Summit Materials Inc (SUM) 2017 Q3 法說會逐字稿

Greetings, and welcome to the Summit Materials Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Noel Ryan, Vice President of Investor Relations. Thank you, Mr. Ryan, you may now begin.

Good morning, and welcome to Summit Materials' Third 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 third quarter results. We also published an updated supplemental workbook highlighting 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 third quarter investor presentation, which is available on the Investors section of our website in PDF format.

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 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 third 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 will turn the call over to Tom.

Thank you, Noel, and welcome to today's call. As detailed in our press release issued earlier today, the Summit team delivered an exceptional performance in the third quarter, while managing through a series of major weather events that impacted our Houston and Southeastern markets. Harvey, a Category 4 hurricane, brought more than 50 inches of rain in some parts of Houston beginning in late August, severely disrupting our businesses in the region. Irma, a second Category 4 hurricane, battered the Virginias and the Carolinas beginning in early September, resulting in a number of lost days due to heavy rainfall. Given the broad scope and duration of the disruption stemming from Harvey in addition to Irma-related rainfall in the Southeast, we've reduced our full year adjusted EBITDA guidance, which I will detail shortly.

Putting aside recent weather events, the demand outlook for our business remains strong and supported by balanced growth in both private and public end markets. From a regional perspective, we see growth accelerating in Texas, Utah, Nevada, the Carolinas, Virginia and Georgia. However, in the Mid-Continent states of Kansas, Missouri and Kentucky, we continue to see stable growth in the private market, offset to some extent by soft public spending.

Turning to Slides 4, 5 and 6 of the deck. Overall, we saw broad-based improvement across key financial metrics during the third quarter. Adjusted EBITDA increased to 18.1% from the prior year period as supported by a combination of organic volume growth in our materials lines of business, favorable cement pricing, improved operating efficiency and acquisition-related contributions. We continue to see solid organic growth in cement and aggregates volumes. Cement prices are growing in the low single-digit range, while aggregate prices are flat due to sales mix-related factors. Excluding these mix-related factors, aggregates prices actually increased nearly 3% in the third quarter.

Turning to Slide 7. Margin realization remains strong in our materials lines of business. Adjusted cash gross profit margin in aggregates increased 130 basis points to a record 73% in the third quarter due to solid pricing in most markets, together with sustained organic volume growth. In our cement business, a combination of organic price and volume growth, together with improved operating efficiencies, contributed to a 160 basis point increase in adjusted cash gross margin to 50.6% versus the prior year period. Incremental margins for aggregates and cement were 81.2% and 62.5%, respectively, in the third quarter. While on an LTM basis, incrementals on aggregates and cement are trending in the low 70% range. The modest decline in third quarter adjusted cash gross margin is mainly due to lower realized margins in our products line of business. Given that we sell about 1/3 of our company-wide ready-mix volume in the Houston market, we experienced Harvey-related softness in overall product margins in the period.

Turning to Slides 8 and 9. Organic sales volumes of aggregates increased 2.6% in the third quarter versus a decline of 3.4% in the prior year period. Excluding Houston, organic sales volumes of aggregates were up nearly 5% in the third quarter, given strength in Vancouver, Utah, Nevada and North Texas. Organic average selling prices on aggregates declined less than 1% in the third quarter due mainly to mix-related factors in the West segment.

In the third quarter, organic sales volumes of cement increased 10% supported by strong demand in our northern tier markets, while cement prices increased 3.2% versus the prior year period, consistent with the pace of growth we've seen on a year-to-date basis.

Organic sales volumes of ready-mix concrete was down 3.1% year-on-year in the third quarter due to Harvey. Excluding Houston, organic sales volumes of ready-mix were up 1.6% in the third quarter. Organic sales volumes of asphalt increased 11.9% in the period despite Harvey-related softness in the Austin paving market.

Turning to Slide 10. Due mainly to the combined impact of Harvey and Irma, we've lowered our full year 2017 adjusted EBITDA guidance to a range of $425 million to $435 million. By way of reminder, our full year adjusted EBITDA guidance only includes transactions that have been announced.

Turning to Slide 11. Here, we provide a detailed adjusted EBITDA bridge between the midpoint of our prior guidance and the midpoint of our revised guidance range. We estimate the combined impact of Harvey and Irma accounted for approximately $15 million of our revision to full year guidance. While the recovery in Houston is underway, significant clean-up work is still to be completed. Currently, 4 of our 6 sand and gravel sites in the area are operational. The sites in operation include our 2 largest production facilities in the region, Smith and Vox, which are capable of fully supplying existing customer demand. However, aggregates volumes still had not fully recovered to pre-Harvey level at the end of the third quarter.

