also highlight our fourth quarter asphalt results.
Gross profit increased by $4 million compared to the fourth quarter last year.
This was driven by 10% improvement and shipments and a 3% improvement in average selling prices. In addition.
We expect we experience volume growth in California in spite of wet weather in the fourth quarter.
These volume and price improvements in addition to a 12% reduction and the average unit costs for liquid asphalt.
Drove a 52% improvement and you know profitability in asphalt.
Suzanne will share with you the detailed numbers in a moment.
But first I'd like to summarize our full year 2019 accomplishments and talk about why we're excited about 2020.
Let's start with the most important aspect of our business safety.
In 2019, our people, let us to wait another year of world class seats and performance, despite being busier than ever.
We also completed the rollout of all of our strategic initiatives.
Commercial excellence.
Operational excellence logistics innovation and strategic sourcing.
We believe.
These initiatives will help us accelerate growth towards our long term goals.
On the financials on aggregate shipments grew by 7% an average freight adjusted sales price was 5.6% better than 2018.
Iris gross profit increased by 16%.
And unit property, Italy profitability grew by 8%.
Cash gross profit per tonne with $6.74 another step forward.
On the path to our longer term goal of $9 per talk.
And while our non aggregates segment gross profit was flat year over year. The second half showed signs of improving trends in the asphalt business.
Our adjusted EBITDA for the year grew by 12% and importantly, our return on invested capital increased 13.9%.
As a whole we were pleased with our a result, but we are satisfied just setting records. Our focus is on getting better every day and reaching our potential.
As we enter 2020, we're well positioned to take advantage of supported markets and deliver another year of double digit earnings growth.
Our markets will continue to benefit from both public construction demand.
Led by highways and a resurgence in demand on the private side, particularly residential.
The public how where demand is there.
That's all the revenues to support the investment.
As we've seen excuse me as we said before it's not a matter of yeah.
Rather when the projects are finally started and shipments to begin to be fair.
We see.
We've been a little bit disappointed over the last couple of months, where the speed with which the states or letting work. However.
We remain confident that these projects or go in the near to medium term.
With respect to residential demand.
Which.
We've been a bit cautious.
But.
Now, we're seeing a very positive turn and leading indicators would volkan markets outpacing the rest of the country.
Underlying demand fundamentals, including population unemployment growth remain firmly in place and underpin our expectations of growth in private residential and nonresidential construction.
These demand characteristics are catalyst for positive pricing environment in 2020.
And demand visibility is also an important contributor.
With our geographic footprint.
Focused on the higher growth markets, we are in the best position to capitalize on public and private demand.
So what does all of this me for 2020.
We anticipate.
8% to 4% growth rate in aggregate shipments.
<unk> freight adjusted sales prices are expected to increase between four and 6%.
Additionally, we maintain our longer term view of approximately 60% same store flow through rate to gross profit on a trailing 12 month basis.
Overall, we're looking at double digit growth in aggregates segment earnings.
Moving to our construction products segment, we expect 10% to 15% growth in gross profit collectively.
This contemplates relatively stable liquid cost an asphalt.
I'll now turn it over to Suzanne for further comments on our 2019 full year performance and 2020 got us.
Thanks, Tom and good morning, everyone in 2019, our aggregates volume growth reflected the solid underlying demand fundamentals in our markets, including growth in population households in jobs that is two to three times that of other markets everything.
Next 10 years.
Shipments in certain markets into South East mid Atlantic and Texas were particularly strong.
Average sales prices in aggregate to increase and higher prices were widespread with all major markets reporting improvement.
For the full year, our costs were up 4% contributing to a 48% same store aggregates flow through rate as Tom mentioned, there were several factors that affected gets rate, particularly in the fourth quarter.
Our segment gross profit increased by 16%. This continued progression underpins our ability to deliver attractive earnings growth.
It's a g. expenses, while higher in absolute dollar terms decreased as a percentage of total revenues.
Moving on now to the balance sheet cash flows and return on investment we made progress in each of these areas.
Our balance sheet structure remains strong with a weighted average debt maturity of 14 years and a weighted average interest rate of 4.4%.
Leverage was reduced from 2.6 to 2.2 times well within our target range.
We generated $820 million of discretionary cash flow.
And we followed our capital allocation priorities to determine the most share holder returns enhancing use of that cash.
In 2019 this included investments in attractive growth opportunities as well as return of cash through dividends and share repurchases.
And as a result, our return on invested capital improved by 130 basis points on an adjusted EBITDA basis.
I'll move on now from 29 team to Twentytwenty.
Tom has already covered the operational aspects of our segment guidance. So I'll comment on a few other point.
It's a g. expenses are forecast to be approximately $365 million and twentytwenty.
This represents a reduction in absolute dollars as well as a reduction in the ratio of expense to revenue.
We already have taken steps to ensure we are efficiently leveraging our overhead.
We anticipate that interest expense will approximate $125 million and bad.
Depreciation and depletion accretion and amortization will approximate $385 million and twentytwenty and our effective tax weight, our effective tax rate will be approximately 20%.
The combination of these assumptions lead us to an adjusted EBITDA range of 1.385 billion.
To $1.485 billion for 2020, the midpoint of gets range represents a 13% increase as compared to 2019.
