Summit Materials Inc (SUM) 2017 Q4 法說會逐字稿

Greetings, and welcome to the Summit Materials Fourth Quarter and Full Year 2017 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Noel Ryan, Vice President of Investor Relations for Summit Materials. Thank you. You may begin.

Good morning, and welcome to Summit Materials Fourth Quarter and Full Year 2017 Results Conference Call. Leading today's call are Summit CEO, Tom Hill; and CFO, Brian Harris.

We issued a press release before the market opened this morning detailing our fourth quarter and full year results. We also published an updated supplemental workbook highlighting key financial and operating data, which can be found in the Investors section of our website at summit-materials.com.

This call will be accompanied by our fourth quarter and full year 2017 investor presentation, which is available on the Investors section of our website.

I would like to remind you that management's commentary and responses to questions on today's call may include forward-looking statements, which by their nature are uncertain and outside of Summit Materials' control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may differ in a material way. For 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 entering 2018, followed by a financial review and outlook from Brian Harris. At the exclusion of these remarks, we will open the call for questions.

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

Thank you, Noel. And welcome to today's call. Before we get into the discussion of our 2017 results, I want to introduce our new Executive Vice President and Chief Operating Officer, Karl Watson Jr. who joined our senior leadership team on January 8. Karl is a proven operator, a strategic thinker and an experienced leader. He has all of the attributes to help lead our company into the next growth phase. Most recently, Karl was the President of Cement and Southwest Ready Mix at Martin Marietta. Previously, he served as President of CEMEX USA. While at CEMEX, Karl lead the turn around that there are multi-billion dollar U.S. operations, grown EBITDA from an annualized loss in 2011 to nearly $600 million by year end 2015. On a personal level, I've known Karl for many years and have had a great deal of respect for him and I'm excited for what he brings to Summit.

With that introduction, please turn to Slide 5 through 9 of the accompanying presentation deck.

While 2017 was a record year on many levels, no achievement was more notable than our world-class safety record, which continued to be among the best in our industry. For us, operational excellence begins and ends with providing a safe working environment for our employees. I want to recognize the efforts of our RK Hall team in North Texas, which recently surpassed 4 million man-hours with no lost time incidents. Congratulations to Robert Hall and his team for a job well done.

As detailed in our press release earlier today, Summit delivered exceptional full year results that exceeded the high end of our adjusted EBITDA guidance range. We generated double-digit growth in net revenues, adjusted cash gross profit, operating income and adjusted EBITDA. This performance was driven by a combination of organic growth in our materials line of the business in addition to our record 14 bolt-on acquisitions that further established our leadership in well-structured regional markets. Overall, our mix of heavy materials as a percentage of EBITDA increased to 62% in 2017.

Our fourth quarter results reflected a strong finish to the year despite poor weather and lingering disruptions in the Houston market related to Hurricane Harvey, which have since subsided.

The recent passage of the Tax Cuts and Jobs Act is a significant positive development for Summit. Given a lower statutory federal corporate tax rate, we've reduced the value of our deferred tax assets as well as the estimated amount we are required to pay under our Tax Receivable Agreement. Post-tax reform, we estimate that the value of our TRA liability have been reduced by 20% to $332 million, with the first significant TRA payment to LP unit holders projected to commence in 2026, 6 years later than our estimate prior to Tax Reform due to the extension of the bonus depreciation provision outlined within the act. Simply put, not only do we expect to pay no federal income taxes for the foreseeable future, we also expect to have no meaningful TRA payments for 8 years.

With the passage of tax reform, approximately $217 million of estimated cash payments that would have been paid to pre-IPO investors under our TRA may instead be invested back into the business contributing positively to projected free cash flow.

Underlying demand for heavy materials accelerated in our core markets during 2017. Organic sales volumes to Cement increased 5.8% versus the prior year, driven by increased activity along the northern Mississippi River corridor. Organic sales volumes of aggregate increased to 3.4% versus the prior year, in line with the long-term average growth rate, but significantly better performance in 2016, driven by demand growth in Texas, Vancouver, the Carolinas and Utah.

