Q2 2019 Earnings Call
Good morning, ladies and gentlemen.
Welcome to the Vulcan materials company second quarter earnings Conference call.
My name is John and I will be your conference call coordinator today.
As a reminder, today's call is being recorded.
During the <unk> portion of this call we ask that you limit your.
Participation to one question plus.
A follow up.
This will allow everyone who wishes the opportunity to participate.
Now I will turn the call over to your host Mr., Mark Ward, Vice President of Investor Relations for Vulcan materials Mr. Warren you may begin.
Good morning, and thank you for joining our second quarter earnings call.
With me today are Tom Hill, Chairman, and CEO , and Suzanne Wood, Senior Vice President and Chief Financial Officer.
A question and answer session will follow their prepared remarks.
Before we begin I'd like to call your attention to our quarterly supplemental materials posted at our website Vulcan materials Dot com.
You can access this presentation from the Investor Relations home page of the website.
Additionally, a recording of this call will be available for replay at our website later today.
Please be reminded that comments regarding the company's results and projections may include forward looking statements, which are subject to risks and uncertainties.
These risks along with other legal disclaimers are described in detail in the company's earnings release, and and other filings with the Securities and Exchange Commission.
Finally management will refer to certain non-GAAP financial measures you can find a reconciliation of these measures and other related information in both our earnings release and at the end of our supplemental presentation.
Now I'd like to turn the call over to Tom.
Thank you Mark and thanks to everyone for joining our call today.
We truly appreciate your interest in Vulcan materials.
Our second quarter results reflected our continued strong performance.
A 15% improvement in adjusted EBITDA.
An 11% improvement in aggregates gross profit per ton.
We are relentlessly focused on unit margin.
He is one of our most important metrics and it increased in the second quarter by 58 cents to $5.74 per ton.
On a trailing 12 month basis.
Our aggregates gross profit per ton.
Has increased at a 12% compounded annual growth rate.
From the second quarter of 2013.
We remain on track to achieve our full year EBITDA expectations.
Our overall results for the first half of the year.
And the trajectory of the principle drivers of profitability and our aggregates business volume price and cost were in line with our expectations.
I'll spend a few minutes, giving you some highlights of our performance in these areas.
Aggregate shipments in the quarter increased by 4% year over year.
Or 3% or 3% on a same store basis.
This growth in volume reflects the solid underlying fundamentals in our markets.
Shipments and our southeast and mid Atlantic markets were particularly strong.
California experienced another wet quarter, but despite this shipments increased compared to the same period last year.
Wet weather also affected shipments in Illinois, Tennessee and Texas.
The second driver of our profitability is price and we perform well you're also.
Freight adjusted average sales price improved by 5.9% compared to the same quarter last year.
On a mix adjusted basis, the increase was 5.4%.
The 50 basis point difference was due to favorable geographic mix.
These increases were in line with our expectation.
And the pricing gains were widespread every key market across our footprint posted improved pricing.
Our third key profitability driver centers on our cost disciplines.
And our operational efficiencies.
Our management teams and our leaders across the company are keenly focused on this.
And we're making good progress.
We measure our operational efficiencies in a number of ways, but one key financial metric for Iris is same store gross profit flow through.
On a trailing 12 month basis. It was 65% at the end of June .
Our operational execution at the plant level keeps improving.
And it's rewarding to see that the hard work of our men and women at Vulcan.
Is translating into strong incremental earnings.
We will continue to focus on these disciplines because they are a significant tribute contributor.
To the quality of our earnings and our ability to compound our unit margins.
As we look to the second half of the year.
The overall view of our markets is generally unchanged shipments into private construction end markets are good.
On the public side demand is healthy and continues to strengthen.
With the increases in state and local highway funding being converted into backlogs and shipments.
We believe that we are in the early stages of longer term growth and how we demand which is a function of increased state and local investment in infrastructure.
Since our last call. Another Vulcan State, Illinois has passed legislation to increase revenues were rose since 2013, 11 states that make up 85% of our revenues have increased fuel taxes or increase other ongoing sources of revenue for highways.
This supports our positive highway demand outlook.
And the improved visibility underpins improving pricing.
In summary.
Our backlogs are good.
And our geographic footprint and capabilities put us in a strong position to take advantage of market opportunities.
Now I will turn the call over to Suzanne for some additional comments on the results Suzanne.
Thanks, and good morning to everyone as Tom mentioned, our trailing 12 month same store incremental aggregates flow through rate of 65% was quite good while price is certainly an important driver of this metric I also want to touch on the impact of our operating cost performance.
Operating discipline accountability and cost management significantly benefited our results again this quarter, our same store unit cost of sales increased by less than 2% as compared to the prior year's quarter. The largest single component of this increase related to greater stripping activity, which is a function of anticipated future shipments. This accounted for about 40% of the higher costs and for information the effect of diesel fuel cost wasn't minor in the quarter.
Our second quarter, and say Gee cost increased mainly due to compensation related expense, including incentives that are tied to earnings expectations and the share price. Our incentive plans are designed to reward our people for good execution and improved earnings both of which we have experienced.
We also made investments in people and processes to accelerate the benefits derived from our sales and operational initiatives.
Our trailing 12 month S AG expense as a percentage of revenues declined this year and we will continue to focus on further leveraging our S AG costs.