Moving onto our cash flow expectations remember that our business is an inherently cash generative one and 2020 will be no exception, we anticipate discretionary cash flow of approximately $800 million.
As you model, our cash flows I'll share some thoughts to help you fill in the blanks.
As a guide posts, we will continue to adhere to our unchanged capital allocation priorities in directing our uses of cash and we will stay within our target leverage range.
We expect a cash interest expense of $120 million.
Operating and maintenance capex of $275 million, and finally cash taxes of $180 million.
The discretionary uses of our cash involve returns to shareholders internal growth capital in acquisitions, Let me cover each one of those.
First we expect to maintain a progressive dividend generally growing it in line with earnings to a level that is fully sustainable through the cycle.
Second we expect to spend approximately $200 million on growth Capex for projects that are already largely underway as we did not spend the full amount of growth capital we projected in 2019.
These projects include the opening of a new Corey in California capacity expansion at other core age as well as improvements to our logistics and distribution network and sales yards.
And third we will continue our disciplined devaluation of acquisition opportunities as they arise only investing in those which fit our strategy and offer superior returns and synergies.
And last we will continuously evaluate the use of opportunistic share repurchases as a means to return excess cash to shareholders.
Now I'll turn the call back over to Tom for closing remarks.
Yeah.
Thanks Suzanne.
Now before we go to cure in a.
I want to take this opportunity to think the minimum or bulk materials for their hard work and their dedication.
They have taking good care of our customers and have improved our business processes and disciplines.
Importantly.
They have promoted our strong safety culture, and all responsible for delivering our industry leading safety metrics.
As we move forward, we will continue to capitalize on our strengths.
Our aggregates focus business.
Our outstanding geographic footprint.
And our local execution capabilities.
We will also remained focus on compounding our unit margins through the cycle.
And improving our return on invested capital.
Now, we'll be happy to take your questions.
Ladies and gentlemen, as a reminder, if you'd like to ask the question. Please press star one and again, we ask that you limit your participation to one question plus a follow up thank you.
Our first question comes from family Elliott of Stifel. Please go ahead.
Good morning, everybody for take taken the question.
Tom could you talk a little bit about the cost structure kind of puts and takes is we're heading into 2020, let's say some of that being played in the current guide does any of this roll off Im just trying to curious to see how you guys just thinking about the cost piece.
Sure.
If you if you look at fourth quarter.
The average cost per unit profitability was as I said it was impacted by three unique items.
And pretty much equally all three of those items are somewhat of a combination of mix and timing. The first one is a large clean fuel project, which we will be take during the quarter for tipping fee. The job was temporarily stopped but it will start back up in 2020, So we'll see that again.
We'll get that bag second item was really geographic mix or there was increased volumes to remote distribution rail yards on the Gulf Coast, which is a good thing. It just comes at a higher cost and some reason did you.
Our experience not only the court costs, but also yard costs and you couple that with we had little bit lower volumes in the mid Atlantic States were due to timing of war and then the third item was increased equipment maintenance cost. There's good driven by our equipment inspection efforts as part of our operations.
Excellence efforts, which we kicked off in February of last year, and this is really to prevent catastrophic equipment failure, a it improves operating efficiencies that actually improves customer service and while the cost were higher in Q3 in Q4, because these efforts.
A long term focus on maintenance is just the right decision for the company now those efforts will benefit US later this year as overtime it improves cost bought by helping to eliminate expensive failure costs.
And and really the expense of downtime and.
I would expect somebody's cost to continue for bid into 2020.
But all of that's built into our full year 2020 guidance and I got to I'm very pleased to spends a lot of working while for now please where operators or performance here.
The depth and then.
Speaking on the cost side can you speak to lever is your seat on the as they tea line or to call yesterday, but I feel like you know that tracking below 7% of sales made where the best of the company's history.
Talk a little bit about how you're driving that down but it revenues are going to be up double digits.
Yeah sure on I'm happy to do that and good morning to you beat the I'd say Gee area. You know, which is you know predominately out you know corporate and administrative tight cost is an area where we.
You know are continually focusing our attention if you look at the fourth quarter and you look at full year of 2019, while the absolute dollar amount as higher we did reduce it as eight at the those costs as a percentage of revenue and that's something that we had been really focused on as part of our budgeting process and as we move.
10 to 2020, I mean look that you know, we we want to make sure that we are delivering the appropriate services to our operational folks and we have looked across the footprint. A you know, particularly in those corporate and admin functions for waste could be more efficient.
Affected in delivering those important services to people and sometimes that is just finding more efficient ways to do things, sometimes that using technology you'd get to use a you know a number of things that youre disposal to try to affect some change so you'll see those.
Efforts.
Which have already begun some some are on you know completed as as we speak you'll see that reflected in the 2020 guidance and we are absolutely driving toward not just a reduction of those cost as a percentage of revenue, but also a reduction.
In the absolute dollar amount and we have plans in place to do that.
Perfect. Thank you very much the tide been desolate.
Thank you.
Our next question comes from Trey Grooms of Stephens, Inc. Please go ahead.
Good morning, <unk> good morning.
Morning.
So.
I guess I'm going to taught me or my first question is more around the volume so one for Q.
For Q volume you did see a little bit of a deceleration there.
