渥肯建材 (VMC) 2016 Q1 法說會逐字稿

Welcome to the Vulcan Materials Company first-quarter earnings call. My name is Alicia and I will be your conference call coordinator today.

(Operator Instructions)

Now I would like to turn the call over to your host, Mr. Mark Warren, Director of Investor Relations for Vulcan Materials. Please go ahead, sir.

Good morning, everyone, and thank you for your interest in Vulcan Materials Company. Joining me today for this call are Tom Hill, Chairman and CEO; and John McPherson, Executive Vice President and Chief Financial and Strategy Officer.

To facilitate our discussion today, we have made available during this webcast and on our website supplemental information. Rather than walk through each slide, Tom and John will summarize the highlights of our quarterly results and outlook. We believe this approach will assist your analysis and will allow more time to respond to your questions.

With that said, please be reminded that comments regarding the Company's results and projections may include forward-looking statements which are subject to risks and uncertainties, including general economic and business conditions, the timing and amount of federal state and local funding for infrastructure, the highly competitive nature of construction materials industry and other risks and uncertainties. These are described in detail in the Company's SEC reports including our earnings release and our most recent annual report on Form 10-K.

In addition, during this call Management will refer to certain non-GAAP financial measures. You will find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures and other related information in our earnings release and at the end of this presentation.

Now I'd like to turn the call over to Vulcan's Chairman and Chief Executive Officer Tom Hill. Tom.

Thank you, Mark, and thank all of you for joining us for our first-quarter earnings call. I hope you've had time to review our earnings release and the supplemental information posted earlier today on our website. As you saw reflected in our financial results, our teams really hit on all cylinders during the first quarter, particularly in our core Aggregates segment.

We met our customers' needs for higher volumes of material, we continue to migrate prices upward with an eye towards longer-term returns on capital. We leveraged fixed costs and lowered our unit cost of goods sold, even after excluding the impact of lower diesel cost.

And, obviously, our margins and total profits for the quarter grew rapidly as a result. On a 21% gain in total freight adjusted revenues the Company, our teams delivered 112% gain in total gross profit. It's certainly true that you can't extrapolate the full picture from a single quarter's results, but when you look at our results in the context of the last several quarters you see very solid and improving fundamentals.

Several things about this quarter really stand out in my mind and I'd like to spend a little time discussing them with you. As a starting point, I want to emphasize that we continue to believe that the recovery in our markets still has a long way to go. Our business is in the midst of a long, gradual recovery in demand. It's not unusual in such a recovery to experience periods of relatively faster and slower growth. And certainly our first-quarter saw a number of positive things come together all at once.

But we are still in early stages of recovery for the construction economy. For example, to underscore our point, we entered 2016 in terms of per capita Aggregate demand relative to long-term averages pretty close to where we were at the time of the 1982 recession. Having said that, clearly the fundamentals of our business and our core Aggregate focus strategy are very strong. This is, to our way of thinking, a recovery with real staying power.

Of course, we will take 17% shipment growth whenever we can get it, but what impresses me about the quarter and really the last 12 plus months, is the solid additional evidence of a sustained and sustainable recovery. It's supported by growth in all of our end-use markets with public demand just beginning to strengthen.

It's taking hold in more of our key markets and is leading to volume gains in more of our key facilities. And it's supported by longer-term fundamentals, including sustained gains in construction employment, state and local revenue help, and early signs of rising wages and incomes. We will see some ebbs and flows in the rate of demand recovery and our shipment growth, but that's to be expected, particularly quarter to quarter.

The first quarter reinforces an important point. This recovery is real, it's broad-based, and our geographic breadth and positioning will serve us well as the recovery moves forward. The first quarter provided a clear snapshot of this fact. Our overall shipments grew more than 15%, even though our Texas and California businesses were flat to down. This is another indicator of a recovery with real staying power.

A second point is that our local teams throughout the Company are not only executing well, they are also adapting well to changing market conditions. They have performed well and have maintained operating discipline and focus while challenged by rapidly increasing volumes.

Their focus and ability to adapt, their expertise in balancing product mix, pricing and greater efficiencies day to day and week to week bode well for our future. It can be easy to lose our focus when adjusting and adapting to rising customer demands for quantity and quality of product, all the while hiring new staff and adjusting shift structures.