I'll briefly touch on our non aggregates segments.
Asphalt gross profit was $28 million, an increase of $2 million as compared to the prior year.
Shipments increased by 8% or 5% on a same store basis due to large projects in the Arizona market.
Well the year over year shipment growth was good it was less than we expected due to the adverse effects of weather on California, and Texas volumes.
Asphalt pricing in the quarter rose by 8%. This was partially offset by liquid asphalt unit costs, which were 16% higher this quarter compared to second quarter last year.
Our concrete gross profit was in line with Q2 last year with higher prices offsetting reduced volumes.
Turning now to the balance sheet little has changed from first quarter, except that our net debt to EBITDA leverage ratio declined to 2.4 times within our target range. The average maturity of our debt is 15 years and our weighted average interest rate is 4.5%.
Our leverage position and debt structure provides us with significant flexibility as we continue to grow our business.
On page eight of the supplemental slides you will find information on our discretionary cash flow expectation for the full year using the midpoint of our EBITDA guidance as the starting point.
As a reminder, we define discretionary cash flow as EBITDA less working capital change interest taxes, and operating and maintenance capital on this basis, our discretionary cash flow for 2019 is projected to be $815 million.
While there were no share repurchases no M&A during the quarter. These remain important parts of our capital allocation priorities.
For the full year, we reiterate our expectation of spending approximately $250 million on operating and maintenance capex and approximately $200 million.
On internal growth projects.
And now before I turn it back over to Tom I'll take this opportunity to reaffirm our 2019 adjusted EBITDA guidance of between 1.25 billion and $1.33 billion.
We tried to be thoughtful when we gave our initial 2019 annual guidance in February and we have performed consistent with those expectations through the first half of the year.
We believe we are well positioned to continue this execution in the second half of the year.
We are mindful however of the storm related challenges that can characterize the third quarter and therefore, we remain comfortable with our initial guidance range and with finishing the year in the middle of that range.
And now I'll turn the call back over to Tom for some closing remarks.
Thanks Suzanne.
I'm very proud of how our people have performed so far this year.
And I want to take this opportunity to thank the minimum removal.
Especially our operations and sales teams.
For taking care of our customers.
Holding each other to a high standard of operational excellence.
And delivering on our financial results as promised.
Our financial performance is important.
But safety is always our number one priority.
Our safety culture is strong and our safety metrics our industry leading.
It is critically important and remains our number one priority to send our employees home safely every day.
As we move forward, we will continue to capitalize on our outstanding geographic footprint.
Execute at the local level.
Taking advantage of market opportunities.
And continue growing our aggregates unit margin.
Now we'd be happy to take your questions.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your cigarettes are each or equipment.
Again press Star one to ask a question.
We will take our first question.
From Stanley Elliott of Stifel. Please go ahead your line is open.
[noise] Werent Stanley.
Hey, good morning ever you all doing.
Good.
Thanks, Congratulations on the quarter could you guys talk high level kind of what you're seeing regionally you know certainly nice quarter here, particularly with the weather issues.
Hi, Justin just from a high level, if you look at it.
How eats geographic years before me I'll start on these.
Mid Atlantic States.
Described the private demand slow and steady.
Public highway demand is very good importantly, we're seeing robust pricing.
In margin growth in the Middle and Stakes in 2019.
Moving to the south Eastern United States. The Southeast States are really performing strong and the vast majority of those markets.
I think the private side, we see growth a little bit of a watch and a couple of areas Nashville in Miami Nashville is is the private stuff still growing but its just long in the tooth Miami, we're seeing a little bit of shrinkage on the private side the rest of the.
Southeast States very good private.
Healthy demand from highways.
[noise] so good volume we're seeing.
Really good margin expansion in this area driven by good pricing and also responsible operations cost management and remember this is were by far the largest in the southeastern United States largest producer.
And encouraging area, Illinois, a this is a market. It's actually we started to see it turn we're now seeing pickup in private demand driven by airport and Tollway work or we just saw Illinois pass a highway bill, which we're thrilled with so more demand coming on on the public side Nonres is growing reserves is now improving prices are improving.
This is really good news for Illinois, which has struggled over the last five or six years.
It is also good news because this is a really well run business and would these volumes coming on we were able to leverage that performance.
Moving over to Texas.
Dfas Slash North, Texas, very healthy public growth slower on the private side, probably some concerns on resin nonres.
A little bit slower pricing in North, Texas, South, Texas, we see public demand is actually really hot.
The private side I'd say, a mixed bag Reds okay.
Ah Nonres.
A little bit slower, but okay prices very healthy coastal Texas. This is a very strong market both on public and private very good pricing and margin expansion in coastal Texas and yeah, Weve not seen anything really substantial out of the energy sector it'll be exciting for 2020 122.
Moving over to California. This is despite wet weather, an exciting market for us solid public growth, particularly in central and and.
It should be solid private work, particularly in central and Southern California. The Bay is gotten pricey on the private side. So maybe a watch for us there, but our focus there has been highways.
Public side is growing and growing fast and accelerating a we've got big backlogs growing.
Highway Lettings pricing in California has been very good is very good we see high single digits. This year.
And Weve seen very good cost control in spite of bad weather in California, So substantial margin growth everybody's concerned about California, I've, particularly I'm not in fact, I'm really I'm thrilled with our performance in spite of wet weather.