While organic growth and average selling prices on materials was disappointing last year, we see an opportunity for recovery this year. Organic ASPs on Cement increased to 3.3% in 2017, below the long-term average growth rate. However, in our northern Cement markets, an $8 per ton price increase becomes effective on April 1, which we expect to result in a higher rate of Cement ASP growth. Although organic ASPs on aggregates were essentially flat year-on-year on a mixed adjusted basis, organic aggregate ASPs increased 2.9% in 2017, closer to the long-term average growth rate.

We anticipate sustained organic growth and average selling prices for aggregates across most of our markets as we look ahead to 2018. Organic sales volumes and aggregates increased to 3.5% in the fourth quarter given broad-based growth and demand across most of our markets. In the fourth quarter, average selling prices on the aggregate adjusted for mix increased 3.2%, while average selling prices for Cement increased 2.5%.

Turning to Slide 10 through 12. Excluding ready-mix concrete, every other line of business posted year-on-year organic growth in 2017. The 2.3% organic decline in ready-mix lines was primarily attributable to Hurricane Harvey related disruptions in Houston during the second half of the year. Together, with slower activity levels in Kansas. On a combined basis, Houston and Kansas represented approximately half of our total ready-mix concrete volume last year. Excluding Houston and Kansas, organic sales volumes in our ready-mix business increased 4.7% in the fourth quarter and 4.6% in the full year 2017.

We anticipate recovery in Houston ready-mix volume this year, particularly as we pass the first anniversary of Harvey in the back half of 2018.

Turning to Slide 13 and 14. Adjusted cash gross profit margins on Cement and aggregates increased meaningfully in the fourth quarter and during the full year 2017, driven by a combination of organic price and volume growth.

For the full year, aggregates adjusted cash gross profit margin increased 330 basis points to a record 65.3%, while Cement's adjusted gross profit margin increased 190 basis points to a record 47.1%.

The full year incremental margin on aggregates was 83.1%, up from 74.5% in the prior year, while the incremental margin on Cement was 69.5%, up from 50.2%.

Turning to Slide 15 through 20. For a discussion of market conditions in our top 4 states, which on a combined basis, represent around 55% of revenue. Texas remains our largest and one of the most exciting growth markets entering 2018 at 21% of revenue. Beginning with Texas private, which consists of residential and nonresidential construction, approximately 60% of our Texas revenue. We continue to see a strong market for new single-family homes entering 2018. Statewide single-family permits increased approximately 10% in 2017 versus an increase of 1.9% in 2016.

In Houston, lots of housing inventories sit at just 3 months or 70% below the prior peak, while single-family housing starts remained 33% below the peak. On the nonresidential side, we continue to see significant [growth] along the I-99 corridor in Houston and an energy driven Midland/Odessa. The Texas Public market, which represents 40% of our revenue in the state, is poised for an acceleration. Several factors regarding this. First, according to the Texas Department of Transportation, funding for fiscal year 2019, which commences September 2018, is expected to increase by $3 billion year-on-year given funding under Proposition 7. By fiscal year 2020, it is forecast that Proposition 7 will add nearly $5 billion annually to the state transportation budget, representing a more than 50% increase from the fiscal year 2018 budget.

Second, Texas Lettings Schedule published in January indicates that fiscal year 2018 will be a year of catch-up on public projects that were otherwise disrupted by the impact of Hurricane Harvey late last year. Further, as you may be aware as part of the recent budget deal, the Senate has passed an $89 billion emergency appropriation that includes $20 billion in funding for infrastructure investments in Texas, Florida and other regions recovering from major natural disasters that hit last year, including Harvey.

Given that Houston spends just $1 billion to $1.5 billion annually on public infrastructure, the prospect of a major federal aid package that helps to build dams and other water containment to protect Houston from future flooding events could be significant, driving increased public spending in the region over a multi-year period.

On balance, we have a very positive outlook for Texas in 2018.

Turning to Utah, our second largest state at 13% of revenue. We estimate Utah Private represents approximately 70% of our Utah state revenue. Job growth in Utah increased 3% in 2017, the second highest growth rate of any state last year, with Nevada leading the pack. Labor conditions remained tight with unemployment holding at 3.5%, well below the national average. Significant net migration is expected this year, which could exacerbate the existing housing shortage facing the state with only 1.8 months of housing inventory at year-end 2017.

