渥肯建材 (VMC) 2017 Q3 法說會逐字稿

Welcome to the Vulcan Materials Company Third Quarter Earnings Call. My name is Elaine, and I will be your conference call coordinator today. As a reminder, today's call is being recorded. (Operator Instructions)

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

Before we begin, I would like to call your attention to our quarterly supplemental materials posted at our website, vulcanmaterials.com. You can access this presentation from the Investor Relations homepage of the website. 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 the reconciliation of these non-GAAP financial measures and other related information in both our earnings release and at the end of our supplemental presentation.

Now I'd like to turn the call over to Tom. Tom?

Thank you, Mark. Good morning, everyone, and thanks for joining us this morning.

As you saw in our earnings release, Hurricanes Harvey and Irma had a major impact on Vulcan's operations and results. And this occurred across a significant portion of our most profitable markets. Absent these hurricanes, our results would've been in line with the expectations set forth in our second quarter call. Adjusting for the extreme and prolonged bad weather, our daily shipments rates in our Aggregates segment, for example, were up at least 7% in August and September over August and September of last year.

Looking ahead to 2018, we see the conditions in place for a continued gradual recovery in materials demand, with solid organic growth in our shipments and for return to the incremental flowthroughs and compounded unit margin improvements that have characterized our business for quite some time.

I'll now share a bit more insight into the quarter and underlying trends, and then John will touch on some preliminary perspective as we look ahead to 2018.

The quarter's extreme weather impacted our shipments and margins significantly, disrupting operations from Texas, across the southeast. This included shipments from our Calica quarry in Mexico. We estimate that the aggregate shipments were lowered by at least 1.5 million tons during the quarter. In addition to the immediate impact of shipping days lost due to the evacuations, storms and extended power outages. We and our customers have been working through the lingering effects of labor market disruptions, haul truck shortages and other logistical challenges. This has been in addition to the necessity of prioritizing debris removal and other recovery work. The storms also impacted our reported pricing and margins, particularly in our Aggregates segment. Part of the effect is to be attributed to geographic mix as we lost volume in several of our more profitable markets and operations, but we also experienced higher energy cost and lower labor and production efficiency, and we experienced lower utilization rates on our ships and other distribution assets, along with a series of storm-related repair costs. In certain cases, the impacts of the storms on our margins were exacerbated by the operating decisions we have made in anticipation of strong shipment growth. For example, we had recently added to our staffing levels in the [Midland] facility, which then experienced significant shutdowns or drops in production versus planned. The storms impact have been far-reaching. After Harvey, for example, our business in Phoenix experienced pressure on sales volumes due to a shortage of haul trucks. Drivers almost immediately had shifted to Houston to service FEMA's debris removal work. Although our planned operations did not suffer any lasting damage from the hurricanes, these were major events and it'll take some time for our business in coastal Texas and other Gulf Coast states, including all of Florida, to return to normal.

Now we're back serving our customers across these markets, where we're shipping a different mix of material and generally, a lower price mix of material, a different source of jobs than prior to the storms. In addition, we and our customers in these markets continue to face tight labor and logistical constraint. It is certainly possible that the recovery work associated with these storms will generate incremental demand for our materials over time. For example, a number of key legislative leaders in Texas are pressing for significant investment in flood control infrastructure, but for the balance of 2017, we don't expect to fully recover shipments lost in the third quarter.

Certain markets, including coastal Texas, the Gulf Coast and Florida, continue to experience a drag on growth and unit profitability into the fourth quarter. As a result, we now expect full year aggregate shipments of 181 million tons and full year EBITDA at $1 billion. But the underlying trends and the very attractive fundamentals of our business remain unchanged. As I noted at the beginning of my remarks, our daily shipment rates in August and September, adjusting for hurricane impacts, were consistent with the 5% to 10% balance of the year expectation discussed in our second quarter call.

Public construction activity has disappointed in 2017. The state DOTs and contractors have struggled for a wide range of reasons to meet schedules, but given the shift to higher levels of legislated and dedicated transportation infrastructure funding, this would appear to be a temporary decline before an extended period of growth. From today's levels, demand has much further to recover and our shipments have much further to grow. The pricing climate also remains constructive, with pricing improvements consistent and widespread across the business. Trailing 12 month average selling prices have improved in 15 of our 19 [zero-manager] areas. Adjusted for mix and acquisition impacts, freight adjusted average selling prices year-to-date have increased approximately 5% over the prior year.

In terms of core profitability on a same-store basis, while third quarter gross profit return was essentially flat, our cash gross profit return and our key legacy Aggregates segment was a third quarter record of $6.45 and that's despite the headwinds I've mentioned. In short, we remain well set up to convert incremental materials demand and to incremental earnings and cash flow growth.

