渥肯建材 (VMC) 2016 Q3 法說會逐字稿

Good day, everyone, and welcome to the Vulcan Materials Company third-quarter earnings call. My name is Laura and I will be your conference coordinator today.

(Operator Instructions)

Additionally, today's call is being recorded. Now I'd like to turn the call over to your host, Mr. Mark Warren, Director of Investor Relations for Vulcan Materials. Mr. Warren, you may begin.

Good morning, everyone. 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, we will focus on the highlights. We hope this approach will provide 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. 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. Additionally, Management will refer to certain non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures and other related information in our earnings release and at the end of our supplemental presentation.

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

Thank you, Mark. Thank all of you for joining us for our third-quarter earnings call. We'll keep our prepared remarks fairly brief today since we discussed many of the key business trends and our outlook just a few weeks ago during our Aggregates Day event in Atlanta.

Looking at the third quarter and our recent performance, four main points stand out. First, we obviously saw shipments decline in the third quarter. However, to my second point, we see it as localized, not cyclical. Third, our profitability continues to grow. Fourth, our prospects for sustained growth remain very exciting.

Let me address each in just a little more detail. First, we obviously have seen a drop in year-over-year shipments. This is due in part to a period of relative weakness in new construction starts across much of our footprint. It's also due to weather and other location-specific factors impacting our business in California, Texas, Virginia and Illinois. Third-quarter year-over-year shipments in these four states were down 15% collectively. Now, in stark contrast, our other markets experienced combined year-over-year shipment growth of 6% and in fact, several markets saw strong double-digit growth to the order of 12% to 21%.

Second, and importantly, we continue to view these volume headwinds as temporary, or a transitional lull in a multi-year recovery that is still intact and sound and actually with a long way to run. To this point, the variation in results across our footprint reveals volume challenges that are clearly localized rather than cyclical. Notably, our daily aggregates shipment rate increased from August to September and from September to October, with October exceeding the prior-year period by about 3%. In addition, according to Dodge reports, trailing 12-month construction starts showed sequential improvements in both August and September, picking up from a noticeable slowdown in March that lingered all the way through July. In short, the fundamental foundational drivers of a multi-year recovery remain firmly in place.

To point number three, our core profit engine remains very powerful. We're on track to deliver $1 billion of adjusted EBITDA this year and this is despite volumes that are below our original expectations. In our aggregates segment, third-quarter freight-adjusted selling prices were 7% ahead of third quarter 2015 and gross profit per ton rose 9%. For the 12 months ended in September, gross profit per ton has increased 25%. The flow-through of incremental freight adjusted revenue into incremental gross profit has exceeded 80%.

Also for the 12 months ended September, the total business delivered net earnings of $371 million and $981 million of adjusted EBITDA, with an adjusted EBITDA margin of more than 27%. This is an improvement of 430 basis points over the prior year.

Fourth and finally, we remain excited about our long-range growth prospects. We are well on track to achieve our profitability goals and near term, we like the volume, pricing, and profitability momentum we see for 2017. We also like the very robust pipeline of projects that we see building for 2018 and 2019.

John will share a few thoughts regarding our current momentum and outlook in a minute, but first, I'll offer a bit more insight into how our business has been performing across our footprint. As we discussed during our Aggregates Day in Atlanta, the recent demand climate has made it a little hard to distinguish the signal from the noise. For example, there's been clear accelerating growth in the longer term project pipeline. The impact of the federal highway bill, the FAST Act and higher state-level funding are beginning to show up in the mix. At the same time, there's been a softening in the rate at which this water behind the dam has been released in the form of construction starts.

There was also a lull in state highway spending during the first half of the year. This was as states work their way through the remainder of a fiscal year that did not include new FAST Act funds. Notably, this has now started to turn in a positive direction. The latest (inaudible) report on highway contract awards shows them increasing by 30% in September and this is the second consecutive month of growth following weak contract award activity during the first half of the year.

