Summit Materials Inc (SUM) 2016 Q3 法說會逐字稿

Greetings and welcome to the Summit Materials third-quarter earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Noel Ryan, investor relations. Thank you, Mr. Ryan. You may begin.

Good morning and welcome to Summit Materials' third-quarter 2016 results conference call. Leading today's call is Summit CEO Tom Hill and CFO Brian Harris.

We issued a press release before the market opened this morning detailing our third-quarter 2016 results and published an updated supplemental workbook highlighting key financial and operating data, which can be found in the investor section of our website at summit-materials.com. This call will be accompanied by our third-quarter presentation, which is also available in the investor section of our website.

I would like to remind you that management's commentary and responses to 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 factors that could cause actual results to differ, please see the risk factors section of Summit Materials' annual report on Form 10-K filed with the SEC on February 22, 2016. Additionally, you can find reconciliations of the historical non-GAAP financial measures discussed in today's call in this morning's press release.

Today's call will begin with remarks from Tom Hill, who will provide an update on our business and market conditions in the third quarter. Followed by a financial update from Brian Harris. At the conclusion of these remarks, we will open the line for questions.

With that, I will turn the call over to Tom.

Thank you, Noel, and welcome to today's call. Let's begin by turning to slides 3 and 4 of the conference call presentation deck.

Summit generated solid third-quarter results, as supported by continued execution of our materials-based growth strategy. Net revenues, gross profit, adjusted EBITDA, and net income all increased on a year-over-year basis in the third quarter, driven by continued organic growth and average selling prices on aggregates and cement. Including acquisitions, total sales volumes increased across all our lines of business in the quarter.

Gross profit margin increased 290 basis points on a year-to-year basis to 40.3% in the third quarter, while adjusted EBITDA margin increased 220 basis points to 30.4%. Improved margins were driven mainly by higher materials pricing and lower costs resulting from improved productivity. Adjusted net income increased by more than 15% to $73.5 million, resulting in adjusted EPS of $0.73 per adjusted diluted share.

Please turn to slides 5 and 6. Aggregates price per ton, including and excluding acquisitions, increased 8.1% and 4.6%, respectively, while cement prices increased 7%. Strong growth in material selling prices served to more than offset organic declines in material sales volumes. The decline in third-quarter organic sales volumes was attributable to a combination of unusually wet weather in Texas and our other core markets, tough prior-year comparisons in Vancouver, given the completion of several large 2015 sand projects, and challenging highway markets in Kansas and Kentucky due to public budgetary issues.

On an organic basis, aggregate volumes were down 3.3% year to date through the third quarter. However, excluding the impact of Vancouver, organic aggregate sales volumes increased on a year-to-date basis. A good illustration of the strength and underlying demand evident in most of our markets.

As indicated on slide 7, precipitation levels in our top five states were well above historical levels in the third quarter, particularly in our Texas market, where heavy rains and flooding affected operations in the period. The total number of days with precipitation increased materially in Austin, Dallas, and Houston, impacting our operations.

Total inches of rainfall were also well above the long-term historical average in each of our top five states, except for Utah, where our aggregates business actually posted organic volume growth in the period. In our top MSAs, total rain inches were nearly 20% higher versus the historical average.

We continued to make progress on price and margin growth during the third quarter, as illustrated on slide 8. Gross profit margin increased across all lines of business year to date through the third quarter, a trend that continues into the fourth quarter.

Aggregates margins have increased by 560 basis points on an LTM basis when compared to the prior-year period. Our integrated-materials-based-model remains a key competitive advantage for Summit, one that provides surety of demand, superior pricing, and consistent margin capture at each stage of the value chain.

As illustrated on slide 9, we completed three small bolt-on acquisitions during the third quarter in addition to a fourth in October, all of which we expect to begin contributing meaningfully to earnings beginning in 2017. In July, we acquired Rustin, a ready-mix concrete supplier in Oklahoma that complements our existing business in northeastern Texas.

In August, we acquired two Mississippi River materials distribution terminals from the Angelle Companies. This transaction expands our local cement distribution network into the central Louisiana markets.

