Summit Materials Inc (SUM) 2017 Q1 法說會逐字稿

Greetings, and welcome to Summit Materials First Quarter 2017 Earnings Conference Call. (Operator Instructions) And as a reminder, this conference is being recorded.

I would now like to turn the conference over to Noel Ryan, Head of Investor Relations. Thank you. Please go ahead.

Good morning, and welcome to Summit Materials First Quarter 2017 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 first quarter results. We also published an updated supplemental workbook highlighting the key financial and operating data, which can be found in the Investors section of our website at summit-materials.com. This call will be accompanied by our first quarter investor presentation, which is available on Investors section of our website.

I would like to remind you that management's commentary and responses to questions in today's call may include forward-looking statements, which by their nature are uncertain and outside of Summit Materials' control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may differ in a material way. For a discussion of some of the factors that could cause actual results to differ, please see the Risk Factors section of Summit Materials' latest annual report on Form 10-K filed with the SEC.

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 first quarter, followed by a financial review and outlook from Brian Harris. At the conclusion of these remarks, we will open the line for questions.

With that, I'll turn the call over to Tom.

Thank you, Noel, and welcome to today's call. Before we transition into a discussion of our first quarter results, allow me to share a few thoughts on the business as we kick off the construction season.

From inception, our strategy at Summit has been to drive consistent growth and profitability, margins and cash flows through the cycle driven by a combination of continuous organic improvement and targeted strategic acquisitions that complement our decentralized vertically integrated model.

While Summit is well known as one of the most active acquirers in the heavy construction materials space, we also have a disciplined approach towards driving organic growth in volumes and selling prices, along with a consistent focus on cost efficiency and operational excellence.

For the last 30 years, our key decision-makers have created shareholder value by buying businesses and making them better, as we continue to do. Last year, we hit our targets on price growth and cost containment but fell short on organic volume growth in aggregates given temporary weakness in our Austin, Vancouver and Houston markets, which overshadowed underlying demand in the rest of our businesses. During the first quarter, we posted organic materials volume growth in Austin and Vancouver as both markets rebounded versus the prior year. We remain bullish on the Houston market, which we expect to improve as we move through the year.

On balance, for the full year 2017, we forecast organic materials volume growth. This increase in organic material sales volumes, coupled with continued organic price growth and cost containment, position us for significant progress as we look to the remainder of the year.

As indicated on Slides 4 and 5, first quarter net revenue, gross profit and adjusted EBITDA all increased significantly on a year-to-year basis. Subsequent to the acquisitions of Everist and Razorback, both of which closed during the first quarter, we've closed 4 additional transactions since February for a combined purchase price of approximately $70 million. The equity offering we completed in January helped to fund these transactions while adding dry powder to the balance sheet.

Given expectations for continued organic growth in material sales volumes and average selling prices, coupled with EBITDA contributions from recently completed acquisitions, we are raising our adjusted EBITDA guidance to a range of $430 million to $445 million for the full year 2017. Including the completion of 6 bolt-on acquisitions on a year-to-date basis, we are raising our full year gross capital expenditure guidance by $5 million to a range of $140 million to $160 million.

Turning to Slide 6. You can see that organic cement price and volume increased 6.3% and 17.6% year-on-year, respectively, in the first quarter. The growth in organic cement volumes was mainly attributable to good weather and solid demand along the Mississippi River corridor where we operate. Importantly, a small portion of our annual cement shipments occur in the first quarter. So while mid-teens organic volume growth is certainly strong, we view mid-single-digit cement volume growth as a more reasonable run rate for the full year.

Organic aggregates price and volume growth increased approximately 3% and 1%, respectively, in the first quarter. In the East, we saw pockets of organic growth in Kansas, Kentucky and Virginia; while in the West, our Utah, North Texas, Austin and Vancouver markets all posted year-on-year organic volume growth. On the products side, organic asphalt sales volumes were up 65% year-over-year due mainly to an acceleration in public work in North Texas and Austin.

As indicated on Slide 7, gross margins within our aggregates, cement and services line of business all increased on a year-to-year basis in the first quarter. Cement margins were particularly impressive in the quarter, up 150 basis points year-on-year due to a combination of price and volume growth while aggregate margins benefited from a recovery in organic volumes and continued low single-digit price growth.

Our services business has benefited from a combination of clear weather and solid paving activity in our Austin, North Texas and Kansas markets.

In our products businesses, margins declined 200 basis points year-on-year in the first quarter, given the less favorable average selling prices for ready-mix concrete, together with a sales mix weighted towards asphalt, which is lower margin when compared to ready-mix.

With that high-level overview of our first quarter results, let's turn to a discussion of the demand outlook within our regional, private and public markets. As we said on prior occasions, the maturity of the private construction cycle differs on a region-by-region basis. Many factors play into why one local market might be earlier cycle than another. However, we generally look to acquire and build businesses in stable growth, well-structured materials markets, characterized by favorable demographic trends.