Single-family permits increased 18% last year, to remain 21% down below the prior peak, while most of inventory in Salt Lake City is 80% below the prior peak. Nonresidential also remained strong as the value of office construction hit an all-time high in 2017. In addition to a $3 billion redevelopment of the Salt Lake International Airport, which will last another 5 years, there are other significant opportunities on the horizon, including the construction of an 855,000 square foot Amazon fulfillment center and approximately $600 million in public school construction funding approved by voters in November 2017. This translates into regional demand in Utah over the next 3 years.

Similar to Texas, we remain very positive on the outlook for Utah. Together with neighboring states Nevada, Colorado, Wyoming and Idaho, who share similar underlying market fundamentals.

Turning to Kansas, our third largest state, at 12% of revenue. Kansas public works accounts for 50% of state revenue, but then a disappointment in recent years due to significant tax cuts and austerity measures that have diverted funding away from the State Highway Trust Fund. However, in late 2017, Kansas Public received some welcome good news, the Kansas Weather approved authority for the Kansas Department of Transportation to issue a total of $400 million in bonds over fiscal years 2018 and 2019 to find important preservation projects throughout the state. With this additional bonding authority, KDOT will be able to boost its preservation spending to approximately $320 million in each of these fiscal years. Yet even as preservation spending is poised to increase, spending on new construction projects continues to decline. In summary, we think Kansas public spending in fiscal 2018, which commenced January 1, 2017, will be essentially flat on a year-on-year basis.

Keep in mind, while Kansas Public appears to have troughed, we are approximately 40% below 2015 state transportation funding levels, leaving ample room for improvement. Kansas Private, which represents the other 50% of state revenue, continues to perform quite well with single-family housing permits up 14% year-on-year. Unemployment in Kansas remains below the national average and is expected to remain so in the 2018 with several large employers continue to add jobs in the region.

On the nonresidential side, construction of commercial wind farms is accelerating in Western Kansas and Northern Oklahoma, which should drive aggregates in ready-mix volume in 2018. Our balance, the outlook for Kansas remains mixed as stable gross private demand is offset by soft public funding.

Turning to Missouri at 9% of revenue. Missouri private, which accounts for approximately 75% of our state revenue, is starting to accelerate in both single and multi-family, particularly within the Columbia market. New construction of single-family homes has grown in the low- to mid-single digits, while state unemployment remains well below the national average. On the nonresidential side, there are several large commercial projects ongoing in the market, including the recently announced construction of a major steel plant outside of Kansas City with construction beginning in the first quarter of 2018.

Missouri public, which accounts for 25% of our Missouri state revenue is also poised for improvement. While Missouri has its seventh largest highway system in the country, the state currently has an $800 million annual shortfall on its transportation budget. The shortfall is due to the fact that the state's motor fuel tax is the fourth lowest state fuel tax in the nation, having last been increased in 1996. Indirectly past this issue, the Missouri General Assembly established a bipartisan task force to make recommendations regarding the funding of the state's transportation system. In its January 2018 summary of findings, the task force recommended increasing the state excise tax on gasoline and diesel by $0.10 and $0.12 per gallon. This would raise approximately $430 million annually to improve roads and bridges. We anticipate legislative efforts to increase Missouri motor fuel taxes, will be introduced in the near future.

On balance, we see Missouri private as remaining stable, while Missouri public could accelerate if the new motor fuel tax is implemented.

Turning to Slides 21 and 22 for a discussion of our Cement segment, which had a record year in 2017. Overall volumes were strong, while ASPs were somewhat disappointing. On balance, the Cement segment grew EBITDA by 13%, while adjusted EBITDA margin grew to a record 42%. Cement incremental margins were exceptional last year due to strong operational performance at our plants together with the increased organic growth in volumes and ASPs.

We remain highly constructive on the Cement outlook over the next several years. Consistent with our prior comments, we expect domestic supplies of Cement servicing the Mississippi River corridor will begin to tighten with no major domestic capacity additions in our markets currently under way. We currently expect that imports will supply the marginal tonnage into our markets as we look ahead to 2019 and beyond. While large coastal markets will have ample access to imported cargoes, England markets like many of the ones we serve, are expensive to reach due to the estimated cost of freight, demurrage, and stevedoring. As a result, we see a scenario in which these transit costs push river cement prices higher in future periods.

