Summit Materials Inc (SUM) 2015 Q4 法說會逐字稿

Greetings, and welcome to the Summit Materials fourth quarter and fiscal year-end 2015 earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rodney Nacia, Summit Materials Investor Relations. Please go ahead.

Good morning, and thank you for joining us today for Summit Materials fourth quarter and full year 2015 earnings conference call. Today's conference call is hosted by Tom Hill, Chief Executive Officer, and Brian Harris, Chief Financial Officer. This morning we issued a press release detailing our fourth quarter and 2015 results which can be found in the Investors section of our website at Summit-materials.com. We also published a supplemental worksheet highlighting key financial and operating historical data in the Investors section of our website. During this call we will review our fourth quarter presentation, which is available by accessing the live webcast in the Investors section of our website.

I would like to remind you that management remarks and answers to your questions on today's call may include forward-looking statements, which by their nature are uncertain, and outside of Summit Materials' control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may differ in a material way. For a discussion of some of the factors that could cause actual results to differ, please see the risk factors section of Summit's prospectus filed on August 7, 2015, filed with the SEC. In addition, we will refer to certain non-GAAP measures on this call. You can find a reconciliation of non-GAAP measures for historical periods to the most directly comparable GAAP in the press release. With that, I'll turn the call over to Tom.

Thank you, Rodney, and welcome to our fourth quarter and full year 2015 earnings conference call. On today's call, I will review our operating highlights and market dynamics and then discuss Summit's unique strategic advantages. Brian will then give you some additional details on our operating and financial results. After our review, we will open the lines for questions.

Turning to slide four, 2015 was another exceptional year here at Summit. We delivered net revenue of $1.3 billion and adjusted EBITDA of $288 million. 60% of this adjusted EBITDA came from our materials businesses, which includes cement and aggregates, with the remaining 40% from products and services. Had we owned all of our acquisitions at the beginning of 2015, our pro forma net revenue would have been $1.4 billion, and adjusted EBITDA would have been $308 million. This strong financial performance was supported by improving underlying demand, positive industry fundamentals, and the successful execution of our strategy of acquiring and improving these material-based businesses.

We ended 2015 with over 2 billion tons of well located reserves, and doubled our cement capacity. Demand improved across most of our markets in 2015. Private residential and nonresidential starts are well below peak levels, and infrastructure end markets are poised to benefit from expanding Federal and state funding for highway projects. As a result, we believe there is significant upside as these markets continue to improve. While we can't control the pace of this recovery, we continue to focus on improving price and reducing costs. In 2015 prices increased across all lines of business, on a reported and organic base, including organic aggregate prices up 7% for the fourth quarter, and 6% for the year.

This overall price momentum helped us achieve incremental gross margins of approximately 57% for the quarter and full year. A unique acquisition strategy accounted for a significant portion of our growth in 2015. This strategy provides us with the benefits of a scalable national operation and benefits of local entrepreneurial leadership. This is truly the best of both worlds. Our proven ability to integrate and improve these businesses greatly contributed to our full year adjusted EBITDA margin, increasing 460 basis points to 22%.

Turning to our results on slide five, as you can see, we delivered strong results in the fourth quarter and for 2015 as a whole. We meaningfully enhanced our materials exposure, improved our cap structure, and exceeded full year targets. As I mentioned previously, we increased adjusted EBITDA 52% to $288 million, with a 460 basis point improvement in margin. This was driven by organic price and volume improvement in each of our lines of business, and the successful integration of our accretive acquisitions, especially in cement. In the fourth quarter our adjusted EBITDA increased by 45% to $90 million, with improvement in all segments. Our fourth quarter gross margin improved by 480 basis points through a higher mix of materials, and core profit improvement across aggregate, cement, ready-mix, and asphalt.

Turning to slide six, we continue to see positive demand trends in our end markets and key states. We are well-positioned in attractive markets to benefit from what we expect to be a steadily-improving construction environment. Positive indicators across our end markets provides us with confidence that we are still in the early stages of the US construction recovery. In private construction, the long-term fundamentals are all quite positive.

In residential, housing starts finished 2015 at 1.15 million, but are still way below normalized levels of around 1.5 million. In Texas, we have a stable residential outlook, with the pace of activity increasing, albeit at a slower pace. In Utah, the residential market has been a particular bright spot, with housing continuing to outpace the national average. In nonresidential, as a reminder, we participate in light commercial activity, such as strip malls, hotels, and retail centers, generally speaking this market follows residential development. We have limited exposure to heavy nonresidential projects, such as energy or industrial development. Kansas and Missouri have positive nonresidential outlook, supported by expanding job markets.

In Utah, nonresidential construction starts increased over 40% in 2015. And in infrastructure the recent passage of the five-year highway bill, or FAST Act in December 2015 provides enhanced visibility for Federal highway funding. In addition, many states have increased their highway funding. This increased funding will support growth in highway construction for the next several years, as actual highway spends tend to lag funding by 18 to 24 months.

