渥肯建材 (VMC) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Vulcan Materials Company Fourth Quarter 2017 Earnings Conference Call. My name is Lynette, and I will be your conference call coordinator today. As a reminder, today's call is being recorded. (Operator Instructions)

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

Good morning to everyone. Thank you for your participation in our earnings call. 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.

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 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.

Thank you, Mark, and thank all of you for joining us for our call today.

We have several important topics to cover: the Aggregates USA acquisition; the impact of tax reform; points on improving demand and pricing fundamentals; and, of course, our overall financial expectations for 2018.

I'll begin with a recap of the fourth quarter and the year. The pattern of shipments in the quarter was encouraging. November, December aggregate shipments posted double-digit gains over the prior year, and this was following slight declines in October's daily shipments due to lingering storm impacts. When the weather was good, shipments were strong. This was consistent with underlying demand improvement and the need to catch up on delayed work.

Aggregates freight-adjusted pricing in the quarter improved 2% over the prior year and 4% for the full year. This is adjusted for geographic and product mix.

High-single-digit full year pricing growth in California and Georgia reflected good visibility to continued demand recovery in those key states. In contrast, pricing in Texas declined 4% in the quarter. This was largely due to Hurricane Harvey's continued impact on job mix in the coastal region and on freight distribution costs that couldn't be passed through immediately.

Now these were temporary challenges, and our longer-term pricing strategy and expectations remain unchanged.

We didn't perform as well in the quarter converting solid revenue growth into incremental gross profit. Several margin headwinds negatively impacted gross profit in Aggregates by approximately $20 million. In addition to the price mix headwinds, we experienced a 23% rise in the unit cost of diesel fuel.

There were additional costs related to the transition to 2 new more efficient Panamax class ships and for storm-related ship loading and barge movement. We also absorbed certain expenses related to operations that we acquired during the year. We view these as temporary headwinds.

We expect a return, this year, to the longer-term flow-through rates and compounding unit margin improvements that we typically have delivered throughout the recovery.

I am very pleased that we ended the year with a best safe performance in our company's 60-year history. Our accident rate in 2017 was less than one incident for every 200,000 employee hours worked. Now our goal is 0, and approximately 70% of our facilities are there already, having experienced 0 injuries in the past several years. I give great credit to our local leaders and the commitment of our workforce.

Now stepping back a bit and setting aside for a moment the achievement of our world-class safe performance. I will say bluntly that 2017 was, in other important ways, a frustrating year. Yes, there were extreme weather events. They were very challenging. They disrupted our operations and our customers' businesses in major ways and for prolonged periods.

The pace of public construction activity in 2017 was also frustrating. DOTs continued to adjust to new and higher levels of funding, resulting in a more complex mix of larger projects, creating delays.

A number of large jobs experienced significant start delays, in some cases, further compounded by bad weather. Going into 2017, our customers and we expected highway and infrastructure shipments to increase by about 3%. Instead, they declined by 7%.

Last but hardly least, in some instances, I was less than satisfied with our own operating performance. It became quite clear that operating conditions were going to be unusually difficult throughout much of the year, wet material, shipment delays and other cost pressures. Some of our teams adjusted very well. Others, not well enough in my view. Taken as a whole, we have room to improve and we're doing so.

While there were some frustrations in 2017, we also had some real wins. The fundamentals that underpin our long-term strategy continue to strengthen. The core drivers of demand for our materials improved. Pricing dynamics and our operating capabilities continue to get better, and our asset portfolio grew and is now stronger. Our tax position and cash flows and our balance sheet all have continued to improve over the past year.

Regarding recovery in demand for our materials, we continue to see a long runway, with private demand strong across most markets.

On the private side, 2017 saw continued growth in household formation, permitting activity, contractor backlogs and notably, related construction employment. All of this points towards a sustained recovery in demand.

Customer confidence strengthened throughout the year, and we've entered 2018 encouraged by what we're seeing with ABI, the Dodge Momentum Index, long-term project pipelines and other leading indicators. These and other factors suggest private demand in bulk-and-serve markets should continue to grow faster than across the nation as a whole.

The long-term fundamentals for public demand also strengthen over the past year. Public demand is finally beginning to turn into what looks like an extended period of growth. With actions taken by California, Tennessee and South Carolina in 2017, 9 of the states we serve, representing more than 75% of our revenues, have now meaningfully raised long-term road construction funding.