Based on preliminary discussions with customers, all indications are for sustaining growth in cement demand over the coming year. In Minneapolis, Saint Paul, there is the extension of the light rail system that will commence early this year. In St. Louis, there are multiple investments in water infrastructure and strong management projects that have been announced in both Minnesota and Iowa. The KDOT has announced increased concrete trading levels for fiscal year 2018 and fiscal year 2019. In Kansas City where we have our Memphis cement terminal, the legislature passed a motor fuel tax increase last April that is expected to raise an incremental $350 million annually for KDOT as a direct result of this funding, the City of Memphis has announced a 3-year plan to repair, replace and improve state and city street. Further, construction of the $1.2 billion I-74 Mississippi River bridge between the Iowa and Illinois is a significant source of demand that will last at least another 3 years based on the current construction schedule.

In summary, we see continued upside for our Cement business, given a favorable demand backdrop, coupled with the opportunity for improved pricing power as domestic supplies further tightens.

Turning to Slide 23 for a discussion of recent acquisitions. In 2017, we invested $420 million across 14 completed acquisitions, including cash paid and deferred consideration. 45 days into the calendar year, we've invested another $120 million across 3 bolt-on acquisitions in Texas, Utah and Missouri, all of which closed in January. With more than 60 transactions completed since 2009, we've continued to acquire quality materials-based assets in what we named a fragmented industry, bringing the benefits of scale to smaller private operations while creating significant value for our shareholders.

Located along the Utah fund range, Metro ready-mix is an aggregate and ready-mix concrete company that positions us as a top 3 ready-mix player with significant cost synergies in the Salt Lake market. Price construction is an aggregate to asphalt paving and construction services company that expands some of its footprint in West Texas, particularly in the growing Midland/Odessa market. When this construction in Central Missouri is an aggregates business sort of extensive reserve that expands and complements Summit's existing position in Central Missouri. Each of these acquisitions contributes to our leading positions in the markets we serve, and we are excited to welcome them to the Summit family of company.

We'll remain strategic prior through cycle, while same discipline in our capital allocation. Last year, multiples for completed privately sourced bolt-on transactions were significantly below those of some of the larger marketed transactions that were announced. We continue to see the opportunity for additional bolt-on acquisitions this year in existing and contiguous markets, while continuing to evaluate personnel investments as they arise.

With that, I'll turn the call over to Brian for discussion of our fourth quarter and year-end financial results.

Thank you, Tom. Good morning to everyone. We had a strong full year performance highlighted by year-on-year organic volume growth in both cements and aggregates, margin expansion in our materials lines of business and the mid-teens growth in adjusted EBITDA.

Incremental margins remain elevated throughout our materials lines of business, hitting multiyear highs in 2017. We entered 2018 with record levels of cash and available liquidity with which to invest in high-return organic growth projects and bolt-on acquisitions. In the year ahead, our focus will be on further positioning the company for long-term growth in margin expansion, free cash flow and profitability.

Let's begin on Slide 25. Consolidated net revenue increased by 17.7% in 2017. In our West segment, net revenue increased 22.2%, while in our East segment, net revenue increased 16.6%. Year-over-year improvements in both regions were attributable to growth in organic and acquisition-related net revenue.

In our Cement segment, net revenue increased by 8.1% on a year-on-year basis, supported by positive organic growth in average selling prices and sales volumes.

Organic net revenue growth was approximately $52 million in 2017, driven mainly by improved performance in the West and Cement segments.

In the fourth quarter 2017, when compared to the prior year period, consolidated net revenue increased by 13.7%. In our West segment, net revenue increased by 26%, while in our East segment, net revenue increased by 7.9%. Improvements in the West segment were attributable to both organic and acquisition-related growth, while in the East region, acquisition-related growth offset lower organic net revenue in the period.

In our Cement segment, fourth quarter net revenue declined 4.4% as we experienced adverse weather conditions in October and November.

Turning to Slide 26. Summit continues to generate strong cash flow from operating activities, which excluding net capital expenditures, have translated into year-on-year growth in free cash generation. In 2017, free cash flow increased to a record $115 million.