Turning to slide seven, to add a little detail on states highway programs, specifically, many state government throughout the country have already passed legislation to allocate additional resources to increase their highway investment. During 2015 Iowa, Utah, and Idaho implemented gas tax increases, and Texas took legislative measures to provide additional funding for highways in their respective states. Texas expects to have almost $10 billion of highway lettings this year, compared to $6 billion last year, supported by funding from Proposition 1. We anticipate that other states will follow suit to meet pent-up demand for highway maintenance and capacity increases.

Turning to slide eight, with the increased focus on oil prices recently, we want to take a moment to update you on our business in Texas. We have a very diverse business in Texas, with locations in Austin, San Antonio, Houston, Odessa Midland, and north Texas, covering the area from Amarillo to Texarkana. We have limited and direct exposure to oil and gas, and are seeing the benefits of a very healthy highway program. On the residential side, there is still a lot of pent-up demand for housing, driven by shortage of inventory across the state. In addition, light commercial demand continues to grow. In Houston specifically, we are seeing continued strength year-to-date. The impact of the oil price decline is being offset by stable residential demand, particularly for entry level homes, increasing demand for light commercial activity, and a multi-billion dollar highway program.

Turning to slide nine, we had strong pricing momentum in our core aggregates and cement businesses during 2015. Favorable industry dynamics support pricing in both of these businesses. In cement, we have the two most northern plants on the Mississippi River. This region is geographically isolated and relatively insulated from either domestic or international cement imports. The positive materials pricing environment is supported by high barriers to entry, a depleting resource, and well structured markets.

Turning to our growth story on slide 10, a critical part of Summit strategy is our proven ability to acquire, integrate and improve, both platform and bolt-on acquisitions. We have completed 38 acquisitions through 2015, for a combined investment of $2.2 billion. We focus our acquisition efforts on materials based businesses with strong market positions in existing and attractive new markets. We also supplement this growth in the downstream, where we can add value through the vertical. We remain committed to growing our business through acquisitions in a disciplined manner, and anticipate acquiring approximately $30 million of annualized EBITDA each year. We far surpass that target in 2015 with the acquisition of the Lafarge Davenport assets. We have continued this materials-based acquisition strategy with the recent acquisition of American Materials Company, which has operations in the fast-growing North and South Carolina markets, which was announced today. Our deal pipeline remains healthy, and we are optimistic about our ability to grow and add value through acquisitions.

Turning to slide 11, since 2012, we have increased our adjusted EBITDA margin by 790 basis points to 22%. This performance improvement is an integral part of our strategy, and our management teams are passionate about increasing margins. This is facilitated by our decentralized business model, which maximizes local relationships, a world-class IT network, and tools and methodologies which allow our local management teams to drive performance. In 2015 our incremental gross margins were 57% across the Company, with 59% on materials and 50% on products, which compares quite favorably to the sector. Now I'd like to turn the call over to Brian, who will take us through our financial performance and balance sheet metrics beginning on page 12.

Thank you Tom. We are pleased with our strong financial performance to conclude our first year as a public company. And in particular with the pace at which our margin expansion is accelerating. We reported an increase in sales of 20.5% to $1.3 billion, and adjusted EBITDA improved 52% to $288 million. I'll now review some of the details and drivers behind these numbers.

Turning to slide 13, pricing was favorable across all lines of business during the fourth quarter and full year. You have the specific movements by business, along with regional data in the Appendix, so I'll focus on a few highlights. Aggregates prices increased 7% in the fourth quarter, reflecting the benefit of successful price increases implemented over the past 18 months, cycling into current project activity, and favorable demand. In our combined cement operations, including our Davenport and Hannibal plants, average cement prices increased 25% in the fourth quarter, mainly reflecting favorable mix, in addition to core price improvement. Ready-mix price growth was steady, and asphalt price while still positive, was a little lower than the full year, mainly reflecting lower liquid asphalt input costs and regional mix.

Turning to slide 14, underlying demand was stronger overall, and acquisitions contributed additional growth, primarily in cement. The Davenport acquisition completed in July 2015 drove the significant increase in cement volume, particularly in the fourth quarter, but also for the full year. Aggregates and ready-mix organic volumes grew in the mid-single digits, and were in line with expectations, and enhanced by acquisitions for the fourth quarter and full year. In asphalt, lower volumes in the east on tough comps in the seasonally slower fourth quarter magnified the delta here. The full year organic decline in asphalt, captures weather-related challenges during the first half of the year, along with the fourth quarter volatility.

Moving on to our gross margin on slide 15, we were especially pleased to achieve aggregates incremental margins of 74% for the full year. Total gross profit increased approximately 40% for the fourth quarter and full year. As a percentage of net revenue, gross margin in the fourth quarter expanded to 36.3%, compared to 31.6% in the prior year quarter. Our expanded cement network, along with our aggregates based acquisitions completed since 2014 were meaningful contributors to this improvement, resulting in an 810 basis point increase in the mix of our gross profit from higher margin materials during the fourth quarter. In the fourth quarter we also achieved 500 basis points of gross margin expansion in products, and benefited from lower energy costs. In cement our fourth quarter gross profit increased 117% year-over-year, although our cement gross margin was impacted by major annual repair and maintenance activity.