Also in August, we acquired RD Johnson, a Kansas-based asphalt and construction services business that will result in incremental aggregates pullthrough. In October, we acquired Midland Concrete, a ready-mix plant operation in Midland, Texas, that will complement our existing Troy Vines operations.

Please turn to slide 10. Approximately 40% of Summit's net revenue is derived from the public highway market, which we believe is poised for a cyclical upturn entering 2017. The 5-year $305 billion federal highway bill, or FAST Act, includes $230 billion for highway spending.

Federal funds on average provide more than half of state DoT capital outlays for highway and bridge projects. And we anticipate a 2% to 3% per annum increase in these annual authorizations. This bill in conjunction with many state initiatives to increase highway funding will result in steady increased spending on highways over the next few years.

Within Summit's portfolio, Kentucky, Kansas, and Texas have traditionally been among the state markets most weighted toward highway spending. Our Northeast Texas business, which is engaged in aggregates, asphalt, and paving construction, had a very strong year thus far, benefiting from significant incremental demand resulting from lendings associated with Proposition 1.

Our Kentucky and Kansas businesses have faced budgetary delays this year with regard to public infrastructure spending on new projects. However, we believe Kentucky will recover in 2017, given the passage of a new, albeit delayed, two-year highway funding bill earlier this year.

Approximately 60% of our net revenue is derived from private residential and nonresidential construction, which complements our public infrastructure market exposure. Both residential and nonresidential activity remain robust through most of our markets, although the pace of recovery back towards prerecession levels continues to vary by region.

On the residential side, US single-family housing starts increased by 5.4% in September 2016, with improvement evident across most of our major markets. According to the latest monthly residential building permit data, Utah, Missouri, Kansas, and Kentucky had all experienced significant year-on-year new permit growth, which is encouraging.

Utah continues to see significant demand growth, with one of the lowest unemployment rates of any state in the country. With interest rates near historical lows and sustained improvement in employment levels, we expect housing markets to revert back to more normalized levels of 1.4 million to 1.6 million starts per annum over the next several years.

On the nonresidential side, US spending has increased 4.3% year to date when compared to the prior-year period, according to census data. Nonresidential activity, especially the light commercial that we primarily service, typically lags residential construction by one to two years.

Entering 2017, we anticipate an overall improvement in highway, residential, and nonresidential spending. Texas appears to be in the later stages of the current private construction cycle, with prospects for a new cycle to begin in late 2017. Elsewhere, the Utah, Missouri, Kansas, and Kentucky markets appear to be in the earlier stages of the construction cycle.

In our cement markets, we anticipate positive organic volume growth in 2017 as supported by our access to multiple end markets along the Mississippi River. On balance, Summit is exposed to geographically diversified stable growth markets that we expect to support superior performance into the coming year.

With that, I will turn the call over to Brian for a review of our third-quarter financial metrics.

Thank you, Tom. Summit had an outstanding quarter across multiple key financial metrics. Adjusted EBITDA increased by more than 20% to $146.2 million in the third quarter, while adjusted net income increased by 15.8% to $73.5 million or $0.73 per adjusted diluted share. Including the benefit of completed acquisitions, adjusted EBITDA was higher across all operating segments in the third quarter of 2016.

Please turn to slide 11. In our east segment, net revenue increased nearly 30% year on year in the third quarter, driven by contributions from acquisitions completed in 2015 and 2016, as well as the addition of large ready-mix concrete projects in Kansas related to wind farm activity. Adjusted EBITDA increased 41% in the east segment during the third quarter compared to the prior-year period.

In our west segment, net revenue increased 1% year on year, as favorable market conditions in the Intermountain West were partially offset by temporary softness in the Texas market due mainly to unusually wet weather and lower volumes in Vancouver. We generated 7% year-on-year growth in adjusted EBITDA during the quarter due mainly to higher selling prices and improved cost control.