As illustrated on Slide 8, single-family housing starts in our top 5 states are currently 40% below the prior peak and below the 30-year average of about 175,000 annualized starts. In Utah, for example, we currently have strong population inflows, while at the same time, there is a housing shortage exacerbated by low rental vacancy rates. For the first time in 40 years, more families are moving into Utah than there are new single-family homes being built. These types of conditions lend towards lengthening the regional housing cycle in many of the markets where we operate.

From a demographic perspective, the unemployment rate in our top 5 markets has been below the national average 29 of the last 30 years, creating less variability in end-market demand for construction materials that in coastal markets historically more susceptible to boom-bust cycles. In the period between 2008 and 2012, during and immediately following the Great Recession, national unemployment was 200 basis points higher than in our top 5 markets. With about 1/4 of our net revenue coming from 4 markets in Texas, including Houston, Austin, Midland Odessa and North Texas, we keep a close eye on demographic trends within these MSAs. Texas, and in particular Houston, remains a significant gross market for us. Houston suffered from adverse weather and a late-cycle residential market during 2016 as organic aggregate volumes fell 12% year-on-year. We anticipate an early-cycle recovery in West Houston residential demand towards the latter half of 2017 given discussions with our major homebuilding customers.

As illustrated on Slide 9, JBREC estimates that unsold finished home inventories in Texas have declined by 25% year-on-year as of March 2017, reflecting a rate of inventory absorption well ahead of the national average. In Austin, they estimate single-family housing permits are up significantly year-on-year; while in Houston, signs of stabilization are clearly evident, where population growth is 2x the national average, employment growth remains positive and the migration of new businesses into the state continues to create demand for housing and low-rise commercial businesses.

As indicated on Slide 10, approximately $225 billion will be allocated to states under the federal highway program via the FAST Act between 2015 and 2020. Approximately $80 billion of which is earmarked for states where we have operations, including Texas, which stands to reap approximately $18 billion in federal infrastructure funding between now and 2020.

For their part, several states have been at the forefront of efforts to raise state level revenues to match federal funding available to them under FAST as indicated on Slides 11 and 12. In Texas, voters have approved Proposition 7, creating a constitutional amendment to dedicate portions of revenue from the state's general sales and use tax as well as from the motor vehicle sales and rental tax to the State Highway Fund for use on the construction, maintenance and rehabilitation of nontolled public roads.

Prop 7 stands to dedicate up to $5 billion in biennial sales tax revenue to the State Highway Fund starting in the 2018 fiscal year, which begins in September 2017. For TXDOT fiscal year 2018, the state anticipates a 23% year-on-year increase in highway funding, amounting to an incremental $2.2 billion per year under the Statewide Transportation Improvement Program. Between fiscal 2017 and fiscal 2020, state-level funding is expected to rise from $9.7 billion to $12.6 billion, driven mainly by growth in contributions from Proposition 1 and Proposition 7.

In Utah, Governor Herbert signed a bill several weeks ago that authorizes up to $1 billion in general obligation bonds to fund the catch-up spending on state highway infrastructure projects. This bill, which takes effect July 1, 2017, allows the Utah Transportation Commission to speed up several previously approved highway projects at a maximum spend of $1 billion over the next 4 years. We believe this acceleration in spending should directly benefit our business in the state, where we are one of the top 3 players in the market.

Many additional states are also considering similar funding measures.

Turning now to a discussion of our Cement segment, which continues to perform exceptionally well in the current environment. Our Cement distribution capabilities span from New Orleans up to Minneapolis-St. Paul. Currently, approximately 80% of the Cement volumes we sell go into Iowa, Missouri and Minnesota, all of which are markets projected to experience low to mid-single-digit volume growth in cement consumption over the coming years.

As indicated on Slide 13, domestic cement demand is anticipated to exceed U.S. production capacity levels as early as 2019 according to the Portland Cement Association. We expect increases in U.S. import levels from the current rate of 13 million tons per year, nearly half of which is supplied from Greece, Turkey and China.

During the last 25 years, we've seen 2 3-year periods where domestic product shortages contributed to a multiyear spike in domestic cement average selling prices. As indicated on Slide 14, the first period was from 1993 to 1995, where cement prices increased by more than 20%. The second period was from 2004 to 2006 where cement prices increased by nearly 30%. While U.S. cement prices have gradually increased since 2012, there is a scenario going forward in which we could see a multiyear spike in pricing should history repeat itself.