On slide 16 we demonstrate the significant growth in adjusted EBITDA and margins for the fourth quarter and full year. Adjusted EBITDA margin improved 390 basis points for the fourth quarter, and 460 basis points for the year, largely as a result of our ability to increase prices organically, the accretive contribution from our acquisitions, and our active cost management. A larger proportion of higher margin materials and product revenue helped as well. As we announced in our press release today, we reclassified our segments, and moved cement to its own segment. Due to the immediate integration of the Davenport assets, it is impractical to break out the growth in cement between organic and acquisitions. Davenport accounted for the significant majority of our EBITDA growth in the fourth quarter, along with some aggregates based deals. For the full year, the contribution from aggregates based acquisitions in the west accounted for 28% of adjusted EBITDA growth, with Davenport helping as well in cement. Overall, our strategy is built around continued margin enhancement, and we're pleased to capture additional margin at each phase of our vertically integrated business, for the fourth quarter and full year.

Moving on to our balance sheet and liquidity on slide 17, we ended the year with a prudently levered balance sheet ,and ample capital resources to continue executing our strategic growth initiatives in a disciplined manner. During 2015 we invested over $500 million in acquisitions, while also successfully reducing our net debt to EBITDA leverage ratio to 3.9 times on a pro forma basis, and ahead of our target of 4 times. We intend to remain disciplined with our capital allocation, with the long-term objective of reducing our leverage multiple.

During the fourth quarter we issued $300 million of 6.125% senior notes due 2023, reflecting an upsize to meet strong investor interest. This capital provided us with an attractive source of funds to refinance our debt, and lower our cost of capital. We used a portion of the bond proceeds to redeem the remaining $154 million of 10.5% notes, for a total repayment of $625 million during 2015, representing $27 million of annualized net interest expense savings on the refinancing of 10.5% notes. For the full year 2015, we reduced our reported interest expense by $2 million to $84.6 million, and we entered 2016 with an annualized run rate interest expense of approximately $72 million. At the end of fiscal 2015, we had total outstanding net debt of $1.2 billion. Our cash balance was $186 million. And we had $210.6 million of availability on our revolving credit facility.

Looking ahead to the outlook for full year 2016 on slide 18, we expect continued growth, and in 2016 we are introducing our adjusted EBITDA outlook of $325 million to $345 million, which compares to adjusted EBITDA of $288 million in full year 2015. Our outlook assumes organic improvement and American Materials Company, which we closed last week. As a notable shift from the prior year, our outlook moving forward will exclude the impact of any future acquisitions. We continue to target approximately $30 million of annualized adjusted EBITDA per year from acquisitions. The potential upside from any future acquisitions is excluded from our $325 million to $345 million range, due to the unspecified closing dates of any future acquisitions. We will incorporate the impact of future acquisitions as appropriate on subsequent quarterly calls as deals occur. For gross capital expenditures, we expect to spend approximately $150 million to $170 million in 2016. This number includes, first, maintenance CapEx, which should approximate 6% to 7% of net revenue, and is consistent with normal levels. The 2016 CapEx figure also includes several projects, mainly in our aggregates facilities, to improve efficiency and increase capacity. The high return projects will be completed in 2016, and deliver returns in 2017 and beyond. And with that review, I'd like to turn the call back to Tom for some closing remarks.

Thank you Brian. We have executed on our strategic plan outlined at the time of our IPO. As we have mentioned on prior calls, this is truly an exciting time here at Summit. We have the right people, the right strategy, and the right capital structure to deliver future growth and profitability. Our strategy is based on, first, a steadily-improving underlying demand, second, margin enhancement with a positive pricing environment and a commitment to reducing costs, and finally, a proven relationship-driven acquisition strategy. We are now happy to take some of your questions. Operator, can you please open the lines up to Q&A.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). One moment please, while we poll for questions. Thank you. Our first question comes from the line of Paul Luther with Bank of America Merrill Lynch. Please proceed with your question.

Thanks, hi Brian and Tom, it's PT Luther from BML, how are you?

Thanks, good PT.

Good. I was wondering, first off, if you could help give us a sense of the price and volume assumptions that underlie the EBITDA guidance for 2016, specifically really looking at aggregates and cement? And if you could give us an update on cement price increase plans for 2016, and how they're being realized, if you have a sense so far?

Yes, PT, we don't give specific guidance on volume and prices by line of business. However, we see a continuation into 2016 of the underlying market in 2015. So we see more of the same coming. Specifically on cement, we did announce a $12 a ton cement price increase, effective April 1 from our Continental cement operations. The cement price increases in the market in that area have been anywhere from $8 to $15. We would hope to realize two-thirds of that $12 in 2016, which will reflect some discounts for larger customers, it will also reflect the fact that it's April 1, and we're in many, many different markets, with many different pricing dynamics. So is that helpful?