Yeah, and I'd just add one thing to that I think you in first quarter, you will remember us saying in terms of pricing that and you know the pricing gains were very widespread across the country with all the markets and our key markets up in pricing year over year, save one which was the Illinois at the time and it was winter. So that wasn't another particular concern to us in the second quarter, Illinois has joined a you know the rest of our key markets and each of those key markets had a pricing that exceeded second quarter last year. So we thought that was a very positive sign as well.
Perfect and then last for me on the cost environment are you seeing anything in the second half of the year be it labor whatever it would be that would be pause for concern in terms of what's going to happen on the pricing environment, and then kind of as a corollary to that you've done a nice job of putting a lot of growth capex and cost reduction at the corporate level and at the distribution level, you will help us with that in terms of how we think about managing that cost structure going forward.
Yeah, I think you saw a very good performance in cost in the second quarter. Our total cost of sales was up 2% in spite of wet weather through a number of our states, which really eats up operating efficiencies. So we overcame that the biggest driver of the increase as you heard Suzanne say the second quarter with stripping.
In anticipation of of sales volume growth. So I'll take that problem. All the time, we saw good improvements in operating efficiencies and the things that drive our cost our folks are very focused on this more to calm I you know I can't tell you how focus our operators are on improving their operating efficiencies that really drive the costs are not and Bob based on our performance in Q2, they are winning.
This is so important as you know because it's a big driver of those unit margins and be able to take that incremental revenue revenue to the bottom line. So as I would describe the rest of the year more to calm and I would.
I expect us to keep improving operating efficiencies.
Perfect. Thank you very much and congratulations best of luck.
Thank you.
We will take our next question from Jerry Revich of Goldman Sachs. Please go ahead. Your line is open more injured.
Hi, Tom Suzanne market how are you.
Good.
Good it can you talk about the pricing cadence on the spot market heading into the back half of the year now that we have six months in the books I'm wondering if the high end of your initial pricing guidance.
It is still achievable or if there are mix factors, we should we should keep in mind as well.
You know you we talk a lot about price I think that remember.
Most of the fix a fix for plant has was priced in January and February .
We did see some successes in mid year price increases to fix plants and a number of markets, Virginia, Alabama go some of the Gulf Coast, Arizona.
The other 6% of our work is good work and Weve been doing it as we speak.
We always tell you that's a that's not a spot market price increase that's a campaign overtime.
And we feel good about our what we see in our backlogs in our booking pace. We think those prices will move up through the through the balance of the year as we bid and all of that's driven by confidence and visibility into a growing market, particularly the very visible and very fast growing public market and highways. So I think as you look at it is we step back and Suzanne look at our ER.
Booking pace and how about pricing is that its going and the pricing of our backlogs, we're very comfortable that the balances over the year price increases will be in line with guidance.
And in terms of is it is there any potential to get to the high end of guidance to get to the high end, yeah, you'd have to put up pricing north of 8%. It sounds like we're probably gravitating towards the midpoint of the guidance, which implies pricing closer to call. It 6.5% in the back half compared to the I wouldn't tell you without shoot more towards the middle of the range of guidance for us like that so it was a realistic and very achievable goal.
Okay.
And then to shift gears for asphalt you know in the past you folks have gotten that business to be in the mid to high teens from a gross margin standpoint, I'm wondering is there anything structurally different in this cycle compared to past because you know when we're looking at <unk>, 8% gross margins and a business that has about 8% as she made a sales you know that's not a it's not a pathway to profit contribution even with the great flow through that you're getting in aggregate. So I'm wondering is there something structurally different in asphalt makes this cycle versus the past or when can we get back to those teens type gross margins.
Well I think the the simple answer is no. There is nothing structurally changed in asphalt. This is a function of liquid liquid pricing and cost.
And I think you're seeing a turn there overall, we're seeing profitability in asphalt product line improving both in volume and unit profitability you saw that in.
Q2 with volumes up 8% and that was those volumes were up in spite of wet weather in Tennessee, Texas and California.
Well some of our biggest asphalt states liquid costs were up $11 million.
However, gross profit per ton was flat this stopped a six quarter I'm wrong of shrinking unit margins asphalt due to liquids prices spiking that leveled off as you remember <unk> fourth quarter to first quarter and it's been pretty much flat through the first half looking ahead I would expect unit margins to be on the rise as asphalt prices are rising and liquid prices have stabilized.
If you step back and look at the full year I would maybe expect us to end up a little on the lower end of guidance and asphalt and that's really a function of wet weather in the first half of the year. We just had so much rain and Tennessee, Texas, and California that we don't know that we'll have enough shipping days to get the volume we expected.
Before the end of the year now that being said our backlogs are very good our lettings are growing.
And the unit margins growing so between rising unit margins Big backlogs, a dramatic increase in highway funding Lettings in Vulcan States. This product line has a very bright future.
Yeah, I would I would add to that that.
With with respect to the you know the guidance for the remainder of the year Tom's right. You know, we're just being a bit cautious and evaluating the number of shipping days, we have left in the ability of our contractors to perform all of that work a in a very compressed timeframe. If you go back to the guidance. We gave at the beginning of the year for the non aggregates segment, which is asphalt as well as concrete and calcium we said that we expected that to grow year over year. The gross profit by 15% to 20%. We now think that that gross profit year over year growth will probably be toward the lower end of that at about a 15% again, you know being being a little bit cautious on that and I think that you know in terms of of consensus you know most of the consensus is at about 15% anyway.