We have completed 6 acquisitions for a combined purchase price of $180 million on a year-to-date basis, easily one of the busiest starts we've had. Since our last conference call in February, we've closed on 4 new acquisitions for a combined $70 million, as indicated on Slide 15. In total, these 4 acquisitions bring approximately 90 million tons of aggregate reserves, 4 active pits and 3 ready-mix concrete plants. All 4 of the acquired companies represent compelling strategic bolt-on opportunities to existing platform businesses in Texas, South Carolina, Missouri and Vancouver while providing increased exposure to both public and private markets.

Houston-based Hanna's Bend is a sand and gravel supplier with significant permitted reserves northeast of Houston. Hanna's Bend is a pure-play aggregates company that is an ideal fit with Summit's existing base of assets in West Houston.

Carolina Sand is a construction and specialty sand supplier with a solid reserve base. This was an acquisition of a pure-play aggregates company that doubles the company's existing exposure to the Myrtle Beach, South Carolina market, while representing a compelling add-on to the existing Virginia, Carolinas platform.

Sandidge Concrete is a ready-mix concrete business that represents an attractive bolt-on acquisition to our existing Missouri platform.

Finally, Vancouver-based Winvan Paving is an asphalt and paving services company that vertically integrates our existing materials platform.

In summary, we are excited to have Hanna's Band, Carolina Sand, Sandidge and Winvan join the Summit family of companies and look forward to growing with them in the years to come.

Looking ahead, our acquisition pipeline remains robust, with more than 20 additional transactions currently in various stages of diligence. For the full year 2017, we anticipate closing on approximately $40 million to $60 million of acquired EBITDA. We look forward to providing you with additional updates on our progress in the months ahead.

With that, I'll turn the call over to Brian.

Thank you, Tom, and good morning to everyone. As Tom indicated, Summit reported strong first quarter results, driven by a recovery in organic material sales volumes, coupled with continued organic growth in average selling prices.

Looking ahead to the remainder of this year, our focus will be on translating this operational momentum into growth in free cash flows, together with a further reduction in net leverage.

Let's begin on Slide 17. Consolidated net revenue increased by 24.5% year-on-year to $259 million in the first quarter of 2017, with the following segment split: In our West region, net revenue increased 15.9% on a year-on-year basis to $132 million as acquired net revenue more than offset a modest decline in organic revenue. In our East region, net revenue increased 38.3% on a year-on-year basis to $83.2 million, bolstered by broad-based growth in both acquired and organic net revenue. Finally, in our Cement segment, net revenue increased by 29% on a year-on-year basis to $43.8 million, supported by positive organic growth in average selling prices and volume.

On Slide 18, EBITDA margins continued to increase, up 200 basis points to 24.5% on an LTM basis through the first quarter 2017 versus the prior year period. Importantly, while much of the margin growth last year was related to growth in materials average selling prices, acquisition-related synergies and cost controls, this year, we anticipate growth in organic volumes should also contribute to margin expansion. By mid-cycle, we expect to see EBITDA margins growing another 250 basis points to approximately 27%.

As indicated on Slide 19, both operating cash flow and free cash flow, which we define as operating cash flow less net capital expenditures, increased materially year-on-year on an LTM basis. LTM operating cash flow through the first quarter 2017 has more than doubled on a year-on-year basis while LTM free cash flow increased by fourfold over the prior year period. As our business becomes increasingly cash generative, we expect to be able to fund a larger portion of the acquisitions and organic investments.

As illustrated on Slide 20, net leverage declined to 3.7x in the first quarter, down from 4.5x in the prior year period, while cash and available liquidity increased by more than 20% from the prior year period. We anticipate the decline in net leverage to approximately 3x by year-end 2017, assuming the midpoint of our upwardly revised 2017 adjusted EBITDA guidance, which includes acquisitions closed to date. Including both availability on our undrawn revolver and cash on hand, our total liquidity stood at more than $370 million at the end of the first quarter.

Looking ahead, we are well positioned to fund transactions currently in the acquisition pipeline together with the capital requirements of our business.

As indicated on Slide 21, we have increased our full year 2017 adjusted EBITDA guidance from a range of $410 million to $425 million to a range of $430 million to $445 million, which implies growth of 13% to 16% versus our full year 2016 further adjusted EBITDA of $382 million. 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 acquisition-related EBITDA in their estimates. As before, we estimate just under 75% of full year EBITDA will be generated in the second and third quarters of the year, weighted mainly towards the third quarter.

For the full year 2017, we updated our prior forecast for gross capital expenditures by $5 million to be in a range of $140 million to $160 million. Total gross capital expenditures in the first quarter 2017 were $51 million, which is in line with our normal pace of spending for this time of year.

For modeling purposes, including the impact of all 6 completed acquisitions on a year-to-date basis, SG&A is running at a quarterly range of $57 million to $59 million, while DD&A is running in a quarterly range of $43 million to $45 million. Interest expense continues to run in a range of approximately $24 million to $25 million per quarter.

