Summit Materials Inc (SUM) 2016 Q4 法說會逐字稿

Greetings, and welcome to Summit Materials' fourth-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now turn the conference over to your host Mr. Noel Ryan, Vice President of Investor Relations. Thank you, Mr. Ryan. You may now begin.

Good morning, and welcome to Summit Materials' fourth-quarter and full-year 2016 results conference call. Leading today's call are Summit's CEO, Tom Hill, and CFO, Brian Harris.

We issued a press release before the market opened this morning detailing our fourth-quarter and full-year results. We also 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 fourth-quarter and full-year presentation, which is 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 of the factors that could cause actual results to differ, please see the risk factor section of Summit Materials' latest annual report on Form 10-K filed with the SEC.

Additionally, you can find reconciliation 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 of] our business and market conditions in the fourth quarter, followed by financial review and outlook 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 4 and 5 of the conference call presentation deck.

We reported strong full-year results exceeding the high-end of our latest EBITDA guidance issued in January 2017. Continued stable growth in total sales volumes, coupled with organic growth and materials pricing, resulted in 29.2% year-over-year increase in our full-year adjusted EBITDA.

Gross margin increased by 300 basis points year over year to 37.2% while adjusted EBITDA margin increased 270 basis points to 25%. For the fourth quarter, adjusted EBITDA increased 12.9% year over year to $102 million, as supported by continued margin expansion in our cement product and services business, together with contributions from acquisitions completed during 2016.

Although total aggregate sales volumes were up in the fourth quarter, organic aggregate volumes were down in our West region, due mainly to softness in the Texas and Vancouver markets which we view as temporary. Following a slow October, we finished the year very strongly as November and December adjusted EBITDA increased 35% and 65%, respectfully, versus the prior-year period.

In January, we completed a 10 million share primary equity offering. Net proceeds from this offering enable us to fully fund the acquisition of Everist Materials and Razorback Concrete. While adding more than $125 million of net proceeds to the balance sheet to fund future acquisitions and reduce net leverage.

As we scaled our business over time, net cash from operating activities has grown exponentially. Up more than 200% over the last three years to $245 million. Entering 2017 we have record cash and liquidity with which to pursue new growth opportunities.

We expect a busy year ahead with more than 20 potential transactions currently in the acquisition pipeline. Going forward, we expect to self fund more of our growth as cash generated from operations continues to increase.

Today, we are introducing 2017 financial guidance in the range of $410 million to $425 million, which includes approximately nine months of EBITDA from the announced acquisitions of Everist and Razorback. This full-year guidance excludes any potential EBITDA benefit from future unannounced acquisitions.

By year end 2017, assuming the mid-point of our 2017 EBITDA guidance, we anticipate net leverage of approximately 3 times. Excluding contributions from future unannounced acquisitions.

On slides 6 and 7, organic sales volumes of aggregates were down in the fourth quarter and for the full year 2016, after being up 5.2% in 2015. Both organic aggregates and product volumes declined in 2016 due to a combination of transitory factors.

Including, soft highway spending in Kentucky and Kansas, severe weather in Texas, particularly within the Houston and South Texas markets, a late cycle decline in residential activity in Houston and tough prior-year comparisons in Vancouver owing to project timing. Excluding Texas and Vancouver, two of the most affected markets, organic aggregates and ready-mix volumes increased 1.2% and 5.1% year on year, respectfully, in 2016.

On slide 8, we forecast aggregate volume growth in the West and East segments together with continued volume growth in our cement segment for the full year 2017. In the West, Utah remains strong, while in Texas we see opportunities for year-on-year improvement given stable employment trends and crude oil above $50 a barrel.

In Vancouver, we are seeing increased activity with several large profile projects such as the Massey Bridge and the 216 interchange on Highway 1 that have the potential to support multi-year increases in local market demand. In the East, we see Missouri, Virginia and the Carolinas as growing public and private markets.

While in Kentucky, highway markets are expected to normalize. In summary, we expect that improved aggregate sales volumes, together with continued strength in materials ASPs position Summit to generate continued organic EBITDA growth in 2017.

On slide 9, gross margin on Aggregate, Cement, Products and Services all improved in 2016. Since 2014, aggregates gross margin has increased by 760 basis points, while cement segment gross margin has increased 520 basis points. While much of this margin growth has been driven by sustained increases in ASPs, we think a recovery in organic volumes over the next year, particularly within aggregates, will serve as a further catalyst for organic EBITDA growth.

Turning to slide 10. As I mentioned earlier in January, we announced two bolt-on acquisitions of materials based companies, Everist Materials and Razorback Concrete for $110 million. On a combined basis, Everist and Razorback bring aggregates operations with more than 100 million tons of permitted reserves in Colorado and Arkansas.

In addition to an extensive network of vertically integrated ready-mix concrete and asphalt plants in growing public and private end markets in proximity to our existing portfolio of materials-based assets. Everist is an attractive bolt-on to our existing assets in Colorado, primarily serving the fast growing Summit County market.

Everist served very early cycle private markets, which are just beginning to show signs of acceleration. In addition to public markets, markets which stand to benefit from increased activity resulting from work along the I-70 corridor.