Relative to what we saw in some of the other quarters and seeing the volume going from 7% or so I guess since you put up in 19 in aggregates to the guidance this year of two to four.
My first question can you talk more specifically about how we get there you know what what your end market expectations are or your assumptions for for your end markets you know public private non res and then residential.
That you had baked into that.
Hi, Good morning, that's it that's a good question I'll just start off with a with a gentle reminder, about the tough comp that we had year over year in fourth quarter and then Tom can address them more specific comments you know if we look at the fourth quarter of 2018 from the revenue perspective.
It was just a really strong quarter at we had an 8% growth and volume, which led to a 24% in aggregates gross profit so.
I think with the volume increase of about 4% in the quarter. This year I mean, frankly, that's I think that's that you know pretty pretty decent growth, it's well within our guidance range that we set for it at the beginning of the year and coming off a very good fourth quarter, we had last year on not completely surprised.
By that.
Yeah, I would I would add to that the two to four growth and 2020 I think is our try to be thoughtful about taking everything into account demand time, your shipments whether or not comparing it to 2018, so remember that.
This that we saw a little bit slower starts and leading indicators in the private side and the third quarter Cod July to October.
That is now picked up and picked up dramatically.
And it could flow through part of 2020 as a short wall or it could just what we're seeing wind out the blow through it we just don't know quite know yet.
I will not all the highway side.
Fundings up demands up and public works for the first time, not how would public works is picking up.
Still there's quite a bit of unknowns about again about how fast the deal teas.
Can get jobs, let and to work the funding is there, but it seems to be about timing nothing.
We also not gonna have his answer we're not going out first quarter 19 last year, we had a windfall grew up 13% as we had pull forward from the prior year and then 2019, we didn't have any hurricanes or tropical storms that impacted us in any any material way I think the two to four volume growth.
Our guidance is a thoughtful approach as we pull all those factors together.
I would point out at all this we will see.
Growth in all four in markets and the one that's that's coming on and we're pleased to see is that the non hardware infrastructure pieces is now growing.
Got it okay and.
Tom You mentioned.
The one Q of.
19, having a pretty good showing there with some windfalls, how should we be thinking.
And maybe this is for zinc Suzanne, but how should we be thinking about the cadence there the volume as we look in 20.
You know in light of it seems like tough comps and.
Sure.
I think I think as always is gonna be timing related it'll be you know the the will have ebbs and flows with that but.
The it will be timing of weather and kind of large projects.
Okay fair enough. Thank you know pencil.
Thank you.
Our next question comes from Catherine Thomas.
I beg your pardon Kathryn Thompson of Thompson Research Group. Please go ahead.
<unk>.
Well, thanks for taking my questions today.
First focusing on only a knee or seemed to pick up in running so normally you talked about muddy prepared commentary that folks see that.
How do you expect told you see work what type of projects and how big an impact because we don't normally have.
The state that has relatively underperform have been passed several years.
I think it's hard for me to sure yes. What's your question first of all houses in Illinois, and what was what we should we expect from from how we work on type of work.
Yeah really what.
We've seen loadings are you starting to work come from rebuild Illinois, and what your expectations for pizza volumes at the state from the past Act.
So I think that Illinois, I wouldn't next we're not expecting a lot of that funding to flow through in 2020, I think is way more 21, we still have some of the coal work in airport work, which will benefit us in Illinois and 2020, all the private side in Illinois, It's probably not.
All of our strengths is probably won't be places, we're probably seeing some some weakness on that so while the team and always the job improving unit margins, so that and getting the benefit of big volumes and I don't think we'll go see the highway work in Illinois much of it until until 21.
I am I answering your question.
Yep Yep Yep. That's helpful. That's helpful. And then also just following up on the rail network.
Assumed that business volumes are out of your South Georgia ops could you give us confidence what color in terms at the type of projects, which you've seen that are driving demand in golf. Thank you.
Yeah. So so it was.
Fourth quarter. The real work was really widespread and it was really more timing we were pleased with it as good or could just come to the higher cost, but it was across the board I mean, it was Texas It was.
The the.
Mississippi, Louisiana ups less consuming panhandle outsell fell back even into Florida, We really just had just had a good solid fourth quarter and weather helped it.
Alright, thanks very much.
Our next question comes from Jerry rhetoric of Goldman Sachs. Please go ahead.
Hi, good morning, everyone.
Good morning bigger.
I'm wondering can you talk about.
The pricing cadence as we think about 2020 versus 19 any differences in timing of price increases that we should.
Keep in mind and can you comment on how broad the price increases in terms of breadth of markets. As we think about 20 versus what you put brlninety.
I wouldn't describe it is very silver points, we were very similar 29 cream.
We're continuing to see solid price improvements at this point at 2020, we're very confident guy to that poor, 6% price improvement for the year. Our bid work backlogs would support this and our discussions with our fixed plant customers would support this kinda price momentum again and we always.
This out what we'll do it again, it's it's really underpinned by that visibility of the rapidly growing highway work and a solid.
We think a solid performance will be seen and growth in the private side and then again now we're starting to see growth in and the non hardware infrastructure, while it's the smallest piece of it it's healthy and I would tell you that we're going to see price increases across its really watch, but it's across every one of our markets as it wasn't.