As it pertains to cash taxes, we anticipate paying $2 million to $4 million in state and local cash taxes and no federal income tax for the full year 2017, given existing net operating loss carryforwards. Therefore, for consistency's sake, we would recommend all analysts model out the cash tax rate in their forecasts.

Finally, with regard to total equity units outstanding, as of April 1, 2017, we had 106.4 million Class A shares outstanding and 4.9 million LP units held by investors, resulting in total equity interest outstanding of 111.3 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 over to Tom for his closing remarks.

Thanks, Brian. In summary, I am pleased with the strong momentum we have entering the construction season. Organic material volumes and average selling prices are higher, public and private spending is healthy in our top regional markets and our acquisition pipeline is very robust with $40 million to $60 million of acquired EBITDA expected this year. We are generating solid cash-on-cash returns on acquisitions completed over the past 3 years and continue to evaluate a number of attractive materials-based opportunities that complement our existing footprint. Our balance sheet remains healthy, capable of supporting targeted investments in early cycle well-structured materials markets.

Just within the last month, both S&P and Moody's upgraded Summit, given improved credit metrics and an increasingly positive outlook. Optimism for the business is reflected in our new full year guidance, which is supported by a combination of improved organic growth and acquired EBITDA. As before, our focus remains on generating consistent profitable growth that rewards shareholders over the long term.

Thank you for your continued support of Summit. We look forward to seeing you on the road in the coming weeks and months.

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

(Operator Instructions) Our first question comes from the line of Robert Wetenhall with RBC.

This is actually Michael Eisen on for Bob this morning. I was hoping you could just start off by talking about some of the end markets you guys are seeing outsized strength to. The Cement number was very impressive this morning, and we want to see if there were any trends that were really driving this and how we should think about that moving on throughout the year.

Yes. Thanks, Mike. Really, we're seeing good solid growth in all our end markets, nonres, res and in the public markets. Especially on cement, I would say we're seeing it especially on the private side. We're seeing some pickup in places like St. Louis, where we haven't seen it for a long time. So all in all, we're seeing some really good tailwinds in really all of our end markets.

And then for just a quick follow-up on that point in Cement. We're looking at such strong performance, and you guys talked about mid-single-digit growth moving forward. You mentioned in your prepared remarks that there's good tailwinds for an uptick in pricing over the next few years. How much do you guys think there's potential for earlier pricing in 2017? And how that can drive upside to the numbers from here?

Is that specifically on Cement?

Yes, it was.

Yes. Cement, we're probably going to have a bigger impact from higher volumes than we are from price this year. Volumes are quite strong, but price will be probably in that 3% to 4% range this year. But as demand starts to exceed supply domestically, I think we'll see that price accelerate in '18 and '19. And our -- we had almost 18% volume increase in Cement in Q1. That won't be maintained for the rest of the year. We would look at mid to high single-digits increase in Cement volumes as achievable.

Our next question comes from the line of Kathryn Thompson with Thompson Research.

First, on volumes. Could you just help us walk through the volume flow-through inter-quarter and how this would compare to a typical Q1? Also, if you could help clarify on the aggregate side what was the greater driver for the improvement in organic volumes and particularly, if you could give color on markets that previously have been weaker, Vancouver, Houston and Kentucky, and how they contributed to the quarter.

Yes. I'll take the aggregates question and then hand it over to Brian on the volumes in Q1. The biggest change was the fact that the 3 areas where we had significant headwinds in 2016, Vancouver, Austin and Houston, Vancouver and Austin have really turned around and are actually growing organically. Especially Austin has had a dramatic turnaround there with our new management team. We're doing quite well, especially on the aggregates side. Houston, we had some bad weather in Q1. Our customers are very optimistic for the balance of the year, but I'd like to see that flow through as the weather starts to clear up there. Brian?

Yes. So on the volume flow-through from quarter-to-quarter, Kathryn, I think I'd point you in the direction of the data sheet that we produced last -- that we posted to our website. The volumes ramp up steadily through the quarter if you look at through the year. So if you look at last year, we started to add a little under 7 million in aggs volume in Q1 ramping up to about 9.7 and then 10.6 and 8.8 in the fourth quarter. We'd expect a similar pattern of volume flow-through this year. Obviously, we had -- the weather issues can play a part in it in any given quarter. But in terms of the pace of volume, that's about right. Q3 is always our biggest. And when that flows through to EBITDA, we get about 75% of our EBITDA in Q2 and 3. And that's weighted approximately 40% to Q2, 60% to Q3.

Just a clarification on your guidance. Is the entire delta for the upside to EBITDA guidance driven by the acquisitions you outlined in your prepared commentary? And then what was the pro forma -- could you reconfirm what the pro forma impact from acquisitions made in 2016 were to numbers? And what's your best estimate for 2017?