That is helpful. Thanks. And then another one, on the CapEx guidance, so it looks like, I think what's implied is growth-related or project-related CapEx, I think around $50 million or something to deliver in 2017, I guess, in terms of returns. Is there a way you can give us a sense of what kind of returns you're eyeing for that $50 million investment or so?

Yes, those investments that we're talking about are spread over a number of our aggregates, quarries primarily. They involve both capacity expansion, and productivity and efficiency improvement. They're going to provide returns in the future for many, many years to come, and we typically target returns in the 20% range on those kinds of investments.

Yes, the investments themselves are spread mostly on our aggregate facilities, there are in Kentucky, there's a large project just west of Houston, there's another one north of Austin, and then there's also one south of Charlotte in South Carolina. So they're pretty widely spread, but they are very focused on the aggregates business.

Great. And then if I could squeeze in one more, and then I'll jump back in queue, we have heard that weather was difficult in some pockets of the US in Q4. I was wondering if you saw much disruption in Texas, I guess specifically where there was a lot of rainfall, if there were deferred tons that might have been shifted more to 2016?

Certainly the weather in Texas in Q4 was not very good. We didn't find it to be that disruptive. And I have never been smart enough to figure out the actual impact of weather. Yes, did it impact us? Most certainly, but it's very hard to quantify that. And I just never have been able to do that.

Okay. Great. All right. Brian, Tom, thanks very much.

Sure.

Thank you. Ladies and gentlemen, due to time constraints, we ask that all callers limit themselves to one question and one follow-up. If you have additional questions, you may requeue, and those questions will be addressed time permitting. Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.

Good morning, everyone.

Hey Jerry.

Tom, it looks like surprising in aggregates really accelerated in the fourth quarter. Can you talk about which regions had incremental price actions that were put through in the fourth quarter? It sounds like that was the case. And can you just talk about the range of your price increase announcements you've made for January 1, 2016, and how those price increase announcements compared to January 1, 2015, and that's just in aggregates, please?

Yes, I think we have had very good success in Texas overall with pricing, and that continues, and will be similar, I believe in 2016 as in 2015. Also in Utah, and also in our recently-acquired business in Vancouver. We've had probably more stable or lower single-digit price increases in the middle part of the country, in Kansas, Missouri, Kentucky. And that's sort of the flavor for it, Brian. Do you have any further?

We did quite well across the board, actually, on price in Q4. It was pretty evenly spread across most of our business units and regions.

Okay. And then in asphalt, you've had excellent margin expansion with liquid asphalt costs coming down. Can you just talk about your expectations for asphalt margins over the next quarter or two, as you're thinking about those margins compressing off of these very good levels on a delayed basis, or how would you encourage us to think about it, Tom?

Well, if the price of oil keeps going down, I suspect that we'll have very similar margins as we had last year. So yes, I'd be optimistic about asphalt margins in 2016. There's a lag, the pricing tends to be sticky going down and going up, so we do get some added margin from the decline in hydrocarbons. Mostly it's a pass-through in a lot of states, but in Texas, there is no pass-through on liquid asphalt costs, so actually in December we acquired a liquid asphalt terminal called Pelican, which I think is going to add significant value to our asphalt operations in Texas, which are a big chunk of our overall asphalt volumes.

Thank you.

Okay, Jerry. Thanks.

Our next question comes from the line of Todd Vencil with Sterne Agee. Please proceed with your question.

Thanks. Good morning, guys.

Hi, Todd.

Can you talk some more about American Materials, just talk about what the volumes, the EBITDA looks like there, and then is that included in your guidance that you gave for the year?

Yes, the EBITDA is included in our guidance. We're not disclosing what the EBITDA is in that one, except for the fact that it is in our guidance. It's five Sand & Gravel sites in the Piedmont area of North and South Carolina. Very fast growing. It's based in Wilmington. Great business. Local entrepreneurs put these Sand & Gravel sites together. It's 100% Aggs-based business. It adds to our goal of geographic diversification. And it's a great fit with the Buckhorn Quarry and Sand & Gravel site we acquired in June of 2014. And we see great add-on opportunities in this area, and we're very excited about it.

Good. Good. A follow-up, which you kind of led me into, talking earlier, you said about 460 bips that you added to the EBITDA margin last year. Can you kind of parse out how much was due to a shift in the mix of the business more toward materials?

Obviously it was definitely averse to us, the overall mix of the business when you combine the cement and the materials went up about 810 basis points. A favorable contribution. In the year, I think it's about 900. We were at about a 52% of our business was materials-based at the beginning of the year, with the acquisition of Davenport, and the other acquisitions we built on later in the year, we added to that mix. So it's definitely a positive shift. I can't give you an exact split, but I can come back to you on that later.

That's perfect. Thanks a lot.

Our next question comes from the line of Kathryn Thompson with Thompson Research Group. Please proceed with your question.

Hi. Thanks for taking my questions today. First, on the cement segment, how much of the roughly 25% increase in pricing of the quarter was driven by adding the Davenport assets to the mix, versus pricing appreciation in the market, or if there something else we should take into consideration regarding pricing for cement? And then the second, you've been helpful in the past in giving just a basic update on capacity utilization rates at your plants, if you could give an update on that? Thank you.

