渥肯建材 (VMC) 2016 Q2 法說會逐字稿

Welcome to the Vulcan Materials Company second-quarter earnings call. My name is Sherlon, and I will be the conference call coordinator today.

(Operator Instructions)

And now I'd like to turn the conference over to your host, Mr. Mark Warren, Director of Investor Relations for Vulcan Materials. Mr. Warren, please begin.

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, Chief Financial, and Strategy Officer.

To facilitate our discussion today, we have made available during this webcast and on our website supplemental information for your review and use. Rather than walk through each slide, Tom and John will summarize the highlights. 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 the construction materials industry; and other risks and uncertainties. These risks 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 to this call, management will refer to certain non-GAAP financial measures. You'll 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 second quarter earnings call.

Our business continues to perform very well. Even with a slower rate of shipment growth in the second quarter, our margins continue to improve considerably. We remain on track, consistent with our guidance to deliver full-year adjusted EBITDA of between $1 billion and $1.1 billion.

The fundamentals of the business continue to strengthen. I'll mention three areas in particular. One, the factors underpinning the continued gradual recovery in demand remains intact. Notably, with higher levels of public funding, supporting further growth in 2017 and beyond. Two, our internal execution remains very solid. We're meeting our customers' rising needs, and we're balancing volumes, pricing, and product mix. Our teams are continuing to do an outstanding job converting incremental revenue into profits.

And three, the core profitability of the business continues to improve. Trailing 12-month gross profit per ton in our aggregates segment increased by 31% to $4.77 per ton, and adjusted EBIT on a trailing 12-month basis increased 62% to $682 million, so the foundation for multi-year growth continues to strengthen in demand outlook, in execution, and in our core profitability.

Now, regarding second quarter shipments: I want to reiterate a point made in last quarter's earnings call. A single quarter's result doesn't always give a good picture of the underlying volume trends in the business. Now obviously, the 3% growth rate for aggregates shipments in the quarter contrast sharply with the first quarter rate of 17%.

Prolonged bad weather in certain markets, large project timing, sales mix, and other factors can cause our business results to vary substantially week-to-week and month-to-month. Certainly, we've seen that variability over the last two quarters, but the underlying drivers and the basic trends remain unchanged. For example, if we pull back to look at just the first half of the year, as opposed to looking at two quarters individually, we see that our core aggregates business has posted shipment growth of 9% over the first half of 2016 and pricing growth of 8%. Those results are in line with recent trends and with our plans for the year.

I'll comment in more detail on individual geographies during Q & A, but taken as a whole, the bottom line is that we still see our core demand drivers and longer-term project pipelines strengthening across our footprint. In fact, we anticipate sustained growth in all end-use segments, even though we've yet to see much benefit in terms of shipments from rising public funding.

We'll see continued recovery in private construction. Public funding will start to pick up in an important way by 2017 and beyond, as states commit to large long-term projects on the strength of the Fast Act, and we see a healthy number of large projects that we will serve in the queue for 2017 and 2018.

Now moving back to the second quarter, just as a number of factors combined to boost the rate of shipment growth in the first quarter, several factors combined to affect shipments in the second quarter. We saw extremely wet weather in several key markets. At the same time, certain markets experienced a lull in large project starts, both public and private. This was despite a healthy pipeline of projects, and in retrospect, it's likely that some work was pulled forward into the first quarter.

As you know, we typically see a fairly high degree of variance in shipment patterns across our individual markets, particularly month-to-month. But I think that it's fair to say that the second quarter brought with it a higher-than-normal degree of variance.

The second quarter could be seen as a story of the haves and the have-nots. Virginia, Texas, California, and Illinois, combined, saw aggregate shipments decline by 10% versus the prior year, while the remainder of our states, combined grew shipments by 14%. We continue to see strong shipment growth across most of the Southeast, where the recovery has really begun to take hold over recent quarters. And certain of these states, for example, Georgia, have put in place higher levels of public funding that will support higher materials demand in 2017 and beyond, even though we haven't seen much of that impact yet.

For California, Texas, Virginia, and Illinois, we've seen a mix of weather and large project timing impacting year-over-year shipment rates. Although the specifics vary by state and market, I'd note that California, Texas, and Virginia each have healthy longer-term growth prospects, and what we're experiencing now is more transitional or timing-related issues. In contrast, we don't currently see a similar path to longer-term demand growth in Illinois due to that state's well-known fiscal challenges, although our team there has done a nice job of growing its profits and cash flows.

I mentioned the significant fluctuations in shipment rates month-to-month throughout the quarter. As you saw in our press release, during May, this resulted in daily shipments declining by about 5% from the prior year. On the other hand, daily shipments' rates in April and June were up approximately 8% and 6%, respectively. These kind of fluctuations are not uncommon. All the more reason to avoid extrapolating from short-term volume trends in a business such as ours.

Even though these swings in shipments' activity at the local level can create some operational challenges, our teams have done a superb job adapting to changing market conditions and consistently meeting our customers' needs. So ultimately, I don't find the recent spikes and lulls in demand to be a great concern. It's just the nature of the business.

Regarding our local teams' ability to adapt to changing market condition, I'm pleased with the way our people are delivering continued profitability gains, despite modest overall shipment growth and shifting delivery in production schedules. Regarding pricing: our average price -- freight-adjusted selling prices for aggregates in the quarter were up 7% over the prior year, despite some headwinds from geographic and product mix. Meanwhile, our unit costs of sales were flat, and unit cash gross profit per ton increased $0.86, or 15%, from last year's quarter.