In our cement segment, net revenue increased by 24% year on year as supported by positive pricing following the Davenport acquisition in July 2015. Although we experienced mixed weather conditions during the third quarter, performance improved and remained strengthened during September. Adjusted EBITDA increased 28% during the third quarter compared to the prior-year period, supported in part by improved productivity.

Please turn to slide 12. Given Summit's significant growth since inception, we are very pleased with our improved quality of earnings in recent years. Two key measures of earnings quality include growth in margin capture and growth in free cash flow generation, both of which are listed on this slide.

As you can see from the data, Summit has continued to generate consistent margin expansion in recent years as both organic and acquisition-related growth has positioned us to realize improved economies of scale and diversification across both stable growth geographies and lines of business. To that end, gross profit margin and adjusted EBITDA margin have increased to record levels on a year-to-date basis as underpinned by increased selling prices, continued cost discipline, and productivity gains.

Further to the point, our free cash flow on trailing 12-month basis is more than $80 million through the third quarter 2016, a significant improvement over the prior-year period, despite higher-than-normal levels of discretionary net capital spending, which typically runs between 20% and 30% of total net CapEx.

On an LTM basis through the third quarter, Summit had total capital expenditures of $141.2 million compared with $88.9 million in 2015. On slide 13, we see a breakdown between discretionary and maintenance capital spending, with the historical split being three-quarter maintenance and one-quarter discretionary.

Capital spending as a percentage of net revenues is elevated in the current year due to expenditures on new aggregate plants and upgrades to our existing facilities in Kentucky and South Carolina. Longer term, we continue to target total capital expenditures at 6% to 7% of net revenues.

Total net leverage as defined by total net debt divided by trailing 12-month further adjusted EBITDA declined from 4.5 times to 4.3 times during the quarter. We currently anticipate that total net leverage will decline to 4 times by year-end 2016.

At third-quarter end, Summit had cash on hand of $31.6 million, total outstanding debt of $1.5 billion, and our full revolver borrowing capacity of $209.4 million available to us. Annualized cash interest on net debt outstanding currently stands at approximately $87 million.

Turning to slide 15, we are reiterating our full-year 2016 adjusted EBITDA guidance to be in the range of $360 million to $370 million, which includes the successful period for acquisitions completed thus far in 2016. Backing into this full-year 2016 guidance, total adjusted EBITDA is forecast to be in the range of $90 million to $100 million for the fourth quarter of 2016. Our full-year 2016 gross capital expenditures guidance continues to be in a range of $150 million to $170 million, consistent with our prior forecast.

And with that, I will turn the call over to Tom for his closing remarks.

Thanks, Brian. On behalf of our entire senior leadership team, I want to extend my gratitude to our valued employees for their ongoing efforts to position Summit as the leading materials-based company.

We are pleased with our third-quarter performance and believe Summit is well positioned in the current construction cycle, which remains in the early innings. Our materials-based strategy and integrated operating model are resulting in superior performance, as evidenced by the significant growth in margins and free cash flow generated on a year-to-date basis.

We look forward to providing the public with a strategic outlook and investment thesis at our first-ever investor day in Houston on November 15. The event will be available via webcast and all presentation materials available at the event will be posted in the investors section of our website. We look forward to having you join us at this important event, which will include members of our senior leadership and operating company management.

With that, I would like to open the call for questions. Operator?

(Operator Instructions) Trey Grooms, Stephens.

Congrats on a solid showing. Great quarter. So you guys have obviously had very impressive margin improvement here, especially in the face of a pretty challenging volume environment.

First, what are the key drivers there? How are you guys pulling that off? And how do we think about the sustainability or continued margin expansion going into next year, especially if we were to see some organic volume improvement in 2017.

Trey, we certainly think it's sustainable both on the price and on the cost front. You have to remember that we have only owned our companies an average of 2 to 2.5 years, so we do believe that there is still significant cost improvement opportunities in all our businesses. And the underlying pricing environment pretty much across all our products is quite good. So we are very optimistic for continued margin improvement going forward.

Okay. And I guess looking at the improvement that you've seen this quarter and in prior quarters as well, what are -- is that mostly coming from synergies that you guys are finding and pulling out? Is it more kind of just blocking and tackling every day cost save type stuff?