As the largest supplier of ready-mix in Arkansas, Razorback provides Summit with an exciting entry point in an early cycle market. Razorback is close to our existing cement terminal in Memphis, which could allow for supply synergies over time.

Positive population and employment trends, along with accelerating construction activity, position Arkansas as an attractive market for us heading into 2017. On slide 11, in addition to acquiring quality assets to fuel growth, we also have successfully improved these businesses typically targeting an unlevered IRR in excess of 20%.

In 2015 and 2016, we paid an average of approximately 8 times EBITDA. Post-synergies these multiples declined to an average of 6.7 times EBITDA. Our unique acquisition strategy remains a key point of differentiation for Summit, positioning us as an emerging growth play in what is widely regarded a mature industry.

On slide 12, we provide a detailed overview of our current acquisition pipeline. As previously indicated, we have more than 400 acquisition targets in our proprietary contact database.

Entering the year, the pipeline is as full as I have ever seen it, positioning us for a very busy year ahead. We currently have more than 20 deals in the pipeline with transactions ranging in size from $1 million to $12 million in annualized EBITDA.

We continue to pursue multiple low-risk acquisition opportunities that are immediately accretive and that have the potential for significant post-transaction synergies. More than half of the EBITDA under review is aggregate based. Consistent with our current materials mix.

On slide 13, we provide an outlook for each of our top-five states by net revenue, which collectively represent nearly 70% of our overall business. Texas represented a one-quarter of our revenue in 2016.

Split fairly evenly between private and public work with no direct oil and gas exposure. Recall that our business in Texas is spread across four regional platforms including Houston, Austin, Midland-Odessa and North Texas.

We currently anticipate that Houston's residential market, which was one of the first to recover following the great recession, troughed in 2016, setting the stage for a new cycle beginning in late 2017. We remain bullish on the nonresidential markets in Houston, which will be required to serve the significant population inflows and new residential construction put in place during the past eight years.

On the public infrastructure side, Texas remains an outstanding market opportunity for Summit over the next several years. In January 2016, the state comptroller's office indicated that it expects to generate a record $25.4 billion in revenue for roads, bridges, and other components of the transportation system during the next two years.

TxDOT is expected to receive $12.8 billion in FY18 and $12.6 billion in FY19 for highways, bridge and other mobility projects. For context, the agency's latest report shows that in FY16, which ended September 30, the Transportation Department had $8.7 billion in revenue from taxes, fees and other government sources. On balance between our private and public exposure in Texas, we anticipate a year-over-year rebound in our volume growth.

Turning to Kansas, which represented 14% of our revenue in 2016, evenly split between public and private work. Kansas is another early cycle market for us. One characterized by stable household formation that has supported residential growth in the greater Kansas City and Topeka areas. However, on the public side, KDOT remains challenged as state legislators have regularly chosen to withdraw funds earmarked for road maintenance to compensate for budgetary shortfalls in other areas.

According to the US Department of Transportation, more than 60% of all roads in Kansas are in poor condition. Implying that this state will, in the near future be forced to play catch up on its transportation infrastructure spending. Just last week, the Kansas legislature approved a bill that raises income taxes by $1 billion over the next two years.

However, the governor remains critical of the move and may look to block the measure. Heading into 2017, we see some improvement in pricing and volume in Kansas, given stable growth in the private markets and indications of some modest improvement on the public side.

Turning to Utah, which represented 12% of our revenue in 2016. Just under 80% of Utah revenues are derived from private work, much of which is in and around Salt Lake City. Utah is a very strong early cycle market, characterized by low unemployment and growing residential demand with single-family permits up 10% to 15% per annum over the last two years.

The state is recognized as pro-business, ranking as the number one most business friendly state by Forbes six of the last seven years. Unlike Texas, where residential markets rebounded quickly post financial crisis, Utah was a late bloomer, with housing demand only beginning to recover in 2012. As a result, we see this market continuing to grow.

Turning to Missouri, which represented 12% of our revenue in 2016. Approximately 3/4 of our Missouri revenues are derived from private work. Missouri is in early to mid-cycle market. On the private side, markets like Kansas City and Columbia are characterized by low unemployment and rapid growth and demand for affordable housing, with rental vacancy rates hovering below 1%.

Finally turning to Virginia, which represented 6% of net revenue last year. The acquisition of Boxley in early 2016, we entered the Roanoke and Lynchburg markets, where approximately 80% of our revenues are derived from private work. This year we expect strengthening employment data in both of these markets will serve to drive residential and nonresidential growth.

Turning to slides 14 and 15, over the next several years we'll use cement as a significant growth catalyst. Limited domestic production capacity and tightening supply conditions have combined to create opportunities for sustaining growth in cement pricing. With cement domestic consumption anticipated to exceed domestic supply within the next few years, we would anticipate a steady increase in ASPs over time.

According to the Portland Cement Association, no meaningful capacity expansions are expected to come online within the next five years. Meaning that imports will be the primary source of incremental supply, at least for the foreseeable future. As illustrated on slide 15, the US is currently importing about 11 million tons of cement per year, well below the 36 million tons the country imported at the peak of the cycle in 2006.