And finally, you have some profitability tailwinds at your back, such as lower diesel costs and higher product pricing, there could be a tendency to lose some operating discipline. But this hasn't happened. When demand has risen, our plant level teams have adjusted just as quickly to meet customer needs. They are highly focused on the operating details critical to our long-term success and are acting with discipline to ensure peak operating efficiencies.

Our sales teams have also responded effectively to ensure we are serving each market segment well. And our sales and operating teams have stayed coordinated in balancing production in demand. We're driving earnings while helping our customers grow.

We're going to face some operating challenges as the recovery continues and as we grow. That's just the nature of our operating more than 340 facilities across many states. But I take an extra measure of confidence from how well our teams have responded over the last two quarters.

Finally a third point that strikes me as I reflect on the quarter in trends in our business, that's the payoff from our Aggregates focus and from our commitment to continuous compounding improvement in all aspects of our business. We brought our Division Presidents, our Senior Line Leaders from around the country together recently and one of the things we discussed was the importance of keeping our energy, which is electric.

I can tell you right now that our people remain driven, hungry for growth and improved performance. Our people, many of whom have 15, 20, even 30-plus years in the business, know that we are a long way from normal demand and the corresponding profitability in our business. We live this every day, with many plants still running part-time and many crews still without full-time work. Our people are balancing immediate customer needs with the maintenance and investment required to serve the growth that is coming.

So our job is to keep tapping into that pride, that sense of ownership and competitive spirit, in order to keep getting better day in and day out. And certainly our shareholders benefit from this emphasis on continuous compounding improvement. As you've seen, we continue to expand our margins faster than pricing alone and that improvement drives better returns on capital and allows for financially sound reinvestment.

This recovery began in the second half of 2013. Our gross profit per ton in our Aggregates segment has improved $2, or 78% on a trailing 12-month basis. The drivers of this improvement are many and to some may seem dull, but the impact on our lasting franchise value is anything but dull.

Having shared these observations, I'll now hand it over to John for some brief commentary regarding our outlook. John?

Thanks, Tom, and good morning, everyone. I'll start with the headline, which was also noted in our release. Our full-year 2016 guidance for adjusted EBITDA remains unchanged at $1 billion to $1.1 billion. That said, we ended the second quarter tracking toward the high end of that range.

Now looking at our first-quarter results and at our momentum over the last few quarters, as well as listening to the comments Tom just shared, some of you may ask why are we not raising guidance at this time? Well, we'd like to be clear one more time that it's not because we lack confidence in the business's long-term fundamentals. If anything, that confidence has risen and that's confidence in a recovery with multiple end-use segments and geographic drivers and a constructive pricing climate allowing for more fair and adequate returns on capital as we move forward and in our internal ability to execute and to adapt to changing market conditions.

Nor do we see any imminent threats that we're just failing to mention. Simply put, it's early. And we need to take some care not to over interpret any single quarter's results. We caution against it.

As we have said frequently before, we encourage investors to also focus on longer-term trends. We believe that helps separate the signal from the noise, if you will. And for this reason, you see us incorporate trailing 12-month figures and other longer-term trend information into our release and supporting materials. With those cautions shared, let me offer a few more comments regarding our current outlook for the balance of the year.

We currently expect same-store Aggregates shipments to be up 8% to 9% for FY16 over FY15. This compares to our early February expectation of up 7%. Certainly our first-quarter shipments evidenced underlying strength in demand, even after adjusting for weather and other favorable factors.

Publicly funded construction activity has shown some year-over-year strength, although the effects of the Federal FAST Act and recent state and local funding initiatives have, for the most part, yet to flow through the system. And some of our end customers appear to be adding some capacity, albeit prudently and gradually.

Our updated same-store shipment growth expectation is roughly in line with the rate seen over the trailing 12 months. Again, we expect that growth rates will fluctuate month-to-month and quarter to quarter as the recovery moves forward. That has been the pattern of this recovery and of past recoveries. But we are also seeing a recovery, although it has a good ways to go, that continues to see more geographic markets and more end-use segments participate fully.

With respect to Aggregates' pricing, we continue to project year-over-year growth and freight adjusted average selling prices of approximately 7%. First-quarter prices showed approximately 2% sequential improvement over fourth-quarter pricing. Price increases that took effect in January and as of April 1 were generally well accepted by the marketplace and in line with our beginning-of-year expectations.