Turning to Slide 27. Net leverage was 3.4x at year-end 2017, down from 3.9x at the end of the prior year. Cash and available liquidity increased to $602.5 million versus $352.1 million at the end of the prior year.

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 28. Here, we introduce adjusted EBITDA and capital expenditure guidance for the full year 2018. For the full year 2018, we forecast adjusted EBITDA to be in the range of $490 million to $510 million, including contributions from the 3 transactions completed year-to-date, but excluding any acquisitions that are yet to be completed or announced. This guidance implies a year-on-year adjusted EBITDA growth of 10% at the midpoint of the range when compared to further adjusted EBITDA in 2017.

For the full year 2018, we forecast total capital expenditures to be in a range of $210 million to $225 million, including the impact of the 3 acquisitions completed year-to-date 2018. This guidance implies a year-on-year CapEx growth of 12% at the midpoint of the range when compared to the full year 2017.

Nearly half of our 2018 CapEx will be directed towards growth and development projects, up from just under 1/3 of CapEx in 2017. Key projects included within our 2018 growth CapEx include: our crush plant upgrade in Vancouver; the overhaul of our Cement terminal in Memphis, together with multiple capacity expansions and plant upgrades at locations throughout the company. For modeling purposes, including the impact of all 3 completed acquisitions on a year-to-date basis, SG&A is running in a quarterly range of $68 million to $70 million, while DD&A is running in the quarterly range of $48 million or $49 million. Interest expense is running at 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 $4 million to $6 million in state and local cash taxes and no federal income tax for the full year 2018.

Finally, with regard to total equity interest spending, as of December 30, 2017, we had $110.1 million Class A shares outstanding and $3.8 million LP units held by investors, resulting in total equity interest outstanding of $113.9 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. Turning to Slide 30. In summary, we anticipate 2018 will be another very strong year for Summit. Tax reform is a significant development for our business, one that we expect to contribute meaningfully to projected free cash flows with a more than $200 million reduction in our estimated TRA liability. Residential and nonresidential demand continues to accelerate in our larger geographic markets for single-family housing starts in months of inventory well below prior peaks.

Some of our largest public markets appear poised for an acceleration in 2018, benefiting from increased state and local funding measures. Coming off a record year, our Cement segment is well positioned for another strong performance given favorable market conditions along the Mississippi River corridor and the opportunity for improved growth in average selling prices.

We had several bolt-on acquisitions currently in diligence while our balance sheet remains well capitalized to support the ongoing growth of the business. With the impact of Hurricane Harvey now fully behind us, we anticipate prior year comparisons will become increasingly favorable in Houston, our largest metro-market by revenue in the back half of 2018. Our full year results are a testament to the efforts of our 6,000 employees. Their continued focus on safety and performance exemplify a culture that remains committed to operational excellence. Our people are creating value for our customers, our investors and the communities we serve. Our team performed an exceptional effort in 2017 and I'm looking forward to what we can achieve together in 2018.

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

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

It's actually Blake Hirschman on here for Trey. First one for me is just on the 2018 EBITDA guide, the 10% year-over-year growth at the midpoint. Is it fair to assume that something like mid-single-digit to upper single-digit organic EBITDA growth is built into that from where you exited the year? And then that just the 3 acquisitions you've done year-to-date are kind of layered on top of that within that range. Is that a fair assumption?

Yes, Blake. That's fair.

Okay. And then just one quick follow-up on that. Can you kind of remind us how we should be thinking about the seasonality and the cadence of how EBITDA might flow through, just given the 1Q and its seasonally unimportance relative to the full year, just how we should kind of be modeling that.

Yes. I mean, our EBITDA typically in Q1 is about 5%, a little less than 5%. Q2 and Q3 together are around 70% and then Q4 is 25%. Obviously, that can vary with weather and so forth, but that's approximately what it should be.

Our next question comes from the line of Rohit Seth with Suntrust Robinson & Humphrey.

Just on the Cement business. I was curious if you can provide any commentary around the traction you guys have with the cement price increase you announced for January.