Okay I appreciate the discussion thank you.
Thank you.
We will take our next question from Scott Schrier of Citi. Please go ahead. Your line is open.
Morning, Scott Good morning.
Hi, good morning, everyone. So.
Last 12 months, you had 65% incremental margins there over your company norms and your target levels. It looks like you have good cost control your volumes to support the fixed cost absorption pricing in the mid single digit range, you've got your stripping out of the way this quarter.
Is it possible to maintain.
65% run rate given the compounding profitability characteristics of aggregates I'm not asking you to commit to it of course.
Taking into account all your comments on guidance, but I'm curious what would be needed and is it possible to sustain.
An elevated level of profitability.
I think we first of all let me let me if I misspoke on stripping I Didnt mean to stripping is not out of the way that will continue through the year because of demand and what we see coming with particularly with <unk> demand. So stripping costs will stay out for a while and I would expect them to stay up I know they'll say up between for for at least the next six months again, that's a good thing because it's anticipating.
Big volume growth driven by public demand I think we hate sound like a broken record, but we're going to take you always back to 60.
Not the good things can't lined up in a row for a while to get you above 60, but we point out while you have a lot of Tailwinds. This is.
This this sports played outside there's a lot of things that can happen and to offset just the tailwinds, you're not going to have them, you're going to get you're going to get some things that are that are that are going to challenge you along with the good stuff. So.
Just from experience first can you have a a period at above 60, yes, and you have a period of below 60, yes, but I think we always bring you back to 60.
Got it understood and then I wanted to ask another one on the cost side of things and your cost containment and I'm curious if you could speak to some of the efficiencies or profitability, you're seeing in some of the long haul markets either through your vessels and can turn a rule or the rail networks and also a little more on that you know we've been hearing about some moderation in transportation costs and I'm wondering if there is some puts and takes there you know one of the things that we've heard or you have spoken about in the past is higher transportation costs generally enhance the economics of the aggregates business, but is there the potential that moderating costs could actually potentially open up some more competition and pressure pricing. Thank you I think I think first of all the cost I'm, referring to is our actual operating costs not transportation, it's actually the cost to produce and and and and so Rob taking the logistics most taking most logistics out of that so.
I'm really referring to our total cost of sales to produce stone <unk> ex transportation.
Going to your transportation question, we're seeing rising costs for long haul transportation, particularly by rail as you know this is a spike but it's real this year, the Mississippi River and the river transportation costs have been delayed and higher due to flooding. So I would I would tell you that.
Particularly long haul transportation, we continue to see it escalates not not go down in price and the old normal level off is actually going up at a pretty good pop.
[noise].
Oh, great. Thank you.
[noise].
We will now take our next question from Kathryn Thompson of Thompson Research Group. Please go ahead. Your line is open.
Good morning.
Good morning, Hi, Thanks for today. Thank you for taking my questions. Today. Unfortunately, we're on the policy related with Illinois.
And also following up on SD Wan and prop seven but we don't believe could you give us just given the increased funding.
Give more color in terms of what end markets you primarily serve in Illinois today.
And what has it look back historically when there was actual funding for infrastructure and them and shifting for SB, one and prop seven are you seeing the full impact of those two initiatives or do you believe that funding and Lettings will continue to grow. Thank you.
[noise], Illinois, we really service the pool market and its its we're not focused on the private particular private or the public and we service you know Nonres Reos public and and highways you know, it's nice to see own return B.
That highway work that highway funding will take a while to flow through as it does.
And in every state however, particularly in Illinois, We think we'll get bridged because there is substantial tollway and airport funding, which is very close to one of our largest core is up there, but you know, Illinois dobles their gas tax from 19 cents to 38 cents. It is firewalls. It will take <unk> actually double the capital expenditures in Illinois for highways overshoot now over a six year timeframe.
And as I said, we're starting to see resin non rose turn I think was willing to us. This is a very well manage business for us. So as I said earlier. This is exciting because we are improving unit margins, regardless of we've been we've been improving unit margin, Illinois. Despite challenges from volume. This volume rose will will really put some put the turbos to that so we'll enjoy that.
As far as how ways excuse me highway spending is concerned kind of across the country.
We're excited about it and I'll run through of eight or nine of those if you'll allow me a Florida highway Lettings in 2020 will be up 25%, Georgia Highway Lettings will double in fiscal year 2020, we expect highway lettings in Texas to be up 25%.
V Dot and regional authorities should be up 20% South Carolina up 10% tend to see revenues have doubled Oh excuse me have gone up 40% since the improved back past, California is very exciting we've seen since SB one.
Through fiscal year 2017, 18, we have seen lettings double.
They will be up another billion dollars in fiscal year, 20, which just started so.
To your point highway Lettings are very good and dramatically improving over the next 12 months.
Okay very helpful. And then shifting to the residential end market, where are you seeing areas of strength weakness.
And what's the cadence of what you're seeing on your for your major markets.
Thank you.
Thank you.
Starting the west or Rez in California, as good a watch for us would be.
San Francisco, which has just gotten pricey.
Moving to Arizona Raz is quite strong non res and raz Oh through the public the the the the private side and in Texas.