Yes. On the acquisitions, Kathryn, it's -- or on the increase in guidance, a little over 50% of it is due to organic growth with a little less than 50% due to the additional acquisitions. So we are -- we're seeing -- we're off to a very good start for the year and we're very optimistic, so that's why we bumped the guidance.

Perfect. And then finally, just in terms of product availability, something that we've been focusing with our aggregate contacts is showing a more consistently -- a potential tightening of clean stone supply in the field as we head into the spring and summer construction season. Are you seeing this in your markets? What are you doing to prepare for it if you are seeing it?

Well, Kathryn, thus far, we have not seen that. I mean, typically, shortages in clean stone happen in September, October as the paving season starts to really ramp up as winter approaches. But we certainly -- I have not heard that in our markets. We have expanded our capacity in the last 18 months in several of our markets. So I think we'll be just fine on the supply side for clean stone this year.

Our next question's coming from the line of Trey Grooms with Stephens.

I guess, first question I've got, I want to ask about M&A. You guys announced another 4 acquisitions, I guess, today. So it looks that makes 6 year-to-date, I think. And pipeline sounds very good. Obviously, there's a lot of tuck-in opportunities that you guys have out there, and you've been demonstrating that nicely that you can pick those off. But also, it sounds like there could be a few large deals out there potentially. How do you think about the potential for larger deals now where you sit today versus more tuck-in types? And then also, with that, on the M&A front, as far as materials versus more downstream or services aspects, kind of what the pipeline looks like there from a mix perspective is and what your appetite would be there for both of those types?

Yes. Trey, I mean, we like the singles and doubles. We like the small- to medium-sized deals. We think that's where we're really strong. And we are very, very busy now. I mean, really, remarkably busy on the deal side. There are a couple of big transactions out there. We are certainly spending some time and looking at them, seeing if there's a way that we can create value. So I wouldn't -- I'm not optimistic on those deals because they're auctions, and we've never been a big fan of auctions. But we're certainly looking at them and seeing if there's a way that we can create value. But I would be not optimistic that we'd be able to get something done there. And as far as mix goes, I mean, we're -- yes, you can look at the deals we just did. Hanna's Bend is a pure aggregates deal. Carolina Sand is a pure aggregates deal. Winvan and Sandidge are downstream bolt-ons. But when you bolt on in the downstream like that, you're strengthening your materials position by having a larger offtake. So I'd see our product mix not shifting very much. It might go up or down a couple of percent, but we see -- we're very comfortable with our product mix as is.

Makes sense. Okay. And then, I guess, you mentioned, kind of sticking with M&A, the $40 million to $60 million in expected EBITDA contribution. You kind of -- you think you're kind of well on your way there. How much -- without getting too specific, I guess, I mean, how much of that do you already kind of have under your belt from the 6 acquisitions that you've done? And I guess, just trying to get an idea of that range, if you're already kind of halfway there or 1/3 there or just a ballpark on how to think about...

Yes. Trey, we're roughly halfway there. The 7.5 multiple that we've all -- have said over the last couple of years, that still is about right. So you can run the calculations yourself. But it's just more of the same. But like I said, it's very active right now. And it's not a week goes by when it seems another deal doesn't -- that doesn't surface.

Good to hear. Last one for me and I'll turn it over. The weakness in the ready-mix business, I mean, obviously, you pointed out softness in Houston res, which you think is going to turn as we kind of get further along in the year. But could you talk about outside of Houston with your ready-mix business? Were there other drivers impacting the volume and pricing there in the 1Q? And just anything else you could add, or is it just simply just extreme -- just weather and then other factors going on specifically in that market?

No, I think the biggest factor in that was certainly Houston. But Houston had exceptionally good weather in Q1 of '16 and probably had normal to slightly worse wet weather in Q1 '17. So that certainly exacerbated the differential there. The rest of our ready-mix markets are very healthy from Utah to Colorado to Kansas. And overall, it's -- and we added a ready-mix business to our North Texas operations. It's done extremely well. So we're optimistic. I mean our customers in Houston are telling us it's going to pick up. And you all read the homebuilders' information that comes out, and most of the Texas homebuilders are very optimistic. So the weather's starting to clear. Our volumes are good there at the moment, so we'll -- well, I'd like to get another couple of months of good volumes before I get less worried about Houston.

The next question comes from the line of Rohit Seth with SunTrust.

Just on the guidance, the quarter, obviously, coming in better than expected. Is it fair to say you're coming in ahead of your internal plan?

We normally don't comment on internal plans, but let's just say we're very happy where we -- how we started the year and very optimistic for the rest of it.

Got you. So what would it take to get to the high end of the range versus the low end? What are you guys looking for there?