19 Yep.
And you know we will have if you hit the pricing guidance, we'll have two straight years of 5% or so pricing gains isn't sustainable in the medium term and obviously, you're looking for lower volume growth in 20, Ben 19, I'm wondering as we think about the medium term outlook.
How would you counts wants to think about sustainable level of long term pricing gains.
You know, obviously, we're not going to give guidance pest 2020, but you saw it and 19, you'll see it and 20 I think the again, we've got long term substantial highway funding coming and that visibility will continue to grow so that just supports the kind of pricing were soon.
Okay.
And lastly, you know in the past when you had pricing momentum in aggregates in your asphalt markets you, you'll able through as chief gross margin expansion I forgot to fast rate than we've seen so far in the cycle can you just comment on what's holding you back from achieving historical levels of gross margins in asphalt.
In in mid cycle compared with bass.
Yeah, well I think and as far as asphalt is concerned.
Where we where youre guiding to lot higher product lines being being up 10% to 15% asphalt prices in unit margins or go above the big improvement that asphalt we would expect gross profit in asphalt to be up double digit.
That would be probably a slight improvement.
Flat to slight improvement liquid cost.
I think the good news is the.
Good good highway work, where we experience.
Big funds and the timing of that line up with our asphalt business. So you know if the story last fall I think is this is.
We said, we all last year, we would catch and bypassed liquid <unk> liquid prices or liquid cost improve you. The margins you saw this happened in the fourth quarter more to come.
Okay. Thank you.
Thank you.
Our next question comes from Anthony Pettinari of Citi. Please go ahead.
Good morning, good morning, good morning.
Tom I think you mentioned being disappointed over the last couple of months with regards to the speed with which some states are letting work I was wondering can you just get a little more color on which state you're seeing.
Yes, and maybe the magnitude of the delays you know welcome to what you were initially expecting.
Yeah, I I would I would just go this way I think at this point, where we arent you you're right now we would expect highway demand at this point be up predict low single digit now that could move to mid single digit depending on the timing of large projects and really states ability to get work, let's get work started.
As I said earlier for asphalt good news in the states, where we have asphalt probably had the strongest demand going into 2020, Texas, California, Virginia, Florida, Tennessee.
But if the flip side of that is you know places like Georgia, South Carolina. They struggled it into last year to get worse.
To get fundings live and work started.
You know we've looked at Georgia, where we're still ship in three Mega projects in Georgia, that's helping but.
I would tell you that highway awards data starts.
There's been a little slower, but then again lettings. They do have been flow that come and go all that said I think that single digit that low single digit could turn quickly to push us to mid single digit got Georgia.
In the second half of my team. We're Lettings were slow now, Georgia and the first half of 20 is going to let a billion dollars' worth of work.
Texas is looking to double their lettings going into 2000 2021, that's already opiates at 7 billion you want to 14.
California, we'd expect one spending to go up some 13% embedded in that is a 25% increase in maintenance funding and that makes this funding could go very fast.
All in all will experience growth in highways and 2020 and for years to come.
And then I would give you a reminder, that probably starts like now while they've done maybe a little bit slower or 20% versus whether were two years ago. So its grow when it's just how fast can the in states either to work.
Got it got it that's that's very helpful. And then a in the release I think you made some reference to concrete project delays can you talk about where you saw these project delays in the magnitude and whether you expect this to kind of continue into 2020.
Yeah. They we got delayed to places it was timing of big projects in Virginia.
And then it was bose whether in fires in Northern California, where we've got hit with on the volume piece of this I would expect volumes in concrete in 2020 up mid single digit reopened and recovering in both those markets.
I would expect prices up probably probably mid single digit and I would expect.
You know unit margins in concrete up double digits.
Okay. That's helpful I'll turn it over.
Thank you.
Our next question comes from Mike Dahl of RBC capital markets. Please go ahead.
Good morning, Thanks, Fred morning, Marty Thanks for taking my questions I'm just to follow up on one of the.
Prior questions around the state Lettings up.
What's your sense of just the underlying fundamental cause for the for the slower pace of of weddings.
Is it a is it a worker shortage I said.
Something in terms of the just getting things there the through the regulatory body is just a little more color on the underlying root cause there.
Yeah, I don't think its external factors outside of the video Tees, it's really them being able to.
So they got up to slug of funding they got to mature into that into they've got to have you got to get it estimated permitted let 'em. We got engineering that goes into its there's a lot of work for those beauties.
Foot projects out while everybody has you know has the pressures of.
Oh workers and employee, but this is not what's what's what's holding up the let exists. It's just it's hold on the states is just them their ability to get that work planned it out inlet and put to work, particularly at some of that projects are larger.
And they had been in the past that larger the project said that just adds a degree of complexity to the process.
Awesome.
Okay. Thanks, a second question just thinking about.
Just thinking about the incremental margins if I look at 2019 and.
On the hall the difference if my math is right in terms of the incremental margin and what you would target on because 60% would be about 60 million and EBITDA and so understand some of the onetime.
Issues or transitory issues that you've been talking about but it's pretty big number and this isn't a year, where you had everything kind of working for either in terms of volume price and your internal initiatives. So as we go into 20, I guess, what I'm getting at is really just what's giving you the level of confidence.
That you can get back to the 60% is it is that actually volume was too.
Hot in 20 910. So it gives you go into 20, the stripping costs on us.