Our revised full year adjusted EBITDA forecast takes into account 4 factors including: one, lower sales volumes in Texas, Virginia, Kentucky and the Carolinas due to the hurricanes; two, higher operating costs per ton of production, given our decision to pay employees in hurricane-affected markets during periods in which we were not operating; three, lost EBITDA stemming from Harvey's destruction of our Houston-based asphalt terminal, which supplies liquid asphalt to our Austin paving operations. The disruption of this terminal amounts to approximately $3 million of lost EBITDA on an annualized basis. And four, the impact of slower public spending in Kansas, which, while not hurricane-related, remains a real challenge. Offsetting the combined impacts of the hurricane and soft Kansas public spending was approximately $2 million of EBITDA contributions from recently completed acquisitions.

Turning to Slide 12. At the end of the third quarter, Houston ready-mix volumes were at approximately 95% of normalized levels, while aggregates volumes were running at approximately 75% of normalized level. While we expect aggregates volumes in this market to recover over the coming months, the recovery is likely to be gradual.

Turning to Slides 13 and 14 for an update on Texas, our largest single market at more than 20% of revenue. Even before hurricane season, residential demand in Houston had recovered from prior year level, consistent with our outlook coming into the year. Single-family permits are up year-on-year, months of housing inventory remain low by historical level and public spending is robust in the region as supported by several large multiyear projects.

In Northeast Texas, business is quite strong. During the third quarter, we experienced double-digit organic volume growth in aggregates, ready-mix concrete and asphalt in this region. With the acquisition of Alan Ritchey in August, a transaction I'll speak to in more detail shortly, we now have a foothold that extends from our existing platform in Northeast Texas into the Dallas market. Alan Ritchey provides us a great entry point into Dallas, a market supported by sustained growth in population, employment and housing demand.

In Austin, we're seeing a lot of paving work. Importantly, pricing on both aggregates and asphalt have also recovered from the prior year period. In Midland/Odessa, oilfield services activity is picking up, which has created a growing need for housing together with road improvements. We also are seeing increased need for ready-mix as multiple greenfield frac plants are being constructed in the area. At a statewide level, we see a lot of investment in public infrastructure, concentrated mainly in metro markets such as Houston, Dallas and Austin. Overall, highway activity around the state remains strong. While the diversion of TXDOT resources toward Houston is a near-term headwind, we continue to see growth in lettings throughout the state. In Northeast Texas, we have a $1 billion reservoir getting ready to break ground. Final permitting and construction for the reservoir is scheduled for the first quarter 2018 with completion by 2022.

Turning to Slides 15 and 16. Utah remains another significant growth engine for us, along with activity in neighboring Nevada and Colorado. We are a top 3 player in Salt Lake City, arguably the hottest housing market in the country right now. Single family starts in Salt Lake increased 11% year-on-year in August, while housing inventory sits at just 2 months. On the public side, population growth in the state has required significant investment in roads and infrastructure, including several large projects, such as the $450 million I-15 technology corridor together with a $2.2 billion expansion of the city's airport.

Turning to Slides 17 and 18 for a discussion of our cement business. As before, we anticipate a gradual tightening in supply of domestically produced cement over the next 3 years given limited spare capacity. The Mississippi River market that we serve consumes some 15 million to 16 million tons of cement per year. We estimate approximately 75% of river demand is supplied by producers on the river, with the remainder coming from producers adjacent to the river and through imports. Similar to the rest of the U.S., the river market is nearing a point where regional supply will soon be surpassed by demand. We're no exception, with both of our cement plants currently operating at peak rate. Given this backdrop, we anticipate sustained growth in average selling prices on cement over the coming years. In 2017, we've realized a $4 per ton price increase. Several weeks ago, we announced a price increase of $8 per ton that will go into effect in our markets south of St. Louis on January 1 and in our northern markets on April 1. On a year-to-date basis, our Cement segment has generated $93.3 million of adjusted EBITDA, up 18% year-on-year, while adjusted EBITDA margins on cement have consistently expanded in recent years, driven by price and volume growth in addition to improved cost efficiencies.

Turning to Slide 19. As you can see on this slide, our industry remains very highly fragmented. Across the supply chain, there remains hundreds of family businesses that represent attractive acquisition targets for Summit. However, as we continue to scale the business, acquisitions won't be the only source of growth, as you will hear in Brian's comments. Investment in organic growth will become an increasingly important part of our narrative over time as we seek to continually -- continuously improve the businesses we acquire.