Looking closely, this isn't too surprising as many states have entered a new fiscal year, with the FAST Act money flowing into their pipelines and a backlog of projects ready to go. During the slowdown period earlier this year, a number of markets saw adverse weather conditions, shortages in skilled labor and other factors that have constrained the rate at which existing construction projects could be completed. A number of our customers have found it difficult to catch up in the near term on work deferred due to bad weather earlier in the year.

Generally speaking, our operations across the southeast and Mid-Atlantic states continue to post solid gains in volumes, despite these challenges. Florida, Georgia and North Carolina enjoyed robust double-digit volume growth to the tune of 12% to 21%. This was accompanied by strong pricing and unit margin performance. Now, Virginia, on the other hand, is an example of a market where we're seeing good pricing momentum, although volume momentum hasn't picked up yet.

Turning to Texas and California, shipment levels in these states remain challenged in the third quarter. This was below the expectations we had at the beginning of the year. Shipments in Texas were down 21% in the quarter. This was driven in part by coastal Texas shipments, which were down 27%. All of Texas was impacted by bad weather throughout the quarter, most notably in August. Business in north and south Texas fell off accordingly from what would otherwise have been a much stronger performance in those areas.

Houston and the coast, however, in addition to the well-known downturn in the oil and gas industry and extensive flooding, also experienced a delay in textile work. When we talk about Texas and volume declines, it is in fact largely isolated to the coastal area of the state, separating out state-wide weather impacts. But despite a transitory period of volume headwinds, there is ongoing pricing momentum in Texas and it simply highlights the underlying confidence and continued growth in the Lone Star state. At the same time, our core profitability, which has also been strong, keeps improving. The bottom line is that overall, we expect continued recovery in Texas markets.

In California, shipments were down 17% from last year's quarter. We continue to see a slowdown in large project work in public and private sectors. This is work we are well positioned to serve. Caltrans also continued to grapple with highway funding related to diminished excise taxes. This created a bigger slowdown in project work than anticipated. We have reason to believe that political leaders will ultimately reach agreement on new state funding measures for California, for California roads, which are rated the worst in the US.

Putting it all together, we expect to see a return in 2017 to a pattern of recovery and growth in California. Our sales force is aligned to take advantage of growing up -- of these growth opportunities. Large projects are getting back on track. The pipeline of major projects continues to get bigger and bigger. Construction starts are back on the upswing. There will ultimately be improvements in state funding for roads, along with he local highway improvement initiatives.

In fact, we're already seeing early signs of improvement. Highway contract awards in California were up 98% in September as these new FAST Act funds are starting to flow into the system. Underlying these facts are fundamental strengths. In our California business, as well as Texas, our core profitability continues to improve. In California as in Texas, despite the lull in shipments, pricing has remained strong, in the high-single digits, underscoring the basic confidence in the trajectory of California markets.

Across our Company, our focus on core profit improvements, the little things that make us better every day, is keeping us on track towards our longer term goals. You see it in our results. Now I'll hand it over to John for some brief additional comments regarding our outlook for 2016 and the momentum we see heading into 2017.

Thanks, Tom, and good morning to everybody. I'd like to touch quickly on a few points regarding our forward outlook, but let me first note that our views have not changed meaningfully from those that we communicated during our late September event in Atlanta. First, and as Tom noted, we continue to project $1 billion of adjusted EBITDA for FY16 and due to continued gains in unit profitability and overall margins, we think we can reach the low end of our beginning-of-year guidance range despite shipments falling well below our original forecast.

Now, to put this outlook in some context, let's take a look at results and trends, particularly with respect to our improved profitability over the trailing 12 months. As you heard Tom say and as you've seen in our releasing, during that period we generated net earnings of $371 million and adjusted EBITDA of $981 million. Behind that, it's important to note that our average freight-adjusted selling prices and our aggregate segment have increased 8% over that time, our average gross profit per ton has increased 25% over that time, and our overall gross profit as a percent of freight-adjusted revenue for the Company has risen from 34% to 39%.