Our incremental flow-through rate exceeded 80% for the quarter and 75% on a trailing 12-month basis. We also enjoyed healthy margin expansion in our asphalt and our concrete segments, despite low rates of volume growth. On a total Company basis, and excluding the impact of freight and delivery revenues, gross profit, as a percent of revenue, increased 500 basis points over last year's second quarter. Those are strong results and they aren't one-offs. They represent a next step on a long-term path of continuous, compounding improvement.

We provided additional information regarding our longer-term profit improvements in our release and the supplemental slides, so I won't repeat that here. Other than to highlight that on a trailing 12-month basis, our gross profit per ton and our core aggregates segment has increased by 87%, or $2.22 per ton, since the recovery began in 2013.

Now, before I hand it off to John, I'd like to share a few thoughts regarding our expected results for the balance of the year. As I've already noted, we are reaffirming our full-year adjusted EBITDA guidance of $1 billion to $1.1 billion. We finished the first quarter trending towards the higher end of that range, although we gave some of that back during the second quarter.

We continue to expect full year aggregates shipments to exceed 190 million tons, but our ultimate results will depend in large part on three things, just as was the case in the second half of 2015: one, on the ability of our customers to catch up on weather-delayed work; two, on the start and completion timing of larger projects; and three, on the number of shipping days allowed by weather conditions, particularly in the fourth quarter. The demand fundamentals are there and strengthening. The pricing and unit profitability is there.

It's on track and it's growing, so then it's really a matter of timing. How we finish will largely depend on how much of the work that is clearly there can be completed by the end of the year before we move into 2017, where demand will only grow. Let me sum it up. We saw a strong first half, with 9% shipment growth and 8% pricing growth in our core aggregates segment. Longer-term demand fundamentals are in place, pointing towards a strong scenario developing for 2017.

In the near-term, we've seen rapid growth across the Southeast, but a lull in large project activity in parts of California, Texas and Illinois. We are benefiting from excellent continued improvements to our core profitability, even during a quarter with slower volume growth. The pricing climate remains positive, and, as was the case last year, we need to make up for some weather-delayed volumes in the second half.

I'll come back in a moment with some final remarks, but for now, let me hand it off to John for a few brief comments regarding our overall cost controls, our balance sheet strength, and our capital allocation priorities. John?

Thanks, Tom.

I'd like to start with one more compliment to our local teams and their operational performance and cost control discipline throughout the early stage of the cycle. Although we have had, and will likely continue to have, ups and downs from quarter to quarter, the overall cost trend has been impressive.

For example, in our core aggregates segment, our unit cost of sales per ton, as measured on a trailing 12-month basis, has declined consistently with each reporting period since the recovery began in the second half of 2013. So over a three-year period, when our average selling price for a ton of aggregates increased by about $1.64, again measured on a trailing 12-month basis, our average unit cost of sales declined by about $0.57. Lower dealer prices have aided these results, but strong daily operating disciplines, effective coordination among local production and sales teams, and a commitment to continuous improvement have also played a central role.

We often talk about how seemingly small improvements compound and add up to a sizeable impact on our business. And in this case, our ongoing local operating disciplines have contributed meaningfully to the strong conversion of incremental revenue and to incremental profit that we've reported throughout the recovery so far. Unfortunately, we cannot make entirely similar observations regarding our SAG costs, despite the fact that we've held administrative headcount basically flat since the recovery began. As you've seen, second quarter SAG was $13.5 million higher than the prior year.

A bit more than half of this increase results from the amount and timing of accruals for performance-based incentives and deferred compensation plans. Approximately another quarter of the rise in second quarter SAG resulted from higher salaries and relocation expenses, primarily related to investments in our sales and business development talent, and the strategic rotation of sales leadership across geographies. We will continue to make strategic investments in our sales talent and capabilities.

Those costs and higher incentive accruals will cause run rate SAG costs to be elevated in the nearer-term, with our full year projection now at $310 million. Although we aren't fully satisfied with our recent results in trend, we will continue to leverage SAG to sales throughout the recovery and beyond. The investments we're making are sound and ultimately support a higher volume growth at higher margins.

I'll touch now briefly on our balance sheet strength as the facts have continued to improve, but the fundamental story remains unchanged. Our stated goal, as you know, is to maintain an investment-grade credit position throughout the cycle. We have achieved such a position. And of course, our cash profile continues to improve. In short, we have the financial strength and flexibility needed to pursue a balanced mix of capital reinvestment, growth investments including M & A, and return of capital to shareholders. Finally, I'll note that our weighted average cost of capital has declined significantly since the recovery began, in part due to our improving financial performance and credit position, and in part due to our focus on aggregates and the divestiture of our cement and concrete assets from our portfolio.

Turning now to capital allocation. Our summary message is that our recent and planned activities remain consistent with the priorities you've heard us articulate several times. We do remain active in terms of business development and the pursuit of acquisition opportunities that fit us strategically. And I think it is fair to say that we are aggressive but disciplined.

We're looking at a number of opportunities at various stages of development and again, we have the financial capacity to grow without overly straining our credit position. And we have continued to return additional capital to shareholders via share repurchases. As you know, we have not committed to a specific repurchase target. Instead, we will remain opportunistic and seek to balance a return of capital and reinvestment over time.