It's higher than just trying to understand that bridge a little.
Yeah, I I'll I will comment first and then I'm I'm sure Tom will will have a follow up comment and I I can't say I'm quite sure about your your math on the 60 million, but with respect to the and the 60% you know that is.
We we say this off and that is a long term average you're going to have some quarters in some years when you hit it some quarters, you're you're you know below what we have had on.
A couple of years, where we were just above that in fact, if you just look at 29 team.
For the trailing 12 month period ended in September we were right at 60%. So I think when you look at the flow through for you know for this year. It really does revolve around you know those three items that you know that Tom called out had it not been for those we would have been I'm you know much.
You know much closer to to that number and some of those were timing and mix related entity extend its timing and mix related you won't have that pressure down into 2020.
Yeah, I think fundamentally this is not because this is not inflationary issue. It's it's more about timing.
We've talked about the go remote distribution that's a good that's really good because there's more volume for us.
The field work, we'll call them and 2020 as far as what we did in Q3 and Q4 with stripping and preventive maintenance I goes it just got good operating disciplines first of all the script figures and investments in this instance, while its costs you're you're it's a onetime thing for a while as you develop pits and get ready.
The for future volumes, which we think we're gonna grow.
On the maintenance side, it's really about we want to control our equipment don't have equipment control you.
And make sure you're doing a timely merit, let me just give you felt like a real life example of that if you were take a sudden put cone crusher down due to all samples at cost or $50000. If you wait till it failed and cost $250000 and that's just the tip of iceberg cost because now you're taking the plant down which is very expensive.
And if you look at.
Underneath that where we all are from really important metrics like tons per hour to a plant downtime or tons per man hour, you're seeing improvement. It's an investment we started a favorite was investment in our people operations.
Through this operations Excellence program allows us to maximize the long term efficiencies operations.
And I'd tell you that I'm confident that these efforts will improve our profitably as a company and I think we are folks who have taken those into account is they created their plan and their guidance for 2020.
Okay. Thanks for the color.
Our next question comes from Rohit Seth of Suntrust. Please go ahead.
Hey, Thanks for taking my question just curious on money if president if residential construction grew faster than expected in 2020 would there be any if your mix benefits or maybe on the cost side.
No I think I think it would you like residential has a good mix of both of both base and clean stone Oh, I think it would it would flow through like like everything else.
Although and that is something we'd love to see so we got our fingers crossed but I wouldn't expect any big.
Price mix change or unit margins mix change.
Okay, and then on your incremental margins.
Just kind of building on some of things you've already said, but.
The last few years, it's come under the 60% and I'm curious how much of equipment failures been part of that issue.
Well I think there was we do that we talk about same store and same store in 2018 finished 65% 2019 was so we have years interrupt web years below I think as you look at it and I would point out to you that same store.
And you could have times when it's hard to that have caused was lower will guide you back to the 60.
Right.
Everything.
I'm, sorry, I was just going to add I think the other thing for US as you know that the real question as we look through you know some of the.
Fourth quarter cost is is there something there that is indicative of a significant shifts and the cost performance of the company is something going on there that hasn't materially changed the cost structure of the company and back to need would.
Either real you know important sort of carry forward question into 2020 and again as we go back three those items you know our view internally as Weve talked.
Talked a lot about them is is no that there isn't something that is a significant change and the cost structure of the company and for that reason, even though there can be some volatility in it between quarters. There years, we on the long term basis guide back to a trailing 12 of six day.
Understood and then on the M&A pipeline can mean provide any thoughts on what you're seeing out there I mean your appetite.
Yeah as always we got some projects both large and small that were working again as we've always tell you its discipline everything does not fit us it's got to be unique to two to two have synergies for us have the discipline that if it's too expensive wont be able.
To walk away from it and and really importantly is once you get it make sure you integrate it very fast and very accurately. So we've got a number of working we'll just you know again, all and built fit us So we'll be picky about what we buy.
Any deals the size of there.
Okay.
Well you noticed both it's both some large ones and some small ones all because any mega ones out there, but I would this full gamut.
Understood all right. Thank you.
Thank you.
Our next question comes from Michael would have anymore.
Instinet. Please go ahead.
Hi, Good morning, I thought I was hoping you could quantify the a repair and maintenance a little bit more I'm curious if you could tell us how much. It is a percentage of of Cogs and should we think about this is that purely variable on next year in terms of increasing alongside volume or could could it maybe decline after being elevated this year.
I think what what we would guide you to that this is that I think you may see a little bit more this in the first few months of the year and then I would expect it to level off to beat guidance that we've given young.
And I would call that out as boasts both some stripping and some repair and maintenance.
But I think we're confident as we look at our handful.
Through for the year.
Okay in 29 Keene I know you were talking about throughout the year earlier in a year from lower mixed ongoing and onto the larger highway projects. I'm curious if you can give us an update on that has that continued are you seeing kind of mix up as those projects mature.
I think what we saw in the end the mix that we saw in the quarter.
Was a little bit of both.
Oh geographic and a little bit of product mix.
We will we called out I think was that are for the year. Our performance was right in line with guidance.
Full year was 5.5 mix adjusted 4.8, and it was in the impact of.
Asphalt size is really driven by highway work geographic mix, a little bit higher volumes on the Gulf coast in the southeast.