Well, it's a combination. I think -- it is really what our integrated model produces. We block and tackle every day, working on costs. We obviously have had some tailwinds on hydrocarbons. But we've had really significant improvements and productivity in our aggregate and our cement businesses. And our integrated vertical model has produced good margin enhancement at each stage of the vertical.

Brian, any thoughts on that?

Yes. In [the course] of diesel was about a $2 million year-on-year improvement and that brings us to about $7.3 million on diesel for the year. As you know, we buy forward, usually about a year in advance. So we have already locked in a portion of our 2017 requirements. So that continues to be a tailwind for us.

And then all the things that Tom mentioned: repair and maintenance costs, some of the tools and productivity improvements that we will continue to drive into the business. We should see those sustained for the foreseeable future.

Great. And then interquarter, I know you touched a little bit on September, but can you talk about how the organic volumes trended through the quarter and then into October? And then I guess as a follow-on to that, with the Vancouver -- when did that big project rolloff anniversary? And how do we think about that in the context of organic growth?

Yes, certainly during the quarter, it was a tough start to the year from the weather perspective. I think everybody saw that July and August were still very wet months across much of the country, actually, not just in Texas. Obviously, that gradually improved during September and has continued into -- it's continued into the fall here. So generally improving weather conditions are helping with the organic volumes.

In terms of the Vancouver situation, as we said on the last call, the second-half comps get steadily easier throughout the rest of the year. We've seen an improvement there year on year in the sand volumes. And so we would expect that to normalize and be balanced out by the end of 2016.

Yes, and our Vancouver operations -- our team there has really produced very good results, again emphasizing both price and cost. So although volumes are down over 20%, our margins and our EBITDA are just about on plan. And we see -- that's an area -- probably the one area where we have seen where we do rely on larger projects and those projects have been pushed out.

When we teamed up with Mainland, we thought that we would have some of the big projects going by the end of 2016. Now it looks like it will be the end of 2017 before they start. And it might even be into early 2018 before we see some real significant volume pickup there. But our team has been able to reduce costs and actually produce fairly good results despite the lack of volume.

Okay, thank you for that. And last one for me and then I will pass it on. I guess it was last quarter, you guys highlighted the situation in Austin with a new entrant into the market there, I believe on asphalt side of things. Can you talk about that situation? Kind of an update on any changes in the competitive behavior in that market? How that market is shaping up there, given the new competitor.

Yes, it significantly improved as the quarter went on. And actually, September was quite a good month for us in Austin. It is still very competitive with an aggressive new entrant, but we certainly have stabilized our business and would really see some meaningful improvement there going into 2017.

So I would say we have stabilized; we've got a great young team down there. And it is still competitive, but we're going to do much better going forward there.

All right, great. Thanks for the color. I will pass on. Look forward to seeing you guys next week.

Bob Wetenhall, RBC Capital Markets.

Gentlemen, very nice quarter. Congratulations. Just wanted to understand in terms of timing of flows on shipments. Seems like there's some weather issues in 3Q, which you highlighted. I think those were well understood. How do we think about 4Q 2016 and the first quarter of 2017, given some pretty warm weather, especially in the first quarter?

And then the other question I wanted to put into a bigger frame is it's been tough weather in the second half. And there has been some delays in highway funding actually turning into shovel-ready projects. So in terms of thinking about volumes next year, do you have a good setup for significantly higher shipment levels, given the fact that the highway funding might actually turn into actual road construction?

We're certainly optimistic going forward. Q3 was heavily impacted by weather. We have not seen outside of Vancouver really any significant delay in projects. There's been a lull in Houston in major highway projects, but that was certainly signaled well in advance.

Our business tends to be less reliant on large projects. We tend to have much smaller -- in our residential business, for instance, it is not really reliant on larger orders. And that is pretty much true throughout our US businesses. We are not reliant on large projects.