As we consistently call out, fourth-quarter results can be impacted significantly by weather and the effective length of the construction season and our strong results from Q4 of 2015 present tough comparisons. But our improved core profitability should be sufficient to allow us to reach our stated goals for 2016 if recent shipment momentum holds up through the quarter.

Now turning to 2017, I'll begin by reiterating that it remains too early for us to give specific or firm guidance. We're primarily focused on finishing the current year strong and we're just at the beginning of our internal planning cycle for next year. But from what we can see today, from the data we see today, we expect continued volume recovery in 2017 along with further improvements in pricing and overall margins. In other words, continued progress on track with the longer range goals we've outlined previously.

With respect to volumes, and again, we're not yet in a position to share specific numbers, we currently expect growth in each of our primary end-use segments next year, residential, private non-res, highways and other public infrastructure. We also expect to see broad-based growth across our geographic footprint and growth in substantially all of our key market areas.

We've noted that construction start data points have recently turned back up after several months of softening and highway contract awards in our key states have also turned up recently. On top of that, longer term project pipelines continue to strengthen from already strong levels. But the relative start weakness we've experienced earlier this year, combined with strong first quarter 2016 comparisons, suggest that 2017's volume growth on a year-over-year basis could be back-half loaded.

We expect the pricing climate to remain positive and constructive for 2017. The strength of longer term project pipelines and significant increases in dedicated public transportation funding reinforce confidence in a sustained recovery. Materials producers and others in the construction supply chain remain focused on earning adequate returns on capital. Competition remains intense, but overall and generally speaking, we're battling over value and not just volume.

Given these dynamics, we would expect our free cash flow profile and overall financial condition to strengthen further next year. We should have the financial capacity and the flexibility needed to support reinvestment in our franchise, growth including, but not limited to, M&A, as well as additional returns of capital to shareholders. Tom, back over to you.

Thanks, John. We're pleased with the continued strong earnings growth and margin expansion we saw in the third quarter, despite lower shipment levels. The drivers of a recovery in shipments remain very much in place. Our core profitability continues to improve and our fundamental outlook for the future of the business remains unchanged.

Given that positive outlook, I can assure you that we will invest in our business accordingly. We will keep investing internally. For example, we will plow about $125 million into internal growth projects this year. These projects will help us serve our customers better, increase efficiencies, and add to the bottom line. They include five new rail yards, three in Texas, one in Charleston, South Carolina, and another one in Savannah, Georgia, along with six greenfield sites, that's new quarries, that we're developing in growth markets across the country.

At the same time, we will continue to aggressively pursue bolt-on acquisitions in key markets, as well as other strategic acquisitions, all of which will further strengthen our leading position in the industry. I want to conclude by thanking our employees for their commitment to improving every day, to working safely, to finishing this year strong, and to delivering another year of even stronger results. 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.

Thank you, sir.

(Operator Instructions)

We'll take our first question from Kathryn Thompson with Thomson Research.

Thank you for taking my questions today. Really just want to focus on certain geographies. I know that you gave some color in your prepared comments. I want to dig a little bit deeper.

First on California, a lot of their budget for Caltrans has been tied to gas prices. We've seen gas prices move up. How has that impacted your conversations with Caltrans regarding the budget? Also, when you look at the volume softness in that state, how much of it was large project delays versus the budget related issues which would be inherently tied together or any other relevant factor that we should take into consideration?

Good morning, Kathryn. I think -- let me just kind of comment on California overall. I think we feel optimistic about demand in California. We see sustained strength in residential and kind of smaller private work. The headwinds that we faced this year shouldn't repeat next year.

If you can look at the pipeline data, start data and listen to our customers, we feel better about California even though we haven't seen the shipments come back yet. We feel good about the public funding situation in California. The elements are in place for this to come together for state funding. You've got to remember that California still has the worst roads in the country, even with a little bit of increase in the gas tax received from price.