Probably a watch in DFW, where Houston is strong the south east the.
Private market is quite good across the vast majority of our markets in the southeast the watch for us would be residential in.
And Nashville, which is wish our shipments are growing residential we're really watching it because it's been there a long time and it's been very hot a longtime Miami a little bit different story, probably some construct some contraction in the private side in Miami and the mid Atlantic I would describe the private side as.
Steady slow growth.
Yes, Kathryn and I would I would just add to that that you know again looking at our geography, our footprint in the markets. We serve I mean that the fundamentals continue to be in place you've heard us mention that as a number of times you know good population growth good employment growth with respect to Iran. Still relatively speaking you know a lot of level of.
Of houses I mean, we're certainly not back anywhere close to you know peak starts and then you know with the interest rate environment and the fed signalling you know that that it is well things can always change I mean, it's relatively unlikely that we're going to have a rate rise in the next little debt I mean, those are fundamentals. We watch all the time that you know are generally moving in a positive direction.
Thank you very much.
We will now take our next question from Rohit Seth of Suntrust. Please go ahead. Your line is open.
Hey, Alan.
Hey, how you doing my question on the energy projects, you touched on that a little bit in the in the prepared remarks, but can you just talk a little bit about the opportunity set.
And what you're seeing there.
Yeah that we aren't following about a dozen projects that are multi year multi million ton projects that are at different stages in the pipeline and all of them are different stages. Most the vast majority of this work will.
Sure between 2020 and 2023 so.
We're not there yet there's a little bit shipping around the fringes a few of those.
So you know we're trying to help those folks get numbers and get those projects ready and get them started.
Remember that with our blue water capacity it gives us an edge here with these projects they'll be exciting.
We're working on them, but they I wouldn't I wouldn't expect them to start impacting us until sometime mid year 2020.
Okay, and then I just want to talk about your backlog. He said you guys used to put a slide together in your deck showed the highway backlog would you characterize that as moving up down or kind of stable.
I would describe highway work <unk> dramatically moving up and that will continue to escalate over the next five to seven years.
Okay. Thank you that's all I got.
Thank you. Thank you.
We will take our next question from Trey Grooms Stephens. Please go ahead. Your line is open.
One tribe.
Good morning, Hey, good morning, everyone.
First would be on just I guess, some some housekeeping here on on the.
Mix benefit that you guys realized in the quarter on price.
Was that more of a product related mix benefit or was there a geography or geographic benefit there and then I you know any any expected mix impacted in the third quarter.
Yeah, the 50 basis points was a geographic mix.
Okay on as far as as far as the second half mix I wouldn't expect will always be some kind of mix.
With what geography, and a little bit of product, but I wouldn't expect it to be dramatic in the second half of the year.
Okay.
Fair enough. Thank you and then.
You also you know you mentioned the stripping cost and of course that that can happen from one quarter to the next.
And I think he said that it's it's going to be ongoing.
And then also with freight cost. He said you know still going up for you guys on the longer haul stuff, but as we look at the increase in Cogs that we saw in the quarter I think it was the 2% is that that's really a similar kind of rate that we should be thinking about as we look in the back half when we're looking at these costs.
I would I would tell you that.
Dan short answer your question is yes.
I think that you know our folks are doing a good job as I said earlier executing on those operating disciplines that drive cost and the efficiency with that I think it's important in this that you take that cost and take it to unit margins.
We saw you know unit margins in the second quarter up 11% to $5.74.
We've now put together three quarters in a row with double digit unit margin improvement and that is a combination of solid pricing, but very good operating execution and it's not about spending money, it's really about the the execution of the operating disciplines that drop cost so.
You heard me, thank our folks at the minimum of open that that drive those unit margins I like to do that again, because they are now consistently turning in double digit improvements in gross profit per ton. So I would expect us to continue our operating disciplines and the cost to follow.
Yeah, I know that the operating execution has has really been a focus for you guys. Congrats on the good results there.
Last last one for me is just on you know you of course, the Illinois market, you mentioned in Texas, and Tennessee saw delays.
But to Suzanne point earlier on I think we were talking about ready mix, but.
Theres only so many hours in a day and so many days in a in a quarter and then a year.
So as we're kind of looking at these the delays that we saw in some of these markets for you guys. I know the underlying demand is there there's that's pretty clear, but how do we think about the opportunity to kind of execute or realize on some of this maybe pent up demand that might be there.
Yeah. So you know it you're right you're exactly right, there's only only half the year left for less than half flurry off now. We also have some bottlenecks would transportation I think the underlying demand is there the demand is not going away. So whatever we don't ship in 19, we will ship in 20 that you saw the perfect example, that's in January of this year when that work the pin up and shipped in January so it will really be a function to some degree of weather and timing on some large projects I think if you don't mind I'll stop and step back and let you know how about how we look at the second half of the year.
As you heard Suzanne say, we are very comfortable with our guidance.
I think we tried to be thoughtful when we gave you guidance in February we said the upper end would be good weather and job starting on time.
Though lowering would be implement whether in jobs delayed.
As you look at us, giving guidance staying in that guidance range for the balance of the year I will we want to do is be prudent about weather and timing on jobs. We had a really good start to the year with January extremely strong would that flow through of work from 18 pushing back the rest of the year shipments. The other five months has actually been at the high end of our guidance ex January .