Certainly the comps -- we have a very good fourth quarter last year and a very good first quarter with great weather. I'm hoping we have great weather again this year. But there are definitely tough comps going into the Q4 and Q1. But we have good backlogs in our businesses. October was pretty decent. And we are optimistic.

Thanks for highlighting the tough comps. That kind of makes sense. Maybe you could also explain a little bit your comments about the slide deck showing that Texas might be closer to the late stages of the cycle. And how are you thinking about Texas specifically in 2017, if that's your perspective?

Yes, when we say late cycle there, we are really focusing particularly on the private construction market in Houston. We would see a uptick and a new cycle starting there. Certainly, some of the commentators and forecasting groups out there see an upcycle starting in the second half of 2017. A lot of that. I think you -- at $45 or $50 oil, that will help that marketplace.

So our Houston business has held up remarkably well. We happened to be in the right place at the right time. As our business in West Houston really focuses in the west and southwest portion of the city, and also our business is primarily into the low-end starter homes, and that market has stayed extremely strong.

We have also been able to diversify somewhat into the light commercial business. And also on our aggregate business, we are participating in some of the increased highway spending there.

Overall, we see 2017 as fairly stable in our overall Texas business. We will see some improvement in Austin. We had a superb year in our North Texas operation, which is in the aggregates, asphalt, and paving business. So overall, we see stable to maybe slightly up next year in Texas. So it is still -- it's a great place to do business, and we're very happy with where we are in Texas.

That's super comprehensive. Thank you. Just one quick question. If you guys could provide a little color on your acquisitions in the third quarter: Rustin, Johnson, Angelle, as well as Midland Concrete in 4Q. Just kind of how impactful will these be and what's the outlook for the M&A pipeline? Thanks and good luck.

Thanks, Rob. These are all very value-added deals that happen to be fairly small. The four deals, Rustin in Oklahoma is a great diversification of our RK Hall business, which is an aggregates, asphalt, and paving contractor. This is a ready-mix bolt-on. Really fine business.

RD Johnson is an asphalt plant and paving and construction service business in Lawrence, Kansas, where we have a significant presence with our Hamm operation, which was our first acquisition back in 2009.

Angelle is at two terminals in Louisiana, which will help improve the distribution network for our two world-class cement plants in the northern Mississippi. And then Midland Concrete is a really nice one-plant bolt-on to our operations in Odessa/Midland. We are very optimistic about the Permian Basin. I think it's probably going to be the best-performing basin in the US over the next 10 years, and this is a real solid infill bolt-on acquisition there.

Our deal flow is really busy right now sort of across the spectrum. There are some pretty large auction-type deals out there, which we probably won't be successful on, as we weren't successful in the two cement deals that were announced couple months ago.

But our bread-and-butter, anywhere from $10 million to $100 million proprietary negotiated deals, we are very busy on those. And we will be very optimistic going into 2017 that we'll continue with the acquisition program that we've had since we started.

Kathryn Thompson, Thompson Research Group.

Thank you for taking my questions today. Wanted to focus a little bit on pricing. The 7% increase in pricing for cement in the quarter -- just once again wanted to get your perspective on how much of this is the addition of Davenport or product or just pricing appreciation from the price increase early this year.

Yes, it's very difficult to tell because those businesses were so integrated, but I -- we don't really have a lot of data on that again because the businesses are so combined. My view is it's the price increase that happened earlier in the year pretty much entirely due to the price increase that was pushed through in the earlier part of the year.

Thanks. And then on aggregates, a pretty big delta between the organic pricing and then the fully integrated pricing. Is it correct to assume that that -- the upside is driven by your acquisitions in the Virginia and the Carolinas market?

Correct. Those are very high-price markets. And it had a big impact on the overall price level.

Excellent. And then do you have a -- and if you have mentioned this and I missed it, apologies on my end. But you have an estimation as to the volume impact of weather in the quarter?

You know, Kathryn, I have never been smart enough to really have an exact opinion on that. It certainly was material and -- but I have always hesitated to put an actual volume or dollar impact on that.