Turning to Slide 20. This year, we have invested $402 million across 14 bolt-on acquisitions, making this the busiest year in our history in terms of deals closed. Since our last update in August, we've completed 4 additional materials-based acquisitions, including Georgia Stone/McLanahan, which provides an entry point into the growing Georgia market; Alan Ritchey Materials, which provides us with an entry point into the Dallas market, building on our strong market presence in Northeast Texas; Columbia Silica, which further bolters our aggregates presence in Central South Carolina; and Stockman, which builds our aggregates presence in Central Missouri.

Looking to 2018, we anticipate another busy year ahead with a strong pipeline of potential small to medium-sized acquisition targets on the horizon. We remain patient, disciplined investors focused on acquiring quality businesses in stable markets at multiples that allow for significant value creation through the cycle. While this approach is both labor and time-intensive, it is a strategy that we expect will continue to be successful over the long term.

With that, I'll turn it over to Brian for a discussion of our third quarter financial results.

Thank you, Tom, and good morning to everyone. We had a strong third quarter performance, highlighted by organic volume growth in both cement and aggregates, year-on-year margin expansion in our materials lines of business and mid-teens year-on-year growth in adjusted EBITDA. Incremental margins remained consistently high throughout our materials lines of business, trending in the low 70% range on an LTM basis. We've upwardly revised our full year 2017 CapEx guidance to account for more organic investments in the business, together with incremental acquisition-related spending, while lowering our full year 2017 adjusted EBITDA guidance to account for hurricane-related disruptions to the business in the third quarter, and to a lesser degree, in the fourth quarter 2017.

With regard to our balance sheet, net leverage is down on a year-on-year basis, while our current liquidity position is sufficient to support the ongoing growth of the business.

Let's begin on Slide 22. Consolidated net revenue increased by 19.6% year-on-year in the third quarter. In our West segment, net revenue increased 24.7% on a year-on-year basis, while in our East segment, net revenue increased 15.7% on a year-on-year basis. Year-over-year improvements in both regions were due to growth in organic and acquisition-related net revenue.

In our Cement segment, which serves markets along the Mississippi River corridor, net revenue increased by 13.1% on a year-on-year basis, supported by positive organic growth in average selling prices and sales volumes.

Turning to Slide 23. On an LTM basis, incremental margins on cement and aggregates were 72.1% and 71.8%, respectively. LTM incremental margins on cement are up from 43% in the prior year period.

Turning to Slide 25. Net leverage was 3.7x at the end of the third quarter, down from 4.3x in the prior year period. Cash and available liquidity increased to $506 million versus $224 million in the prior year. We anticipate the decline in net leverage to approximately 3.5x by year end 2017.

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

Turning to Slide 26. We have raised our capital spending forecast to a range of $180 million to $190 million for the full year 2017. Using the midpoint of the old and new guidance ranges, the net increase is approximately $36 million. Of this increase, $22 million is related to a series of targeted investments in organic growth, while the remaining $14 million is related to spending on the 14 acquisitions we have closed to date this year.

With regard to organic growth, we have 3 categories of projects worth noting. The first project involves a major crushing plant upgrade at our Cox quarry in Vancouver, which supplies aggregates to our 4 stone depots along the Fraser River. The new plant installation, which is expected to be online by year-end 2018, is forecasted to reduce variable cost per ton by approximately 20% beginning in 2019. During 2017 and 2018, we will invest approximately $30 million on this project.

The second project involves the construction of a new cement terminal in Memphis, Tennessee, along the banks of the Mississippi River. This project, which is expected to be completed by year-end 2018, will position our Cement segment to lower our delivered cost into the market. During 2017 and 2018, we will invest approximately $15 million on this project.

Third, we recently made investments in land with probable reserves across several states, including Kansas, Missouri, Kentucky and North Carolina. These investments extend the lives of our existing sites, and in some cases, provide the opportunity for greenfield expansions. Across all of our approved organic growth investments, we are generally targeting mid- to high-teens unlevered returns.

For modeling purposes, including the impact of all 14 completed acquisitions on a year-to-date basis, SG&A is running in a quarterly range of $60 million to $62 million, while DD&A is running in a quarterly range of $48 million to $49 million. Interest expense is running in a range of approximately $28 million to $29 million per quarter. All analysts should also model for approximately $2 million per quarter of transaction-related expenses, an amount which can vary depending on the volume of potential acquisitions under review.