However, in 2006, import terminal ownership was spread across a wide range of domestic producers and third-party operators. While today, producers with domestic operation, currently own an estimated 80% of all US cement import terminal capacity. Given that domestic producers control the majority of these cement import facilities, we expect pricing to remain rational over the near term.

Please turn to slide 16. During the next decade, through a combination of existing legislation on the books and proposed spending measures currently under review, we anticipate a material increase in funding for infrastructure. In our markets, approximately $0.60 of every $1 spent on infrastructure is funded by the federal government.

With the passage of the FAST Act by Congress in 2015, together with what some are referring as the BOLD Act, an industry proposal that builds on many of the new administration's views on potential infrastructure investment, we believe state DOTs are entering a new era of federally funded infrastructure investment that represents a significant opportunity for Summit.

Although FAST was passed in late 2015, we expect infrastructure spending will not begin to increase until the second half of 2017, as FAST funds begin to flow into state DOT budgets. While the full extent of President Trump's infrastructure spending plan remains under review, the administration has released an initial top 50 list of emergency and national security projects that may take priority.

The projects include a $1 billion renovation of the Kansas City airport in Missouri, near our Hamm business. A $1 billion plan to improve roadways along the I-70 mountain corridor in Colorado near our Everist business and a $1.8 billion major development project at the St. Louis airport near our Continental Cement business.

On balance, there is little doubt that federal infrastructure dollars are going to increase. It will simply be a matter of time. With that, I will hand the call over to Brian for a discussion of our financial results.

Thank you, Tom, and good morning to everyone. Let's begin on slide 18.

As Tom indicated, Summit reported strong full-year results coming in above the high end of our EBITDA guidance. While organic aggregates volumes were down year over year, solid growth in materials ASPs more than made up for it, resulting in continued margin improvement.

Consolidated net revenue increased by 15.4% year on year to $1.5 billion, with the following segment split. In our West segment, net revenue increased 2.4% on a year-on-year basis to $736.6 million in 2016.

Net revenue contributions from recently acquired assets more than offset declines in organic net revenue impacted by softness in the Texas and Vancouver markets. In our East segment, net revenue increased by 25.5% on a year-on-year basis to $470.6 million in 2016 due to strong contributions from recently acquired assets.

Finally, in our cement segment, net revenue increased by 43.8% on a year-on-year basis to $281.1 million, supported by positive organic growth and average selling prices and volume. Please note, that the fourth quarter was the first period in which we reported organic year-on-year comparisons for the cement segment.

On slide 19, you can see the strong margin growth generated by our business over the past three years with adjusted EBITDA margin reaching a record 25% in 2016, up nearly 730 basis points from 2014. While much of the margin growth in the last year was price driven, we also continue to drive margin improvement from cost control, efficiency gains, and acquisition-related synergies.

On slide 20, you can see that on a consolidated gross profit basis, incremental margins increased across all lines of business in 2016 when compared to the prior year. For the full year 2016, incremental margins on products and services increased by 570 and 1,400 basis points, respectively, over the prior year. Further evidence of the value created by our vertically integrated materials-based model.

On slide 21, free cash flow, which we define as operating cash flow less capital expenditures, has grown materially in recent years, up from $16 million in 2014 to $108 million in 2016. Exiting the year, the cash conversion ratio, which measures the efficiency of our capital allocation, remained strong despite elevated capital spending in 2016. Last year gross CapEx as a percentage of net revenue, was slightly more than 10%; however, longer-term we anticipate this range to be closer to 7% to 8%.

On slide 22, net leverage has continued to decline over the last three quarters. Net leverage came in at 3.9 times at year end, slightly better than our guidance of 4 times. Including proceeds from the recent equity offering, less $110 million used to acquire Everist and Razorback, net leverage would have been 3.5 times as of year end 2016.

As Tom indicated at the onset of the call, we anticipate net leverage of about 3 times by year end 2017, assuming the midpoint of our 2017 adjusted EBITDA guidance. Including both availability on our undrawn revolver and cash, together with the net proceeds from the equity offering, our total liquidity stood at more than $480 million at year end 2016. Looking ahead, we are well positioned to fund transactions currently in the acquisition pipeline together with the working capital requirements of our business.

On slide 23, we introduce full-year 2017 adjusted EBITDA and gross capital expenditure guidance. For the full year 2017, our adjusted EBITDA is forecast to be in the range of $410 million to $425 million. While this guidance does include nine months of contributions from the announced acquisitions of Everist and Razorback, there are no additional contributions from potential acquisitions that may be completed during 2017.

A few words on financial guidance. Firstly and by way of reminder, our full-year adjusted EBITDA and capital spending guidance only includes transactions that have been announced.

As we complete additional acquisitions throughout the year, we will update our full-year guidance. However, for modeling purposes, we advise analysts to refrain from including potential acquisitions-related EBITDA in their estimates.

Secondly, with regard to the phasing of our adjusted EBITDA guidance heading into 2017. While we do not provide quarterly guidance, it is worth noting that approximately 75% of all adjusted EBITDA generated in 2017 will be in the second and third quarters, with our third quarter generally being the strongest quarter of the year.