I think the other probably less but still material impact was on the cost side. When it rains as much as it has rained, it really impacts productivity level in your aggregate locations. And even despite that, we improved our year-on-year costs in our aggregate locations. So I've always hesitated, Kathryn, except to say that it is material, especially in the third quarter.

Okay, great. Final question. You've been able to do this in prior conference calls, but able to focus on end markets where you are seeing the greatest growth from a geographic standpoint. And maybe put some parameters in terms of what type of growth you are seeing. So for instance, more color specifically around your volume growth in your better growth markets. Thank you.

Yes, I would touch on maybe a little bit different than what we have in the slide deck. But just say look, in Vancouver, we have seen volume declines, but we've seen good pricing and good cost control. So the financial results there have been okay.

In the Intermountain West, especially in the front range of Utah and in our new acquisition in Las Vegas, we have seen really good mid-single-digit volume growth. Very strong markets that we believe are really early cycle, both in Utah and Vegas. We think we have many years there of runway to get to midcycle. Very strong markets. Probably some of our strongest markets would be in Vegas and in Utah.

The Kansas, Missouri, Kentucky, I would look at our midsection businesses there. Much more stable that tended not to have the ups or downs that we have had. These are really fine marketplaces that we do extremely well in.

Kansas and Kentucky have had some funding issues on the highway side. Kentucky will assuredly get better and it's starting to get better now. It was just a delay in the passage of their biennial highway bill that will impact the overall 2016 numbers. But the lettings there have been pretty good.

Kansas is a bit more problematic. We have a governor there who tends to use the highway fund as a piggy bank to balance his budget. We see that possibly getting better next year. They said that they were going to reinstate the maintenance program that they -- which is about a $600 million program for next year, but I'm not sure that I would count on that.

Missouri, we've got a great business there and very -- extremely well run. The assets that we bought from Oldcastle have performed extremely well and we're very optimistic about those. But these are -- just overall, these are low-single-digit growth markets, but very solid performers.

Our new business in southern Virginia -- the Boxley operations and then our operations in the Carolinas. The AMC sand and gravel business that we acquired earlier this year. And also the Buckhorn Quarry and sand and gravel locations just south of Charlotte are really flying. Very strong. I believe it's in the higher single-digit growth there. So really we see that market as one that we would like to grow significantly and that's been a real star performer.

And then overall, our cement markets from Minneapolis down to New Orleans. Very -- a bit mixed, but good solid growth. They were heavily impacted by rain this year; pretty much up and down the Mississippi had a huge amount of precipitation. We would see a return to growth in those markets in 2017.

The cement markets that we have announced, they have $12 price increase, January 1 for Memphis and South; and $12, April 1, St. Louis and North. There are various price increases out there from the other producers, anywhere from $4 to $20.

So we'll see over the next few months where that shakes out as far as what we expect for a realized price increase. But yes, I think the cement markets are certainly -- as we go forward, some -- the markets that we expect to see some real organic growth.

Great. Thank you very much.

Rob Hansen, Deutsche Bank.

I just wanted to get a handle on your implied 4Q guidance. I think you've got in the slides around $380 million of pro forma EBITDA. The number for this year -- if you were to use the same exact $90 million number from last year, that gets you to the bottom end, but you have added seven companies and I think seven quarries in total compared to last year.

So is there anything timing related here that is impacting the numbers in 4Q? I just wanted to get a handle on what's going on there.

Yes, Rob. It's Brian here. As we mentioned, the more recent acquisitions, the ones that are noted in our deck today, they had a small amount incremental this year. The more meaningful EBITDA from those will be derived in 2017 and beyond.

So the bulk of the improvement that we've seen so far was from the acquisitions that we did early in the year: Boxley, AMC, and Sierra in April; Oldcastle about the middle of the year. But the ones we've done late in the season will not add meaningfully to the 2016 EBITDA.

Got it. And then when you look at the volume growth that you are getting from the acquired companies this year, it seems pretty strong. What would those be like on a pro forma basis, just to get a flavor for that?

I don't think we have that data off the top of our heads here, Rob.

Okay. That's fine.

We will get you that. We just don't have that in our information here.