With regard 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.

Finally, a word on the tax receivable agreement. In the third quarter, we released $513 million of the valuation allowance against deferred tax assets that is generally responsible for a $484 million income tax benefit realized in the period. Further, given an increase in the probability that deferred tax assets subject to the TRA would be realized, we recorded $489 million of tax receivable expense in the third quarter 2017. The company has accrued its full liability related to the TRA, which totaled $549 million as of September 30, 2017. This accrued liability is not considered debt for the purposes of the company's net leverage calculation. Please note that TRA expense is excluded from our calculation of adjusted EBITDA. At this juncture, we estimate the earliest cash distributions under the TRA will commence in 2021.

Finally, with regard to total equity interest outstanding, as of September 30, 2017, we had 108 million Class A shares outstanding and 4 million LP units held by investors, resulting in total equity interest outstanding of 112 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 over to Tom for his closing remarks.

Thanks, Brian. Turning to Slide 28. In summary, material sales volumes have continued to improve over prior year levels, given strong underlying demand in our core markets. Cement ASPs are stable and are poised to increase in 2018. Incremental margins on materials are strong. The acquisition environment is target-rich, and our balance sheet remains well capitalized to support the ongoing growth of the business. These results are a testament to the tireless efforts of our more than 6,000 employees. Their relentless focus on safety and accountability, even while managing through weather events of historic proportions, exemplify a culture that remains committed to operations excellence.

For 2018, we are looking for a combination of organic and acquisition-related improvements in adjusted EBITDA as supported by continued price and volume growth in our materials businesses. With an eye to the future, we remain geographically diversified across an attractive mix of high and stable growth markets, the majority of which are in the earlier stages of a multiyear recovery in construction spending.

In closing, I want to thank Doug Rauh, our COO, who plans to retire at the end of this year. Since joining Summit 5 years ago, Doug has helped to develop a great team of leaders that will continue to drive best-in-class performance in our businesses. Doug and I have been friends for many years, and we wish him well as he transitions into retirement.

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

(Operator Instructions) Our first question comes from the line of Trey Grooms with Stephens.

I guess the first one for me is on the 4Q. On Slide 11, you guys pointed out a few things, moving pieces for third quarter and fourth quarter. But outside of I think what was at least highlighted for 4Q, outside of those 2 things, Harvey and then I think some benefit from M&A and in Kansas, is it safe to say that everything else is progressing as you guys expected for the 4Q if we step back and go back a few months?

Yes. There hasn't been any major changes, Trey. Utah continues very strong. Vancouver, strong. The underlying costs in the business haven't really changed. I am very pleased with our continued improvements on cost management. But overall, I would say everything else is roughly in line, and we just -- we hope we get some good weather going into November, December.

And with that, Tom, would that slide as well as the one that kind of pointed out some of the storm impacts, is it fair to say -- and I think there's still some lingering things going on with Harvey into the 4Q, but is it fair to say that the Irma market is, at least from where you guys stand, is kind of more back to normal than what you would say is the case for Harvey markets?

Yes. I mean, we have -- we don't have any operations in Florida, which I think have had some lingering effects. In our markets, we just had a number of rain days which disrupted our operations. So yes, I would say that our Irma states are definitely back to normal.

Great. Another one on -- just I appreciate the slide you had in kind of, I think it was 28, on some thoughts into the outlook for '18. But I was wondering if you could give us anything else as far as -- you mentioned organic EBITDA growth. You mentioned price and volume growth or improvements next year. Just as we look at the end markets that you guys touch, how can you frame up, at least maybe even high level, how we should be thinking about those -- the trends in those end markets going into next year?

Again, Trey, I would say it's just going to be a continuation of this year, hopefully without any major weather events. But we see continuing and accelerating growth in Utah, Nevada, western slope of Colorado, Texas and the Carolinas and Virginia. The center part of the country, we're very disappointed with the highway spending in Kansas. We're hoping it gets a little better next year, but it's more likely that it's '19 that we see any real improvement there. And Missouri and Kentucky are doing okay. They're stable growth. So really, just a continuation of the last couple of years' trends with a little bit of acceleration in some of the states that we mentioned.

Great. Last one for me is on labor. Obviously, it's something to watch. Have you guys, and specifically to your markets, is it -- have you started to see any significant bottlenecks to note? Or how Harvey and Irma and that recovery process might be playing into it?