We'll start to see the FAST Act start kicking in. Then we saw August redistribution of federal funds add just under $0.25 billion to California. Then you've got -- as you know, you've got the local initiatives that are on the ballot for next week that if they all pass would total about $2.5 billion annual. For us in California, as we say, it's not if, it's really about pace, and probably the pace of large projects. I think we're feeling pretty good about 2017 and the longer term outlook is pretty bright for California.

Thank you. On Illinois, that state has been a little tougher when you think about just the state from not only public side but also from the private sector spending.

Yes, I think --

How should we think about Illinois as we go forward?

I think that's a real contrast to California, where we feel like California the fundamentals are really good and coming back fairly strong. Illinois is a weak spot for us and it's really about public funding. The private side is actually not too bad in Illinois but the public side is just going to be tough for us. I would say this much. Even with volumes down, I'm proud of our team in Illinois. Their profitability is up and facing some pretty good headwinds.

Just to add a little bit of color on those two states, I think it's instructive to contrast Illinois and California a little bit. Illinois for us, the business is doing quite well, as Tom said. There's actually some green chutes in their funding, some toll road funding, some other funding that's not as dependent on the overall public sources. As you probably know, there's some efforts to, if you will, protect transportation funding from other needs in the state. Illinois is the one place we called out where we just don't see the path to long-term growth that we see in the rest of our footprint.

If we contrast that with California which, yes, is going through a little bit of a lull right now, particularly on some large public funding, even the outlook next year for California is quite bright and we see growth in California in 2017 and beyond. Those are very different situations in our view, one which is doing well and profitable but doesn't right now have the long-term growth visibility.

California's quite different. Yes, as you know quite well, Caltrans is challenged in some of their funding this year. Yes, that impacts us disproportionally because of our large asphalt presence and the customers we're really lined up to serve well. But we don't expect to see anything like the same headwinds next year that we've seen this year in California. I'd also just remind you, give to you a sense of that visibility and how it plays out in the marketplace, our pricing in California is up nearly double digits. Very different situations between those two states.

Thanks. That's a good segue for the next question, just for the consolidated aggregate pricing in the quarter. How much was product mix and/or geographic mix impact the total average price in the quarter?

There was an impact from geographic mix, probably just under 1% negative impact. A lot of that is you think how much our business in a place like coastal Texas was down. That's one of our higher priced markets. Even that itself had a significant impact on total pricing for the business.

Perfect. Finally, just more broadly speaking, would love to get your thoughts or color on are you starting to see FAST Act dollars flow through these states and how much was that a contributor to strength in the markets that did have solid growth?

I think that you're starting to see FAST Act dollars flow through in lettings. I think they've flown through, through shipments yet and I think you'll start to see that in the first, second quarter, probably second quarter of 2017. We're back logging jobs right now that are in the letting. Their lettings are picking up because of FAST Act spending, but I don't think we've seen much of that get into shipments yet. Not into shipments, but we began to see a real uptick as states, several state DOTs, turned into their new fiscal year.

We are seeing some of that FAST Act money, as Tom noted, begin to be more aggressively allocated, including a reallocation of funds to California that happened just recently. The money's getting put to use but we really haven't seen it impact our actual aggregate shipments very much yet at all. Provides visibility for pricing, so it's probably a positive on pricing, but not a big impact yet on shipments.

Great. Thank you very much.

Thank you.

Next we'll turn to Trey Grooms with Stephens.

Good morning, gentlemen.

Good morning, Trey.

I guess quick question on one of the comments you had in the prepared remarks about October. I think you mentioned that it was trending up kind of around 3%. First, was that pretty broad-based across your enterprise or was it more geographically isolated to certain markets, kind of driving that improvement?

It was pretty broad based. We're still facing some challenges, as we said, in California but other than that, and a little bit of weather on the East Coast, it was broad based. I think that what you're seeing there is the projects starting to come through, both res and non-res, and that will pick up as we move into 2017.