Yes. I mean about $8, April 1 is what we've announced in most markets. The industry is between $6 to $8 in the Mississippi corridor. So far, knock on wood, it's -- we've gotten good signals that those price increases are going to hold. So we're very optimistic going into the season. However, it's still February. So we've got a couple months ago, but I'd be very optimistic that we are getting traction on our Cement average selling price.

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

This is for Cement, we're hearing some certain regions in the U.S. tighter supply of fly ash, which theoretically would be positive for your cement operations in terms of pricing support and also incremental volumes. In the markets in which you operate, are you hearing of any tightness of fly ash -- supply of fly ash and then one quick cleanup with your guidance. I may have missed this, the contribution from acquisitions to that EBITDA guidance really for the first 3 acquisitions made this year.

Yes. Thanks, Katherine. On fly ash, yes we are seeing some tightness. We are not, at this point worried about supply, but we do see some significant price increases coming on fly ash. Definitely, we'll increase the cost for our ready-mix business, which typically with Cement and fly ash, you're able to pass along. And if it gets much more expensive, it'll make it more attractive to use more Cement, which is certainly an area where we supply cement, we look at as a positive. But yes, it is tightening. We'll see. It can actually be impacted by weather because it's impacted by how those coal-fire power plants are running. We'll see, but we're not particularly worried about it. Texas is probably the area where we're seeing the biggest price increases and the most noticeable shortages. As far as acquisitions, Brian?

Yes. We've spent about $120 million. And it's fair to say that we've stayed within the guidance range that we've typically had for the multiples that we pay in around about 7.5x.

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

I just wanted to ask a little bit about both the pricing in the East segment. So it looks like on an annual and on a quarterly basis, organic growth in East was pretty limited. I'm guessing that's a lot due to Kansas. Can you also talk about a little further East and what you're seeing in AMC and Boxley in the platform over there, which I know generally is also a little bit more of a higher price market?

Yes, we saw good solid growth in 2017 in the Carolinas and Virginia in our AMC and Boxley companies. We do see that growth continuing in '18. It's in the low- to mid-single digits, pretty much across-the-board there. But those markets across the 3 segments, both infrastructure, residential and nonresidential, are seeing good solid growth, and we see that continuing.

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

Tom, it seems like kind of a lingering overhang is still Kansas right now. Is there anything you see that could develop the course of the year in that market, maybe particularly on the public side that could turn business around this year? Are we really kind of thinking about this as kind of more of 2019 story in terms of that market coming around?

There was an article in the paper the other day that the new governor said, “Hey, we have to stop raiding Highway Trust Fund.” So certainly, there is political pressure to stop raiding the trust fund. There's also significant discussion of increasing revenue via fuel tax increase or other tax increase. I think you're probably correct that it's, if you see any increase there, it's going to be '19. But the fact that they issued $400 million worth of bonds, at least will give us some cushion in '18, that it's not going to get any worse in '18. But we're 40% below the numbers that they used to spend in Kansas on highways. And I'm pretty confident, we'll get back there, but it's going to take a few years.

Our next question comes from the line of Michael Eisen with RBC Capital Markets.

I was hoping you guys could take a moment to talk a little bit more about the strong incremental margin performance you guys had this year. Specifically in the Materials segment. It was way stronger than we would've expected seeing kind of the longer-term average you guys have talked about. And I was kind of in the absence of stronger pricing that we see historically. So kind of what's driving the higher amount? What can this potentially be with a more firm pricing environment? And should we expect a higher performance to continue going in the next year?

First off, Michael, I'll just say that some of our incremental and our incremental over performance comes from the fact that we are just, on the cost side, really performing well. That goes especially in our aggregates and our cement operations have really been running extremely well and we see that continuing. Pricing, you have to look at the mix adjustment when you're looking at incrementals and were in the 3% range on aggs. Certainly, if that accelerates, we would see some upside. But Brian, maybe you have some are further color on that.

Yes, no that's right, Tom. It's really a continuation of the thesis that we've been on since the very beginning to expand our margins. We've done that quite successfully since the IPO and will continue to do so -- and it's a combination of volume, price and cost that comes in. We've had some great success with our acquisitions and integrating those in the performance efficiencies that we get from those as well. So all of the above contributing to that margin expansion, which we would expect to continue.