Just a lot of our forecasts are low to mid-single digits on volume. If it gets to mid-single digits, we'll get to the high end of the range.

Okay. And then on the M&A pipeline and just building on that discussion, you said you're midway through the EBITDA contribution range. And given you have a rich pipeline, trying to lower the leverage, I mean, would you be willing to move above the $60 million?

For the right deal, for sure. But we are very conscious of our leverage level. And so it's a balance. And the great part about a nice, robust pipeline is you can be even more picky.

Got you. And does the leverage target of 3x by the end of the year assume no more deals essentially?

No. But we'll get down towards 3x even with the revised guidance on the amount of acquired EBITDA.

Okay. And then in the slides, you have a mid-cycle EBITDA target of 27%. It seems like you can probably get there a lot sooner than mid-cycle. Is there anything we should be thinking about there on the incrementals or the change in the mix of business, anything of that nature?

Not really.

No, well, that was really just to remind people about the range that we provided at the Investor Day back in November, where we said mid-cycle was at 27%, and that was with organic growth and the mix that we had in the business at that time. Hasn't changed significantly from then and we believe that we can still -- on track to deliver that margin expansion.

Got you. All right. And then just on the actual volumes, you made a big pop there. Is there anything we should be thinking about there? And I saw the ready-mix concrete was a little bit weak. And how do you guys think about those for the rest of the year?

The asphalt is just distorted because it's a very -- it's a small number. Ready-mix compared to the prior year was soft in Houston as the -- the weather differential. Brian, anything else as far as...

No. And obviously, we had a very strong quarter in volume for cement. Again, that's not necessarily typical of the run rate for the rest of the year, as Tom mentioned at the outset. And the headwinds in the markets that we had last year in Vancouver and Austin on aggregates are beginning to turn around as we had hoped that they would do. So...

Your question was more on asphalt though, right, Rohit?

Yes. It's really both. I mean, just the big pop there, and is that a big pickup in FAST Act spending driving activity earlier?

North East Texas is very strong. Austin was very strong, coming off a challenging year with an easier comp. So those both contributed positively.

I mean, if you look at it, what, they're only, what, 7%, 8% of our annual volume in Q1. So take it with a grain of salt. But we're -- our backlogs are quite good. We've had really good recovery in Austin, and we're optimistic for the year. But the 65% increase isn't particularly meaningful.

Okay. And then last question on the incrementals for the year. Still -- we should still think about the incrementals kind of what we saw in last year?

No, I think so, on aggregates -- this is on our data sheet -- you can see a steady improvement in our aggregates margins. They're gradually increasing, 59% in 2015, 62% in '16. We have a run rate LTM of 61.4%. So in aggs, we continue to see margin improvement there as we go through the year and we start to increase our volumes in the second and third quarters.

Our next question comes from the line of Adam Thalhimer with Thompson, Davis.

Ready-mix prices, do you expect them to improve as the year goes on?

Yes. I mean, I think they'll get better. I think it's really important to look at Houston, whether we get a cement price increase there next year will also determine whether -- or excuse me, at midyear. And we're optimistic that that happens; in which case, we'll get a ready-mix price increase in Houston. So that has a disproportionate effect on our overall ready-mix because it's such a high proportion of the total. The rest of our markets, we're seeing good, solid increases, but the question is whether Houston will follow.

Okay. And then you mentioned you're seeing a good flow of potential acquisitions. What are you seeing on the competitive front for those deals? Are you seeing private equity show up and…

Not so much private equity. We are seeing a few other larger companies out there. But most of the deals that we are looking at, the small- and medium-sized bolt-ons, it's still the same level of competition. When you get the big auctions that I mentioned a little while ago, that gets very competitive. And that's why we tend not to compete very well in those. So our small, medium size and the way we run our business, we're definitely the buyer of choice. And most of our deals continue to be negotiated not auctions.

Okay. Lastly, I wanted to ask about the materials mix. As you think about mid-cycle and the 27% adjusted EBITDA margin, do you think aggregates and cement is still 50% of gross profit? Or could it be higher?

Today, Adam, it's about 60%, actually, the EBITDA contribution from cement and aggs combined. In those mid-cycle assumptions that we've provided back at the Investor Day, we hadn't assumed a significant variance to the mix from where we are today. Obviously, if there was to be an increase in the proportion of revenue and EBITDA from materials and cement, then that percentage can possibly increase.

(Operator Instructions) Our next question comes from the line of Nishu Sood with Deutsche Bank.

I wanted to follow up on the quarterly sequence of aggregate volumes. Against the very tough comp last year of 6%, you were able to generate organic growth. Now in the back half of the year, you have negative high single digits. So that implies, on a continued pace, some really strong year-over-year aggregates volume gains in 2Q through 4Q, I mean, something in the order of double digits. But earlier in the Q&A, Brian, you were mentioning that we should expect the quarterly volume cadence to be similar to last year. And that implies basically continuing just at this kind of 1% volume year-over-year. So can you please help us frame that? How should we think about that, kind of reconciling those statements?