Okay, that's great. We can follow-up later with that. Just on free cash flow generation, seems like it's been pretty strong so far for this year. What are you thinking for the full year? I know 4Q tends to be a good number for that.

Yes, we should end the year with approximately $90 million to $100 million of cash on hand from where we are today. I think as we speak, we are at about $64 million right now.

So as you know, the second half is typically a strong cash generation period for us as we collect our receivables and inventory winds down a little bit towards the end of the year. So we would expect a continued strong cash generation in the fourth quarter.

Also, it's a somewhat slower quarter for CapEx. As you know, we tend to spend our CapEx in the first half of the year as we get ready for the start of the season. So yes, we will expect that to continue on the current trends.

Got it. And then just related to the CapEx on slide 13, it looks like the maintenance CapEx -- it looks like significantly higher than in 2015. Just wanted to get in terms of what the drivers are of this? Is this just timing or were there some specific maintenance projects that were happening in 2016 versus other years?

I think the split is still approximately the same. It's 75% or so is maintenance. It's a slightly higher base this year. The bigger impact there was actually not on the maintenance projects, but on the cost reduction and capacity expansion projects.

We have done a number of those throughout this year that happen to be quite a few primarily aggregates-related plant upgrades and new plant installations that we have put in place. So we do have an elevated level this year. By the end of the year, we will probably be down to about 9%-ish of revenue. So again, slightly elevated, but mainly not so much on the maintenance, but actually on the capacity expansion and cost reduction projects in our aggregates facilities.

Got it. Thanks, guys.

Brent Thielman, DA Davidson.

On the public spending pressures in Kansas and Kentucky, I know you guys have raised these factors before. Just trying to put these in context of your business. Do you feel like you've seen most of the impact already and we should start to lap some tough comparisons in the coming quarters? Or is there a little more I guess to come here into year-end, first half of 2017?

I think we've seen the worst of it. Certainly, in Kentucky. Kansas is still, I would say, an open question. Our Kentucky business should certainly see some improvement next year as lettings are fully distributed through the year instead of -- we had three or four months where there were virtually no lettings earlier this year.

Kansas, it's -- like I said, it's a very hot political issue there and there's lots of pressure to reinstate some of the funding. But it's pretty much an open question on where that turns out. But it is not going to get much worse.

It's -- and a good part for us is that in Kansas, it's not huge part of our business. We are actually -- in our two business units there, we are actually having some good years overall profit wise. And again, I attribute that to our teams there really focusing on price and cost management. So I think going into 2017 combined in those two markets, we will definitely see some improvement.

Okay, great. And then Tom, is it fair to say these are really the only two markets where you've seen something kind of the [district] redeveloping from the public infrastructure standpoint?

Yes, I think that's right. We're going to see some real improvements in Iowa as that gas tax increase kicks in. We're going to see continued improvements in Utah. We're going to see really, I think, some very interesting increases in Texas as Prop 7 starts to hit I think at the end of next year. So I think those are the only what I would say soft spots in our public outlook.

Got it. Okay. And then just on the dip in asphalt pricing, is that a product of lower mix costs or some geographic shift?

It's mix. It's just -- price is a very poor indicator on the asphalt business because liquid asphalt is such a large part of the cost structure. And depending on which asphalt you expect on a job can have a very large impact on the selling price, but not on the margin. So our margins actually improved in asphalt year to date. And so the selling price is just a bad indicator in that business.

Okay, understood. Thank you.

Scott Schrier, Citi.

Thanks for taking my question. I'm looking back on the leverage. So it looks like you're doing a good job to reach that goal of 4 times by the end of the year. What happens after we hit that? And going into next year, you guys are obviously generating some good cash flow.

And I know Tom, in the past, you said on the acquisition front, you are more of a single than a doubles hitter. But you mentioned earlier the call you were unsuccessful maybe on some larger projects. So how do you balance where you think you want to go with leverage to looking at your acquisition pipeline and maybe looking at larger acquisitions versus more of these small bolt-ons?