Just for a little more color for you all, as Tom said it's very broad based, but just to be -- just to clarify a little bit further. It has bounced back in Texas. It has not, as Tom said, bounced back yet in California, although as we just discussed we see a lot of positive signs for next year for California. If California you took California out, or if California were flat, that 3% up number would be up 5% to 6%.

I'm just trying to give you a feel for how broad based in relative strength ex-California. California's still a little bit soft in October for us. Again, we see a lot of positive signs but it's taking a while to flow through. Texas is already rebounding and you'll get a feel for what the rest of it adds up to.

To be clear that when we say that's the daily shipment rate, again to give you all a feel, we're shipping a little more than 800,000 tons per shipping day. I just want to with clear now so I don't get misinterpreted. That's per shipping day. We had 21 shipping days in October. It's not per calendar day, if you will.

I got you.

That will give you a feel for how much week longer or week shorter construction season can also have in the fourth quarter for us.

Sure. Okay. That's super helpful. Then I guess with that being said, I don't know if -- with October behind us now, at the Analyst Day you said you guys are going to have trouble hitting the 190 million tons of the original guidance that you had. With October behind us now, with the third quarter and October behind us, I guess, can you help us tighten up that volume range for the year at all as far as kind of how we should be thinking about it if we get, I guess, normal weather in November and December? Anything more granular we can get there?

I think as always, as you know, the fourth quarter, it's about weather and timing and the number of workdays we'll have will be important. Will our customers have enough wherewithal to get the work done in those days? I think that the demand is there. We're seeing the projects coming. Our customers have really wanted to get the work done because they see what's coming in 2017. The work is there. The desire is there. It's just kind of it's always about timing and can you get it all done in the number of days you've got left in the year. John?

Just to give you a number, given some of those capacity constraints and our customers just getting the work done, we're probably looking at, we guess, 182 to 184 in terms of millions of tons for the year.

Okay. Perfect.

Again, in mind there's a lot of variability around that. We're shipping 800,000 tons a day right now. To answer your question, that's probably what we're looking toward and at those levels we think we're still aligned with the overall EBITDA guidance we've given.

Got it. Thanks. My last one is more, I guess, kind of looking into next year. Directionally, you've talked about volume and price just very broadly and directionally, which I get why you don't want to go into any more detail with that yet. Can you give us as far as gross profit per ton and how we should be thinking about that, even if it's just directionally as we look into next year, given the fact that we're expecting volume growth, we're expecting pricing growth, but any geographic mix that could impact and without the tailwind maybe as much on diesel, just how to think about your broad thoughts on gross profit per ton next year.

I'll start with price. We continue to see a really healthy environment for price and that's driven not just by demand but really about the visibility that our customers and the market sees with the pipeline that's coming. The majority of our markets have already announced price increases for fixed -- for our fixed plant work. Those will be effective anywhere from January 1 to April 1.

If you just kind of look at the price without putting the markets beside, as we've announced price increases, I'm just looking at a list, $1, $1.50, $0.75, $1.50, $1.75, $1.25, $1, $1, so healthy price increases. Timing will vary with that. I would tell you at this point when we look at it, it's pretty generally accepted in the markets and the markets are helping with that. All of that's driven by that visibility and confidence in that pipeline that's growing. That will give you some kind of idea of what we're seeing on pricing out there.

When it comes to cost, as I think our folks are doing a real good job managing cost and the operating efficiencies that drive those costs. At the same time, keeping our people safe. Volume will only help that.

Okay. Thank you very much for the color. Good luck, guys.

Thank you.

Just for everybody, there's nothing that we see on the cost side that would throw us kind of off track of recent trend on improving profitability, whether that's flow-throughs well above 60%, whether that's our ability to get operating leverage in the system and leverage each step in the P&L. Certainly as we finish off our planning cycle internally which again, we're just beginning, as you know we focus quite a bit internally on our profit per ton one market at a time. I guess we'd be quite surprised if our profit per ton didn't continue to grow a good bit faster than pricing alone would indicate.