Well, in our operations, the only place we really see significant tightness in labor is in the Utah market. We are definitely short of ready-mix drivers there, and we are seeing some pick-up in labor costs there. Besides that, in Houston, there is a lot of cleanup going on now, and that is certainly disrupting the new construction markets as the cleanup goes on. Millions and millions of cubic yards of debris are being -- are still being taken out of there. We hope by year-end that, that corrects and that we see a bit of pickup in Houston next year.

Our next question comes from the line of Bob Wetenhall with RBC Capital Markets.

That's a fantastic slide deck. You took away all my questions. I wanted to ask on pricing, both on aggregates and cement. Can you help us think about aggregates pricing? Given the negative mix, it looks like there was a lot of fill in there during the quarter. What's pricing on a normalized basis for aggregates if you look to '18, given the volume trends you just recapped? And tied with that in the cement business, if there's consolidation adjacent to the river and Ash Grove gets bought by someone, is there a better pricing environment? What are the implications structurally for that market?

Yes, Bob. On the aggregate side, we see, on a mix-adjusted basis, low- to mid-single digits. We see that continuing into next year. On the cement side, as I've said a number of times, we're a bit disappointed with the price increase we got in 2017. We have announced an $8 price increase for next year, and we would hope to achieve $5 to $6 of that next year. So overall, a very positive pricing environment. And I just had a senior moment. What was the third part of your question?

No. That actually pretty much answers it. So you're thinking low- to mid-single digit growth in aggregates and realized pricing per ton in cement of $5 to $6?

Oh, yes. And oh, then you also mentioned further consolidation. Ash Grove is a fine competitor. If their deal with CRH completes, we see a continuation of rational behavior by CRH.

Got it. Got it. That's good to know. And then maybe you could just flesh out a new theme, which I heard about for the first time today. It sounds like you're balancing your accretive M&A program with more investment in the company or reinvestment. You called out increased capital spending. It seems like you're going to keep net leverage a little higher than I anticipated at 3.5x. Is this a strategic shift in focus? What's the opportunity set for the investor base here, given the fact that it looks like, between Vancouver and Memphis and some other acquisitions, there's -- am I detecting a subtle shift in strategy or reallocation of resources? Anything you can do to flesh that out, Tom or Brian, will be terrific.

Yes. I mean, I think that, certainly, as far as allocation -- capital allocation, we are seeing some awfully good opportunities internally, and especially on our materials, aggregate and cement businesses. We are seeing in the marketplace of acquisitions of any size that pricing has gotten very, very high and we just don't participate in the kind of prices that are being paid at the moment for the larger deals. However, we do see a continuation of a really strong population of small and medium-sized deals. So I would see there is subtle shift towards some internal projects and maybe recognizing that the larger deals are just not going to be priced where we, as a pretty disciplined investor, don't see paying mid-single -- or excuse me, mid-teens multiples for anything in this industry.

Is it fair to say that you're on track to do at least $400 million in investment in M&A next year? If I'm understanding you correctly, are you going to be shifting more towards internal investments that have a lower risk profile with great incrementals, as opposed to paying up to buy stuff in the public and private markets?

Yes. Thanks, Bob. Yes, Bob, we're not going to pay mid-single -- or mid-teen multiples for materials acquisitions. And we see allocating capital towards our existing materials positions to be a wise move. We see $400 million of acquisitions going forward, very achievable. Hard to predict, but very achievable. So I hope that answers your question.

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

Just on the acquisitions you acquired since August, you have 2 bolt-ons in 2 new markets. Could you give a little bit more color first on the relative profitability of each of these relative to current operations? And then if you could flesh out a little bit more how you're thinking about new markets that you entered and growing those markets?

Yes, Kathryn, thank you. Yes, these are really all -- the Alan Ritchey, Columbia Silica and Stockman are all bolt-ons to existing operations. The only new markets that we entered is Georgia. We had an opportunity to acquire 2 basically adjacent quarries in Northeast Georgia. And along with a really very well-qualified management team. We see some great growth opportunities in that market. Our acquisition strategy has always been two-pronged. We've always focused on bolt-on acquisitions. They're the lowest risk, highest return and that's really what our focus always is. But we are looking to add new geography with new platforms. In a smaller way, that's what Georgia Stone Products is, is a new platform in Georgia, and we are looking for new geography. It's gotten more expensive to acquire that geography right now, but we're very opportunistic in doing that. And the great part about new geography is that it adds more opportunities for future bolt-ons. So that's really what our strategy continues, as it has been from day 1.