And last, but hardly least, as another indicator of the quality level of our performance, our safety results for the third quarter represented a new record for the company. Our 2017 MSHA/OSHA reportable injuries have dropped by 1/3 compared to last year. Our injury incident rate is approximately half that of the industry rate. That's a world-class achievement and a credit to our people who are focused on superior safety performance, just as they are focused on superior operating performance everyday.

Now I'll hand it over to John to cover some of our preliminary thinking about our positioning heading into 2018.

Thanks, Tom. Before commenting on 2018, we'd like to clarify that our planning process for next year remains in its initial stages. Right now, we're currently focused on finishing the current year strong. So we'll give guidance for 2018 during our next earnings call and not today. But we thought it would be helpful to share some early thoughts regarding how we currently see the stage being set for next year.

Starting with the demand environment, we currently see mid-single-digit growth in 2018 over 2017 as recovery in private construction activity remains strong across the vast majority of our portfolio. And public construction demand appears to be firming up with most markets poised for low single-digit growth in 2018, a clear and positive contrast with the relative weakness experienced in 2016 and '17.

With respect to public construction, the key will remain the pace at which state DOTs and contractors in start and complete [finance] work and work deferred from 2017. Our backlogs and our order flows relative to public construction work, particularly highways, continue to build, adjusting some upside to the current outlook that delays experienced in 2017 will not repeat in 2018. And certainly, we hope for some normalization of weather in 2018, leading to an effective gain in a number of available construction and material shipment days.

Breaking it down geographically, 2018 may be a year of haves and have-not. And have-nots would include Illinois, Kentucky and Alabama. These states combined, they see modest declines in demand due primarily to weak public spending. Opportunities for price gains in these states may also be limited. While other states, the have, would appear poised to see growth in both private and public demand, with private being the larger driver of 2018 shipment growth. Virginia, North Carolina, South Carolina, Tennessee, Georgia, Florida and California should all see demand continue to recover toward longer-term norms. And although further along in its recovery, we anticipate continued growth in Texas, driven by ongoing growth in private demand, along with several large highway projects recently booked. We expect the pricing climate to remain positive across these states also, although some may see a more moderate rate of expansion as individual markets adjust after multiple years of steady increase.

Georgia, in particular, should benefit from a strong combination of public and private demand growth in 2018. California demand also looks poised to continue its recovery, with 2018 driven mostly by private work with the benefits of new public funding coming late in the year and into '19 and beyond. Given this visibility, California pricing for heavy materials should continue to improve at a healthy pace.

From a cost and profitability perspective, certain of the headwinds experienced in '17 should not repeat in 2018. Examples will include cost related to transitioning to our new ships, cost related to California floods and wildfires, and of course, the cost Tom referred to relating to the recent hurricanes. As Tom mentioned, the business should be well-positioned to convert to even mid-single-digit demand growth and to solid organic growth in earnings and cash flows. And the business should also benefit, moving forward, from the capital allocations decisions we've made over the past few years. During 2017, we expect to reinvest approximately $300 million into core operating CapEx, consistent with our prior guidance. During 2016, we've reinvested approximately $250 million. These investments improved the longer-term efficiency, capacity and flexibility of our production and support strong customer service. Having made these investments over the past few years, we expect the level of reinvestment per ton of production to moderate moving forward. Core operating CapEx in 2018 may be lower than in 2017.

Our gross capital investments have also performed well. For example, acquisitions closed since the beginning of 2016, with a total consideration of approximately $245 million, should contribute approximately $35 million to our EBITDA in 2018. To clarify, these figures do not include any impact from our announced transaction with Aggregates USA.

With the close of the Aggregates USA transaction, we will have invested over $1.5 billion in long-term growth since 2013, while further strengthening our portfolio through divestitures and swaps. And while making these investments, we've maintained an investment grade credit position consistent with our stated goals while extending the weighted average duration of our debt, lowering the weighted average interest rate and retaining excellent liquidity. We retain the flexibility to fund smart growth investments, internal and external, as we move forward.

Tom, back over to you.

Thanks, John. Let me continue briefly on the topic of capital allocation and specifically, growth investment. As we all know, our industry is seeing a good bit of M&A activity recently with long-term growth prospects, where heavy materials in the U.S. attract capital from around the world. At Vulcan, we continue to evaluate a number of M&A opportunities and we're also pursuing the targets that are greenfield core investments and expansions to our distribution network. But as you heard me say before, we're going to remain disciplined. We're going to stay focused on those assets for which we are the best owner. We're going to remain patient and disciplined when it comes to valuation, and we're going to create and capture the synergies. Our planned acquisition of Aggregates USA fits our criteria for investment. The DOJ review continues to move forward as expected, as we noted when the transaction was announced to anticipate the investing of Tennessee assets. We're hopeful that this transaction will close during the fourth quarter and we look forward to discussing this transaction in more detail once it's closed. Now I'd like to close our prepared remarks with a quick look again at the fundamentals.