Annual maintenance at our cement plants and winter weather, typically position the first quarter as our lowest EBITDA period of the year. For the full year 2017, we forecast our gross capital expenditures to be in the range of $135 million to $155 million, which implies a capital budget that will be flat to down 12% versus 2016. From a modeling perspective, we anticipate approximately half of our full-year capital expenditures to occur in the first quarter each year.

Thirdly, with regard to cash taxes. The full year 2017, we anticipate paying between $4 million and $7 million in state and local cash taxes at our C-Corp subsidiaries and no federal income tax, given existing net operating loss carryforwards. Therefore, for consistency's sake, we would recommend all analysts model out the cash tax rate in their forecast.

As we have discussed previously, under our structure, tax benefits are created when limited partners exchange their ownership interests for shares in our common stock. 85% of these benefits are payable to the limited partners when they are realized.

In the fourth quarter, we recognized $14.9 million charge for estimated future payments, as these limited partners under the tax receivable agreement entered into at the time of our public offering. Approximately $13.8 million of this amount is expected to be paid beginning in 2019 or thereafter. This charge is excluded from adjusted net income as indicated in the reconciliation provided in the press release we issued this morning.

Finally, with regard to total equity units outstanding as of January 2017. Pro forma for the 10 million share equity offering, we had 106 million Class A shares outstanding and 5.2 million LP units held by investors. Resulting in total equity interests outstanding of 111.2 million. In calculating the adjusted diluted earnings per share, this is the share count that should be used. And with that, I'll turn the call back to Tom for his closing remarks.

Thanks, Brian. With our second anniversary as a public company approaching, I want to take a moment and recognize the dedicated efforts of the nearly 5,000 employees here at Summit that have all contributed to another strong full-year performance.

I also want to thank our many investors and analysts for their continued support. At the IPO, our management team outlined four key objectives to create shareholder value. These objectives included sustained growth and margins, a reduction in net leverage, the acquisition of at least $30 million per year of EBITDA and sustained growth in free cash flow.

Looking back, I am pleased to say that our team has more than delivered on each of these objectives. Since the IPO, gross margin is up 750 basis points, net leverage is down to 3.5 times from 4 times, even after completing an additional 13 acquisitions.

Acquired EBITDA has averaged $60 million per year over the last two years and free cash flow has increased by 550%. In summary, we have delivered on our promises and really have had a truly exceptional performance.

Before we move into Q&A, I want to highlight several other recent corporate developments. First and most importantly we significantly reduce net leverage with the January equity offering. Positioning us to screen into a wider number of value-oriented portfolios than we have in the past. We remain focused on our credit metrics as we seek to get net leverage down to 3 times by year end, assuming the midpoint of our 2017 adjusted EBITDA guidance.

Second, on November 9, 2016, Blackstone, our former private equity sponsor, sold its final remaining position in Summit. Third, at our first-ever investor day in late November, we provided long-term free cash flow and adjusted EBITDA guidance allowing investors to better appreciate the potential of Summit's business at multiple points in the cycle.

Fourth, the recent equity offering significantly increased the float. Resulting in a sustained rise in average daily trading volume that equates to more than $50 million per day, 4 times what we were doing this time last year. An important factor for institutional investors looking to build positions of scale in Summit.

Fifth, we provided more detailed information around why the downstream is a comparatively higher return business for Summit than our peers, and why our vertically integrated model is capable of generating industry-leading downstream margins.

Then finally, just today, we have outlined our unique acquisition pipeline, which includes more than 20 transactions in various stages of diligence. While Summit remains a relatively young Company, we have produced an outstanding track record of performance in a very short period of time. One that we believe merits a higher market valuation.

We have built a great business and look forward to a continued dialogue with the investment community on the many opportunities ahead. With that, I would like to open the call for questions. Operator?

(Operator Instructions)

Kathryn Thompson, Thompson Research Group.

First it's just a follow up for the basic drivers for your EBITDA guidance for FY17. How much of the increase is driven by acquisitions on a dollars basis and also could you clarify a little bit better on the dynamic of how much price versus volume is a driver for the upside?

Good morning, Catherine. There's very little incremental on acquisitions.

Obviously there's no new acquisitions in it. The incremental from the two deals that we have announced will be pretty small.

As far as price and volume, we expect to get both next year. Where we didn't get volume contraction on an organic basis last year, we see both of those contributing.

I don't think we are prepared to give exactly the split of that because we don't give exact volume and price guidance but they will both -- they will both contribute significantly. Brian any other thoughts on that?

No. Kathryn you can see on our reconciliation that's in the deck, that our pro forma EBITDA exiting 2016 is $382 million. So that's the additional $11 million represents the EBITDA that we would have, had all the acquisitions that we made during 2016 occurred on January 1.

That's helpful. I also have a follow-up question on your aggregate segment. What was the greatest driver for that organic roughly 12% year-over-year decline in volumes?