And now, I'll turn the call back over to Tom.

Thanks, John.

Before taking your questions, I'd like to say a few words about my confidence in our Company. I've been with this Company for over 26 years, and I believe our business is stronger and more resilient than it's ever been. We're in the midst of a sustained multi-year recovery. We're enjoying an ongoing recovery in private construction, and on top of that, we are just beginning to see a new wave of increased public spending.

We'll highlight these demand trends for 2017 and beyond during our Aggregates Day event on September 29. We have an amazing aggregates focus asset base that positions us extremely well to serve the demand growth that is coming. Our core profitability and cash flows are very strong and just keep improving. Our balance sheet is strong.

Our financial condition gives us a lot of flexibility to do smart M&A, to reinvest in our operations, and to return capital to our shareholders. And our culture at this Company is great. Our people are helping each other get better every day, and they are upbeat and they are on their game. Our position is frankly an enviable one, especially when viewed against the backdrop of uncertain times.

And I really like our position looking out over the next several years. At some point, our country must address the major infrastructure challenges that we still face as a nation. Look, it's good to have a five-year federal highway bill, but we still have a degraded highway system. Major US infrastructure investment must and will occur eventually, whether as a matter of smart proactive economic policy; reactive fiscal stimulus; dire necessity; or some combination of these. We don't assume such a scenario in our longer-term outlook, but we will be well-positioned to meet that need when it arises.

In the meantime, we remain very confident in our business and are focused on making a strong franchise even stronger. Let me conclude by thanking our outstanding employees for their performance during the quarter, and for the work they continue to do every day to deliver another year of very strong results. And thank you for your interest in Vulcan Materials.

Now, if the operator will give the required instructions, we'll be happy to respond to your questions.

(Operator Instructions)

We'll have our first question from Kathryn Thompson, Thompson Research Group.

Hi, thank you for taking my questions today.

Good morning.

Good morning. First, going to focus on more specific states. For Georgia, in particular, how much of your strength was driven by the new funding initiatives with House Bill 170, new rail lines in Savannah, or just overall improved economic health of the State? Just really helping us to balance, because each of those are different types of buckets -- one being a new business opportunity, one being new funding, and one is just day-to-day business.

At this point, Kathryn, it's all just organic growth in Georgia. You aren't seeing any flow-through from the new highway funding. Might see a little bit towards the end of this year, but that's really going to be 2017 and 2018, so that's just really healthy growth in Georgia.

Okay, and nothing really from the new rail line?

Not at this point.

Okay, flipping to two states that were softer, California, Virginia. Virginia, we were well aware of some of the wet weather, but specifically addressing those two states, to what degree were volumes impacted by large project delays, wet weather, or any other relevant fact that we should take into consideration? And if you're able to comment on how trends are progressing in each of those states as we go into Q3.

Yes, I think if you're asking me, do we see some kind of change or deceleration in demand growth in these states, the answer is no. Both the private side, residential is very healthy; non-residential saw a little bit of softening in the second quarter but the leading indicators in the pipeline -- very healthy. The public side will only get better.

We'll see a little bit of a lull in California while they address funding, but overall, we don't see any deceleration in either one of these states. I think that -- take them one at a time. California, very positive. Our strength there is large commercial and highway projects.

We saw a lull in that of recent; commercial side, some of our customers maybe didn't pick up as much work of late as we would have liked, and candidly, we can do a better job with that. On the highway side we'll see a little bit of a short-term decrease in funding because of gas price, lower gas prices, but that's got to rectify itself.

California is rated the worst roads in the US. There's a number of bills there in the state government for funding from roughly increase of $3.5 [billion] up to $7 billion, and then there's I think around more than 10 measures that are on the ballot for November for local and county work that would total roughly an annual increase of about $2 billion, so overall, California is going to be fine. Virginia, as you said, we saw extreme weather, and also had a little bit of timing with projects. We had two big projects last year, the Midtown Tunnel and a large wind farm that were going.

We had one pushback this year, the Fairfield Marine Terminal, but just to give you a little flavor around that. If you took three large jobs that are coming -- I-66 in northern Virginia, the Chesapeake Bay Bridge job, and the Fairfield Marine, which I just mentioned, that would be -- put those jobs together you'll be around 7 million tons, so demand in Virginia will continue to grow.

Kathryn, it's John. Just to put a little more color on the four states we called out, just to give you a feel for it again, to echo Tom's point, we do not see any cyclical change here in these states or across our portfolio. Really, the only one, if you back up and take a trailing 12-month look that's down on volume for us, is Illinois. We've talked about Illinois before, that's just a bit of a different fiscal picture rolling over some large projects that we didn't have this year that we did have last year.

That's the one place the demand growth outlook just isn't as clear. Everything else that we're calling out is primarily a timing issue. It's weather-related, it's pulling work forward into the first quarter, or it's just how large projects get started and how they flow through the pipeline, so Illinois is a little bit different but everywhere else is basically on the same track that it's been.

Illinois was in the mix to ask, how should we think about modeling Illinois, not just for the next quarter but for 2016, and what's your view for going forward and how we should think about modeling Illinois volumes? Is it a situation where we should expect a decline, or flat, any color would be helpful, thank you.