Sure. It's pretty hard to split out exactly what the shifts, the mix of that 25%. There are probably three elements. The price at Davenport was definitely higher. And there was also a general price increase in the marketplace, which improved as the year went on, just because of the realization improves as older jobs drop off. And then third, in the prior year, we had some out of market what we call wholesale tons, which we then would have had less of in 2015. So I think all three of those things contributed, plus or minus equally to that. We don't really have that data handy. We can probably get it for you, Kathryn.

And the capacity utilization rates at your plants right now?

Yes. Davenport is at capacity. And we still have some additional capacity that we can probably another 150,000 tons at Hannibal, that we hope to utilize in the next year or two.

And then what?

I said, and certainly the system of terminals that we have now from Minneapolis to New Orleans, will certainly help us utilize that excess capacity at Hannibal.

Great. Thank you. And then on aggregates, you're exposed to some states that haven't been as big users. Other than Texas, the states outside have not been as relatively large users, of [Tythia] and alternative funding perhaps. So as a result, a lot of your balance for demand for aggregates in particular have been more for asphalt overlay or concrete projects. As we move forward with the new highway bill, and the states are coming with alternative funding, one of the things we focused on is the balance of base versus clean stone, and your net worth. So could you give us a sense of how comfortable you are, in terms of your balance of base versus clean, and what this means for pricing as we look out, not just for 2016, but for the next couple of years?

Yes, I mean, our aggregate operations in general are very well balanced. The area that historically would have been imbalanced would have been in Texas in our sand and gravel operations, but with the very large highway program there, we're actually experiencing some sand shortages in the Houston market, and we have a very strong backlog for the remainder of the year there. But in general, our aggregate operations are in quite good balance. I'm trying to think of, Vancouver is a very balanced operation. Yes, I don't see an issue there, Kathryn, that we've seen at all.

Okay. Perfect. And as to the shortage in sand would help contribute to pricing in Texas?

Correct. As a matter of fact, we just picked up a very large sand job in Houston, at a significantly higher price than we would have been a year or so ago. So I'd be very optimistic about our pricing environment in aggs in all of Texas.

Great. Thank you so much.

Thanks, Kathryn.

Our next question comes from the line of Trey Grooms with Stephens. Please proceed with your question.

Hey, good morning and congratulations on a good quarter.

Thanks, Trey.

So on the non-res outlook, it's for high single digits. Can you talk about some of the things you're seeing out there, whether it be kind of what's in backlog, or some of the discussions you've had with your customers, and so forth, that kind of gives you some confidence in that outlook for non-res specifically?

Yes. We're very specifically in light commercial, and I'll just go market by market. In Houston, we're actually seeing a significant increase in our light commercial activity, for both our sand and gravel and our ready-mix. And this is as the light commercial tends to lag and to follow residential development. And over the last three or four years, in the West Houston market which we participate in, there's been a large amount of large developments put in. That they're now filling in the strip malls, the Home Depots, the Lowe's, the other retail establishments. And so we're really seeing a good shift in our business towards that light commercial. In Utah, Utah had a very strong 2015 in nonresidential. It was helped by a couple of large projects which we actually didn't participate in, but again, it's light commercial. And we would be very optimistic for 2016 and 2017 for light commercial in Utah. Looking out at the other markets there, the Kansas, Missouri, Kentucky, we're certainly seeing some growth in light commercial, and would probably not be as strong as what we're seeing pretty much across Texas and Utah, but still we're seeing some increase in activity there.

Okay. Thanks for that, Tom. I appreciate it. And then I guess as my follow-up, and maybe this is for Brian, I don't know, but as we kind of look at the guidance and we think about there might have been some weather in the 4Q that created some pent-up demand, that type of thing, is there anything that we should be making note of when we are thinking about kind of quarterly cadence that's imbedded in that guidance, any large projects, or anything at all that would help us out on how to kind of think about that quarterly allocation there?

I would say that the biggest thing in the quarter to quarter guidance is always weather, and it's pretty hard to predict, so I would just say that, we see more of the same in 2016. We see underlying demand really not changing a whole lot in 2016 versus 2015. We see Utah a little stronger, especially on the single family residential. We see highways in Texas very, very strong, and they were strong in 2015, and they'll be probably even stronger in 2016. But really we sort of see more of the same. So I wouldn't see the quarterly split changing a whole bunch from 2015, weather-dependent.

Yes Trey, and if you go back into the supplementary data, you're going to see the quarter by quarter profile of the business by line of business, for revenue and margins. And I think that will give you a pretty good indication of the cadence, at least of the seasonality that's typically imbedded in our business.

All right. Thanks a lot, guys. Good luck.

Okay, Trey. Cheers.

Our next question comes from the line of Stephen Kim with Barclays. Please proceed with your question.