Okay. Great. And then last year, one of the things that we've been following is you just have a little bit less worry this year, given some markets that were under pressure last year, including Vancouver and a handful of others. Of the markets that were more of a headwind last year, be it Austin or Vancouver, how are they doing today? To what extent have they contributed to the margin expansion in the quarter? Any additional update in terms of the competitive landscape, particularly in the Austin market, which I know has been a thorn in your side for a bit?

Both Vancouver and Austin have both improved dramatically. They're both relatively small in the overall scheme of things. In Austin, it's still very competitive, but we have got a really first-class young management team there that is making steady progress. And we see more progress in 2018 in Austin. It won't be as rapid an improvement as we had in '17 versus '16, but we see continued improvement in both Vancouver and Austin.

Our next question comes from the line of Garik Shmois with Longbow.

First question is on cement. Just given the volume growth in the quarter, footing it out with the statement that your cement plants are at capacity, is it fair to assume that all the growth is coming from imports? And how should we think about the growth dynamic into 2018, will most of the growth again be supplemented by imported volumes?

Garik, it's a combination of both imported material and material purchased from third parties in our markets. So we'd expect that trend to continue, obviously, as there's more and more supply taken up with the domestically -- domestic producers. Then the next best alternative is imported material. But for 2017, it's been a combination of some of both.

Yes. And I think our cement plants are operating extremely well. We've got a great production team there. So we're squeezing out more and more tons there. But certainly, going forward into '18 and '19, the incremental growth there will most likely be in imports.

Should there be any impact in incremental margins, given the incremental growth, as you mentioned, is coming from imports?

Yes. Imports are roughly half the margin that's domestically produced.

Okay. Just wanted to ask on the destruction of the asphalt terminal because of Harvey, the $3 million impact, is there an expectation that, that is going to be recovered in 2018? Or should we assume that you're going to have to source out longer distances to supply the Texas asphalt division?

We would hope to have the terminal back online in July. So I would say half of that would be carry forward into '18.

And I just wanted to lastly ask about aggregates price/mix. There were some mix headwinds earlier in the year. You touched upon that up in Vancouver due to lower price base stone, but I was wondering if there was any mix impacts because of the storms that had impacted either the third quarter or is expected to impact the fourth quarter per your outlook particularly in the Houston market.

I don't think so. I think that our ag volumes -- our aggregate volumes in Houston have not recovered from pre-Harvey. And I think that's a function of the cleanup that's going on and the fact that we sell aggregates to other ready-mix producers who service the office and the highway market. And those projects have certainly been delayed more than the residential slab market, which is our primary ready-mix end use. So I don't see any impact on mix due to the storms.

Our next question comes from the line of Rohit Seth from SunTrust.

Just on the public spending, you mentioned some weakness in the Kansas area. I just wanted to get some thoughts on the other areas of the business given there's some weakness in the public spending according to some metrics nationally. So if you can help provide some color there.

Sure. Going from west to east, I mean, Utah and Colorado continue to be very strong. Texas is strong. Missouri is stable at a pretty low rate, but it's been that way for a few years. Kentucky is stable, again, at a relatively low rate, but stable. And then the Eastern states have all -- the one -- the Virginias and Carolina, all have very strong highway programs and we see that in the monthly lettings. So overall, in our markets, outside of Kansas, which had really had a very sharp decline in highway spending, outside of that, we see some decent growth going into '18.

Okay. I mean, is it fair to say growth in public will be kind of that low single digit for next year? Is that how you're thinking about things?

This is Noel Ryan. So in additional to the federal and state outlook, there's also something to be said for the local outlook. So for example, in Nevada right now, they just had the renewal of the fuel revenue index legislation, which is going to add about $3 billion over the next 10 years in Las Vegas proper, which is going to go directly to new road construction, maintenance and repair, and that was just approved last fall. So those local-level efforts are also very important. They don't get a lot of attention because they're local. But we would say that in many of the markets where we are, we're seeing that type of activity as well.

I mean, so is that directionally an uptick from what you saw in '17 and thinking into '18?

Yes, I'd say so. We also have something on the ballot in Columbia, Missouri for some additional infrastructure spending. We hope that passes. So that would be another uptick for us. So it -- overall nationally, the environment for public spending and for additional state and local spending is quite good. I mean, you're seeing Republican governors vote for increased revenue or taxes, which I think is a very positive sign. Maybe we'll get something out of the Feds. I'm not sure that I'd hold my breath, but I think that there's at least a chance of that. But certainly, the state and local governments are saying, "Okay, we're going to have to do it ourselves." And there's a lot of states and local communities that are doing it.