I know you cited Houston, Kentucky, and Vancouver, which are all the various drivers. Essentially what we are trying to better understand is the greater driver just tough comps in Vancouver? Or is it more something more fundamental coming out of Kentucky? Appreciate it.

Yes, Kathryn. In -- Vancouver it was strictly tough comps. And that will improve in 2017 with a couple of large projects that are actually being bid at the moment.

In Houston, we had a pretty significant decline in aggregate volumes. It's a strange year there.

When they had the floods midyear, we actually were packing pretty close to the prior-year. We had a couple of weeks of very heavy rain, knocked us off of production and it never really recovered.

That -- we sort of had a fundamental organic decline in our aggregates in Houston. We are seeing some signs of life there has highway projects are starting to get underway and we see residential either at the bottom or hopefully recovering by midyear.

Kentucky was a once off with just a delay in the Highway Bill. We see that recovering this year also. Does that help?

It does somewhat. But just to clarify further and perhaps -- correct me if I am not accurate in this interpretation. It would seem that Houston -- if you were to look at all three of those factors, Houston was the greatest driver for that organic decline. Would that be a fair statement?

Yes.

Okay. Final question is, just an update on the competitive dynamics in your Texas asphalt business. I know you have been managing through that with a new player in the market.

Maybe just give a little more update on how that's progressing? Thank you very much

Thanks, Kathryn. Our Austin operations in the second-half of 2016, stabilized and improved and we have a good backlog going into 2017.

We see that market stabilizing. At lower levels than what we would like, but it's stabilizing -- we will see some significant improvement in our Austin business in 2017 versus full-year at 2016.

Thank you.

Blake Hirschman, Stephens.

First question. Overall gross margins up at a nice clip. Overall Company incremental gross margins also strong.

Obviously price has been your friend in the materials piece this year, the organic volume piece not as much. Just trying to get a sense for the sustainability of margins looking into 2017 and how we should think about the margin if we were to see a little bit of organic volume improvement this year?

Yes, we see in the pricing environment, especially in the aggregate and cement side, to be -- continued strength into 2017. We also have had really good success in actually reducing our costs and our aggregate facilities.

Not a lot -- a little bit of headwind on the hydrocarbon side, but not a lot. We see both volume price and cost all contributing to continued margin expansion in 2017.

Got it. Just curious as we had gotten through January and February here. Have you guys started to see any organic growth in your volume?

Cement has been exceptionally strong, but our volumes are so small this time of year, it's really hard to draw any conclusions from it. Weather has not been our friend in Texas so this year. But again, the volumes are pretty small this time of year. So it's really hard to get to really to get any -- draw any conclusions from where we are in mid-February.

Historically Blake, adjusted EBITDA in Q1's have been about 2% to 3% of full-year adjusted EBITDA. It's kind of a non-event quarter.

On the other hand, Blake, our backlogs are very strong and we remain very optimistic -- as the season kicks off in late March and April.

Got it and then last one for me. You mentioned the M&A pipeline is full as you've seen it in a while. Just curious on the multiples that you might pay for deals that are in the pipe.

Are they pretty comparable to that average multiple, the around 8 times that you mentioned in the slide deck? That's it for me thanks and good luck.

Thanks, Blake. The multiples that we pay for the small, medium-sized deals have remained pretty consistent through the years. On the larger deals, you have seen some very high multiples paid for some cement businesses in the last few months.

There's a couple of larger aggregate deals out there where multiples have certainly expanded. But we don't play in those auction larger deals. We stick to what we are good at which is the singles and doubles and that's where we are going to really focus on here in 2017.

Bob Wetenhall, RBC Capital Markets.

Congratulations on a very strong 2016. I love that slide 25, just stepping through some of the things have done to create value for shareholders.

Wanted to pick your brain. It's a great set up for organic growth on cement based on your prior comments.

Can you just step through some of your assumptions that under gird your EBITDA guidance for organic growth and the other products? Because if low single-digit growth is a mid single-digit growth, how should we be thinking about that?

Overall, on the aggregate side we certainly would be looking for low single-digit growth. On the product side again probably low single-digit growth.

ASPs is probably similar to 2016. I think that's what underpins our forecast.

Help me out big picture. You guys are spending more than $300 million a year on M&A since becoming a public company; which is by any measure a pretty torrid pace, and I am just trying to understand on your commentary in some of the prior questions.

It sounds like the pipeline is better than you have ever seen it, if that's correct? Where are you going to plow this money into, and do you think you can still keep getting deals where post synergy's you own -- really good assets at 6 to 8 times?

Is this a repeatable process based on what's going on in the marketplace? Are there enough opportunities? At what point do start to hit a wall with that?

We see a really long runway, Rob. The industry is still fairly fragmented.

Again, our strategy is to really focus on those value added bolt-ons, low risk that can plug and play into our existing operations. Our pipeline gets -- as we have increased our geography and now our geography includes the Carolinas and Virginia, obviously the number of potential bolt-on acquisitions goes up dramatically, also.

Occasionally there will be a new platform. We -- actually at the moment, we really don't have any platforms in the pipeline. They are really focused more on those low risk bolt-on acquisitions.