Yes, thanks very much, guys. I guess the first question talks about your capital, speaks to your capital allocation priorities. We obviously know that you're still planning on, you're still targeting growth through acquisition, even though you're not baking it in your forward guidance, we fully expect that to continue. But I would also think that perhaps there is some sentiment out in the marketplace, that given some of the macroeconomic concerns that have intensified, and some of the disruption in the credit markets, that perhaps maybe your thresholds for evaluating acquisitions may have changed, or perhaps you may possibly have considered increasing the prioritization of perhaps even debt paydown, or applying cash in a slightly different way. So if you could just speak to whether any of the changes we've seen on the macroeconomic front, or in the equity markets and credit markets, have altered in any meaningful way the way you look at evaluating or applying your capital?

Certainly, we have taken note of both the equity and the debt markets. However, we do see the continuation of our existing strategy. Our high yield bonds have actually traded fairly well in the last several months. And we see, not only do we have existing liquidity, which I will let Brian touch on, but I do think, as far as we're concerned, we still have the ability to look at the high yield market. That said, we are very careful in our evaluation of targets. Our deal flow is exceptionally strong now, and we are certainly redoubling our efforts, to make sure that the acquisitions that we do are value-added, and we are just making sure that we're continuing with our sort of our proven acquisition strategy. We don't really see a reason to change that. If the cost of debt goes up, sure, you have to look at higher-return acquisitions to reflect that. So we obviously bake that in. But we to see a continuation of our existing strategy. Brian, do you want to touch on where our existing liquidity is?

Yes. As we mentioned there in the conversation at the start, we did upsize the bonds that we had in November to $300 million, that put a decent amount of cash on the balance sheet. We had $186 million at the end of the year. We were undrawn on our revolver. And we used cash on hand to close the AMC deal that we've just announced. So we feel as if we have ample liquidity to continue with the strategy, and to fund the internal CapEx, and the organic growth that we are pursuing as well.

Yes, one other thing, Stephen, that I would mention there, is, we do pay a lot of attention to where we are in the cycle, and at 1.1 million housing starts, the non-res recovery is only in my mind, is only 18 to 24 months old. We still believe that we are in the early stages of this construction market recovery. If that shifts, if our belief changes, that we're later on in the cycle, certainly that would impact our acquisition strategy, but sitting here today, with really no slack in any of our construction markets, with the new highway bill, with states raising extra money, I still see us in the early innings. And that said, I think it's a great time to go buy an acquisition.

Yes, no, I appreciate those comments very much, and certainly the highway bill provides a lot of tailwinds for many years. But I want to touch on, as a follow-up, your comment about the pipeline being particularly strong, and your comment about the cycle, because one of the concerns that obviously exists out there is that on the resi side at least, Texas perhaps as a state, and not moving beyond Houston, but sort of Texas as a state has been so strong, that it actually isn't looking at early cycle in the state, again, taking the infrastructure side of it out. And so, as you look at your pipeline and you look at the robustness of it, can you share with us perhaps, what kind of geographic distribution or dispersion are you seeing in your pipeline? Are you seeing about an equivalent kind of weighting towards opportunities in Texas, or are you primarily going to be focused on other areas of the country?

Our deal flow in Texas right now is probably limited, and I think when you look at Texas though, and you look at where you are in the cycle, you may be past mid cycle in resi in the middle part of the state and so on, but you can't ignore the highway market, which is just on fire. They had a letting the last two days, very large lettings, it's an important part of what you would look at in Texas, is highways. We certainly would be interested in expanding our footprint in North and South Carolina, Virginia, that area. We like the Northwest. But we always, our first priority is really always to add on to our existing regions. They tend to be the safest and lowest risk. But we look at new businesses and new platforms all of the time, but we have to really find a way to add value to make those work.

Okay. Thanks very much, guys. Congratulations on the strong quarter.

Okay. Thank you.

Our next question comes from the line of Brent Thielman with D.A. Davidson. Please proceed with your question. Brent Thielman^ Good morning. Congratulations.

Thanks, Brent.

Tom or Brian, a question on the aggregates margin specifically, is there a way to frame how much of that huge improvement comes from volume growth and pricing, versus some of the deals you've done, which might contribute higher margins? Is it kind of a 50/50 split? Is that fair?

I think we have that split out on the charts in the deck there. If you'd look at the, let me go back to the slide that we had there. On the volume trends in aggregates, about half of it in the quarter was from organic, and the other half was from acquisitions. So roughly 50/50 there. On the price side, we've now kind of got past the anniversary of mainland, which is, as we've reported on previous calls, was a lower priced market, so you see there the organic and the total pricing beginning to merge together there, and we don't have that shortfall in total that we had in the past. So both contributing, but on a volume basis, it's split roughly 50/50.

Okay. Great. And then, Tom, when you look at the business today, the portion of profits and materials versus kind of products areas and services, is this the right mix going forward? Do you feel the business is still kind of underlevered in the materials?

No, I like the mix we have now. And we like the downstream, where we have really strong materials positions in well structured markets. I think it could go up and down slightly over the next couple of years, depending on the deals that we close, but I like where we are, and I like the vertical, as I've said many times, I think it is with the right materials position, the vertical really adds value.

Okay. Great. Thank you. Good luck.