But now we need to remember that the third quarter is our most volatile quarter. It is the peak of the construction season at the same time. It's also the heart of the storm season, we've already experienced one storm and Luckily Didnt clip us too bad. So we're just trying to be realistic and transparent about storm threats in the middle of peak construction season.
If you move to pricing our pricing has consistently through the year been in line with guidance. We would expect that to continue for the rest of the year and our look at that is is.
Solidly within our guidance.
As we've talked about our operating disciplines, we have executed well and created cost savings.
All of that is driven double digit more unit margin growth for the first half of the year, we would expect that to continue for the balance of the year.
So Matt I would think we'd be on the high side of aggregates volume guidance.
Moving to asphalt asphalt work was delayed as we talked about was delayed in the first half because of rain and Tennessee, California, Texas. Those are two of our biggest asphalt states. So in spite of very big backlogs and growing lettings and growing unit margins.
Well some of that work may get pushed push back just because of the what we talked about the number of times.
As Suzanne mentioned a bit extra.
Cost in incentives and investment in unit margin on S.A.G.
So I would expect the year play out this way a bit stronger on aggregates earnings.
A bit lower on asphalt earnings you put all that together I would tell you that Suzanne and are confident in the year in the middle of our guidance range.
Thanks, a lot.
Yes.
We will now take our next question from Garik Shmois of Longbow Research.
Oh, hi, Thanks, and thanks for all the detail on the on the guidance you kind of answered a lot of my questions. There, but I wanted to ask you know your backlogs are very strong you've got a stronger outlook across your geography is and I know, we're not talking formerly about 2020, but you know if you look out over the next 12 to 18 months.
What would be the limiting factor outside of you know say whether to drive volume growth as you see it you know it just sounds like your visibility has gotten better. So you know is there a certain capacity constraints in the market that would limit your ability to continue to grow. It you know call. It. This you know low to mid single digit volume clipper or anything else out there that you know could be a I guess inhibiting factor for you.
I don't think I see.
Inhibiting factors that would limit well mid single low to mid single volume Rose I think that's achievable I think when you get above that it gets tougher because of things like transportation and labor for our customers not for us but for our customers. You also you also are seeing.
Maturity of a lot of highway dollars and mixed in that are bigger and bigger more complex jobs, the timing of which.
It can be all over the place. We've had you know a few jobs delayed even this year with some big highway work and still were shipping well within our range at the top of it up excuse me the top end of our range of guidance. So.
You know.
To answer your question I don't see it for the numbers that you say now if you want to get to high single digit Yeah, you start to get compressed with labor and transportation and just <unk> our customers capacity.
Okay. Thanks, and I just wanted to ask just on S.G.N. age just given the bump due to the performance compensation in the quarter or how should we think about gionee costs through the balance of the year.
Yeah. That's it it's a good question. The we had initially guided add back at the start of the year to around 355 ish million. We now expect that number to be somewhere between 360 million 365 million. You know obviously, we will continue to look for ways to leverage that but you know year over year that will put us at put our SGN a expenses our S. AG expenses I should say as a percentage of revenues and you know basically in line with where they were last year and maybe just a tick below and I you know it's in it's important you know that we made some of the investments we did because again you know we are on.
A you know a very serious course here to improve our unit margins, we have a number of operational initiatives under way and so I think making.
No investments there to help us further those initiatives and hopefully deliver results a bit quicker are good investments to make so hopefully that that updated guide is helpful. I think the I think the consensus on S. AG expenses for the full year is about 360 million. So so pretty much in line with that.
Okay. Thanks, I just wanted to ask just one more question just sort of.
Pricing in <unk> are you seeing any markets I know you don't want to form we're talking about mid year price increases because your continuously evaluating pricing on a job by job basis, but are there any markets that are structurally just given the demand strength coming in maybe towards the higher end regardless.
That are tighter on supply and in turn fundamentally seeing a more attractive supply demand environment in terms of potentially better pricing environment.
I think I think there's a few markets where certain sizes are tight and there's there's pricing opportunity, but I think the big driver on pricing is the visibility on demand that's coming and the people's confidence that they have worked and they can take risk on ticked up on pricing and profitability and I think that's pretty broad spread and its followed a lot of US followed the increases in state and local funding as we talked about and all the states that drive the vast majority of our revenues so.
Well that's out there I think the big drivers more fundamental and more.
More ingrained, which is a good thing because it means is more long term.
Great. Thanks for the help.
Thank you.
We will now take our next question from Phil and G of Jefferies. Please go ahead. Your line is open.
More night accounting.
Good morning, nice to see the acceleration in pricing this year in aggregates backlogs down quite strong.
I appreciate your some bottlenecks on the shipment side.
Is this level of momentum and growth on pricing sustainable for the next few years.
Short answer is I think the answer is yes.
And the reason I have confidence in that is because of the long term growth substantially growing funding and and on the public side and highways and how visible that is and how sure that is and so you put those those that you picked that its been its growing but its very visible and it is sure and protected gives people confidence throughout the construction sector that they can take risk on price.
Got it.
And just on that note I'm appreciating that you know most of the highway funding has been driven more at the state level, but with funding for the Highway Trust Fund you know expected wind down next year.
What are some of the milepost that you are looking at it from a timing perspective before you think if nothing gets done a you could see some of these projects push out or start a little bit.