Okay. Thank you.
Our next question comes from Phil <unk> from Jefferies.
Hey, guys bought him crashing.
Good morning, appreciating that there's some delayed lettings and potentially some downdraft from prided.
A couple of tougher comps would be helpful. Don if you give us some color how to think about the shape of the year from a growth standpoint.
Yes. Good question I would expect the first of all you got a really tough comp in Q1, because volumes last year were up 13% and it was really that you had to pull forward from 18 to 19 and other than that I would call. It one of timing of large projects and timing of weather.
And we also had a very and you know the weather in the first quarter of last year was with exceptional California was quite good. So would you guys can look outside as to what's happened right now with the wasn't first quarter. This year. So.
Oh, it all up I think it's timing of weather and large projects.
And Tom you're not calling for any delay of larger project at this juncture, which which can't predict at this juncture if I'm interpreting your kind of get so so yes. We're we're shipping a lot of big projects right now I called out three in Georgia, We've got a number of go different places.
I believe it's gonna be how fast the highways can get the jobs left and to work.
Okay, and we were talking about a little bit whether it was fast or slow it what we called out with Georgia, South Carolina, which sauce go slot salt second half of last year's Lettings, which flow into 2020 to slow, but the first half of this year. They got huge flooding. So we'll see I'll pass the word.
Started.
Got it and then based on your guidance for your downstream business for 2020, it's a touch below what you thought I actually coming into 2019. Initially just given some of the project delays you saw last year, and frankly more manageable liquid asphalt price environment I was surprised you're not expecting.
More strength can give us some of the puts and takes.
Yeah, I think I think what we see is real strength in unit margin improvement in asphalt and up double digit.
We're calling for liquid being flat to slightly down and our volumes are just up slightly and the that again will be determined by the timing of this video Ti work and how fast. It gets started you got to remember we had two we had big projects in asphalt in Tennessee, We had the big too old to project.
In Arizona, which neither one of those are repeating going into 2020, sliver windfalls, a 19 to not to repeat even with that we're seeing slight improvements in volume and for that to get much bigger no. The the they'll have to accelerate work is in some of the of Lettings that I've talked about.
Got it.
Thing I'm in the thing I'm a bit ripped through the thing I'm encouraged about I said an asphalt is is you know you saw those margins turn in the fourth quarter, we have been predicting that kind of chasing that through the year 19 that we see we cure that momentum into 2020.
And just one cleanup question, Tom when you said flat to down liquid costs are you, calling sequentially was that more on a year over year on a full year basis.
Yeah, so comparison year over year.
Okay.
Thanks, I importantly, when importantly, with that we're going to manage what number of what happens with asphalt we're going to manage that unit margin. The asphalt appropriately. So they live in prices fall, we'll see that accretive unit margins.
They're like I said, the good news about call it and keep growing it and I think we'll we'll see that as we continue to to perform in 2020.
Thanks, a lot.
Thank you.
Our next question comes from Seldon Clarke of Deutsche Bank. Please go ahead.
Hey, Thanks for your question.
Currently could you just give us a sense of how the margin differs on your shipments by rail and is this a dynamic that's coming solely from higher demand in these particular areas or has the costs or service provided by the rails change with some of the ongoing initiatives.
Yes.
Okay, I would point out this way in general the real tons, which is going to be a little lower margins, where that's and Har Har price.
Our costs, a little bit lower margins, but very good margins.
So it's good work I mean, the volume being up as a good thing I would point out that in contrast, the blue water tonnage is at much higher margins it would be higher price higher costs and higher margins than than the whole so and what we saw in the quarter was just the timing of good work along the rail that happens.
Sure.
It a bit up at a high rate.
Okay, so nothing to do with them putting persist.
No not there it's simple thing with.
Corporate cost versus real distribution you have the you have the rail distribution plus the court call. So just comes at a higher price at a hard in our cost.
Got it Okay, and then I'm just a question on that 2020 guidance, there's that 700 basis points of differential in the high and low and as relates to your and your growth could you just give us a sense of maybe whats embedded in the low end of guidance and what would you really need to see to hit the higher end of that range.
I think you know I would tell you, it's probably going to be mostly volume I'd go back to timing of shipments I'd go back to you know do we get do you get hit with a tropical storm or two or three those would be those would be the big variables I think between the high end of the low when and how it lines up would be would be the delta.
That's right and that's a yeah. That's a very similar approach to what we took and at the beginning of 2019. When we gave the volume guidance, then and you know a range of three to five then.
As you know Luckily and happily we wound up being ahead of that for the year, but Tom's ride. It really comes down to what happens with the timing of shipments and whether as to whether you're at the lower end or that are the higher end in its Tom said, you know will continue to you know watch with interest how and you know residential.
Yeah.
You know how that starts you know continued to improve throughout the year.
All right thanks with time.
Thank you.
Our next question comes from Garik Shmois choice of loop capital. Please go ahead.
Hi, Thanks, just one more important good morning me Hey, good morning.
Just wanted to follow up to fund the highway outlook, just this being in an election year and with the fastest expiring in the fall do you think that could lead to additional letting delays in 2020, just curious how these factors may play into the highly outlook and some of the of the sluggish.