Okay. Thanks Brent.

Our next question comes from the line of Rob Hansen with Deutsche Bank. Please proceed with your question.

Thanks. I just want to revisit the guidance a little bit. If you kind of put in the volume assumptions that you've thrown out there, call it 6%-ish, and then you assume some of the pricing trends kind of continue as well, it would seem like your margins, you're not including really any margin expansion kind of embedded in your guidance. Is that the right way to think about that? And then kind of related to that, what do you consider kind of normalized incremental margins in the cement versus the aggregates now that you've kind of broken that out?

Well, the aggregates incremental par engines were 74% for 2015. They're a little lower for cement. But in total, the overall was I think it's 57%. So we would expect those kinds of incremental margins to be maintained going forward. In terms of the guidance number, Yes, we've baked in our assumptions on volume and price into that guidance. As I say, we don't give specific numbers for those. But the trends that we've seen in the 2015-year are expected to broadly continue, albeit there could be variances from one location to another.

Got it. Okay. And just on the leverage part, I think you've talked a little bit about this before, you met your goal, you're below 4 times, you've got a good cash balance here. If you hit your guidance, let's say you add another $30 million of EBITDA, you wind up somewhere kind of maybe 3.5 or below at the end of 2016. Is this kind of what you're targeting for the kind of future leverage ratios here?

We don't have any specific targets for leverage. We are obviously comfortable, at where we are now. That with a larger deal, could pop up like it did last year with Davenport, but we would have to be comfortable that it would get at least down to where it is now by the end of the year. So that's sort of, we're very comfortable where we are now, and I say again, that gets back to the whole idea of where we are in the cycle. If we were later in the cycle or believe we were later in the cycle, we would want to be at a lower leverage, but where we are now with, the moderate level of activity both on the res and non-res and with the highway program, we believe that the leverage that we have is appropriate for our growth story.

And it will come down, Rob, naturally through the organic growth and the EBITDA. If we did nothing, we'd be down into the 3 to 3.5 range by the end of 2016. So it's just as Tom said, we would allow it to increase temporarily, if we saw the right opportunity, providing we could see a long-term pathway to continue to reduce it over time.

All right. Great. Very helpful. Thank you, guys.

Okay. Thanks.

Our next question comes from the line of Adam Thalhimer with BB&T. Please proceed with your question.

Hey, good morning, guys, congratulations.

Thanks, Adam.

Hey, Tom, you've been in this a long time. Have you ever, in terms of where we are in the cycle, have you ever felt like we were early, and then six months later realize that we were actually late?

No. I mean, I think the biggest mistake when I look historically is in 2006 and 2007, we knew we were past mid cycle and that we were heading into a decline, we just had no idea of the extent of the decline. I'm not sure many people did. But you can feel I mean, 1.15 million housing starts in the US is very low from a many-decade view. Now we may never ever see 2 million again, but I do think we're going to see, 1.5 million, 1.6 million over the next few years. And then for non-res, on the non-res, the aggregate-intensive non-res that we participate in, has really only started to see additional shipments, really from late 2014, through the second half of 2014. So I can't believe that we're not going to have a four to six-year non-residential cycle. That's where I feel we are. And it still feels early cycle to me. And I've seen a number of cycles, I can say that.

Good. Appreciate that. And then on the cement side, there was some talk of in the southern river markets, maybe raising prices in January. I'm just curious if that happened, and if so, how that played out in the marketplace?

Limited success in the southern river market. We have not seen any, we are a consumer in Houston. We have not seen any price increase in Houston as of now. So I think a lot of those price increases have been deferred until April 1.

Got it. Thank you.

Okay. Thanks Adam.

Our next question comes from the line of Ted Grace with Susquehanna. Please proceed with your question.

Good morning, gentlemen.

Good morning.

Brian, is there any chance you could just give us a bridge on the 74% incrementals for the aggregates business, just to the degree you can dissect what pricing contribution was, volumes, and then cost dynamics, specifically calling out the benefit of diesel in the year?

There are a lot of factors there. The diesel goes across obviously more than one line of business, but maybe if I go to deal with diesel first of all, might be the simplest way, but this doesn't just impact Aggs, it affects the whole business. On our core volume over the total year, we had a saving on diesel of about $13.4 million. Obviously we had some increased volume usage, and then we had some of our business, so our total spend was actually up by a couple of million, because of the acquisitions that we made. But actual savings from price reductions was about $13.4 million. In terms of the split of the business, again I'd refer you back to the price and volume schedules that we've got there for the aggregates. We've got them for all of the lines of business there. On slide 14, it shows the volume. So aggregates was organic 4%, and total 8% on volume in the quarter and the year-to-date, 5% and 27%. And the bulk of that 27% came from the acquisitions in the west. So we added obviously LeGrand Johnson partway through the year, so that was a driver within there. What was the third part of your question, Ted? Could you just remind me again?

Just the other cost factors that we should think of in that EBITDA bridge?