I see a pretty long runway Bob. There is -- still just a fragmented industry and the way we do business, the way we run our businesses is very attractive for these private companies and we see a great future doing what we are doing.

You sound pretty confident. Maybe a quick question for Brian and then I will pass it over. It looks like your EBITDA guidance obviously going up from $371 million to the midpoint would be $417 million in 2017, but your CapEx spend is like $145 million, so you're spending less CapEx.

I'm just trying to understand, is the implied in your guidance that because you have EBITDA growth and modestly lower capital spending, should we be looking for a pickup in free cash flow of about $50 million in the base case year-over-year.

Yes, that's correct, Bob. As you know, we signaled early on 2016 would be a year of a little more elevated CapEx.

That's what happened. Although we came in within our guidance range. It was slightly elevated.

Primarily investments in some major upgrades to our aggregates plants and equipment. Those don't occur every single year.

It's going to be coming down a little more towards our long-term trend where we expect to be in that 7% to 8%. Yes lower CapEx and higher EBITDA will lead to increased cash flow next year.

Good. Nice work on 2016 and good luck next year.

Robert South, SunTrust.

Thanks for taking my questions. Building on, you mentioned 20 deals in the pipeline in the final stages. Are these similar in size to the ones you did in January?

Yes. They are in that -- what I would consider small to medium businesses which are from anywhere from $1 million to $12 million of EBITDA.

So assuming you converted the five -- into actual deals, would that equate to about the same investment you made in 2016?

Trying to run those numbers. I am optimistic for the acquisition spend in 2017, but again it's always hard to predict.

You can go zero for five or you can go five for five. It's hard to predict. I would be optimistic that our position spend will be similar as it was in 2016.

Good. On your leverage you came from 4x down to 3 1/2x.

Considering these deals -- your typical conversion rates. Is it fair to assume that you can keep leverage below 4x in 2017?

Yes. Well below 4x. Well below 4x, I would think.

Then on your guidance, is it fair to assume that your organic volume growth and your pricing assumptions are consistent with the long-term CAGR's you gave at the analyst's day?

Yes. I think that's right.

Then in your cement business. What capacity utilization are you running?

We've got about -- I think we've still got about 100,000 tons -- so we are getting close to 95% capacity.

Got you. What are your pricing assumptions in the cement business? What is stopping you from going from 7 tons, eight tons to 10 tons,12 tons, if you are running full capacity?

The market has still got more supply than demand. I think that will change here in the -- medium-term.

It's still a competitive marketplace out there and we think we can continue roughly on the same type of price increases that we have had recently. But when demand exceeds supply, I think that price can start to accelerate.

We don't see that certainly in 2017. We see a very healthy pricing environment but not one where there is any -- where people are on allocation or demand exceeds supply.

Got you. Last question is on Texas.

On page 13, slide deck it looks like you are seeing very positive public demand, positive private demands. Is it fair to assume you're thinking about low to mid single-digit in Texas in volume?

I think probably more on the low side.

On the low side. Okay. All right. That's all I have thank you.

Brent Thielman, D.A. Davidson.

On the outlook it looks like you built in some pickup in public spending, but at the same time you guys are suggesting the impact of the FAST act hits DOT budgets later in the year. A two-part question here.

One, how much of that organic pickup you built into the guide comes from the public side? And two, if FAST act impacts the budgets by late 2017, can you really realize the volume related to that, that quickly?

I think when we say that it hits in the second half of 2017, that's when actually the volume increases. Jobs are starting to lighten out.

Remember the FAST act doesn't have a huge amount of new money. It has some new money and is very positive as far as having a long-term highway program, but it's not a huge amount of new money.

We see public and private markets, I would say roughly equal in improvement in 2017 versus 2016. It varies from state to state obviously pretty dramatically.

We see very healthy highway programs in Iowa and Utah. We see Kentucky getting back to a more normal highway program.

The Carolinas and Virginia, very strong highway markets. And then it's -- every little market is a little bit different, but we see certainly both public and private contributing roughly equally to some improvement in 2017.

Okay. That's helpful.

Then on cement, you mentioned -- you characterized it as exceptionally strong right now, which might be in contrast to what you're seeing in some of the other business lines, at least today. Is that just geography and where those plants serve that's driving -- that strong growth?

I wouldn't make a big deal of early volumes like this. They are so small for the year. But I would rather be ahead then behind.

We do sell cement down in southern markets, which have a little bit more activity right now. As we ship up and down the Mississippi.

I am encouraged on cement and I'm encouraged, actually, in our other businesses. As I said, our backlogs are quite good and like I said, looking forward to the season starting.

Understood. And then on the asphalt side, particularly on pricing.

I know you've got the Austin or had the Austin issues. Could you sort of break out the moving pieces of that 9% price decline and does that slip further in 2017?

Price on the asphalt side is not particularly meaningful, because it relates to the type of liquid asphalt that you use. In fact, I think our margins, even though the price was down, I think our margins were pretty decent.

You know that's correct. Brent, if you look at our spreadsheet, you'll see that our asphalt margins -- our products margins have actually increased quarter-on-quarter every quarter for the last eight quarters.