Good deal. It's encouraging. Thanks a lot.

Thank you.

(Operator Instructions)

Next up is Stanley Elliott with Stifel.

Good morning. Thank you for taking my question. Quick question. You mentioned Illinois. I know they have a Safe Roads Amendment coming out. Assuming it passes, one, when would you start to see money flow through from a project perspective? Two, is that the only thing or what else do you need to see in the crystal ball to help that piece of the market recover? Because generally speaking, it looks like the other markets in the portfolio are going to do pretty well next year.

Yes, I think what that really does is not new funding or additional funding. It's protecting the funding that's there, which is important because in Illinois those funds have been raided in the past. It just protects it or safeguards it, which is important and a good thing. Illinois is public side, they've just got to fix some of their funding issues. As John and I said earlier, we don't see that happening for 2017. It's going to take while. But the private side is still going pretty good in Illinois.

We don't want to give the impression that Illinois is in some kind of free fall. It's stabilized at a lower level. We don't see the same kind of longer term growth fundamentals yet in place that we see in -- I'm trying to give other exceptions but across the vast majority of our -- the rest of our footprint. You hear us, if I contrast it with California again, you hear us talk about things and you know how this works, population growth, employment growth, state of public revenues, so forth and so on.

In a place like California, that story is still very positive. In a place like Illinois it's less clear. I don't want to give you the impression that it's in some kind of free fall. The business is doing quite well. As Tom said, our team there is doing quite well, but we don't have the same view to one-, two-, three-, four-, five-year growth that we have elsewhere.

That's fair. I was just trying to see if there was any sort of inflection point coming up where it could get a little more back on track, but very helpful.

(Multiple speakers) the negative inflection point's behind us.

At some point I think you're exactly right. Could you help us with -- you mentioned the cost side being favorable. Can you talk a little about the enhanced sales initiatives that you mentioned in the press release?

Sure. Again, that's just an area of an investment in the business. As we see long-term growth the in the business, as we're very focused on providing better service to our customers, to be more valuable to our customers, to get full value for our product, we are continuing to invest in some of our sales support systems, customer support systems, people.

Really nothing out of the ordinary, Stanley. Those can be just very important investments to support growth and importantly to support our customers' needs and they tie back to a strategy that's very focused on earning full and fair value for our product. As such, we need to be providing full service to our customers. For a lot of our customers a lot of the time, we are more than just a materials supplier and we want to make sure that as the markets recover, as things get busier, as they face their own constraints, that we're in a position to help them be successful. That's how we're successful.

To add to that, I think we're seeing what's coming in the next four, five years with growth in all market segments. In order to do that, we need to invest in the sales group so we can add value for our customers and be ahead of that growth curve.

Sounds good. Last question from me. On a lot of these internal initiatives, how should we think about whether it's in terms of payback or kind of hurdle rates, anything that you would care to share about all the growth investments that you have going on internally. Thanks.

I think this is a normal part of our growth. We just don't grow through acquisitions. This is about protecting and adding value to the franchises that we have. Greenfields are normal projects for us, whether that is distribution of rail or blue water or new quarries. They take a long time to develop and you've got to get out you ahead of the growth curve. These are normal projects for us and well above the cost of capital.

Great, guys.

They're actually quite attractive, Stanley. As you can imagine, you know enough about our unit economics, about our margins. When we're doing these kind of things in markets that we're already in, particularly on a risk-adjusted basis, these are good investments and we're quite happy to have the financial flexibility to invest in that growth.

Agreed. Best of luck, guys. Thanks.

Thank you.

Now we'll move to Timna Tanners with Bank of America Merrill Lynch.

Not to hammer home, but on the Q4 commentary, I was a little bit confused because you talk about if the shipment momentum continues, then you're on track to meet guidance, but I thought that October was the usually strongest quarter. Do you mean that adjusted for that seasonality if shipment continues or what did you mean by that? If you could just clarify.