We probably expect in Illinois, and I'll make sure we follow up on this with you, but just to give you a sense, but I'd expect flat- to low-single digit growth from where we are today, going forward, so it's not rapid decline, it's just not the same kind of growth on the shipment side. Now the other thing we call out in these states, California, Texas, Virginia, Illinois of note is the businesses are still strong, so don't take near-term volume challenges as fundamental business challenges.

Just to give you a sense, those four states had pricing growth over the last 12 months in the double digits. They had improvement in cash margin per ton over the last 12 months over 20%, and so the businesses are good and sound. It's just a question of project timing and flow.

Virginia, for example, was up strongly in volume in the first quarter, over 20%, so we probably pulled some work forward there. We call out Illinois because it's the one place we just don't see the same kind of longer-term, robust growth that we see in rest of our portfolio.

Okay, great, and final question for me today. You talked about mix and geographic mix having an impact on average pricing in the quarter. Are you able to give a little bit more granularity of which was a greater factor in the quarter? Thank you.

Well, it was a combination of the two. We saw shipments get impacted in coastal Texas with weather, extreme weather, and some timing of projects, it's one of our higher-priced -- it's healthy pricing in that one, so that was geographic, and then you saw some substantial base jobs and shot rock jobs, particularly in Florida, so you put all those together was just under a percent.

Okay, thank you very much.

We'll go next to Jerry Revich, Goldman Sachs.

Hi good morning, everyone.

Good morning.

I'm wondering if you could just say more about what you saw demand by end market across your footprint. Sounds like private non-president may have slowed. Can you just flesh that out for us, either based on shipments in the quarter or based on indications that you're hearing from your customers? Thanks.

Yes, I think what we've seen is the growth in recent activities weakened just a little bit. Longer-term, our backlogs are growing, the pipeline has strengthened, employment levels and other factors point to sustained growth. And at any given time that activity at different geographies will vary pretty widely, but if you look at the leading indicators, the Dodge Momentum Index, ABI, they point to a renewed pace of growth in 2017 and beyond. And then just the simple fact that you've got single-family construction growing at the pace it's growing will pull non-residential up, and that we'll see that coming.

Okay.

Our shipments to private non-residential work in the quarter were still pretty healthy, so they can vary market to market, but I think we've all probably called the death of non-residential spending prematurely several times now. Even if we see a little bit of weakness in near-term start indicators with our customers and then the data we look at, we're seeing just as much if not more, strength in the longer-term pipelines.

We still see growth across all of the individual segments we are talking about, with the one thing that surprised us being slow kind of jumps out is really public infrastructure spending. So, again, the outlook there is strong, but we haven't seen as much in public infrastructure as we would've expected so far this year. All of the fundamentals are there, but the spending hasn't been quite where we would have thought it would have been.

And John, Tom can you say more about that last point? Is it an issue of timing in terms of some bigger jobs getting started, or getting the bidding process done, what are you seeing as driving that delay and how broad-based is it?

On the infrastructure piece, it's really just now you're starting to see the big capital projects, water airports, those kind of projects if you look at tax receipts in our markets, they are all at or near all-time highs, so it's going to happen. It's just a matter of timing, and I think the local governments making the decision to go forward with the capital projects, but you'll see that come on in 2017 and probably more in 2018.

It's a little bit of, I'm going to call it a little bit of conjecture from us, Jerry, but we at least hear some comments about just -- I'm going to call it overall election cycle uncertainty. Putting some near-term brakes on public infrastructure spending in some places. But again, as Tom said, some of the spending on things like sewers and water infrastructure is not even really discretionary.

If you're going to build as much new residential as we're building, you are going to have to build new water, so it's really a question of timing in our view, but it's one area that so far in 2016 we haven't seen the kind of growth we would have expected.

Okay, and lastly, I'm wondering if you can comment on how volumes and pricing looked in July. So May obviously stands out as a month of downside in the quarter. Ask you just give us some context on how July looked?

Well, Jerry, I'll jump in and say as the CFO that we can't comment on the third quarter yet, but in the spirit of that question, one thing I'd note is you know, if May had the same kind of shipping rate trends that we had seen in June and April, we would probably have a very different feel to this call and results. We wouldn't be asking some of these questions, so as Tom said, it's not uncommon to have some variability in shipping rates week-to-week, month-to-month in a business that's all outdoors.

But again, we haven't seen anything from our view that would indicate any kind of deceleration or anything that would take us off long-term trend. This is still a business with solid outlook for 2016, strengthening visibility for 2017, and in our view, multiple years of growth ahead of us.

Thank you.

Thank you.

We'll go next to Bob Wetenhall, RBC Capital Markets.

Good morning. Thanks for taking my questions. Just wanted to -- and maybe this is for John. You guys had commented on your last conference call that the high end of the range for capital spending would be around $400 million this year, and I think you're about running at $200 million.

What are your expectations? Are you going to still keep up with that $400 [million] number, or given what you're seeing in the market, are you going to tap the brakes a little bit?

I think, Bob, we'll keep up with that number, but let me give you a couple of important reminders. Our core CapEx spending, as a portion of that $400 million is about $275 million, so think about that as core operating maintenance capital, and then there's another $125 million in that number that's essentially growth capital. Non-M&A growth capital. So our CapEx outlook, both now and through the balance of the recovery, remains unchanged.