After a quarter still disrupted by hurricanes, it might be helpful to step back and consider the dynamics of the business we're in and where we stand currently. In the trailing 12 months, we shipped 180 million tons. Now prior to the Great Recession, we have to go back 20 years to 1998 to find a year when our shipments were at [so low a level]. In the meantime, we've seen nearly 20 years of economic and population growth in our markets where we've continued to grow strategically with an eye on the long game. So obviously, we see big upside as demand returns to levels that have defined normal consumption patterns over multiple decades. And not only do we have the benefit of our 2017 asset base, we also have the benefit of our 2017 margin structure. Our gross profit per ton today is $4.78 versus $2.11 in 1998. That's about a 4.4% compounded annual improvement in unit profitability over that nearly 20-year period. These are strong fundamentals of our basic but essential construction Aggregates franchise, and they haven't changed. If anything, they've strengthened. Thus, our focus on organic growth and discipline and local execution and our focus on continuous compounding improvements for our customer service and our unit profitability. All of the fundamentals for strengthening demand are in place. Private construction in our markets remain strong, while public construction has been a disappointment for 2017, the need and the demand is there. And the legislation and funding is in place and growing in many of our best markets. As we head into 2018, we have more visibility regarding that demand.

And now we'll be happy to answer any of your questions.

(Operator Instructions) We will take our first question today from Garik Shmois of Longbow Research.

I was just wondering on the cost side, is it possible to quantify your cost that you believe will not repeat in 2018? And what that potential benefit might be?

Garik, it's John, I'll start. But I think right now, it's not -- I think it's a little bit early to do that. And we'll try to maybe be a little more clear when we give an official guidance in February. What I would say is we clearly do not see any reason that with a return to even moderate shipment growth, we won't return to the 60% flow-throughs and continuous compounding improvement in unit margin that characterized our Aggregates franchise. So -- and certainly there should be some opportunity for improvement, I think that -- maybe that goes without saying, but I think it would be inappropriate and a little bit early to try and quantify right now.

Okay, that's fair. I just want to...

And I'll give some more color on that. I think what we won't see is the sudden (inaudible) impact of the ships. We will obviously not going to see the impact of the storms, which were very disruptive for us.

Yes, exactly. And my question, I think, was trying to address, if there's a dollar amount attached to the ships and the storms and the fires in California, but I understand if it's a little bit early to provide any specifics around that. I guess, secondly, is on the price mix headwinds that you called out in the third quarter. Can you help us understand a little bit more how to think about that into the fourth quarter? And then maybe even into 2018, how long you would anticipate some of those headwinds to persist on the pricing play?

Yes, I think in a short period of time, any number of things could affect pricing. So that's could be [product] mix, geographic mix, timing of jobs and even the impact of 2 big storms. I think the key factor when it comes to pricing is that fundamentals of pricing of aggregates hasn't changed, and it's probably better now. You got to remember, we've always -- as we always say that pricing is an ultra-local business, and that local pricing is a campaign that compounds over time. If you look at the slides that we had for this call, we've seen price increases every month for the past 5 years on a trailing 12-month basis, the price has gone up, and that's just a great example of that campaign. But to put a little color on it for you, let me contrast the markets. If you look at Georgia, which is one of our strongest markets both in the public side and the private side, even though volumes have been down a little bit, you saw, due to timing of jobs and the weather impact, we've seen pricing up double-digit in '16 and double-digit in '17. And you contrast that to coastal Texas, where we're further along in the cycle. In fact, we saw -- for a number of reasons over the last 18 months, we saw business probably dips on there. We've seen -- there's a high single-digit pricing every year for 5 years but '17 saw that tailed off a little bit in '17 but believe that will pick right back up in '18, and then you contrast that to California, which is in the relatively early stages of recovery with the private side [and the] public side has not come on but coming on, we've seen -- over the last 2 years, we've seen high single-digit that range to -- well, double-digit pricing, and we'll see very good pricing there in '18. So as we'd say, remember that pricing is a -- it's ultra local, it's a campaign over time, and the proof of that is that slide where you'll see every month price -- pricing improvement over 5 years. So from our perspective, we're very confident with the fundamentals of pricing improvements is sound.

Okay. And then my last question is just, you called out California and Georgia, both in your prepared remarks and just now that they're strong markets. You also talked about labor constraints is impacting the level of volume growth in '17. I'm just wondering if there's any risk that you could see with respect to labor in those 2 states as impacting demand into the next year or from that standpoint, from a timing standpoint, do you see relatively less risk in those states despite the growth outlook?

Garik, I'll start. On Georgia, it will be coming off a year that had -- it was very disappointing at Georgia on the public side and much of that were to deferred to the next year. So assuming that some of the same extraneous events don't happen in '18 that happened in '17, storms, major interchange burning down, those kind of things, I think by the time we work it through off the lower base, we should be okay. The challenge, I think, in Georgia as we look at it, and I think the same is probably true for California at this level, is less labor constraints per se and more about normalization in weather and number of available days, and a little bit more just about the success the DOT and large contractors are going to have in getting scheduled work started and done. And labor is a part of that but so is permitting, there's a variety of other things. And so that's what we'll be really keeping a close eye on, in those 2 markets and many others as we move between now and giving official guidance is what can we see on the public side that relates to work not just being funded, not just being scheduled, not just being slated but actually moving dirt and taking shipments from us. And that's what we'll be keeping a close eye on.