I think what we're saying there is we're seeing those jobs pick up that we've been talking about and starting to come through. We feel good about the fourth quarter. As always, you've got a limited days, number of days to work through, particularly as you get towards the winter months. It's not -- I don't think it's -- we're seeing the work there. We're seeing the projects. It's a matter of constraints from our customers to get it done or number of working days.

Okay. All right. That makes sense.

Unless something odd happened to shorten the construction season by a lot we'd expect to be, just to be clear, on track with our $1 billion of expected adjusted EBITDA. We're not trying to send any weird signal on that, just to be clear. It's the same message as we delivered in Atlanta.

Okay, helpful. In the past you've talked a little bit about your utilization and talked about raising that utilization and what the incremental costs might be and characterize them. Is that something you can update us on?

Yes, if I understand the question correctly, Timna, this is John and Tom will chime in, of course. From a plant utilization point of view, if that's your question, we are still, in the vast majority of our facilities, well below what we would kind of call sweet spots of operations, so we have a lot of operating leverage in front of us. Probably like others in our business, as we started the recovery and started to ramp back up production, we've had to work through some periods of higher particularly maintenance cost, showed up first in mobile equipment, now shows up a little bit for us this quarter in our business and fixed plant or processing equipment, just as you're running things harder and getting them ready for future growth.

To a question that was asked earlier, we should be very well set up to continue to deliver really good operating leverage in what's still largely a fixed cost business for quite a while to come. There will be moments in time where our local operators are wrestling with, and this is obviously this is a good problem to have, how to add a shift or add a crew and to do that most efficiently, most safely, most economically. If you step back from it and you think about our improved margin structures, you think about our incremental flow-throughs, the conditions are in place for those numbers to still be quite attractive for quite some time.

We've got plants that are still running part-time. Even with the volumes that we've seen come back, we're nowhere near optimal operating leverage or efficiencies in these plants. Our operating people are really happy about the volume improvements. With the exception of maybe Texas, where we're running some plants hard, we've got lots of run room ahead of us and I think it will be fun to watch this over the next two to three years.

While we had a couple of headwinds this quarter, our teams have kept operating costs over the trailing 12 months effectively flat, which is a really good accomplishment, given the ups and downs in the production side.

Are we talking 60%, 65%, still, utilization?

Yes. Probably every market's different. Demand, different plants when you run them, but that's what you're talking about.

Okay. Final one from me. I know I like to harp on this, but you've got that high-quality problem of a low dividend yield. Is it fair to assume that the next review by the Board would be in February and not before then? Are we just going to continue to grow with the Company or are we going to start to express some of the greater earnings power that you like to talk about?

Well, obviously the Board -- let me first say it's a Board decision, so I don't want to preview their decision. Obviously reviewed every Board meeting. If our past pattern holds true, we would be announcing something in February.

Okay.

Again, that's if past pattern holds you true. I don't want to pre-judge the Board's decision. Nothing to our knowledge has changed from our past communications, which is we would expect the dividend to grow roughly in line with earnings throughout the recovery period. Of course, we're very focused long-term on having a sustainable dividend. Really nothing changed, Timna, and February's probably the most likely date. I don't want to pre-judge the Board, but that's probably the most likely date.

Appreciate it. Thank you.

Next we'll move to Garik Shmois with Longbow Research.

Just have a follow-up question on pricing, how we should think about that moving into 2017. You provided some color around mix and some of the percent in dollar increase announcements that you have already scheduled for 2017. If we're to think about the volume growth as potentially back-half weighted to next year, given the tough comps in the first quarter, given just the timing around state budgets and how funding is going to flow through on the infrastructure side, should we think about pricing, the pricing growth opportunity in 2017 as back-half weighted as well?