We have not seen anything in the marketplace conditions, and I'd underscore this, that would cause us to put brakes on our own capital spending or on our pursuit of M&A. Again, our view on the business and its outlook, if anything, is probably strengthening, so nothing from a external market condition point of view that would cause us to adjust our capital spending.

Got it. That's really helpful, thank you. And one question on profitability. Your gross margin expansion was pretty tremendous at 500 basis points, and that came in ahead of what we were anticipating, and I wanted to understand what were the drivers of that?

Was it more about getting favorable pricing, it's obviously a huge tail wind for that, but how much was also operating leverage, and what kind of relief did you get from lower costs for diesel fuel?

Yes, Bob, obviously we had healthy price in the quarter, and that will continue, but I thought our folks did a really nice job with their operating costs, particularly with a little bit lower volumes and they continued to not only leverage the volume but also just improve on the key operating efficiencies and disciplines that drive the profitability of the business, so it was a combination of the two. To answer your question on diesel, total diesel was an impact of about $7 million.

Got it. And just one final. I think you guys doubled your spend on share buybacks for the quarter from $23 million in the first quarter to $46 million. Any thoughts, as you look out into the back half of the year about share buyback activity and what's left under the authorization? Thanks, and good luck.

Thanks, Bob. I think we have over 2 million shares left on the authorization, so I'd say it's not a question of authorization. Our path on share repurchase I would call unchanged. As we've said before, we'll continue to return excess cash to shareholders at this point in the cycle, primarily through share repurchase.

We'll remain opportunistic in doing so, as opposed to give any particular commitment to a certain level of repurchase activity in advance. But again, our basic approach to capital allocation remains unchanged, and as such, we may continue to repurchase shares as another way to return capital to shareholders.

We'll go next to Trey Grooms, Stephens.

Hi, good morning.

Good morning, Trey.

Couple of questions on getting back to the lull in the large projects that you guys mentioned, I know you touched on some of the public stuff, but you also mentioned there was private projects there. And then also May being the weaker month in the quarter, I'm guessing weather played a big role there that you highlighted.

I guess what I'm trying to get at here is that the timing of when these projects that were either pushed to the right, or what have you, when those could come through. Is that a third quarter event or fourth quarter, would they be more into 2017? How do we think about the timing?

Well, it will be all over the place, obviously with large projects. Let me give you a little bit of a view on some large projects, and put a little flavor on that. So if you look at Virginia, for example, I mentioned northern Virginia, the route 66 projects will be probably 6 million tons, I-85 -- and that job will actually go in 2017.

I-85 in southern Virginia is over 800,000 tons, but you'll see some of that in 2016 but a lot has it pushed into 2017. And in North Carolina, the I-85 widening, it's probably 1.2 million tons, and those will see a little bit of that in 2016, but a majority of it in 2017.

The northwest corridor in Atlanta is 1.5 million, and that's the widening of I-75. It's 1.5 million tons, and that will probably do a little more, we'll probably get 700,000, 600,000 tons in 2016, so it will be all over the place. Again, as John said earlier, it's going to be a matter of timing.

The good news is the contractors and our customers want to get the work done, they are going to press to get it done, because they have visibility and know what's coming in 2017, and so they've got to get this off their books so they can free their crews up and go on to other projects. So the desire is there, it's just a matter of will they have the crews in the fourth quarter and will the weather allow them to do it?

So with that, I'm just trying to get a feel for how we should be thinking about the quarterly cadence looking into the back half. Third quarter obviously faces a tougher comp, but it's also generally a seasonally stronger quarter for you guys, and then with kind of the backdrop of weather and how things have moved around, anything unique about the seasonal cadence or your expectation there as we look in the back half?

I don't think there's anything unique about it except for -- very similar to last year. I would underscore what I just said about the contracts and desire to get it done. They are pressed even more in 2016 than they were in 2015 to get this work done because there's so much work coming for 2017.

You'll see, both on the commercial side and highway side, so the desire is there, and the third quarter is always healthy, but depending on weather, the fourth quarter can be great too. We'll just have to wait and see.

Got it. And then last one for me. John, I mean, you guys and the whole team, impressive incrementally in gross profit per ton. And I think last quarter, you said that you expect to see incrementals for this year a little higher than the longer-term 60% target. With half the year behind us now and the current cost environment, can you update us on your thoughts there?

Sure, Trey. I think we still say 60% as our long-term as in through the entire recovery and expansion cycle number, but that's a multi, multi-year view. We've obviously been doing better than that of late, sometimes substantially better.

I think for the balance of the year, I'm not sure we see a much different trajectory than we've been on so far this year in terms of incrementals. Some of that in a very short period of time, if you took an individual month or maybe an individual quarter, can be influenced by the mix of price and volume in our growth, but overall, our teams continue to do a great job.

Again, I come back to something Tom said in his remarks. You know, the work is there. The demand is there. Importantly, Trey, to your question, the profitability is there, core profitability in our business maybe running a little ahead of our plan.

So what we come down to for 2016 is really a question of timing of the shipments and how much gets done this year versus next. But again, the work is there, the demand is there; importantly, the profitability is there, and we see that trend continuing.

Great, that's it for me.T hanks a lot.

Thank you.

We'll go next to Garik Shmois, Longbow Research.