Aggregate unit margins should continue to expand faster than pricing, although the pace of that growth may vary quarter to quarter. As you saw in the first quarter, we're beginning to see some very good operating leverage as we leverage fixed costs to sales. And our overall cost performance of late has benefited from lower diesel prices. Of course those costs may rise as the year moves forward, with some lag in corresponding product pricing.

We continue to expect year-on-year gross profit growth in our Asphalt, Concrete and Calcium segments of approximately 20% collectively. Our local leaders continue to manage material margins in those businesses very well, although they may see some downward pressure from currently strong levels as the year moves forward.

SAG costs were elevated in the first quarter, primarily due to incentive-compensation related accruals tied to our financial and stock price performance. We currently expect full-year SAG costs to remain roughly in line with our February guidance and we will continue to leverage SAG expenses to revenues. Absent the effects of performance-based compensation and certain investments in our sales capabilities, overhead expenses have grown at an approximately 3% rate since 2013.

Our target for core capital expenditure investments remains at $275 million for the year, although we may elect to pull forward some future spending if justified by compelling sourcing opportunities, for example, lower heavy equipment costs resulting from pressures across the global mining sector. You'll see $108 million of PP&E investment reflected in our Q1 financials.

A couple of comments. We typically work to frontload our spending on heavy mobile equipment, in part so that we can see the benefits of associated operating efficiencies during the heavy construction season. And the PP&E spending figures in the financials also include certain internal growth capital investments. For example, ships to serve our Yucatan operation, development of new quarry sites and development of new distribution facilities such as the rail yard we just opened in Savannah, Georgia.

Including these internal growth investments, our total cash outlay for the year could be approximately $400 million. Vulcan's financial strength and flexibility allow for a balance of smart reinvestment, pursuit of acquisition-led growth opportunities, and the ongoing return of capital to shareholders. Our overall capital structure and capital allocation priorities remain unchanged. During the first quarter, both S&P and Fitch raised our credit ratings to investment grade status.

During Q1 we returned approximately $50 million to shareholders via dividends and share repurchases. We repurchased 257,000 shares during the quarter at an average purchase price of approximately $103.

I'll conclude my remarks by noting that our Q1 results represent another solid stop toward our longer-term goals for the Company's profitability when market demand recovers to long-term normalized levels. Inside of Vulcan, we very much keep our eye on those longer-term goals. We have a lot of growth and a lot of work ahead of us, but the continuous compounding improvements that Tom referred to have us well on track and well-prepared for the opportunities and challenges that will inevitably arise over the years to come.

Tom, back over to you.

Thank you, John. I'd like to once again thank our people, many of whom listen to these calls, for their hard work and dedication. I congratulate you for accepting the challenge of finishing 2015 strong and then repeating that performance to kick off 2016.

For those of you in the investment community, I'd like to assure you that our response to these strong results is to sharpen our focus to control what we can control and stay committed to getting a little better every day. In the course of doing this, I want to emphasize that we remain very committed to pursuing strategic M&A opportunities as they arise, further strengthening our asset portfolio in high-growth markets across America.

We take confidence in what we've accomplished thus far in the recovery and we have many opportunities ahead of us, but nobody is letting up. Taking just the basic measure of EBITDA for example, while we are excited about our progress, we know that we still have a long way to go and I can assure you that the Vulcan team is determined to reach our goals. Thank you again for your interest in Vulcan Materials.

And now if the operator will give the required instructions, we will be happy to respond to your questions.

(Operator Instructions)

Jerry Revich of Goldman Sachs.

Hello, good morning, everyone.

Hey, Jerry.

Gentlemen, I'm wondering if you can comment about early indications of pricing cadence for April. Last year you were able to push pricing sequentially over the course of the year and you had a 3% increase sequentially 2Q versus 1Q. I'm wondering how this year is shaping out? Do you think you'll be able to push pricing over the course of this year once again?

Yes, as you look at the first quarter, I think this was a really good start to pricing. It was pretty consistent how we thought pricing would be accepted throughout our markets and with our plan.

Overall the climate for pricing remains very healthy. I think the environment is good throughout the construction industry. In fact, we even see some pockets of tight supply.

As the year goes on, we are going to comp over higher and higher prices with our success with that last year, but it's also about making profit in this business about the balance of price mix and volume. And what's really important is that compounding effect of pricing. And I think at this point we're really pleased with our people's execution of their pricing plans and we have really good confidence in our guidance.

Okay. And can you talk about, on the public construction side, what's the speed of DOT requests for bids turning into actual project work? How's that timeline shaking out? I guess on paper the DOT budgets look really good this year and I'm wondering if you're seeing that materializing in terms of projects moving forward on time?