Well first of all I don't see the demand stalling because of the about the how the federal funding. If you take let's step back and look at Federal funding first and then we'll go into the two how Oh total highway demand.
The house and the Senate are working on a highway bill or our policymakers and key committees are working on.
The reauthorization package now recently the Senate Environmental Public works Committee is right now working on a bill which would increase funding by 28%, we'll see what happens with that.
And funding is a big part of the ongoing conversation.
But that being said about the highway highway Bill a reauthorization you got remember two really important facts that when it comes down to highway demand number one the feds are not going to let highway funding go down even if the fast act expires, they'll just they'll make extensions and keep the funding there regardless number two.
Our states are extremely well our state and local governments are extremely extremely well funding so funding and Vulcan states is up 60%.
Well, that's an increase of over $20 billion per year in 11 states.
Now remember put that in perspective, that's 20 billion 11 states versus a federal Bill, which is 45 billion over 50 states.
And that funding is really starting to flow through the <unk> and we're starting to ship on it and you're seeing the lettings grow so highway demand will grow.
Absolutely grow over the next five to seven years.
Got it and I would I would just also add to that and that yeah.
Historically.
At times in the past when it was time for a federal bill to be renewed United States have operated in this federal Bill extension mode. So they understand how to do that and and are comfortable with doing that and and I think the other point I would make is that if you divide the highway spending among federal state and local levels. It's about a third a third a third so that's why we keep talking a lot about this state funding and local funding and the importance of it because that represents about two thirds of the spending.
Got it that's really helpful color guys and just one last one for me and for a question for you see then based on the outlook for the next few years gross endpoints there definitely sounds a strong directionally, how should we think about capex and capital deployment priorities. There are obviously a few big deals in the market here is good but just curious how you're thinking about M&A in the pipeline and just directionally a the size now it's on these potential targets.
Yeah, absolutely I mean, if you looked at and the M&A. We've typically done in the past. It's it's been more of the bolt on variety as as opposed to big M&A. I mean look you know deals you know a you know come and go in the market. We take a look at the deals when when they arise because that's just good practice to do that but we have been very disciplined with our approach to M&A and we would continue to be so we have pretty big hurdle rates and that that deals have to get over they have to be very strategic to us they have to be accretive to our return on investment profile. You know they have to be something that you know significantly extends the you know the value of the franchise and they have to be something.
They have to be deals that we can integrate you know quickly inefficient, Italy. So we are able to derive the synergies from them. So we continue to look but you know again, we're disciplined we would would wait for the right thing and you know we're not going to.
No we're not going to be crazy about a you know about multiples that is you know that it's not helpful. In in any event you know if we think about you know other uses of that capital from a growth perspective, I mean remember we're going to be spending about $200 million. This year on growth Capex, our internal growth projects were really excited.
About about those and it is a way to enhance and generate EBITDA without a lot of risk and without plant paying you know some blue sky goodwill that you might have to pay if you were to do a bit of of M&A and just as a reminder, some of those growth projects that we are working on this year in which are embedded in that $200 million projected spend are and some greenfield quarries that are in our geographic areas that are beneficial to US, California, Texas, South Carolina and in addition to that and and personally I'm very excited about about this part. We also have a number of sales yard strategically located in the U.S. and that when they come online would extend to extend our franchise and our ability to reach customers. So you know M&A is is one pathway.
But you know for me you know low risk EBITDA enhancing a extend the value of the franchise I quite like some of these internal growth projects and again, we put those through a pretty strenuous and a return on investment review and they are you know accretive as well.
Got it thank you for the color.
Sure.
We'll take our next question from Michael Wood of Nomura. Please go ahead. Your line is open.
Morning, Hi, Thanks for taking my question.
Hi, I wanted to ask.
Your markets in cement are impacted at all by the merger of the two large they don't.
I was in China, if that had a positive or negative impact on pricing in concrete.
Oh, I wouldn't see it affecting our markets in concrete positive or negative lifestyle see a lot of impact for that.
Now that being said, okay and.
Good I'm sorry.
No I'm curious since you improve that segment as well in Twoq versus one queue, but you saw lower gross profits year over year. So just if you can also talk about your confidence in the back half and.
And how you're seeing pricing market.
Yeah, the actually our volumes is what we were.
Gross profit was actually slightly down 2% and that was really driven by volumes being down some of that was rain in Texas. Some of those timing of work in Virginia, our prices were actually up 5% and unit margins were up 5%. So assuming we can get our projects going and get we'll get a little Sunshine I think we'll be fine with us here in concrete.
And on the aggregates can you give us some.
Occasion of the weather impact or lost shipping days in the quarter.
Yeah, I mean, that's a that's a dramatically does that's a big mix bag.
Were you know in the quarter.
For the I'll give you two examples in big markets, where we got hurt to Dallas had another 15 days of rain San Antonio had an increase of 24 days of rain.
Houston that increase of six days in California, we saw La a five day, San Francisco up nine days.
So I I guess that kind of gives you a feel for what that was like and.
Knoxville was up dramatically, but I don't remember exactly the number of days in Knoxville. So.
You know and then if you look at Illinois, we lost.
We lost a full month, we lost 22 days in Chicago.