We always focus on those small value-added bolt-on acquisitions. They are the ones that -- we certainly get the biggest bang for the buck. And we really focus on where we think we are in the cycle and what our appropriate leverage is, given where we are. And I am very comfortable with the leverage we have now, as we really believe that we're in the early innings of this construction market recovery.

And when we look at individual deals, we really do focus on where we are in the cycle. We've looked at some deals recently in two great markets, Denver and Austin, for instance. Great markets.

Would love to be in them, but you have to be very careful what you pay because I personally think that both those markets would be at midcycle or very close to midcycle. And that you are not going to see much overall improvement from where they are. Now, they are at great levels and I wish we had been in both of those markets four years ago, but we didn't.

So we really do pay attention both on the micro and the macro level exactly where we are in the cycle, and that dictates where we should be as far as leverage goes. If we see that the cycle is getting long in the tooth, we certainly will be delevering in that scenario. But we don't see that right now. We see the market; we think we have years ahead of us.

In the Intermountain West, we see the Vancouver business with some of the big infrastructure projects coming back. We see Texas with good underlying highway business. And we see our Houston business really almost at the end of its cycle and should be beginning a new upcycle by the end of next year. So you really -- you have to combine leverage with where you are in the cycle.

Got it. Thanks. I appreciate that color. And on my follow-up, I wanted to ask, so it seems like the AMC Boxley regions and Utah are two of the strongest growth regions you have. It looks like, though, on the weather that you pulled out -- Utah looks like it had pretty favorable weather.

So how do we think about Utah going forward? I know there's a lot of growth opportunity there. Might we see some headwind insofar as that we had some demand pull forward this year thus far because of favorable weather?

Possibly, but if so, it's not going to be very meaningful. The Utah -- especially when you look at the Front Range, we are still well short of prerecession housing levels. I think we are 50% to 60% of prerecession. So the recovery in Utah really only started about 18 months ago.

Whereas, again, if you go just over the mountains, Denver started about four years ago and is much further along the net recovery. And that's why I really believe that the Front Range has a number of years of growth coming to get to midcycle.

Got it. And if I could ask one more. I wanted to ask -- there's obviously been a lot of discussions in the past couple quarters on that Vancouver project. And now looking forward, how do you think of selectivity when it comes to bidding on your projects, whether -- maybe it's not worth taking the higher-volume project that might come in with some lower margins. How do you think about that?

Vancouver's an interesting market and we are logistically set up. We service that market by barge from a very large quarry up the Fraser River. And logistically, we are in a great position on several of these large infrastructure projects.

So I believe we will be the preferred supplier on the large volume projects coming. But I don't think we will have to be low price in order to be the supplier, just because we are logistically advantaged.

Got it, thanks. I appreciate you taking my questions and good luck.

Stanley Elliot, Stifel.

Thank you for taking my question and congratulations on the quarter. Quick question for you. When we start thinking about -- first off, I guess on the acquisitions. On these four acquisitions, have they been consumers of your aggregates and new materials or are these new outlets for you from a distribution standpoint?

They are new outlets. They were supplied by the other aggregate producers.

Great. And then when we think about the CapEx piece, does it return back to 6% to 7% next year? Or are we going to be looking at another year of higher capital spend?

I think it comes down a little bit next year. It might not get to the long-term run rate of 6% to 7% that we look to target. But I would think we will see meaningful reduction in the overall spend and that percentage should move down. But maybe not exactly to the 6% to 7% range.

Great. And then last one for me. On the aggregate expansion projects that you guys have underway, are they all shipping material now or is that going to be more of a 2017 event? And I guess the expectations from that would be that the incrementals would be significantly higher than where they started. Is that fair?

For the most part, they are shipping now. Many of them were completed in the first half of the year. Just precisely for that reason to cope with demand in those higher-volume areas.

Perfect, guys. Well, thank you very much and best of luck.

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Hill for closing remarks.

Thank you, operator, and thanks, everyone, for your interest in Summit Materials. We look forward to giving you our strategic outlook and more information on our investment thesis at our first-ever investment day in Houston on November 15. That concludes our call. Everyone have good day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.