Yes, I think the DOTs are working really hard and really fast to turn their funding into projects, not the least of which is because of the political pressures that they feel. I think that if you look at the new -- most of the new DOT spending that went into law over the last year, you're not going to see much of that in 2017. I think they are plugging hard to get it out there, maybe a little bit -- excuse me, you're not going to see much of that in 2016. Most of that will come in 2017. You may see a little bit at the end of 2016.

But they are working hard to get it out, if they can.

Very aggressive.

Jerry, back on pricing, just with an eye toward the longer-term, to echo Tom's point, we do like the climate we see; everything seems constructive. Very much in line with recent experience. And importantly for us, we seem to be a bit ahead of track on both pricing and margin improvement as it relates to our longer-term goals that we outlined at our Investor Day.

So we are pleased with the results we see. And it's a compounding improvement game, so we are looking to get it better quarter after quarter, year after year.

Okay. Thank you.

Thank you.

Kathryn Thompson of Thompson Research Group.

Thanks for taking my questions today. There's been, obviously, a great deal of focus on the public end market, but wanted to switch gears in terms of what you are seeing in the non-res end market, because there's been some speculation that could that market continue growth as we've seen? So to that end, what are you seeing in terms of market demand trends from non-res projects? Color on growth rate, either by the quarter or for the trailing six months, and the types of project you're seeing growth growing best in your most important markets?

Kathryn, we continue to see growth in non-res. We look at the leading indicators, but what we are seeing in our markets and the backlogs of our customers continues to be healthy. As far as growth rate is concerned, it may not be as fast as last year, but it's still growing. I think that one of the things you'll see here is that the res is growing at a very fast rate and usually non-res, particularly the retail construction, will follow that.

So on the ground we continue to see the growth. We still have a number of the large projects that we'll ship this year on the Coast and we also see some pretty healthy manufacturing growth.

Kathryn, one thing we are seeing that's a bit of a shift or a transition is our local teams are seeing a lot of small commercial work that's really popping up. And it's difficult to predict. It just pops up and gets executed pretty quickly.

But we are seeing that in a number of markets, including near you in Nashville. We think that bodes well for the overall health mix sustainability of the recovery, to see this uptick in small commercial work across many of our markets.

Great. Thank you. And then on Georgia, last quarter volumes were up 20%-plus. Our checks have seen at least a similar if not healthier growth rate there. What are you seeing in terms of how that state performed, but also importantly just revisiting the prior quarter question, which is have you seen any pickup in increased funding from that state, just increased volumes from the funding that was passed last quarter?

Georgia's really hitting on all cylinders. Every market segment is growing. It's very healthy. Housing non-res, the highway is -- actually we've got a number of jobs that were backlogged, very large jobs that were backlogged prior to the funding. The state DOT has had a lot of pressure on it to turn out jobs on the new funding, so we may see some overlay work towards the end of the year in Georgia. But the real hit of the doubling of Georgia's funding will come in 2017 and 2018.

Final question on Texas. In the past conversations we have had, you had said that Texas is really the only market that is getting close to getting back to normal. Are there any other markets that are getting back to that normal market? And then also just for the benefit of folks on the call, if you could differentiate within Texas what markets are what you would view back to normal and what percentage of your Texas revenues are in each of those markets? Thank you.

Yes, first of all, Texas is the only market we have that is anywhere close to normal demand. As far as commenting on the market in Texas, as you said, it's a big place with many different markets. Overall it remains very healthy. Dallas and San Antonio are still very strong.

We are seeing rural Texas get stronger and we have a big presence there, particularly the asphalt presence, and that's good for us because it's driven by the increases in highway funding and the damage that was done to the roads from all the oil [expirations]. Houston, we will probably see some softening in res and non-res. It's a watch for us. The Coastal work, we still have a lot of large work that we are shipping. When I say Coastal, I mean from Brownsville to Beaumont.

Including Houston, there's also a number of tex.dot jobs that are coming there. Now timing of all that with big jobs, as always, you'll see ebbs and flows, but so overall with except for the watch on res and non-res, I tell you, Texas markets are healthy.

Great; thank you very much.

Trey Grooms with Stephens.

Good morning, gentlemen, and congrats on a great quarter.

Thank you. Good morning.