Well, there's a lot of, the main drivers on the margin are the volume and the price. Obviously we had on the aggregates, we had about another $12 million to $13 million of variable costs, and that's predominantly going to be energy-related. The other drivers in our business, labor is relatively benign on inflation, runs at about 2% for most of our businesses in 2015, and there are no other real big factors outside of that.

And could you quantify kind of the carryover benefit, like where did you exit on a per gallon basis on diesel, just so we can think about what that carryover benefit is in 2016?

Yes. As you know, what we do is buy about a month at a time a year in advance, so we've already purchased about 15% of our 2017 requirements locked in at $1.64. For 2016 we've bought about 60% of our requirements at a little over $2. So there will be a carryover. And the balance that we buy obviously will be at spot prices, and that can cause some variability there overall. But for order of magnitude, and we'll consume about 20 million gallons of diesel in 2016.

Okay. And the other thing, if I could just squeeze it in, the EBITDA range, $325 million to $345 million, could you maybe just give us kind of some handholding on what would be the biggest influences of where you fall in that range, whether it's mix, is it more volume dependent or pricing realization dependent, is it costs that have time, seeing any kind of framework there would be helpful, and I'll jump back in queue?

I mean, the risks out there would be in ready-mix pricing, would be, we haven't seen any weakness in that at all, and we're quite optimistic, but that's certainly a risk. I think weather stroke demand would be another risk. I think there's probably upside in Utah demand. We're seeing that market really start to pick up some speed. Brian.

And cost is not really going to be one of the factors that would drive a movement within the range. I think the cost pattern is relatively well established at this point.

Okay.

Yes, we're well along on our integration of Davenport. That's gone quite well. We think we have a world-class cement business now in the upper Mississippi. And so we're very optimistic for that producing a good return this year.

Okay. That's really helpful. Thanks a lot, and best of luck this quarter, guys.

Okay, Ted.

Our next question comes from the line of Robert Wetenhall with RBC. Please proceed with your question.

This is actually Collin filling in for Bob. Just a quick question touching on the capacity utilization of the cement industry again. You previously indicated that you're at full capacity in Davenport, you have 150,000 tons in Hannibal remaining. Do you guys have to the ability to add any capacity at the Hannibal plant, I know you said you have some of that extra line, what would give you confidence to increase that capacity again? How much would that cost?

We do have the capacity to, we do have the ability to double our capacity at Hannibal, to do that is about a $400 million expenditure. We are doing the engineering and permitting it at the moment. We would have to obviously see a pickup in demand. It's a very large expenditure for a company our size, so we would probably want a partner, primarily someone who can guarantee some offtake. Because every time I do a large capital project, it tends to get commissioned 1.5 hours before the downturn. So we would want to protect ourselves on that. I think it's something that we are looking at very seriously, but we're very cautious about taking on a project of that size.

Great. And just a follow-up on the cement business. You noted in the press release and in your commentary that you had some large maintenance and repair expenses given the timing. Can you quantify that? And then also, would you expect that to be like a normal pattern going forward, or would you expect it to be spread out throughout 2016? Just any clarity around that would be great? Thank you.

Yes, so the difference, Collin, was that it fell in the fourth quarter and not in the third quarter as it did in the prior year, so it was just a timing issue. We typically take our cement plants down twice a year for major repair and maintenance. The amount that we end up spending is, generally depends on what you find. Sometimes when you take the plant down, obviously when it's shut down we take advantage of that opportunity to do any major overhauls and repairs that are needed. So in the fourth quarter it was really just a timing difference from the third quarter, but nothing extraordinarily unusual, in terms of the amount of the spend.

Great. Thank you.

Our next question comes from the line of Stanley Elliott with Stifel. Please proceed with your question.

Good morning. Congratulations on the nice year. Quick guidance on the guidance, just for clarification purposes, the $308 million of further adjusted EBITDA, that does not include the American materials, is that correct?

Correct.

Okay. And then could you all give us a pro forma liquidity following American Materials, and also maybe a little flavor on what the dollar amount on the cement maintenance activity might be in the coming year? Thanks.

Yes. So on the liquidity, after AMC, we are undrawn on the revolver, which is still $210.6 million. That's a $235 million revolver with about $24 million used for LCs. And then on the cash, we had $186 million at the end of the year. As of today, we'll be right around about $115 million. Obviously we've consumed some cash for working capital and CapEx as well along the way.

And then the estimated maintenance spend on the cement?

I can't give you a number off the top of my head. I'll have to come back to you, Stanley, on that. You're looking for annual, the total annual spend?

Well, just either just try to get a flavor for kind of the cadence, and then also the dollar amount, since it's kind of twice a year, two large outlays?

The big ones tend to be in the early part of the year. Those are the major shutdowns. The fall, early winter shutdowns tend to be very short. So again, that can vary, but we'll get you, Stanley, some more information on that.

That's fine. Thanks guys, best of luck.

Okay. Thank you.

Thank you. Mr. Hill, we have no further questions at this time, I would now like to turn the floor back over to you for closing comments.

Thank you Operator. Thanks everybody for joining us today. We look forward to speaking with you again in the near future.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.