We'll take our next question from Trey Grooms of Stephens Inc.

I guess, my first one is on, obviously, the impact of the storms in the third quarter and then you noted -- or I guess, in the press release, you noted that it's a lingering effect that you're seeing -- I mean, it's not surprising that, that's impacting 4Q. But what's the expectation as far as how long that can kind of go on, this lingering effect that you call out? I mean, do you think most of it will be behind us in the 4Q, or is that -- could that kind of inch its way into next year as well?

I think -- let met talk a little about those effects for a minute. They're pretty hard to quantify, but I'll tell you some color on it. We're still seeing some impact on shipments and product splits across a number of our markets. And to get -- really in the residential sector, so we're just not shipping -- our customers -- our [grade-list] customers aren't shipping like they were before the storm, I think the residential -- some non-res, but mainly residential. And I'm sure that's a mix of where the labor is and just getting back to normal. So some volume and some price impact there. Cost continues to be impacted. For example, we're having a light load of split ships in Houston Beaumont today. We're waiting to dredge those 2 facilities from the storm. That dredging cost is going to be [$2 billion plus], and we don't know when we're going to get them dredged just because it's that much pressure and demand to get everything dredged from the Gulf coast. So while it's hard to quantify, and it's still being impacted, I believe, this will work out. I don't think they'll drag too much impact into 2018. I think it will be worked out in the next 60 days.

But Trey, as I'm sure you and many others well know, while we are back shipping in many of these impacted markets, we are not shipping the same product mix with the same type of jobs. And so it will take a while. We think it will be mostly worked through in Q4. So we're back and operational, but it's not like life is back to normal for the people who are displaced out of their homes in Houston, for example. The only thing I would say, Trey, just on guidance for the balance of the year, those lingering effects are certainly one of the reasons that we reduced guidance. So obviously, third quarter results contributed. Q4 will be impacted. [I believe during the] October was impacted by Tropical Storm Nate. If you take the lingering effects, you take Nate, you pick the normal uncertainty around fourth quarter weather, and those were all the things that kind of contributed to our -- lowering our guidance to the place we did.

Got it. And just -- I don't know if you can give any color around this, but the guidance for volume that's implied in the 4Q kind of, I guess, low single-digit type volume. Can you take a stab at what might that have looked like excluding these things in the 4Q or the impact of these things in the 4Q? I mean, are you able to kind of strip it out a little bit for August and September? I didn't know if there was any color you could give me here.

Yes. I think it will be back to what the guidance we gave you in the second quarter and what we saw in the first couple weeks of August. And we were excited about that. Saw some of the big jobs we'd been waiting on startups. So I think we will be within that second quarter guidance.

Which was -- so Trey, that's -- that said, (inaudible) 5% to 10% up over the prior year. That's kind of what we see as the underlying momentum in those periods of time, which you can get a clean look at it.

Yes, got it. Okay. And then lastly for me. On the '18 kind of outlook for the demand environment, I just want to be sure I understand. Mid-single-digit demand growth for Aggregate, that's in your market specifically, if I understand right, is that kind of the view there?

Yes.

Yes.

And then with you guys -- in the M&A that you've done, I'm not talking about Aggregates USA, but the other M&A that you've already closed, presumably, you guys would -- if for no other reasons, simply from an M&A standpoint, you should outperform the overall end market with that minimum because of that, right?

Yes.

And we take our next question from Jerry Revich of Goldman Sachs.

I'm wondering if you could talk about what you're seeing on the highway side, just overall, it's our perception that activity level in terms of capital actually getting spent this year were -- was generally light despite very strong DOT budgets. And I'm just wondering what's your assessment on what's driving that delay in terms of appropriations that are translating into a meaningful pickup and higher activity for your business, and what do you expect that to look like in '18?

Yes, that's been a frustration for us in 2017 and one that we thought would have shift or would have flowed through the FAST Act, and some of the DOT funding would have flowed through earlier in '17. Our miss in '17 was the public work. The private side of the business was very strong, very good. It's up and will be up in '18. If you look at the public side today, I think our visibility is a lot better that it was a year ago. Our public backlogs are up considerably and our order flows are up and improving on public works. And we've began shipping on a number of large jobs. We had anticipated shipping much earlier in the year. So I believe and I know our visibility in the public work for 2018 is much improved. I should give you a list of 10 major projects around the country, which we thought will ship second quarter, at least the beginning of third quarter, that are now shipping. 3 examples that I can give you would be I-85 widening in Charlotte, which is over 1 million tons; the much talked about 285/400 interchange in Atlanta is now shipping, that's a multimillion -- a [2-million-ton] job. And then we've also, in that past, talked about our 16 and 75 widening [issue] that got delayed due to runway issues, and now some [funding] issues that are happening (inaudible) which has now began shipping. So as with shipping on these jobs, our timing, our insight and our visibility of the timing and pace of shipping is much clearer than maybe what it was 6 to 12 months ago.