And if you if you go back and look at the shipment volume guidance range. We gave at the beginning of the year, which was 3% to 5% you'll remember we talked about what would put us at the top end of the range and what would put us at the lower end of the range to 3% and the two things we called out that would put US there would have been delay of some big projects that sometimes just unavoidable that's outside the control and also also weather and so given the fact that you know Q2 was was wet as Tom just described I mean, we were frankly, we were pleased to have our volume and growth come out at 4% in the quarter, because don't forget you know, California, and Texas to other markets, we've called out as being quite wet as have others. Yeah. Those two markets comprise about 30% give or take of of our of our volume. So we were we were pretty pleased.
Okay. Thanks for all the color.
Sure.
We will take our next question.
From Mike Dahl of RBC capital. Please go ahead your line is open.
More my good morning.
Good morning, Thanks for taking my questions.
Sure Susan I wanted to pick up on that last that last comment then.
Yeah. If you if you think about.
The performance in the quarter. Despite some of the headwinds it doesn't actually seem like that much of the heavy lifting to get.
Yeah, not just the top end of the volume guide, but maybe a bit above the volume guide for the year and now Tom I know you you made the comment that maybe its time and.
Of that and then so the 5% range, but.
As just more specifically thinking about.
What you've seen quarter to date is there anything you'd point now as far as volume cadence and kind of what to expect for magnitude of growth in threeq versus Fourq you.
Yeah, I think you know, let's just concentrate on the third quarter and I was and I really for the balance of the year, but I think what were you heard me say was we're trying to be prudent going into the third quarter and the the underscore there is the third quarter.
He is the peak of the construction season, but it's also the peak of the storm season. So that can go really really well or that can go really really tough or it can be a mixed bag and so I think I was telling you. The high end of our guidance is trying to take some of that into for volume is trying to take some of that into account.
You know the per example, does what we saw in <unk> in the first half in California.
And so I.
No, it's really trying to be thoughtful and trying to give you our best educated.
Expectation of what we expected based on history and based on our backlogs and based on what we see as a booking pace.
That's right and I would I would just add to this I've got the numbers here for the second half last year. A in you know I have the third quarter as well, but you know, let's not forget last year, you know I'm in the third and fourth quarter. Those were not you know I I don't really consider them to be terribly easy comparisons. If you look at the second half last year, our volume grew 9% our gross profit per ton grew 11 and for the two quarters combined our flow through was about 63% you know that's that's a pretty good performance that that we would be talking about you know over achieving here price was it at 2% you know, perhaps there's some upside there, but it was a pretty strong volume and gross profit per ton second half.
Right I appreciate that but I guess, it's good to hear that.
Upper and sounds like it actually does incorporate the yeah. Some conservatism around the weather, which are which is great.
The the second question I had is is bigger picture you kind of alluded to a few different times some of the internal initiatives and.
No. Some of these are earlier stage than than others, but can can you give us a flavor on some of the internal initiatives that you're you're using to drive unit margins over the next couple of years.
Where are we at on some of the big initiatives and.
Can you quantify any any goalpost for us to be thinking about in terms of impact.
You know from up from a very high level, what drives our quality earnings. It is what drives gross profit per ton.
Again at a high level that would include for your areas of focus on commercial excellence, our logistics efficiencies.
Number three how we procure our goods and services in the fourth our operating disciplines and the disciplines around those efficiencies that drop cost.
We've been working on these at different stages over the last few years, we've invested in people and processes and systems to try to improve our metrics in our disciplines.
And what you are seeing is results improvements in our gross profit per ton again, you know bragman our people in his earlier, we've put together now three quarters, where we've had double digit improvement unit margins. So solid work, but as you pointed out we're far from being done we got a long ways to go.
And when you start talking about goal posts. This again remember this is an ultra local business and every one of our markets and Submarkets has their goal posts, but putting those together is not as nearly as important as what happens on that local level. So you know this is exciting. We you know we've done a lot of hard work, we got a lot more work to do so, but but I congratulate our folks were.
Being disciplined and being diligent with this but more to come on these efforts.
Okay. Thank you.
Sure.
We will take our final question from Robert Mueller of Burn Burke capital. Please go ahead. Your line is open.
Good morning, Robert Good morning.
Hi, This is actually Dan on for Rob Oh, Great. Thank you for taking.
Thank you for taking my question just a quick question with regards to the split between the three end markets is there any way to quantify the performance I'm like infrastructure, rather than Nonres in particular, I remember last quarter around the southeast and on measures, particularly strong I was just wondering whether that's continued and why that why you've seen across your geographic footprint. Thanks.
I think that what we would describe the private side in most all market is growing and steady growth you know a few places a little hotter than others.
The.
Public side is growing and growing faster and we will continue to grow faster I would call the public side, absolutely across our footprint, we see growth.
Again, the US is Suzanne said the fundamentals for the private side, which are population growth employment growth very low inventories of houses and now we expect lowering interest rates that is a good formula for private demand growth.
Put that with the dramatically growing funding from highways and that maturing into lettings and now into shipments that is the great formula for public demand grow so I would call it solid and growing exciting and I would call it solving exciting across our footprint.
Okay. Thank you very much.
Thank you.
Well. Thank you for joining us today, we really appreciate your interest in Vulcan and your and your time. This morning, and we look forward to discussing the company in our results and our performance throughout the quarter look forward as Daniel Thank you.
This concludes today's call. Thank you for your participation you may now disconnect.