Hi, thank you. First question is just you talked about the weakness in Illinois. Sounds like there's a fundamental change, perhaps when you are thinking about that market. Could you speak to perhaps the importance of that market strategically, and then just broadly, what you're seeing and what your appetite is for either acquisitions or divestments at this point in the cycle?

First of all, as John said, you've got a lot of well-known funding and budget issues. Although they did reaffirm the highway spending in Illinois, on one hand the positive, and they also cut the tollway spending in half which will cost us about $700 million in the state for next year. I think the positive side of that is you're still seeing growth on the private side, and as John said, this is a very good business for us, and we have a very, very strong market position.

And our teams up there have done a great job of improving their unit margins, even with some falling volume. Some of that volume also, Garik, is we were at two very large jobs, one at O'Hare and one the tollway, that we were working on last year. And those are starting to wind down, so some of that's just, again, timing of projects, but overall it's a strong market for us, and an important market, and one that I think our folks have done a nice job improving.

Okay, and could you touch on just the second part of the question with respect to M&A at this point in the cycle. What are you seeing out there as far as valuations are concerned, what's your appetite for additional deals, and how do you balance that relative to your capital structure?

They're still out there. We've got a number of them, as John said in his comments, that we're working on, when they will close is always each one separate, each one is timing.

But you always have to be disciplined about what you are buying and what you are paying, and what the unique synergies that we have for Vulcan are, and how do we leverage those. So it's there. We're hard on that trail, and we've got a number of them in the pipeline.

And only thing we would add to your question, which we also addressed in our comments, is if anything we're pushing harder on opportunities, particularly those that fit us strategically. We're going to stay disciplined on valuations, obviously, but we've worked hard to be in a position where we now have the financial capacity to really do good deals where they exist, to make the right ongoing capital investments in our business, and to return some capital to shareholders.

So we can balance all those things, and we certainly have the financial flexibility to pursue M&A- led growth. All that said, we're going to stay really disciplined about it.

Okay, thanks. Just want to shift as my follow-up question to the coastal markets in Texas. Clearly weather impacted demand, in May in particular. Are you seeing fundamentally changing or decelerating along the coast? If so, how does that impact the productivity out of your Cancun quarry, and then also would there be anything for us to think about over the -- maybe in the medium term, if there is deceleration in the coastal markets in Texas around price mix, given it was a head wind in the quarter?

I think that the story, as you said in Texas, was the coastal piece of it. Weather was a big impact. Let's face, coastal Texas was underwater for more than a month, and so that impacted. We also had, as John says, timing on large projects. We had the Grand Parkway and some big energy projects we are working on last year.

We've worked some of that work off, there's still some in the pipeline. Golden Pass, Beaumont LNG, so you'll see some of those tons come back next year. It's hard to tell what's going on in residential and non-residential with the weather pattern we had in the second quarter, probably some softening in Houston. But behind that, you've got huge increases in highway spending. We've seen some of that in 2015 and 2016, but you're going to see more of that in 2017 and 2018 and 2019.

And nothing, Garik, if we summed up, the visibility is not great because the weather is so bad in a quarter where you have volumes drop to 30% in one market. It's hard to get a lot of visibility with that kind of drop, but as you look at it you've got strengthening public spending that should offset potentially some weakening private spending. We haven't seen that weakening elsewhere in Texas yet by the way. The little bit we've seen around Houston, we've not seen spread to the rest of Texas. And finally your question about price impact or impact on logistics out of our quarry in Mexico, I don't think anything I'd call material anyway--

Well, I think you have to remember, the quarry in Mexico, we ship to some 17 or18 port facilities all the way around from Brownsville all the way around to Jacksonville, Florida, so where you might have some temporary softening and timing in projects on the coast of Texas, you've got the southeast and Florida, and those markets picking up substantially, so there's a lot of flexibility in that overall business, and I think we think we're fine with it.

Again, on pricing, which is just really a mix issue, not a fundamental underlying price issue, I don't think we would expect these kind of declines we saw in the second quarter and in future quarters, so I don't see anything that I would try and model in on pricing.

Okay, makes sense. Thanks so much.

We'll go next to Timna Tanners, Bank of America Merrill Lynch.

Hi, good morning, guys.

Good morning.

So I was curious about your comment on the election year having a numbing effect, or freezing people whatever you said maybe on the local side. And just wanted to get a sense of if you could characterize the political sentiment you're getting from your canvassing of Washington in light of kind of the positive spirit of dialogue lately on public infrastructure spending?

I think the good news there is everybody is talking about it. Both presidential candidates, you've got a number of people in Washington concerned about the country's infrastructure. They all know it's an issue, and they also understand that it is stimulus if we do it correctly.

So like I said, we have a five-year bill, but we still have a degraded highway system, and that bill is not going to improve that grade. So it is an issue. Now what's going to happen, we don't know even what's going to happen with the election, but it is an important issue, and one that people are putting out there in front of everyone.

Timna, it's John, because I may have made the comments. Just to add to that. My comments weren't reflective on the nature of the dialogue around future infrastructure spending, which we actually, as Tom said, see quite positive at a federal level, state level, and local level across many geographies. It's more just a negative tone, and some degree of uncertainty, that would seem to affect private investment levels.