And I'm wondering if you folks can comment on California specifically, where we've heard some optimism that the SB 1 bill could translate into spending sooner than initially anticipated based on how tax revenue collection's going in the [urgency bit] output capital in the ground. Are you -- based on what you're seeing, when do you think you'll start to see the benefit of SB 1 in your business?

Yes. I think California is really an exciting place for us and again, the private side, strong, been strong, both non-res and res are very healthy there. And now we've got SB 1. Back in the summer, Caltrans announced $1 billion of accelerated funding. And then in October, they announced the fix-it-first transportation of $3.4 billion of accelerated spending, and that second announcement includes 1,200 lane miles of pavement replacing or repairing [66] bridges and a number of, like, 300 culvert and drainage repairs or replacements. Most of that will come -- you'll see a little bit of that probably in '18, most will come '19 and '20. Paved -- obviously, [overlays] will go faster, but I think, with all of this, remember, it takes normally 2 years to pull it through. We've seen it in a number of builds. Now we'll get some of that accelerated, start shipping, because there's a lot of public pressure to fix the roads in California.

So Jerry, to help you with the math on that a little bit and the others. As we look toward '18, California shipment growth is still driven almost entirely by private growth in our current outlook. The efforts at Caltrans to pull projects forward are very good news. But pulling them forward doesn't mean we're shipping on them in early '18, it means they're starting to work on the project. And so it should benefit us maybe some late in the year, but it's not something that we have baked in for '17, if you will -- I'm sorry, for '18. But back on California, stepping back just a little bit, we continue to think California looks a lot like Texas did 4 or 5 years ago. And as you heard Tom say and you heard me say, that's reflected in what should be a pretty darn constructive pricing climate, not only for our products, but for all of heavy materials in California as we look toward next year, and it's really at that different stage of the cycle. So we're excited about it, but '18 will still be largely private-oriented. Maybe with a little bit of upside if the public comes a little bit sooner, but we think that's more '19, '20 and for many years beyond.

(inaudible) of Jefferies has our next question.

You called out project delays and logistical issues at the DOT last quarter. Have you seen any improvement on that front and any lift from FAST [that is down at this much]? And separately, you're calling for low single-digit growth on public spending next year. Is that generally in line with what you expect that's coming mid-year?

Yes, I'll kind of play back, that story on expectations. Because again, I think the theme is that in '17, public has been a disappointment. At the beginning of '17, we and others would have expected mid-single-digit growth in public demand. What we have seen in '17 and probably what would've seen by the end of the year is mid-single-digit decline in demand. As Tom said, that's where the miss is. The important thing is that we look to '18, we actually see firming up and the return to growth in public spending and public demand across, really, all of our footprint with the exceptions that I noted of Alabama, Kentucky and Illinois. And that's very good for the overall health of our business. We don't have that net mid-single-digit growth outlook for next year, which, again, preliminary, we'll revise it between now and when we give official guidance. As you noted, that's not predicated on a huge jump on public spending. That's predicated on stabilized low to mid -- low single-digit growth in public spending. So if people are able to get projects out the door more quickly, when that begins to accelerate, there could be a little bit of upside to that. But we don't see it happening certainly in the first half of '18 yet. So then we'll keep a close eye on.

Yes, I think back to earlier comments, is the visibility of the jobs that we got started and we're now are going to ship, and the ones that we haven't we don't know yet. We just don't know the timing of them.

Got you. And I guess, just one last one. I mean, coming mid-year has turned a lot of euphoria with this administration pushing through an infrastructure bill. But just given some of the delays in what are tough [era] tax reform, has that lack of clarity in D.C. led to any delays in projects and funding getting pushed out?

No, it hasn't. And as we've said before, this is something this country needs and it's not a matter of if but when. But in the meantime, we've got very good business. Private side has been growing and continue to grow. We're starting to see the -- the highway work flow through finally, and we're starting to see the FAST Act funding flow through. So when that comes, we'll welcome it with open arms. But in the meantime, I think demand on both the private and the public side is healthy.

Kathryn Thompson from Thompson Research Group has our next question.

I just want to first look at some gross margins. Could you walk through the puts and takes of some quarters? I'm really trying to get a better sense of what more is onetime versus ongoing managed costs? Particularly as it's related to the storms. I know you talked about it in the prepared commentary, if we put it around a metric that we can better understand for modeling purposes.