Yeah, you know we've talked about the cadence in the highway lettings and some that are but they've been slow and out coming on strong and the time you have it I wouldn't think the election year would have any impact on state Deo T. lettings in the least I don't think it's gonna have.
Yeah for sure why having impact on the fast act or funding from the Feds.
People, Washington are working hard towards the highway Bill lot of progress made on that.
Both on the both on the Bill side and the funding I don't expect to get a highway bill in 2020.
At the same time, when the fast that expires I don't expect any of that funding to go down we'll just see extension. So I don't see a big impact on on it I don't see any impact on stake deal to Lettings do there's been an election year.
Okay. Thanks, and then just given some of the repair maintenance cost here.
Right and that you called out.
Oh, just to be clear within your plan as you think about your $2 billion EBITDA target you laid out your investor day, and thinking about how that could be potentially achievable. When she reached 230 200.
Okay.
Yeah, if anything I think that the four strategic initiatives, including the the operations Excellence initiative or give me more and more confidence in our ability to get to the $9 that we planned.
I think that operate if you look if you were to look beneath the surface and our operations. While the headline is you know higher stripping and repair and maintenance costs behind that I think you're doing the right things into vesting in the business for the long term really importantly, though is you are starting to see the key.
Operating parameters, which we measure things like tons per hour throughput through individual plants downtime and every new plants tons per man hour individual plants, we're starting to see improved but I think we are teaching.
Our young people to write things to do we are leveraging the collective knowledge and experience a vulcan across 350 plant. So.
Wow.
So while we see some headlines things the ultimate work that goes into this from those initiatives is starting to jail. The commercial excellence initiatives is mature it is working and we're very pleased with our progress there.
Great. Thank you.
Our next question comes from David Macgregor of Longbow Research. Please go ahead.
Yes.
Right.
Getting back to the 2% to 4% volume guide and just a question I guess on construction capacity and.
Get a large increase in awards and letting so what are the downstream bottlenecks that most concerned use a constraint to your volume growth and have you accounted for that.
Potentially conserve development within your guidance.
Well first of all for Vulcan internally I don't think we see bottlenecks, we can handle it we'd love to see it grow as much as it could there will be will be will be there both from an aggregate perspective.
And asphalt respect or concrete perspective on as far as is it lettings work through increased dramatically I think what do you see is the work what happened the big bottleneck as always we that people ask about is labor and all the labor shortages to answer that question is yes, I don't think it's going to hold up work and Doug.
I think it'll hold up his ability to catch up once worked gets delayed so if you had.
So a month in the wintertime, which was already that really cold trying to catch that up or if you had a big tropical storm come through its going to take you a little longer to catch it up just typically don't have the firepower to do it fast that's how I would just grab it.
Okay.
Have you factored that in your guidance.
Element essentially the discrepancy between two to four seems fairly conservative versus the story, which seems pretty bullish.
I think that I think it when it comes the volume of US said, we try to pull all those factors in as compared to last year, the pull through the weather aspect of it.
So a little bit of up above of Oh about air pocket, leading indicators in the rest side and then timings of highway Lettings.
And stakes ability to get that work and wouldn't put all that together and and the upside potential risk piece of it. That's what we've got we've tried to be thoughtful about the two before that makes sense and then just second question on mixing and.
If you could talk about the pace of growth in your backlog in your backlog building faster and your higher margin products and geographies.
I think how I would describe this I think when we looked at the four to six as best we can you take a mix of products of well, that's a mix both geographic and product mix together.
We have seen good improvement in base in our backlogs we've seen good improvement in clean stone backlogs in our booking pace right now as we look at it both in price and volume will support I got us.
Thank you very much.
Thank you.
Our next question comes from Adam Thalhimer Thompson Davis. Please go ahead.
Hey, good morning, guys.
Well what did shock if EBITDA was flat to down in Q1.
Well [laughter] Wade.
We can't give for Q1 guidance I think as we said.
No we are comping over a year in the first quarter of 19, with which was very good weather and we had the windfall pull forward of 13% volume from the year before.
I don't think you'll see that pull through you guys can look outside know what the weather is doing in the fourth skin in the first quarter. So again it will just we're halfway through it will just have to wait and see.
And then Tom can you walk us through the main reason right now in California and Texas.
Sure.
I would describe California.
This way I think that the.
Well, let me start with Texas. The public side is very strong the text dot has done an excellent job of Lettings and getting workout.
There's big war vis vis vis the shipping right now this big work on the Horizon and as we said next year, they're going to go firms, what Oh Wow factor of 7 billion to 14 on the private side I would describe north Texas is being driven by Nonres I'd say, whereas is fairly flat with some exceptions.
Big development, North Fort worth South, Texas housing strong nonresident little bit a soft coastal Texas everything strong and you could see some LNG work start on coastal Texas in the second half of 2020, a little bit going now, California, Northern Cal public is very strong both.
Aggregates in asphalt private side looks good maybe a bit flat [noise].
In the Bay Nonres is a bit soft, but leading indicators were improving publix own southern California again public very strong highway strong non highway a strong on.
Oh I'm proud of it.
Single from private loan in Southern California.
Probably a little bit of watch Russ with leading indicators a bit we're a bit softer the last three months of indicators were up over 20%. So all in all I think you know pretty healthy growth in both states and I would tell you that I would expect good margin improvements unit margin improvements in both locations both in aggregates in enough.