You'll know more about this than us, but you may have seen some of that in second quarter GDP data. And we probably have some customers who, on balance, just give a negative tone out there, particularly on the private side, are a little more reluctant than they would be in a different time to add their own additional capacity to make their own big capital investments, whether that's new equipment, or land for development, or larger staffs. So I wouldn't want to make it too big a deal.

What's interesting to us is just this disconnect, if you will, between the tone you hear in the middle of an election cycle, which is really negative, and what we see in our own business which, frankly, is pretty positive but nothing --longer-term, the dialogue around higher levels of public infrastructure spending particularly on road infrastructure and other infrastructure we are pretty excited about.

Okay, and then to wrap up with a couple other thematic questions. So are you seeing much for small labor constraints that we've been hearing about on construction? Is that an issue at all for you? Second of all, how good is your visibility relative to normal levels in light of that kind of more cautious sentiment?

I think that the -- first of all, the labor issue, yes, we're seeing shortages with our customers, whether it's ready mix truck drivers, or finishers, or carpenters on residential, so there are labor constraints out there, and it is a bottleneck for our customers and therefore for us. I think they are working through it. We've been on this theme for now about a year, and that's actually good news, because it means it's growing and growing faster than they can fill the ranks, and the work isn't going to go anywhere; it's just a matter, again, of timing.

On your question about normal, it wouldn't change our view of normal, but as we've discussed many times before, these bottlenecks, whether they are labor or others, that some of our customers face, they probably do constrain on the margin the rate of growth or the rate of recovery, keeping us for now in the 7%, 8%, 9% rate as opposed to something that the underlying demand would justify being higher.

Flip side is, it can create a generally positive pricing climate, but it may make for a longer recovery at a slightly slower rate, like that 7%, 8%, 9% rate, as opposed to something that would get up into the sustained double digits for a very long period of time.

Okay, great. Thanks, guys.

We'll go next to Stanley Elliott, Stifel.

Hi, guys. Thank you for fitting me in. A quick question on the outlook for costs -- the unit costs on the aggregate side. Obviously, the incrementals are going to be strong this year. Diesel has been a bit of a tail wind.

How much longer can diesel, realistically, be a tail wind for you guys? And then maybe speak to some of the investments that you're making, either on the sales side or on the production side, to help us keep incrementals as strong as they are, or at least tracking above your historical average.

As you look out towards the second half of the year, and the price of diesel last year versus the price of diesel this year, it is probably not going to be a big cost advantage going forward. I think there was -- as I said earlier, our folks are doing a really good job of concentrating on our own operating efficiencies that we can control. Volume coming back will help that, so I feel pretty good about our cost and our ability to take incremental revenues to the bottom line.

As far as capital projects, they are all over the place. Some as simple as replacement of mobile equipment, screens and crushers, usually when you do plant capital, it's a combination of both replacement and process improvement to get more throughput or reduce downtime, which helps on your cost, obviously other than just like-for-like replacement.

On the growth side, we've got a number of facilities who are working on, our distribution network both rail and blue water. All of them are different stages of completion, and then we've got a number of Greenfield projects that we're working on at different stages in completion.

Only additional color I might add is, while we not have the same tail winds from diesel moving forward, we should be beginning to work out of a period where we had elevated repair maintenance costs earlier in the recovery. So we're hopeful those trends will offset each other a little bit, some more work to do there.

Just a reminder, we've got a lot of fixed costs yet to leverage in this recovery. So as Tom said, we're pretty proud of what our teams did, and particularly as an example in a quarter without much volume growth, and still with very uneven production schedules due to weather challenges. To control your costs in a quarter like the one we just finished, is a good sign of the right disciplines, so we have a pretty positive outlook about our margin performance looking forward.

Absolutely, I agree. And just a reminder, when do the new ships come on line? Is there any way to talk about either improved efficiency, or cost savings, or anything around those lines on the two new vessels?

They will come on line at different stages next year, and they will both be more efficient, both particularly in fuel. Also, they have less draft and more tonnage capacity so we'll see improvements, cost-wise, with those ships as they come on line, and we'll be excited to get those.

Probably a little early to talk about it specifically, though. That may be something that's more a 2017 item. Probably a little too early to talk about it, specifically, but they are good investments.

That sounds fair. And lastly, on the M&A side, obviously plenty of flexibility within the capital structure. Are you thinking more on the bolt-on side or are there new markets you'd be interested in entering? How should we think about that from a footprint perspective?

Both. Primarily bolt-on. I mean, those are some of our best returns, and it proves the efficiencies in the overall franchise, but -- and it's healthy. And then as far as new markets, we did that 18 months ago in New Mexico, and where we have a path to a number one or a number two position we'll look at new places. If not, we probably won't.

Is it still fair to say mostly aggregate-focused and potentially some downstream assets, but certainly not the primary focus?

You said it well. We like aggregates.

Perfect, guys. Thanks very much, and best of luck.

Thank you.

We'll go next to Robert Northly, Alembic Global Advisors.

Hi, this is Nick Chen for Rob. Thanks for taking our question this afternoon. You guys touched on it a little bit earlier, just discussing California. But I was hoping you could opine a little bit on some of the state-level funding bills that you guys are tracking, and where you expect them to have the biggest impact going forward?

Sure. I talked about California. That they were going to lose a little bit of funding, but there are a number of -- three bills in particular that would add between $3 billion and $7 billion, and they have to address their roads. And then the local impact, which is in total, if they all pass, would be $2 billion a year, so Texas is one of the fastest growing highway markets.