Just to build on that, I think there was some talk about a $0.07 gas tax increase over the last week or so. That would increase it by about 30%, 40%. Is that enough? And will that -- I thought, clearly, going to be bullish for public, but do you have any thoughts on that? I know you've been working with the industry organization.

Yes. It's plus or minus $2 billion per $0.01. There is a shortfall in the Highway Trust Fund, so we probably need something more than the $0.07 in order to have a significant increase in spending. But we'll take whatever we can get. I also think there's some potential on the federal level for any repatriation of overseas dollars, some of that being allocated to infrastructure spend. So we'll see, especially as we see the tax package that's coming out on Thursday, whether there's anything for infrastructure in that. The industry is very united. Even organizations like the truckers are looking -- are positive on the gas tax increase. It's just whether we have the political will in Congress to pass it.

Got you. Okay. And then on the pricing environment, it's been weaker than we expected for the year in different areas. How are you guys thinking about that next year? And are you still thinking longer term, 3.5% pricing growth is the way to think about the business? And then maybe that, maybe with what's going on, on the consolidation front, record amount of consolidation over the next 3 to 6 months with some large deals going out. How do those -- how do you think those are going to affect your markets? And is there any upside potential on the pricing side?

I think 3.5 is very precise. I think I'd still go with low to mid-single digits on pricing. It's a favorable pricing environment. On the consolidation front, consolidation is always positive. However, these are all micro markets, very local. The deals that have been announced really don't impact our markets. The cement acquisition of CRH of Ash Grove. CRH really isn't much of a cement producer in the U.S., so that's not much of a consolidation effort there. But overall, consolidation helps, but it's -- you really have to look at it in each local community for it to have any direct effect.

(Operator Instructions) Our next question comes from the line of Brent Thielman with D.A. Davidson.

One more on cement pricing, Tom. Last year, pretty wide range of announcements in the market, I think. Any insight on what's being proposed out there for next year, at least in your markets? And is there anything else you think has changed in terms of the competitive dynamics around those assets that has you feeling better about recognizing a healthy portion of that $8, or is it just simply supply/demand?

Certainly, supply and demand is always the #1 determinant. We've had roughly $6 to $8 announced by all the majors in our markets. And we think that, that is a positive. Last year, it was anywhere from $4 to $20, And that, I think, added to the confusion and to some of the disappointment in the $3 to $4 that was achieved. So I'm optimistic going into the year that the industry at least is in a much more narrow band.

Our next question comes from the line of Scott Schrier with Citigroup.

I wanted to ask (technical difficulty) last year, toward the end of the year, you were targeting more of a 3x leverage and it's bumped up a little bit to, I think, 3.2, and now in the mid-3s. Is that just due to a function of the timing of some of your acquisitions? Or is there fundamentally something different that you're looking at the business and how you're viewing leverage versus the cycle?

Scott, it's Brian. Thanks for your question. No, it's really a function of the prices that we're paying. Obviously, we're still paying multiples in and around about 7.5x on average. That's a little higher than we would -- than our leverage ratio, so it's really just the pace of acquisitions which is driving us to the upper end of that range.

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

Tom, you had mentioned doing something similar to the magnitude of $400 million-plus of acquisitions next year. Lots of large deals out there in the marketplace. What's the likelihood that we'll start to see some forced divestitures where you all might be able to kind of come in and, i.e., maybe change the size of the deals that you guys have been looking at from smaller to more midsized looking into next year?

I mean, the problem, Stan, is when they do the divestitures, they typically do an auction, and we tend to lose those also. And they tend to go for similar multiples that the larger transaction was done at. And I just have not, in 35 years, been able to make the numbers work on mid-teens EBITDA multiples. Maybe there is out there a deal that creates enough value and you have enough synergies, but I haven't seen it yet.

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

Two questions. Number one, you mentioned that the storms impacted products margins. And I'm curious if margins in products could have been flat year-over-year ex storms? And then the second one, I'm just curious whether the storms are increasing the CapEx guidance at all. You mentioned -- I mean, you got the rebuild at Houston terminal. So I was just curious if that was in the CapEx guide as well.