So sticking with the geographic theme here, can you talk about how the geographic mix that you're seeing as well as product mix could be impacting your pricing and kind of your expectation there as we look through the balance of the year?

Trey, for the quarter and as we look for the balance of the year, they are really in total, I'm going to call it geographic and product or customer mix issues were kind of a wash. So there's really no big impact in that in our pricing for the quarter.

Back on the geographic point, and really the broadening of the recovery, we do see more of our, if you will, Atlantic Coast markets and Southeast markets really beginning to participate in the recovery more and more fully across more end-use segments. How exactly that plays out in terms of price and product mix impact over the course of the year, we will have to see. But that's not a big driver in the pricing or margin results you've seen of late.

Got you. And then on California being down, it sounded like in the fourth quarter, that was a pretty good market for you and then you noted seeing a slowdown there and you pointed out some infrastructure work. Is that just timing? And then I know weather was obviously a factor there. Can you talk about kind of what the California market looks like when weather is cooperating for you guys?

Sure. As we said, California was hit really hard in the first quarter with rain; we still see solid growth in demand in California. Short-term, we could see some issues with Caltrans funding or timing of work. I think the good news for us about California is that market is very diverse, our out markets in California are very diverse.

So this year, on top of growing healthy residential market growth, we will see a number of water projects, high-rise projects and airport projects part in 2016. So what I'd tell you is overall long-term we believe that California will continue to experience sustainable growth.

Okay, that's helpful. And then last one for me, as I think that you had -- when you first gave your guidance on your 4Q call, you had expected volumes to be more kind of back-half weighted. But obviously with the big volume quarter now you guys just put up, just trying to think about how that changes your expectation for the quarterly cadence or how the volumes kind of shake out as we progress through the year?

And then with that, the obvious question we've been getting, do you think there was any pull forward from some of these stronger markets that benefited from weather kind of pulling forward into 1Q from 2Q or some other period?

Trey, it's John. I'll start and Tom can chime in. On the guidance, what we were trying to note is some of the El Nino-related weather effect that we did, in fact, see. And of course, you saw both our California businesses and some of our Mountain West businesses and a little bit in Texas affected by that. In addition, as Tom just mentioned, we had a bit of a lull in some large public construction work in California.

But then, of course, despite those challenges on the volume side, we posted the results you saw today. It's difficult to say if we had a little bit of pull forward or a little bit of I'm going to call it overflow from 2015 where, for example, in North Carolina and South Carolina some fourth-quarter shipments were delayed by the bad weather they had.

But as best we can tell, however you adjust for it, we are seeing some strengthening in demand across more geographies, across more end-use segments. And as a result you've seen us move our expectation for the year from 7% growth to 8% to 9% growth, in line roughly with what we've experienced over the last 12 months. We are seeing a recovery that still has a ways to go, but has more and more engines driving it, if you will.

That's it for me. Thanks a lot, guys, keep up the good work.

Garik Schmois of Longbow.

Thanks and congratulations. You called out in the press release that you are starting to win share on large projects. And remember a year ago at the Analyst Day when you indicated this was part of the strategy as we work through the recovery, it seems like it's bearing fruit. I was wondering if you could maybe provide a little bit more context around where you are with your share gain platform as it pertains to the quarter and the last 12 months.

Yes, if you remember, I think what we said was we think we probably lost some share in the downturn and so as the markets come back, we will recover that. As the recovery continues to mature, you will see higher and higher shipments in the really high-growth quarters in our markets where we are, so naturally those jobs will be in our zone of natural advantage, so to speak, where we are located.

We are also seeing more and more very, very large jobs, both commercial and highway work, and those also fall right in our wheelhouse. It's just a natural recovery as the market returns.

Garik, it's a little hard for us to quantify that, but especially kind of this time frame in the recovery, but, as Tom said, I think -- it wouldn't surprise us if you're beginning to see some of the larger, more sophisticated producers recovering a little bit of share that they gave up in the downturn.

Okay, thanks. Just wanted to switch to some of the cost buckets within Aggregates. Specifically is it possible to indicate what your diesel cost was in the quarter? And then also on repair and maintenance, it has been trending up over the last several quarters, it was up again in the first quarter. Can you provide an outlook on R&M costs as you move through the balance of the year? Is it still going to be elevated on a year-on-year basis or will some of those costs start to plateau?

Sure. I'll start, Garik, and then Tom will chime in. Just in an attempt to give you some more color as best we can, again first thing we'd highlight is that if you look on a trailing 12- month basis, even excluding the positive effects of diesel, our overall unit cost of sales is essentially flat.