Nishu, thanks for the question. When I was talking about the cadence, I was thinking more about the proportion in each quarter rather than the absolute year-on-year change. What we've said is that on organic volume growth this year, we're seeing the businesses that were headwinds last year beginning to turn around. And we think the pace of that improvement will increase throughout the course of the year in those markets where we've had headwinds last year in Vancouver and Austin in particular. And then Houston should turn around, we think, later in the year and add to that improvement. So we do anticipate low to mid-single-digit volume organic growth over the course of the year.

Got it. Okay. On the acquisitions, obviously being able to fund them internally. From the liquidity, if you're thinking about the $40 million to $60 million of acquired EBITDA, should we anticipate some drawdown of the revolver to achieve that? Or is it -- obviously, you have a strong cash flow quarter that's coming up. Or should we anticipate that it will be through generated free cash flow?

Mixed, Brian?

Yes. A lot will depend on the exact timing of when we complete future acquisitions, but we should probably expect to see some drawdown at some point during the course of the year. And yes, as Tom said, it could be a mix of cash generated through the operations and some drawdown of the revolver.

The next question comes from the line of Jerry Revich with Goldman Sachs.

Tom, I'm wondering if you could talk about the change in strategy in Austin. Can you talk about what the new management team is doing differently and what proportion of the lost market share from last year do you folks think you can recover this year?

I haven't looked at it as a market share, but we've got a really good, young dynamic management team in there. That, in combination with just the natural shakeup of the market, has started to settle down and pricing is starting to get a little bit better. We certainly have regained some share. I can't tell you the exact amount, but the market's quite strong. Our volumes have been very good year-to-date and very optimistic for the year there. Our comps get a little bit tougher as the year goes on there. But all in all, I'm quite excited by what our team has been able to accomplish over the last 6 months.

Okay. And Tom, can you talk about, in aggregates, the cadence of pricing actions that you expect to pay this year in terms of markets where you're putting through major price increases and just calibrate us on how that cadence compares to pricing actions over the course of last year? Just could we see pricing accelerate based on the number of markets you're rolling out increases throughout midyear?

It's very similar to last year. Most of our price increases are in the spring. We typically don't get 2 price increases in a year. And it's early days yet. There's a lot of -- the price increases are April 1. But we're looking at a similar cadence of last year and don't really see any acceleration in pricing, but we see just good, solid continuation of a very positive trend.

Your next question comes from the line of Scott Schrier with Citi.

Tom and Brian, I wanted to ask about the cement network and how close are you to being sold out of manufactured cement? And that 3% to 4% pricing you're talking about a little earlier might have been a little less than what we were expecting. Can you talk about the competitive environment, maybe with a couple of those larger plants down the river and what are some of the puts and takes between how close you are to being sold out?

Well, we're getting very close to being sold out. We are importing some cement this year. And we'd be disappointed with the price of 3% to 4%. There were some competitive actions in the center of the country that limited that price increase. But our volumes are certainly well above what we anticipated. So I think the net effect will be right either at or above what we expected for the year overall. We do see there's been some shifts in volume for various reason. We do see that market getting awfully close by the end of the year, early '18, to demand exceeding domestic supply. And we're optimistic for that pricing situation to accelerate into '18.

Got it. And for my follow-up, I wanted to revisit the question on incremental margins in aggregates, maybe more specifically to the quarter. I just wanted to see, is there -- are there any items in there we should consider whether the production cost or unit cost was affected by anything like inventory builds? Or are there fixed costs in there from your acquisitions? Or are there stripping costs? What are the things there to consider for the quarterly incremental margin?

Scott, there's a big variance obviously in that incremental margin from Q1 of the prior year, where we were at about a little under 86%, which was abnormally high, I will say. And a lot of that was due to -- as everybody knows, it was a very strong weather quarter. We had a number of projects, particularly in our Texas markets, with high-margin, clean stone in the mix in Northern Texas and in the Houston market. So I think you get a little bit of distortion really just as a result of the constitution of the mix of product that was in the business. What I would direct you to again is the underlying margins. The gross margin in Q1 of '17 of 43.5% for aggregates compared to 42.9% in the prior year. And as we mentioned earlier, the LTM on aggregates is steadily improving over the long term. So there is a little distortion quarter-on-quarter on the incrementals, but the long-term fundamentals of the margin expansion are very much intact.

Our next question comes from the line of Brent Thielman with D.A. Davidson.

Picking up off some prior questions. The dip in the products margins this quarter, I mean, it sounds like you had some short-term anomalies with Houston weather, you had a shift toward more asphalt. But it sounds like you think you're going to get better pricing to ready-mix this year. When you put it all together going forward, does the margin headwind sustain? Or do we get back towards expansion mode?