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

Just a follow-up on incremental margins. In the quarter, was there any aggregates business, any inventory build ahead of anticipated 2018 demand? And I also just wanted to ask with Karl Watson coming on board, is there any change on how you're viewing pricing versus volume. He was known as somebody who implemented the value versus volume strategy, both in Martin Marietta and in CEMEX. So I'm just curious if there's any change in how you're going -- you going the market?

So Gary, thanks for the question. On the inventory, no, we don't -- we didn't build ahead of the season. Typically we -- by the time we get to December, we're actually running down our inventories in most places. The exception to that rule would probably be the Cement business where we do -- we're unable to produce enough during the peak of the season. So we do build inventory when we're producing during the tail end of the season. But other than that, no.

So, it's really just a continuation of our prior strategy. Nothing unusual in the Q4, Brian. I think that's also -- now Karl certainly has been a price leader in his career. And we would look at that as reinforcement of our existing strategy and he's got a great track record of that and I think he will be able to certainly be able to help us.

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

A quick question. Could you talk a little bit, incremental some nice -- can we talk a little bit about what's embedded in your cost assumption in the coming year? And then you historically hedged these, so maybe kind of talk about to what extent you recovered from that exposure.

Yes. In the 2 areas, you would think about as far as cost inflation would be wages and diesel. We are seeing a little bit of wage inflation in Utah. But in general, it's around the rest of the group, it's sort of a continuation of the 2% to 3% that we've seen historically. On the diesel side, we use 29 million gallons of diesel because we've hedged about 40% of it, we see about, if the rest of the year continues at today's price, about $0.19 per gallon increase or about roughly $5 million versus last year. So pretty benign. As we go into '19 and '20, we'll see. I'd be concerned about wages and certainly pricing will get to be more important as those -- as we do get some wage pressure in '19 and '20.

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

So on the guidance for 2018, I just wanted to get a little further clarity on volume and price assumptions that you're making for aggregates and cement. And also on the Capex, since it's going to be more organic growth-oriented in nature, just want to understand the driver of that shift, please.

On volumes and prices on our aggregates and products, it's sort of a continuation of the low- to mid-single digits across the board there. On Cement, we hope to do a bit better than that and we would hope that pricing would be, and volume, will both be in the mid-single digits. As far as CapEx goes, Brian?

Yes. On the CapEx, we've highlighted on the last call an issue that we had a couple of big projects, one was the upgrade to our [COGs,]plant up in Vancouver. That's one of the big drivers of the increase year-on-year. We'd also highlighted the upgrade to the Memphis Cement terminal. So those account for a fairly large portion of the increase. But then we have another $40 million or so of projects right across the network, including -- in both aggregates, ready-mix and asphalt. So it's really not a specific shift necessarily. It just so happens that the mix between the organic growth and the maintenance CapEx spend in 2018 is a little bit more bias towards the growth in plant improvement project.

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

I wanted to ask about cement pricing. Obviously, for 2018, it's a relatively known quantity. But longer term, are you in the camp that we could see double-digit cement price increases beyond '18?

When demand exceeds domestic supply, I do really believe you'll see an acceleration in the overall cement pricing. I think we're in markets where you could see some significant acceleration because they're insulated from both foreign and domestic imports. They are -- as you get further up the river, you get more isolated and it's just higher cost to get imports there. So am I in the camp that we'll see it in '19? Maybe not '19, but certainly, if the recovery continues, which certainly we believe it will, that in 2021, you certainly could get to double-digit price increases.

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

Tom, I had a question for you following the comment about the easier backup comps because of Hurricane Harvey disruption. I'm wondering how we should think about the ability to recover the weather-deferred tons in 2018 or if it could take a couple of years to fully recover. And then secondly, if you can just remind us how much spare capacity you still have in your cement complex, given things are running so well there and when you might start looking to import cement to fill customer demand kind of more meaningfully?