We saw a 30 in our markets in Texas, in just the highway legs alone. In 2016 we'll see an improvement of over 30%, state as a whole improvement of over 20%. And a lot of that will go in 2017 and then you'll have improved funding again in both 2017 and 2018. That will go up about 15% or 20% in 2017, and then there's another over $2 billion that comes on to Texas in 2018.

Georgia basically doubled their highway funding. That passed a year ago, and we'll see a little bit of that in 2016, as I said earlier, a majority will come in 2017 and 2018. North Carolina has improved their funding, as has Florida, as has South Carolina, as has Virginia. There are bills being discussed in Alabama and probably won't be addressed until 2017.

I'd tell you a similar story in Tennessee, where it needs to be addressed, and they have not. It won't happen in 2016; hopefully it will happen in 2017. So as I said, a lot of our states have marked improvement in funding. The vast majority of that, except for Texas, will flow through in 2017 and 2018. So we're really looking forward to this, and this is a real bright part of our future.

That's really helpful. Thanks so much.

You bet.

We'll go to Brent Thielman, D.A. Davidson.

Thanks, good morning.

Good morning.

Is there a way to think about the moving pieces of these various issues in May, in terms of the impact you reported average price for the quarter?

I think the average price, as I've said earlier, was healthy in spite of some geographic and product mix issue. Probably one of the bigger impacts in the quarter was on that was just the mix issue was coastal Texas, as John said volumes were down 30%.

It's a very -- it has healthy pricing, and so that had a little bit of an impact but overall, the environment for pricing across our footprint remains healthy, it's strong. Throughout the entire construction segment pricing is moving up, and that's driven by demand increases, and it is also driven by the visibility of what everybody sees coming in 2017 and 2018.

Just to give it a little more color, if it helps, I think our average selling prices, if you take all of the moving pieces and adjust as best you can on a like-for-like basis, probably would have been $0.03 or $0.04 higher than what we reported. Again, a lot of that is having a big decline in coastal Texas. At the same time, that is accounting for some of our southeastern markets which have good pricing, too, growing pretty quickly.

So on a total like-for-like basis, if you look at geographic issues and if you look at some of the product mix issues, our rate of price growth year-over-year would have been a little closer to eight than what we reported. But I wouldn't let any of that distract you from what Tom said, which is the core pricing outlook and climate remains positive, given where we are in the recovery. And I'd also just remind you prices went up pretty healthily in those very same markets that were volume-challenged -- so Virginia, Illinois, California, Texas -- those are all markets that have had good pricing in margin improvement, not just in this quarter, but for the last few quarters.

That's helpful. And then you've talked about the variability and timing of all of these large projects, in terms of volumes. When we think about your outlook for potential volume for the year, and kind of the Company overall, is it more heavily impacted by larger projects than what we would typically see?

No. I don't think it's more. I think that it's just a piece of it. So part of it is going to be the large projects, as we said earlier. Part of it, just across the entire market segments, it's going to be the contractors and can our customers get the work done in the time that they have?

So we talked about labor shortages, you have those and those are an issue, So it about both timing of large projects, our customers' ability to get work out, and then how many days do we have of construction in the fourth quarter? All that will go together to really see how the year turns out. But I'll remind you, this is exactly what we saw in 2015.

Okay, thank you.

We'll go next to Jim Margard, Rainier Investment Management.

Hi, thank you. Could you comment a little bit more on the mix? As you mentioned, the Texas coastal situation was impactful, and presumably the mix will turn more favorable so simply by virtue of that. But could you elaborate a little bit more going into the future, and also were there any other mix issues, other than coastal Texas? And as you go more into a bigger infrastructure build, in 2017 and 2018, what are the implications for the mix in that?

Well first of all, in the quarter, pricing was a combination of -- the mix impact was both geographic, which was Texas, and then mix. So we had some large base work in the southeast, and we also had some large shot rock projects in Florida. And while they may have an impact on price, it has a overall positive impact on profitability, because you've got to sell those mix of products.

Some of them are cheaper to make, and so the price of the margins -- while the price may be lower, the margin is very healthy, and you need to sell the full product line to maximize profitability in our operations. On your question about highway construction, and coming highway construction, that really plays into our hand in that it is a really healthy mix of what our plants produce. It has a combination of base in fines because it's new construction, and it has asphalt rock, it has concrete rock, so it gives the full flavor of everything we produce, and just pushes the overall profitability up.

When you think about it geographically, we really like the -- particularly, well, we like it now, and we like it longer-term the breadth and positioning of our particular geographic mix. These trends we're seeing and where we see the growth and the nature of the increased public spending that we commented on earlier, if anything, these should give us tail winds from a geographic mix point of view. We're well-positioned against where the growth is coming.

Over and beyond that, on aggregates, it also fits into our hand with our asphalt business. So we have very strong positions in a number of states with asphalt, which is a lot more public- driven, so all of the spending on highways will help that business.

Great, thank you.

You're welcome.

At this time, we'll turn the conference back over to Mr. Tom Hill for closing remarks.

Thank you for your interest in Vulcan Materials, and we look forward to talking to you this quarter and over the balance of the year. And I would like to thank our employees for all of their hard work and the things they do to make this Company great. Thanks.

That does conclude today's conference. Thank you for your participation. You may now disconnect.