With the liquid asphalt basically being a pass-through almost everywhere, the actual ASPs that you see, are not that meaningful as Tom said, in terms with what's going on because it is a pass-through. We focused on the margin.

And we would -- see further progress on asphalt margins in 2017.

Okay. Good color. Thanks guys.

Adam Thalhimer, Thompson Davis.

I want to clarify something you said earlier on the average selling price for aggregates and products. Did you say ASPs will be similar to last year?

No. No I don't think so. If I did I misspoke.

We anticipate growth in ASPs next year.

Got it. With regards to -- you already answered some of this but with regards to your cement capacity, what would be your thoughts on maybe expanding Hannibal at some point or adding cement terminals or looking at cement acquisitions?

The two most recent cement acquisitions were just at price levels but we didn't see value for our shareholders in. I don't foresee any cement acquisitions coming up.

However, we do have a cement import terminal in Baton Rouge that we're going to have the ability to keep the market supplied through imports. Now what that will mean, is that our incremental margins will be lower because imported cement is more expensive than our manufactured cement.

But we will be able to see some organic volume growth through imports. As we have said in the past, we are evaluating and had the ability to double the capacity at our Hannibal cement plant and as the market tightens, that will be something that we will continue to evaluate.

It's a 20 -- probably a little over 30 months in permitting and construction. So, it is [really bad] on the cycle. But we are certainly looking at it.

Lastly for Brian. On the tax rate, we're using 15% tax rate going forward.

It sounds like you want us to use an actual dollar amount? I just want to make sure I have that correct.

Yes, we would encourage you to use the cash tax rate that we have outlined there. We've guided to the first $7 million of cash taxes. We think that's the simplest and most appropriate metric to use.

Stanley Elliott of Stifel.

Congratulations on the nice year. Most of the questions have been answered, but I did have a quick follow-ups for you. What were the expectations again on cement pricing? Did I hear $6 to $8 per ton?

We have announced, as you know, we have announced a $12 per ton price increase which became effective in the Southern markets on January 1 and will become effective in the Northern markets in April 1.

So we would expect -- obviously we do our best to capture as much of that as possible. Historically, in the industry, something of a lesser amount than that is typically being captured.

It's usually about two-thirds and in some market areas, we were at $8 and not $12 as far as the price increase. It is a very locally regional type business, like all of our businesses.

We would hope to get $6 to $8 in realized price increase in year-over-year. But it still early in the year and there's a lot to play for there.

Since the election, I know there's been lots of discussions around infrastructure. We haven't seen a whole lot of particulars coming out on the Trump plan.

My feeling is that if we get some a change in the tax code, that you could see your M&A pipeline actually accelerate since you are looking at a lot of these smaller, more bolt-on deals. One, are you seeing any pickup from customers in that regard or potential acquiring targets in that regard?

Also, have you noticed any sort of sentiment change if you will, in your customer base in that they are bringing projects back online or that were -- had previously been tabled? Any help around there from a sentiment perspective would be great.

Yes. I think it general, sentiment is very positive right now. I think also on the acquisition side -- I have never really been able to correlate deal flow to the construction cycle.

I think people sell their businesses due to retirement, succession, all sorts of different things and it's -- really not correlated in my mind to the cycle. Now there are some larger businesses and the divestitures that have come, that have probably been spared by the fact that, hey this is a good time to sell. But again that's not the market that we play in.

We play in the market where we know these businesses, we have talked to them through the years and for some -- usually exogenous reasons like succession, would be probably the most obvious one. They have decided to sell the business.

For us, the deal -- the pipeline and the deal flow has expanded as we have expanded our geography. Like I said, we are very optimistic going into 2017 on the deal side.

Sentiment, I think it's too early to see our customers and our private side customers are certainly optimistic for the year, but I don't think we have seen any major sentiment change out there. I think it's positive and our backlogs are good. But it's still early.

Great, guys. Thank you very much and best of luck.

Rob Hansen, Deutsche Bank.

Aggregates pricing in 4Q, flat year-over-year, took a big step down on an organic basis. What was going on this quarter with aggregates pricing? What drove that to be flat as opposed to up like the other quarters?

Well, first off the fourth quarters are relatively small quarters for us, so I think it's probably more appropriate to focus on the full-year of 4.8%. And I think that's more indicative of the long-term trend that we have seen and expect to see going forward. I wouldn't read too much into the flattish Q4.

Got it. Okay. Kind of a similar question just related to aggregates margins.

Volumes were down the last two quarters but aggregates margins -- gross margins rose. This quarter we've got some flat pricing and volumes are down and you've got margins down around 1.5%. Anything particular in the fourth quarter for margins as well?

Rob again, it's only the second time in the last eight quarters where there has been a quarter-on-quarter decline in our aggregates gross margins. The last one was a 1% decline in the second-quarter of 2016.

We have a pretty consistent record of seeing quarter-on-quarter improvement. But this business is not necessarily linear.

There's a lot of factors in any given month or quarter that could drive that. We would again, look at the long-term trends.

The aggregates gross margins were up by 2.6% in 2016 following a 5.1% increase in the prior year. It's a slight anomaly in any given quarter, which is not unusual but long-term trend is definitely positive.