So what's really behind that, if you take, again, a trailing 12-month view, is that our teams are doing a great job and they have been able to get some real operating leverage as volumes have increased and that's offset some of the cost pressures that come from higher R&M that we've been talking about. So all in all they're doing a great job. We've really seen that the last two quarters; we hope to keep seeing it going forward. We will keep an eye on it, but we're certainly very pleased to see that cost performance.

In the quarter, our average diesel price was probably about $1.30. Probably $5 million, $6 million of benefit from that in total. But, again, what we'd underscore -- and then on R&M in the quarter, as we said, it was still elevated. To give you a rough order of magnitude, the way we look at it, it's probably $0.08 up per ton. It's an issue we've managed tightly; we keep an eye on it. But in the context of our overall margin structure, it's not a defining characteristic.

So, again, we're continuing to manage it well. Our team's doing a great job, we are beginning to see some real operating leverage and, importantly, even excluding the benefits of diesel, we've been able to keep costs relatively flat.

I tell you, I'm not surprised to see (inaudible) costs at this point in the cycle, and that may continue for a while. We're still playing catch-up on putting plants up, running plants harder. You've got to remember, we're still in the early stages of this. While it's been on a gradual recovery, the volumes are still -- our recovery is still early.

As John said, what I'm pleased to see is that over the last 12-plus months or five quarters, we are seeing a trend of the other costs in the operating efficiencies start to improve, which tells me that we are leveraging the volume not only on fixed costs, but also on some of the variable costs in the operating efficiency.

So to John's point, I think our folks are doing a real good job adjusting and adapting to rapidly changing volumes. We have a long way to go and I think that as this continues to mature in the recovery, we will continue to see that fixed costs and variable costs volume leverage.

That's super helpful. Last question is, just quickly, on the asphalt volumes that declined in the quarter. Was that mainly driven by some of the commentary that you indicated that California had experienced over the last quarter?

Yes. California asphalt was hit hard. You just can't lay it, obviously, in the rain. I think we are pleased with our overall asphalt performance. Despite California being down, Texas volumes were up, driven a lot by both textile work and private markets.

I think our folks have done a good job of managing a mix of price, cost and material margins and all the while serving our customers. And that's tough to do in the first quarter with dicey weather, so even with California down, I think we are pleased with our performance in Asphalt.

For sure. Thanks again. Good luck.

Thank you.

James Armstrong, Vertical Research.

Good morning. Good start to the year. Congrats. First question I have is on the weather impact as we go into the second quarter. Obviously the South has been really, really wet in places. Are you seeing any impact of that as we go into the second quarter or have you been able to pretty much overcome that so far?

Obviously April has been wet. Anybody can look at the weather and tell that, but we would always tell you that we are going to, quarter over quarter or even month over month, yes, you're going to have weather; yes, you are going to have things that will affect you positively and negatively.

But you can't judge it quarter over quarter or month over month. You really got to look at it long-term, so regardless of what the weather does, the demand is there and if it gets delayed, it's not going away, it's just postponed. It always catches up and it always happens. But month-to-month, we're going to have periods of good weather and bad weather.

James, we're not going to comment on April sales in this call. We will talk about that in our next call.

That's fair. And then going to Asphalt, margins were absolutely fantastic there in the quarter. Should those continue or should those come under a little bit of pressure as oil prices start to march up? And can you talk about the lag in Asphalt and oil?

If you look at the quarter, material margins were probably a little ahead of our expectations. We could see some pressures as changing in liquid AC prices. Again, I think our folks are doing a really good job of managing that and this is a balance of volume price, costs and material margins, and there is a lag there. Trying to predict what that is and how that is, Asphalt sometimes runs through the cadence of it and sometimes it doesn't. But we will manage that as it comes along.

Okay. Thank you very much.

Adam Thalhimer of BB&T Capital Markets.

Good morning, guys. I'd also say congrats.

Thanks, Adam.

I wanted to ask about firstly on M&A, maybe some updated thoughts on that and you putting your investment-grade rating to work.

Yes. First of all, I'd tell you that we are very pleased with the purchases we made over the last 18 months and how they performed and they performed very well. The M&A market continues to be healthy. This was a huge focus for us and something we pay a lot of attention to, we are very busy with it.