Paul.
Got it Okay next time.
Thank you.
Our next question comes from Adrian Horn of JP Morgan. Please go ahead.
Hi, Good morning, everyone I'm thinking for taking my call someone's with Sunday morning.
Good morning, a quick question.
Oh gosh stocks is and you can you tell us how they ended last year excitedly. They probably ended in a way below what you were expecting early early last year and on wine now you're backing to expecting a 200 million means there's any chances that that could be lower than than your guidance.
Sure and that the main reason for the reduction in cash taxes through the year was that as we started the year, we had not made a determination as to whether we were going to take.
Advantage of bonus depreciation or not that's a calculation that we have to go through each year because there is some interplay between it and then add depletion allowance that that we get when we file our tax returns is as well as some other things. So there's an actual while it might seem obvious you would want to take it.
Vantage of the bonus depreciation there's actually a calculation that you need to go to and to ensure you are selecting the at calculation methodology that gives you. The most tax benefit. So we started out the year under one assumption we determined in the second quarter and called this out it.
The time that we were indeed going to take the bonus depreciation that resulted in for 2019 us paying and you know quite a bit less Hot then we had initially intended and the estimated and into cash tax rate was between.
Seven and 8% as we start off at in Twentytwenty.
We are and you know guiding to not you know one effective tax rate of 20% will go through the same process again and make a determination as to what I depreciation methodology, where we're going to use. So you know there's some chance to cash tax may be lower but we.
He will we'll work through that process in a similar fashion on that that we use this year you know even under the on you know even under the assumption of having higher cash taxes and 2020 as compared to 29 team I'd just point out we still.
I would throw off about $800 million of discretionary cash flow. So very very healthy very substantial that you know 800 million and you know could be put on a discretionary basis toward your growth projects potentially M&A, if something comes along that.
Meets all the criteria that Tom outlined your dividends and share repurchases.
There was very clear Suzanne and then if I may ask another question.
Can you share with us any details on the quick worry that is expected to open in California in terms of a weighing on the size and the potential volume so not all basins that that quite good.
Could take.
Yeah. So it's it's in Frisco, we're not or is it would probably won't open and tool.
Ah beginning of next year price versus second quarter of next year size.
We're not going up.
Actually disclose at this point, we go closer to it will talk about those those things.
Certainly very good market. It was taken us some 10 plus years to getting this done the team has worked very hard and now they're working hard to build it out.
Into a market that is the is it is very healthy and quite profitable.
Excellent and so it's a totally new market for you.
No. It's a market we've been in before.
Okay excellent. Thank so much someone's was on the shade. Thank you Keith.
Our next question comes from Paul Subprime of I'm feeling investment research. Please go ahead.
Good morning, Thank you for taking my questions.
First of all I can seem to raising duty free setting I think because it doesn't make sense. If you already so I don't know coaches to show you answered, but how should we see anybody's full 2020, you wish and if they do freeze is there any trends that you're putting but to your margins as it did in the into filtering into.
I'm sorry, the beginning of your question.
I'm sorry, it's getting your question I couldn't done that couldn't here.
Oh, sorry.
The question was reached to anybody should have ready to degrees in 20, Tweens, how should we think of a Dutch deductions that couldn't bucks or so much in as a deed in Q filtering into.
It did repairs and maintenance is that what you're asking about the connection with a little poor I just couldn't hear I'm sorry.
Yeah I approaches.
It's a competing to rail deliveries they don't do some three degrees that does not impact on your much interfyl.
Oh I wouldn't expect it to build royal happened to be a timing issue a big shipments in the fourth quarter and I would not expect I think we've got those those volumes that we do out of those that real distribution network embedded in our 2020 guidance, what I would see very little impact.
Okay. Thank you very much but.
Thank you Keith.
Our next question comes from Brent Thielman.
D.A. Davidson. Please go ahead.
Lot of Dave Good morning, Hey, good good morning. This one's just for I think for use in Dan just somebody at the expense can you help us understand the sensitivity to growth. This year in other words, if things really line up well through the year you start seeing 567% volume growth, we sustain at veggie blends playing that game metal.
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Yeah, I think we I think we can and.
As I said you know this is a matter of.
Yes, what's driving that that cost reduction year over year or that you know that the changes we talked about and some of that is being more efficient in the way we do things. So it's it's not like it to variable kind of expense its more and what I would call them to fix side that we are making some chain.
Isn't so I think that that would be sustainable yes.
Yes.
Thank you that's all that.
Our next question comes from Michael do that affect cone research. Please go ahead.
Morning.
Good I think afternoon ticking away I've got it [laughter] 12 o'clock [laughter]. So in light of that you've done very good job in answering it and be very descriptive face off mall my questions have been answered appreciate thank you good luck, but thank you.
There are no further questions at this time I would like to having to call back.
To Tom Hill for any additional for closing remarks.
Well. Thank you for your interest and support Vulcan materials. We've enjoyed talking today as you can tell Suzanne are very excited about 2020.
We look forward to sharing the teams news of how we continue to make progress towards our longer term goals of non dollars a ton cash goes public return, we'll talk to you threw out the must become thanks.
Okay Bye.
This concludes today's call. Thank you for your participation you may now disconnect.
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