Just from a mix perspective 85% on the year-on-year decline in Q4 to Q4, was volume-related. Very modest contribution from price on a mix basis.

Got it. Thanks guys. On the cadence of declines for Vancouver and Texas.

I guess what I'm curious about is, you probably past the peak declines at some point, middle of the year. Did you start to see improvement on a year-over-year basis and I don't mean up, I mean less than a deceleration towards the end of the year for those markets?

I actually don't know the answer to that question. I think we will have to get back to you on that one.

I don't believe so. I think it was pretty consistent through the year, but I don't have that data. We will have to get back to you on that one.

All right. Then the last question is clarifying something in the guidance.

When you say volume growth across all segments. You mean this on an organic basis and you are assuming some sort of a modest rebound in Texas and Vancouver?

Correct.

Got it. Thanks guys.

Scott Schrier, Citigroup.

Can you talk about some of the input cost assumptions that you are using for the guidance, please?

Sure, Scott. Labor, which is one of our variable costs we typically have that baked in at about 2% to 3%.

It various obviously a little bit from location to location. On average that would be about where we are at.

On fuel prices, as you know, we do buy forward a portion of our diesel requirements. We've purchased about 50% to 60% of our 2017 estimated consumption.

In 2016, just by way of comparison, we consumed about 19.8 million gallons of diesel and we saw a decent year-on-year decline in price from 2015 to 2016. We don't expect to get that same kind of level of cost reduction there.

Going from 2016 to 2017 as we are seeing some stabilization in the oil price above $50 now. Those are the main input costs. We're not yet seen a lot of inflation on other energy input costs.

We are seeing a little bit of an increase in the price of liquid asphalt, but as we talked about before, that's generally a pass-through for us in most states in which we operate with an asphalt business. So again inflationary conditions remain relatively benign.

Got it. Then on cement and I know you touched on it before, so you broke out the volumes and it looks like you have some volumes from the recently acquired cement terminal.

Can you just talk about maybe how things are going there and what you alluded to? What kind of impact we might see to incrementals from purchased cement? Lastly how do you think about tax reform or tax adjustment on the cements economy in that area?

Yes, we see on the river markets, where we have the two most northern cement plants on the Mississippi. We ship all the way down to New Orleans. Those markets are healthy and both on the public and private side.

I would say that Iowa, on the public side is quite good. The Memphis area, actually where we -- have the Razorback acquisition that will close later this quarter.

We see those -- we see some good solid volume growth and the pricing, again, is in that $6 to $8 range. Noel?

I think Tom's earlier point, is over time, should we choose not to increase capacity at Hannibal, whether it be adding a second line or in capacity in an existing line, we're going to be buying more from third parties. Which essentially means you are basically going to see incremental margins impacted by that. However, you're also going to see an increase in absolute EBITDA coming out of that business.

So over time, where the focus is really more fixated for aggregates and on the product side at the margin; within cement, our focus is more on growing the absolute amount of EBITDA we are generating in that business. So incremental cement product margins right now are running in the low 50's and I think that's probably an acceptable run rate. Scott?

Yes, got it. And if you are just able to comment on what you think -- near Baton Rouge, that any type of border tax adjustment might have on the business down there?

It so unclear what the border taxes is going to be and what impact it's going to have. I'd say right at the moment, we really don't know what the impact is going to be.

Got it. Thank you. Appreciate you answering my questions.

Jerry Revich, Goldman Sachs.

Wondering if you could talk about the magnitude of price increases and aggregates across your footprint that you rolled out for January 1 2017. What's the magnitude of pricing at the start of the year compared to what you folks delivered in 2016?

Then we have heard from a couple other producers that 2016 didn't have the benefit of midyear or late year price increases. I am wondering if you saw that dynamic in your foot print and if you think that might change in 2017?

Yes, I don't think -- I would be surprised if we got midyear price increases. The price increases typically in the aggregate business, especially in the northern half of the country -- our March and April -- spring.

They are very similar to last year and they do vary dramatically from market to market. There's really no consistency at all.

Very strong pricing in the Carolinas and Virginia, less so in the middle part of the country. Texas is still pretty good as far as price increases.

But it varies from 1% or 2% to up to 10% depending on what local market you are in.

Because of the liquid asphalt move, as you pointed out, not the right way to look at it based on the price. I am wondering how you would counsel us to think about material margins in your asphalt business.

2017 versus 2016 how much room do you have for margin expansion? What's embedded in guide?

On the product side, Jerry? Or on the material side?

On asphalt specifically.

Asphalt, I think we should see some progress on margins there. We are going to see some year-in-year improvement in Austin for instance. Our North Texas businesses continue to perform extremely well.

Kansas is going to be a little challenge. There's the highway program there -- I think we're going to see and little bit of improvement but in total terms it's still pretty poor. Kentucky could see some real improvement. I think overall we would continue to see the opportunity for margins to improve in 2017.

Okay. Thank you.

Thank you operator and thank you all for joining us. That concludes our call. Everybody have a good day.

Thank you ladies and gentlemen. This does concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.