Obviously we can't talk about anything we are working on, we will let you know when that happens and when those finalize. But it's healthy, we are focused on it and it's a priority for us.

Are you giving a preference either to smaller deals or larger deals at this point in the cycle?

I think what we look at and what we concentrate is what fits us, both large and small. What are unique synergies to us in making sure that we buy it for the right price and we integrate it. So both.

Okay. And then also as we think about 2017 and the potential for DOT work to benefit from the FAST Act, is there anything we should be aware of in terms of where the pricing on that, where it's lower or maybe the incremental margin opportunity on that work is less? Maybe just some color on that would be helpful.

I think that the impact DOT spending, both state and federal, coming to fruition in shipments will only help pricing.

And, of course, not just -- we would always encourage you to focus -- you and anybody, not just to focus on pricing but overall margin performance. And that volume, that mix, that's good for overall balance of price, operating efficiencies, product mix, let's just say we're looking forward to it.

Great; thank you very much.

Thank you.

Timna Tanners of Bank of America Merrill Lynch.

Good morning, guys.

Good morning.

These should be fairly quick. We've talked a lot about these topics, but I just wanted to touch on 2017 because some of the independent forecasts for nonresidential construction have been tapering their enthusiasm into 2017. So is that just maybe excess enthusiasm on their part or is there something that you might be able to help us understand about tapering in 2017 activity, whether that be some of the big projects rolling off or anything else?

Timna, obviously we haven't given any guidance for 2017, so just with that qualification first, I think what we come back to, in case it's helpful, is what we see, if you will, on the ground. And the momentum that we are seeing overall as it relates to private construction and private non-res is largely unchanged. There are going to be specific geographic markets, for example Houston, that with layoffs, et cetera, we keep an eye on.

But in total we still like the momentum we see, the breadth of the recovery, the breadth of the end markets, the higher levels of small commercial work that we see. So from our humble on-the-ground view, the death of non-res has been announced prematurely.

I think on the housing fees, the housing recovery still remains pretty modest compared to historical cycles and most forecasters would expect it to continue to gain steam. And non-res will follow that.

And the large project pipeline we have seen, as it relates to larger industrial projects, still largely unchanged. So, again, we obviously keep a close eye on it. We're a ways away from anything that we'd consider 2017 guidance on our part.

But what we do see and we've talked about more for 2017 also is just the beginning of the increase in public construction beginning to kick in, strengthening public demand. And we are kind of getting to a point in the cycle where that's beginning to kick in a bit more also.

Okay. Great. The other question is about your high-quality problem, which is a very low dividend yield. And I understand that you just doubled your dividend, but I was just wondering if you could talk around the way you think about it philosophically? Is there a target yield? Is there something that drives the way your Board thinks about the dividend or the right level of it?

Sure, I will start. I think you are right, the high-quality problem to have. First we're focused again on balancing reinvestment in the business, investment and growth including the M&A opportunities that Tom discussed and ongoing return of capital to shareholders. We think we have the financial flexibility and strength to balance those goals over time.

We do not have a target dividend yield. And it's really a Board decision that's revisited, of course, periodically. We do think of it in the context of overall return of capital to shareholders and balancing those other objectives very much including growth. But we do not have a target dividend yield. We do expect our payout ratio over time will be roughly consistent with companies of our credit rating and size.

Okay, great; thank you.

Keith Hughes of SunTrust.

Thank you. You don't have any more notes due until 2018, so how would you characterize the use of cash flow the next couple years between acquisitions, debt paydown and share repurchases?

Our capital allocation and cash uses priorities have really remained unchanged from prior communications. So just to briefly echo some of those, one, we have intentionally managed our balance sheet so that we have the kind of flexibility that you just mentioned. We will make the appropriate operating capital investments back in the business to maintain the value of our franchise.

We do not expect to need to use cash to pay down debt. Obviously we don't have maturities due in the near-term, but we are comfortable with our current level of debt. We will continue to pursue growth opportunities aggressively, whether those are M&A related or, as we mentioned in our release and in our comments, whether they are internally driven growth opportunities, investments in new railyards, new quarry sites, the kind of things that we would do internally, so we have several opportunities there.

We, to the point the question just asked, on the dividend, we would expect the dividend to grow roughly in line with our earnings for a while. We are very focused on the sustainability of that dividend throughout the entire cycle. And then, as we said before, we will be opportunistic as we go forward in potentially using share repurchases or other means to return any excess cash to shareholders after those other priorities.