I think as always what I was giving you in the price increases was fixed plant pricing, which will -- timing will all be different, but those will kick in. You've got to remember a lot of pricing for our work is bid work where we're quoting one job at a time and that will be a campaign. You'll see gradual price increases in those markets as you are able to raise prices throughout the year. I don't see anything different in the cadence of pricing as we got coming up versus prior years. The one thing I would tell you is that the environment for pricing and the acceptance of it is very good.

Okay. Thanks for that. Then just one last question on asphalt. Good performance in the quarter despite some challenging volume conditions in California. If we're thinking about asphalt and the oil prices and potential inflation on the cost side into 2017, how should we start to think about asphalt margins in that backdrop?

I think it's one of those where as you see inflation in liquids, you will also see price increases. I think our folks do a really good job of managing -- creating value for our customers with cost improvements and managing cost along with margin management and material margin management. My view of that is if you see increases in liquid could it have a short-term -- a very short-term impact? Yes, as you work off all work, but overall the price will follow it.

Garik, we don't, from a financial management point of view, we don't have a lot of long-term exposure or anything like that on the liquid side, so it's more a short-term fluctuation in material margins. As you would well know, Garik, material margins in asphalt are just inherently a little more volatile than they would be, for example, in the aggregate side of the business, but they're also generally pretty attractive through a cycle and you get good returns on the capital through the cycle. We like that part of our business. Now, it's tied into our aggregates franchise, but we very much like that part of our business.

I think the other thing I'd add to that is you're going to see pretty good demand increases in asphalt, particularly as the public funding starts to flow through. You'll see a lot more highway jobs, which will improve the demand, which will -- and our customers in the market sees that visibility. They know what's coming. I think we're pretty t optimistic on the profitability with asphalt despite what happens with liquid, even if that hits us a little bit short term, longer term I'm pretty pleased with where asphalt's going.

Thanks so much and good luck.

Thank you.

We'll next move to Bob Wetenhall with RBC Capital Markets.

This is actually Marshall for Bob this morning. You already touched on the dividend, but it looks like you all also pretty aggressively bought back some stock in the quarter. I don't think that any of you all have really sold anything meaningfully. Maybe if you could just tie that to where you see the stock now and the outlook for the business through 2017 and beyond?

Marshall, it's John. I'll start. I don't know if I would use words like aggressive or not, but we bought back 790,000 shares in the quarter. We bought back a little over 1.4 million for the year. As we've said, and this is just consistent with the capital allocation priorities we discussed many times, we'll continue to look to return excess cash, after a variety of other priorities, to shareholders in the form of opportunistic share repurchases.

We reserve the right to turn that on, turn that off. We'll report to you kind of after the fact. We're always judging that use of capital relative to M&A and growth investments and as Tom mentioned, we think we will have some interesting M&A opportunities over time, although they're difficult to predict and we're still active in that marketplace. We do think of it as both an investment and as a return of capital.

Look, would we be doing it at those levels if we didn't think it was a good investment? No, if that's your question. We think it's a good use of capital and again, we'll continue to report out on future actions after they occur.

I think we still see a good outlook both for, as we talked about, the internal investments in growing our business with new quarries and new distribution but also the market out there for acquisitions is good. We're working on a number of those. We hope to have some of those to talk about soon. The growth opportunities in the business are very good.

Marshall, just to -- maybe to answer your question a little more directly, our fundamental outlook on the business has not changed. In fact, we have a lot of confidence in the profit engine and where that's taking us. A lot of the fundamentals regarding long-term demand recovery, if anything, are more in place now than they were when we had our Investor Day roughly a year and-a-half, not quite two years ago. If you believe those conditions, then in our view, putting some additional capital back into our stock's a good investment. It's not exclusive of other things we'll do with capital but we think it's a good use of capital.

Anything further, sir?

That's it. Thank you.

Thank you. At this time we'll conclude our question-and-answer session. I'd now like to turn the call back to Mr. Hill for any additional or closing remarks.

Thank you very much for your interest in Vulcan Materials and your time this morning. We look forward to talking to you over the next few months. Thank you.

That will conclude today's conference. Thank you everyone for your participation.