I think, just some color on that. It's -- those storms were really disruptive. We talked about them. From an operating perspective, you gotta remember we had operations that were shut down days, even weeks. For example, the West Coast in Florida, the operations in there were shut down 2 or 3 weeks. Some Georgia operations were shut down 1 week. And when you're down for that long, the cost don't go away. I mean, we paid our folks doing the evacuation just because it was the right thing to do, but those costs kept building up. So anything specific we talk about is going to be conservative. I think that we're still slowly getting back to normal on that. We'll work that through in the next couple of months, but that's really hard to quantify. John?

Kathryn, I'll try to give a little bit more quantification and color, but let me first tell everybody, it's just inherently very difficult to quantify precisely because the nature of the impacts were so widespread and on so many aspects of the operations. But to try and give you a rough feel of the way we look at it. You saw us note that we think we lost at least 1.5 million tons of production deferred -- of shipments deferred. Just on the increment given where those are coming from, the nature of it, we think that's probably a $15 million to $20 million hit to EBITDA in the quarter. But then let me go to the profitability of our Aggregates segment and to your point about margins. We think the hit there was probably the equal and maybe larger size than just a straight volume loss. This is a function of changes in product mix, changes in production efficiency. Again, in some cases, having fully staffed facilities where we kept everybody in the payroll that had no production for a couple of weeks is very much the right thing to do. Freight and logistics cost, unique spikes in diesel, unique spikes in [freight] cost, which in some cases, we [ate] because we've chose not to pass through to the customers in the middle of a crisis. Repair costs, lower fixed cost absorption, the spike in diesel and its usage in our facilities that you've seen, et cetera, et cetera. So on the cost side, we'd estimate that's another $15 million to $20 million, but that's an estimate in the quarter, and when I say cost [I really mean] profitability. Absent that effect, we probably would have grown unit margins, unit gross profit in our Agg segment, another 5% to 8% quarter-over-quarter. Then if we go to our non-Aggs segment, probably about $7 million to $8 million impact, particularly in our Asphalt segment, particularly in San Antonio, which was hit hard economically. So that, I hope, gives you a feel, Kathryn. I just want to underscore that it's more difficult than the average 1 or 2 items to quantify. Just to give you a view of how disruptive this was.

I absolutely understand, and I think you've seen (inaudible) about that, too. The other thing -- and it's extremely helpful in terms of that quantification. In terms of the optics for pricing in the quarter, and once again, this may be difficult to quantify, but when you look at your 3% pricing, [what's] any impact that the storms have effect opposite pricing, understanding that the shipping or (inaudible) versus clean spend into affected market?

Yes, I think that it was definitely impacted. We've called out in a mix, been about 1%, but that's on the surface. There was for price, the other impact from this storm that are not seen there. And again, we were very careful with our pricing just because it was the wrong time to raise prices in -- during when people were -- are hurting and in trouble, and so that probably had some drag on us also.

Kathryn, we can take this off-line, if you wanted. But if you looked at our, call it, non-freight adjusted pricing, it's total revenue per unit in Aggs. They were up, [by] 5% to 6% relative to our freight-adjusted pricing up 3%. And again, a lot of that was in line with the disruptive markets where we had kind of a spike in freight-related cost, like an immediate spike. And it wasn't passed through the way it normally would be. There's also little bit of cost and price impact there, in some of these markets that's transitory. I think we'd probably say the overall pricing climate and trend, again, you know very well how variable it is by market, incredibly variable by market, but total across the portfolio, tracking between 4% and 5%.

Okay, yes. So I definitely understand that, and just really wanted to get a better understanding of that mix impact of the storm. So that's helpful. Then finally...

Yes. And that mix impact is -- the question was asked earlier, that mix impact is not over. Yes, we'll still see some of that in Q4.

Okay. And final question, and I promise to get off the storm train. Just when you look at recovery in Texas and Florida, we've got mixed feedbacks from a wide variety of different construction value chain [discipline]. A ready mix of truck drivers did well in profits distributors in terms of pace of recovery in each of their respective markets. So maybe you could just frame a little bit more of are you seeing a faster recovery or a slower recovery you thought for Florida] and Texas because that will help us -- we think that's still lingering and that could go beyond Q4. And so that's kind of what we're trying to get some comfort around.

I think it's actually, I would say, pretty slow. It is dragging. I think that every day, we get a little better with this. Labor markets get a little more normalized. Debris get picked up and we're starting to have trucks available. Homebuilders, I think the thing that concerns us is probably the res side. And when we start -- we're not ready -- when our customers in the ready-mixed business starts shipping to residential, and I'm sure this is the question is, the labor constraints there with repairs and rebuilds to homes as well as new construction. So we're hoping that we'll get past this in 50 days, But you may be right there, we don't know. And I think, like I said, the biggest concern is what happens to shippers for res and the timing of that.

And in some markets like Florida, asphalt paving has not really picked back up either. So Kathryn, I think it's fair to say that -- just to underscore that, that there's certainly a degree of uncertainty. I'm not sure anybody knows. It's just a little bit the nature of what these communities are working out of. It's not about our quarterly operations, but it can sometimes be about our customers' operations.