On the first one, yes, the storms definitely impacted our margins in 2 ways. One, it increased costs. We paid our employees even though we were basically out of business for a number of days, and we paid them as if they were working full time, which we thought was the right thing to do. And then I think also it's impacted the ready-mix price a bit. Not a lot, $1 or $2 in Houston. As people were getting back on stream, they tended to be a little bit more aggressive on price. I think that's moderated now. So you had an impact both on cost and on price on the product side in Houston. On the CapEx, I don't think there's any storm-related CapEx in our new guidance. Brian, is that correct?

Yes. Most of the items on the replacement of the terminal are long lead-time items. So the cash flow will probably happen mostly in 2018 related to that. Maybe a little bit here in the balance of 2017, but not significant.

Yes, pretty minor.

Our next question comes from the line of Nishu Sood with Deutsche Bank.

This is actually Tim Daley on for Nishu. So my first question just is relating to the deals that were done in the quarter. So the EBITDA bridge that was provided had about $2 million of quarterly impact from those deals. So if we annualize that and use the acquisition, that gets -- the price paid, that gets us to about 11.8x. I'm just curious, if this -- Tom, you mentioned that the M&A market, especially in the materials side, is getting a bit more aggressive. I just wanted to understand a bit more about that. How -- what would you have paid about 1 year or 2 ago for those deals? And is my math right around that high 11x?

No, the math is wrong, and I'll let Noel address that. On these smaller bolt-on acquisitions, we really haven't seen the increase. These are tuck-ins, relationship-driven acquisitions where they're still in the 7 to 8, 9x level. It's on the bigger, much larger deals that go out to auction that the prices have gotten silly. And Noel, on the multiple?

Sure. So we paid for, on a combined basis for the 4 transactions that we did, $94 million. And keep in mind that you're talking about a significant seasonal element in a lot of these businesses, so it's very difficult to speak to a $2 -- sort of a $2 million-per-quarter give on that. So we would say that, obviously, on a full year basis, these would probably do a bit better than the $2 million that you're modeling for on a quarterly basis. And frankly, some of the businesses over in Texas, for example, which is a full year market for us, the business that we just did in North Dallas, we got at a very attractive multiple. It's an excellent business, and we're very pleased with where that came out at. And as you know, typically 12 to 18 months out, we're going to get about a turn to 1.5 turns of synergy. So that's something that we're planning on.

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

I just want to ask quickly on margins and your thoughts on it, Brian, on margin potential from here. It sounds like cement, we're probably at or near peak, maybe, with more purchase getting into the mix. I get it's lower capital need, so it makes sense. But on the aggregates front, you had another great margin quarter, I think, 73%, which I thought sounded like it was about near where you've been running on an incremental basis in LTM. So just trying to get a sense if there's more room for margin expansion here, or if is this is sort of the high end of where we go.

We continue to drive that margin expansion through a combination of price, cost and volume growth. We're doing pretty well on all 3 (inaudible). When we can get all 3 moving in the same direction at the same time, then we'll see further margin expansion. We think the environment for price is still positive in 2018, and there should be some more volume growth. We're doing well with our productivity improvements on our aggregates business. So there should be still further margin expansion as we go forward here.

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

I'm wondering, Tom, if you could talk about how you see the outlook for pricing in your concrete businesses. And in areas where you're not vertically integrated for your concrete customers, it looks like pricing this year was on the softer side and we saw materials margins come in. I'm wondering if you've sent out price notification to customers of an increase in '18, and if you can give us some color on that. And then from the aggregates business standpoint or product line standpoint, can you talk about the cadence of which you expect pricing to improve into that low single digit rate? When do we get there as we think about '18 off of the flattish pricing we've seen year-to-date?

Yes. First off, Jerry, we are never in the ready-mix business without having aggregates as a base. We're always vertically integrated with aggregates in our ready-mix. Ready-mix pricing has been very good, really, except for Houston, which has had the impact of the oil decline, sort of a collapse in the office market, which we don't participate in, but our customers -- or excuse me, our competitors do. We are optimistic going into '18 that the pricing environment in Houston will start to improve as residential starts to pick up some steam and we get a bit more on the commercial side. So pricing really doesn't start getting announced until late -- early in the year on the product side. But we are optimistic that products will recover. And then when we look at aggregates, we're starting to see some price increases out there in that 3% to 5% range. And again, we're optimistic for aggregates that'd be low to mid-single digits next year. So it's just a continuation of the last few years, Jerry.

That is all the time we have for questions. I'd like to hand the call back over to Tom Hill for closing comments.

Thanks everybody, and operator, and thanks for everybody for joining us. And that concludes our call. Everybody, have a good day.

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