Brent, it really was a mix issue in the quarter with that margin. Obviously, you saw -- in our products group, it's a combination of ready-mix and asphalt. We saw a volume swing to the asphalt and a decline on the ready-mix. There is a little bit of a margin differential between those 2 products, asphalt being a little bit lower than ready-mix. So the combination of those is really what drove that slight decline in the products margin, which was just down to 21.7% for the -- oh sorry, 21.2%. So there was a slight decline year-on-year. But I think as that mix evolves over the course of the year, you'll start to see it swing back the other way.

Okay. And then could you just give me an update on what you're seeing in Kansas? I think it's still a top 5 for you. It seems like it's really tough on that public side. Are you getting some growth in that market despite that?

No. The private side is okay -- actually, the private side is quite strong pretty much across that, but the highway market continues to be lackluster. We're hoping that the maintenance program is put in the second half of the year, but we're not counting on it. There's a lot of conversation going on about increasing gas tax and getting back to -- that state has had a 20-year history of really good support for the highway program until last year and this year. So we're optimistic in the medium term, but we're still hoping for -- by the way, we're still hoping for overall EBITDA growth in Kansas, but we're not seeing any recovery on the highway side.

So Tom, would you sort of characterize this as flat for you right now?

We actually did see positive organic growth in aggregates in Kansas.

Yes, and that's really from the private side.

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

Quick question. When we start thinking about the Cement business as you do start to import and sell more from kind of some of the terminals you have on the river, what does that do from a margin perspective, from an incremental perspective? And how do we kind of think about the puts and takes under that framework? And also, I guess if you could state when you think maybe that would end up happening.

Not much this year. We'll import a bit this year, and it won't really have much impact on the overall margins. But as we continue to grow that business -- the margins on imported cement are roughly half of manufactured. That can bounce up and down depending on what the freight rates are and what the overseas markets are like and where it's going. And that overall objective is to supply manufactured cement to the northern half of the Mississippi and then imported cement to the southern half. That would be the goal that we would have for the next few years. So as we increase our volume over the next couple of years, you'll see a decline in the incrementals but an overall increase in EBITDA.

Perfect. And then there's some modestly positive news, I guess, coming out of Kansas. It sounded like there's a couple of things going on in Kentucky as well. I think both those states have been kind of lackluster here as of late. Did I pick that up correctly, that Kentucky might be doing a tiny bit better for you?

Yes. Kentucky, we're going to have a solid year in Kentucky, more a return to normal. Last year, it was really an anomaly as they spent an extra couple of months negotiating in the legislature on the biennial highway bill. So we'll see some improvement in Kentucky in 2017.

Our next question comes from the line of P.T. Luther with Bank of America Merrill Lynch.

I was wondering if you could just share a little bit of perspective on what you've seen -- what you saw in April, in particular just in terms of trends maybe on the demand and the volume side? And I'll leave it there.

In April, we've had good volumes with some organic growth. So we're very encouraged by the way April has gone. And as the season starts to pick up steam here in May and June, like I said, we're quite optimistic.

Okay. Good. And then on the M&A side, Tom, you certainly off to a torrid pace this year with 6 done year-to-date. I'm wondering if there's any sort of -- like what your capacity for deal flow is from a manpower perspective. If it's a -- how many flights you're willing to get on a year or what? But right, just trying to get a sense for -- you talk about the robust pipeline that you have, how many deals you think you could actually consume in a year?

I think -- well, first off, we have a world-class acquisition team headed by Michael Brady. And we have really done, I think, a -- with our IT platform, we're able to integrate, especially these bolt-ons. I mean, they get -- if we have 2 or 3 weeks between signing and closing, those bolt-ons are literally integrated day one. So that really increases our capacity. I don't see any reason why we couldn't do 10 or 12 or 13 deals in a year. And really, it doesn't matter about size. I mean, the $5 million deal almost takes as much work as the $400 million deal. So we really, I think, have a world-class acquisition team and the ability to integrate very quickly and efficiently.

Great. And then last one and then I'll hand it off. The 4 deals that you mentioned in late-stage diligence, I guess, size and mix-wise, are they pretty similar to historical and the recent deals you've done?

Yes, they are, actually, both in mix and in price and so on. So who knows whether we get them closed or not, it's always a bit of a crapshoot. But I'm not sure I'm supposed to say crapshoot. Is it politically correct? But it is. You never know. But it's -- we're very -- like I said, we're optimistic.

This concludes our question-and-answer session. I would like to turn the floor back to CEO, Tom Hill, for closing comments.

Thanks, everybody, operator. And thanks, everybody, again for joining us. That concludes our call. Good day.

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