(Operator Instructions) Our next today comes from Bob Wetenhall of RBC Capital Markets.

I swear to God, I'm not going to ask a single question about the hurricane, okay? Enough of the hurricane, let's move into the 2018, all right?

So a lot of detail, forward-looking. I'm kind of feeling like we're 180 million shipment tons for this year and last year. I'm trying to understand if there's tenant demands? Are you talking like mid-single-digit buy-in growth next year? That kind of gets me to 190 million tons. You've got some nice M&A that closes, I guess, end of 4Q, first quarter of '18, maybe a couple of million tons, maybe 5 million tons? Just for thinking, and I'm not asking for an estimate or a crystal ball. Is, like, 190 million to 200 million tons like a good conceptual starting point for '18, given all the issues we have this year with weather and hurricanes and all that stuff? And some of the comments you made about kind of widespread recovery, accept John's point, those 3 states, which are kind of struggling, is that the right way from a bookend perspective big picture?

I think first of all, we're still working through that and we're still working on a plan. Those, as John said earlier, will depend on what happens with the public sector, how fast it goes, some of the bottlenecks get cleared up. I think as far as mid-single digit, we're very comfortable with that, based on projects we've seen start and the ones that we know, the timing of the ones that we know are going to go a lot better than it were a year ago. So I think we're still working through that and got to get ahead out of the hurricane and into normal business.

And Bob, we don't want to slide in to giving that number, giving guidance before we give guidance too much. I think I'll come back that private demand climate is still quite strong in Vulcan markets. By the way, if somebody wants to ask, that includes non-res and non-res backlogs in our markets certainly through '18. Res, very strong across the entire footprint. Public transportation, public highway work, strong across -- well not strong, strengthening after a period of lull in what we think is the beginning of a long wave of growth on the public transportation side. At the public -- what we call public, other infrastructure, water sewers, some other things, not as strong and conspicuously weak throughout this entire recovery, but that's now 10% of our business when it would normally be 15%. So it's not a big thing. So we actually see return to at least moderate growth with some upside. And I'd underscore that we haven't seen anything change in our view regarding our ability to convert that growth into good growth in operating earnings and cash flows.

Yes. I mean, you guys just had a couple years where you've been growing volumes, 15 million or 20 million tons. So I mean, there's no question about your ability to leverage yourself when the demand returns. Maybe we could talk for a second about gross profit per ton. And obviously, this year's had some disruption, which is weighed on that and impact in incremental margin performance. How do you feel? What's -- like, where can you take this, Tom, in terms if we get normalized demand patterns? What kind of gross margin per ton can we start looking for on a dollar basis?

And you'll hear us talk about the flowthroughs of 60%, and that's what we tell you all the time. We still -- that nothing's changed with that. We have confidence in that. And I think we won't see some of the cost headwinds that we saw this year, John talked about those, with the shifts from the fuel spikes and obviously the cost from storms and the disruption of the storms. So I think back to our normal flow-through.

So you feel good about continued improvement in profitability. Final question and I'll pass it on. Is there -- am I right to detect the subtle shift in your capital allocation strategy? And -- because you guys spoke more and focused more on it during your prepared remarks, is there any kind of tell to, to how you're putting money back to work and how should we be thinking about that for next year, 2018?

Good question, Bob, it's John. The -- I don't think there's any change in strategy. In fact, it's very consistently with what we've been on for a long time. We did just want to note that on -- we're still very focused in the free cash flow generation, we think we should have accelerated free cash flow generation over time. As you hear Tom say all the time, we're going to stay disciplined in our deployment of capital back in M&A and to the growth with an underscored discipline. Though we do think that we've caught up on some amount of our core maintenance and operating CapEx investments. We've made some very good investments there and we will talk about this more when we give guidance next year, but we'd expect our core maintenance operating CapEx number to maybe even next year to be down a little bit despite production being up a little bit. We think that number will kind of moderate. But no change to our long-term outlook -- or certainly, no change to the cap allocation discipline we've been following for some time.

So you're saying EBITDA grows potentially, but CapEx goes lower so free cash flow strengthens, correct?

Yes.

Adam Thalhimer of Thompson Davis has our next question.

I wanted to ask first, you said mid-single-digit volume growth expected for next year. Could pricing also be up mid-single digits for those 3 states you mentioned, does that drag down the average?

I think as you look at it, we're not there. We actually couldn't give you guidance because we're still doing the work. But I would tell you and repeat is that the environment for price increases is very healthy. It's -- we've got population growth, we've got employment growth. Our customers are growing their pricing and everybody recognizes that our business, we need to add to the profitability of it. So the environment's good, people see work out ahead of them. The visibility is very good, so we can take risk on price, all the way through the construction business, not just Aggregate. So while I won't put a number on that at this point, I'd tell you that the environment is good for price increases.