In acquisitions, would those be in the current footprint or are you willing to look outside the current footprint for the right opportunity?

To answer your question, both. And we've done both. Some of our highest returns on capital are the bolt-ons because they complement your existing operations and they defend some of your [existing] operations. But we will look outside of our footprint. I mean, we just did that with New Mexico over the last 18 months. But I think would we go outside our footprint? We would want to go in as a number one or number two producer or a path to be number one or number two. But to answer your question, it's both.

Thank you.

Mike Betts with Jefferies.

Thank you very much. I'd like to come back on the cost question, please. And looking at the $0.68 per ton saving in Q1, I think that equates to about $27 million. You've kindly explained diesel's a saving of [five or six] and I think the R&M was an offset of about [three]. So I'm still missing a big number there, sort of $24 million, $25 million. Is that all operating leverage because the volume growth was so high or is there anything else there? That's my first question.

My second question, when we're looking at the full year in terms of costs, you highlighted the trailing 12-month flat cost. Is that a pretty decent assumption to make for the full year? Thank you.

I think that, to start with your first question, I think it's a combination of operating leverages and improved volumes and operating efficiencies on the variable side. So it's a combination of both of them. There is a lot of volume leverage in that, but it's a combination of the two.

Are there any one-offs in there?

No. And then, Mike -- I think one of the things, timing of stripping, Mike, I would say maybe had some benefit of it that will -- that's always comes in fits and starts, but it's not a whole lot.

Okay.

And, Mike, for the full-year outlook, we will see -- we are very focused, as Tom mentioned, on continuing to drive these operating efficiencies to control what we can control, to use Tom's words, and to leverage our cost of sales where we can. We will see how we come out. There are a lot of moving pieces in a business like ours, but it's something we're very, very focused on.

Okay; thank you.

Stanley Elliott of Stifel.

Hey, guys, good morning. Question back on the cost side. At what point you start to add more and more shifts? Is this kind of more later in this year or into next year or maybe think about it, can you meet the 9% sort of same-store sales growth on the existing headcount and maybe running a little bit of overtime? Just how do we think about adding shift work on a go-forward basis?

First of all, I wish we were running two shifts everywhere. I'm an old operating guy, and life is good if that happens. But it's on a market-by-market, plant-by-plant basis. So, for example, you go to Texas, you've got plants that are running two shifts already. You go to some markets in some of our Atlanta operations, they are not even running a full shift. So it's such a local business and that is market by market, so there's not a broad-based statement.

But overall, we will do that a little bit at a time, but we are nowhere close in most markets to adding shifts. It's really adding hours or even adding a full shift on a full plant. But we would love to have those problems.

That's great news.

We also, Stanley, back to Mike's point, we are probably getting -- with the breadth of the recovery, we're probably getting to a point where we have enough volume in more of our key facilities to begin to realize a little more operating leverage. Leverage of fixed costs.

Now we're a long ways away -- and, Tom, we discussed it, from any kind of operating sweet spot and we are even further away from production capacity. But one of the benefits to us of getting more volume in more places is that it helps on the fixed-cost leverage.

Okay. And on the growth CapEx piece, I think it was $125 million for Savannah and for the shifts, I imagine the cost realization is pretty immediate when all this starts to flow through, but how should we think about that issue? Does that pick up more into next year or is that even kind of more into closer to 2018 when you start to see the cost savings from these investments really start to come through?

I'd break it into two pieces for you. I think about of the $275 million of operating and maintenance CapEx, for many of those investments we begin to see operating efficiencies pretty darn quick if we are improving or right-sizing mobile equipment fleet, if we're replacing screens or otherwise improving our production processes at a plant level. We try and work those as best we can to have pretty quick return periods on those investments.

For the $125 million for the course of the year that we may spend on growth related PP&E, it's really going to depend on the nature of the investment. These aren't long-term payoff things, these aren't things where you invest one year and you get the benefit 10 years down the road. But it's highly variable, whether it's a new railyard or incremental reserve capacity at a quarry or whether it's a new ship. It's hard to say on the growth capital.

Fair enough. Great, guys, and congratulations.

Thank you.

That's all the time we have for questions. At this time, I would like to turn the call over to Mr. Tom Hill for any additional or closing remarks.

Thank you. Thank you very much for your interest in Vulcan Materials Company and we look forward to speaking to you throughout the quarter. Thank you.

Thank you. That does conclude our conference for today. We thank you for your participation.