Yes. Cement, we are -- we're at a capacity and we are beginning to import cement and we'll continue to do so going forward. As far as the hurricane impact, as we said on our last call, Harvey and Irma accounted for about a $15 million hit. We'll get a portion of that back, but I think it will take a few years to get the full $15 million back. We're trying Houston to come back. Our ready-mix lines look quite strong. But the city is still damaged. And just on that, I mean, one of the things that is, I think, very bullish for Summit is the $89 billion package that passed by Congress. I think, there's $17 billion that's going to the corps of engineers. A lot of that will go to Houston and that is -- that will be very significant demand for heavy building materials. And when you look back at New Orleans, after Katrina, the real boom there was in corps of engineers work, repairing the dikes and so forth. So that's an area. It probably won't hit until 1920. We may get a little bit, if we're lucky, at the end of '18, but it's probably more of '19 and '20 story. But extremely positive or underlying demand of heavy building material products in Houston.

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

Brian, I'm wondering if you could talk about on the acquisitions that you closed on this year. What proportion of the purchase price is eligible for accelerated immediate CapEx expensing in terms of the used equipment purchases and how big of a tailwind is that? And then, when you lay out the favorable terms in the tax receivables agreement in terms of 2026, what level of CapEx is embedded in there? In other words, should we expect that number to continue to be pushed out as you make the acquisition and CapEx around the '18 levels? And then, on a similar note, Tom, I wonder if you could comment on post the tax bill, have you seen any changes in valuation on the EBITDA basis because of the favorable lower tax attributes compared to a year-ago?

Okay, Jerry, there's a lot of parts to that question, but let me have a go. Let me with the TRA and the timing on the TRA payments. Obviously, the accelerated depreciation is the biggest component, but not the only one, that's pushing at the timing on the -- or when the TRA payments would commence. We built into our model, a typical run rate, which is that kind of 8%, 9% of net revenue as what our CapEx will be. We'd expect to get accelerated depreciation on most of that CapEx spend in the future years and that's really the driver behind the timing on when the TRA payments commence. You should keep in mind that we also have substantial NOLs, which we will use over the course of the next several years. With regard to the acquisitions that we've made, yes, we'll get some acceleration depreciation on those assets that we purchased. I can't give you a precise number off the top of my head on how much that would be, but it's factored into our assessment on when the TRA payments will commence.

As far as EBITDA multiples on acquisitions, on the larger marketed deals, they were already, I think, extremely elevated and elevated to numbers that we just don't do. About the lower tax rate, conceptually, it should increase the prices that people can pay for things as you get more free cash flow. We have not seen that yet but you would think over time, it would just from a mathematical standpoint. But Jerry, well, so far on what we do as far as our day-to-day acquisitions and our bolt-on strategy, we're still extremely busy. We've got a few LOIs out there. We really are very optimistic for the year and we continue to just do what we've been doing, and we think it's working and we're just going to continue what we said we do at the IPO.

(Operator Instructions) Mr. Hill, we do have a follow-up question from the line of Adam Thalhimer with Thompson Davis.

I'm just curious if you can walk us around some of the other metro areas in Texas and talk about your outlook.

Yes, the -- certainly the hottest market we're in right now is out in the middle of Odessa as the shale boom seems to be back on. There's real shortage of housing, there's population increase, and we are extremely busy. We had a great year there in '17. I think that will continue to accelerate in '18. In Austin, we're very busy. We had a great recovery in our business there from new entrants the year before. We continue to make progress there. The market seems to be leveling off a bit in Austin, but we're continuing to make operational improvements and I think we'll see some further progress on our EBITDA performance there in '18. We have entered the aggregate business in the Dallas market That continues to be extremely strong. We've got, with the Allen Ricci acquisition we did there, that is performing extremely well, and we see growth probably accelerating in the Dallas market also. And then we have the highway business all the way across North Texas from Texarkana over to Amber Oil and that with the pickup in Texas Lettings. We see that being very strong also. So overall, we see Texas as just a very exciting growth market for us. We would like to continue to grow there. We also, I think, equally in Houston, it's probably in the earliest stage of a recovery of any of our markets. I mean, it had a decline due to the decline in the oil price. It's starting to recover. And certainly, housing is going to accelerate over the next couple of years. We are starting to see more and more non-res and with the Highway Program picking up and with the recovery funds coming in from the federal government, we are very bullish on Houston also. So all in all, Texas is a great place to do business and we're glad to be there.

Mr. Hill, there are no further questions. I'd like to turn the floor back to you for any final comments.

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

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.