Okay. And as a follow-up, I'm just curious, what's your view on the M&A landscape in 2018? Do you see a moderation of the large deals and maybe just a few comments on your priorities for M&A?

Those deals will come and go, and you never can predict them. We're looking on a number of M&A opportunities as we speak, and they'll be all shapes and sizes and you just can't predict that. As -- when the seller gets ready to sell, they're available. As always, I think we're focused on the discipline -- what market -- the discipline about what markets we want to be in, what synergies we have and are unique to us and having to put them to work. Obviously, we're going to be disciplined on what you're willing to pay for an acquisition. And then as important as anything, once you get it, you have to be disciplined about integrating it and making it profitable as fast as you can, and making it a part of the Vulcan franchise and part of the Vulcan family as fast as you can. So we're busy with that. There's deals working right now. But to predict size and a number for '18, really tough to give. I can tell you right now that the M&A part of our business is very busy.

We'll take our next question from Scott Schrier of Citi.

I wanted to talk specifically about Virginia little bit. You continue to have a lot of strength in the ready-mixed, and just want to see what you're seeing in the state, both on the public and private side, whether you think that's going to continue and kind of how you look at the pricing environment there. And I guess, as a follow-up to the last question, how you view the M&A environment in the state of Virginia?

Yes, Virginia is strong. I think if you -- (inaudible) 2016, our weakness in Virginia was non-res. We've predicted it coming back. It has come back, that has really added to our growth in ready-mixed in Virginia. Res continues to be healthy and the public side is healthy. So really good market both from demand perspective and also from a pricing environment, both in -- all the way through the construction materials mix, aggregates prices have gone up in Virginia and will go up hopefully in 2018. And we continue to see read-mixed prices profitability grow in Virginia. Good market for us. And I think our folks are doing a really good job there.

And I wanted to touch real quick on SAG expense, it looks pretty low. Just wanted to see if there's anything there and how you're looking at progress in SAG as we head into '18?

I'll start on SAG. I don't know that we'd say it's low. We're never -- we're always looking at it. An area of continued focus for us. Both in leveraging at the sales going forward, as we've talked about a good bit, but also in terms of making sure SAG dollars are deployed against those things that better serve our customers, better serve our people and just drive productivity and performance overtime. So it's something we are intensively focused on here. We read it as good discipline, good focus, in line, but I wouldn't say our job in SAG is anywhere near done. We're going to continue to focus on it. We're making investments on the sales side, the S part of SAG, particularly to serve our customers better and to grow with the small private work we see, and to make sure we participate in that part of the growth in the market [forward]. And to do so with a full value for our products and we'll continue to be very efficient on all of what I'm going to call the support function aspects of SAG. So good results in the quarter, but an ongoing area of focus.

Our final question today comes from Stanley Elliott of Stifel.

Quick -- before I ask questions, one, just a clarification. So for the Ag USA deal expecting to close kind of fourth quarter, I apologize if you have said it, but the level of divestiture that you were contemplating or discussing, all of that is kind of within that framework, meaning just increasing the likelihood of getting that closed by year end?

We can't share a lot about Ag USA. The [DOJ] process continues to move forward as expected. We believe we'll close it in the -- we believe we'll close Ag USA in the fourth quarter. Divestitures will be a part of that. We're also working really hard and this is -- the most important is about the pre-close the integration and what we could do to make sure we execute on the integration of that business. It is a very good business. We're excited about it. It's great assets in really good markets with really good market positions. They have really talented people. And we're ready to get them on-board with Vulcan.

And Stanley, just to your asset question, to [regulated] asset question. We said when we announced that we didn't expect to be able to keep all the assets on Tennessee, and we still don't expect to be able to keep all the assets in Tennessee. So no change, really.

No. It sounds like that it's moving according to plan. And I guess lastly, can you talk a little bit about the -- some of the internal investments and then some of the new site developments. Is it easier to greenfield a quarry or to kind of work within an organic basis in that regard? Has anything changed on that? Or is it just kind of more opportunistic, kind of something you guys have been doing for awhile?

To answer your question, we're doing greenfields and M&A. Greenfields are very important part of our business. It is part of our strategic plan and something we execute on and been executing on in the last couple of years. We have a number of greenfield work in quarries working right now and an even bigger number of distribution greenfield sites that we're working or are finished. I won't talk a lot about those because of the strategy and the confidentiality of that, but it is absolutely part of our business and a very important part of our strategy.

Stan, I think it's fair to say that it's harder, not easier. And when we talk about things that are coming to fruition, almost without exception, they've been in the works for a decade. So just keep that in mind if we're making announcements in '18 about greenfield developments that they've been in the works for a very long time, and it's very hard to do.

Thank you for your time this morning. Thank you for your interest in Vulcan Materials. We are excited about the growth opportunities we see ahead of us, and we look forward to sharing that with you in our next call, another topic. So again, thank you for your time.

Thank you. Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation. You may now disconnect.