Our order backlogs related to public infrastructure work have continued to build. And importantly, we have recently seen public construction start activity return to year-over-year growth, signaling a better conversion of these backlogs into shipments.

Now it is certainly going to take multiple years for public construction activity to ramp up fully to these new higher levels of funding. But for many of our markets, 2018 should represent an inflection point at the front end of several years of sustained growth.

Improved visibility reinforces a positive pricing climate. This climate is further supported by customer confidence, expanding contractor margins, higher cement prices, rising diesel and other distribution costs, and in certain markets, such as California, a growing imbalance between long-term material demand and available supply.

I will remind you that higher diesel and distribution costs will ultimately help expand the economic moat around our quarries.

In any given period, our reported average sales price will be impacted by mix and other timing factors, and there will be periods of relatively faster and slower growth, but the fundamental trend for aggregates pricing remains clear.

Our asset portfolio has strengthened meaningfully over the past year, further supporting our long-term growth. A prime example of this, we welcomed Aggregates USA -- the Aggregates USA team to Vulcan at the end of December.

We are really pleased with this organization that is now part of the Vulcan family. The acquired quarries and rail yards fit our network nicely, and our new colleagues have already brought new ideas to the table. We expect to realize significant synergies in plant production, rail car utilization, product offerings and growing customer relationships in Georgia, Florida and South Carolina.

We expect these operations to contribute approximately $50 million to EBITDA in 2018 and growth beyond that as markets continue to recover in Georgia -- as markets continue to recover as Georgia DOT projects ramp-up and as longer-term synergies are captured. This was the largest acquisition of the year, but it certainly wasn't the only important addition in 2017.

We completed another 7 transitions -- transactions during the year at a combined value of the $226 million. In particular I would note our acquisition of Shamrock, a leading ready-mix concrete producer and material distributor in the Bay Area; and of LoJac, a major asphalt producer in Nashville. Over the past 3 years, we've invested over $1.2 billion in M&A and internal growth projects that complement our long-term growth.

Yet during this time, our balance sheet has strengthened. Our total debt has increased by $875 million, but our cash interest expense has declined by $10 million.

In 2017, we recovered investment-grade credit ratings, which we intend to retain. The recently enacted tax reform law also improves our current and long-term earnings and cash flow trajectory. We expect our total effective tax rate to drop from 28% to 20%.

Our company grew stronger and more valuable in 2017. We are looking toward -- we are looking forward to continuing top line growth and earnings improvement in 2018.

Now I'd like to hand it off to John to recap our 2018 guidance and investment plan. John?

Thanks, Tom, and good morning, everyone.

First, let me point out that Appendix 3 in the press release financials bridges reported to adjusted EPS for the quarter. We followed our common practice, for example, in excluding the impacts of onetime tax items and debt refinancing costs.

The $20 million of margin headwinds in the Aggregates segment that Tom mentioned was not adjusted out. We'll, of course, be happy to answer any questions you have regarding these items or the tax provision off-line.

As you saw in our release, our 2018 guidance calls for earnings per share of between $4 and $4.65, for growth of approximately 40% over 2017's adjusted EPS. We expect adjusted EBITDA, including the impact of Aggregates USA operations, of between $1.15 billion and $1.25 billion.

For our Aggregates segment, we expect same-store volume growth of between 4% and 6%, generally consistent with the outlook we shared in our most recent call. Continued expansion of private construction activity drives most of the expected year-over-year growth.

Although the intermediate to longer-term leading indicators for public construction continue to strengthen and certain markets will experience very solid growth in the current year, our current overall expectation is for shipments to public end uses to be up only in the low single digits compared to 2017.

Inclusive of Aggregates USA, we expect aggregate shipments for the year to total in the range of 200 million tons.

Although weather patterns and the timing of large projects can be difficult to predict, the first quarter should present the more difficult volume comparisons given the trends of the past 3 years.

For example, first quarter shipments in 2017 were approximately 30% higher than in 2014. As Tom noted, we expect same-store aggregates average selling prices to be up 3% to 5%. The pricing climate remains constructive across most markets, and we expect price levels to build throughout the year as higher diesel costs flow through to pricing.

There has been no change to Vulcan's fundamental pricing strategies or our expectation for compounding price improvements over the longer term.

We expect unit gross profits in Aggregates to expand by double digits, consistent with the results seen earlier in the recovery cycle and consistent with certain cost headwinds not repeating in 2018.

We project gross profit in our Asphalt and Concrete segments to grow in the mid-single digits combined as higher volumes are partially offset by modest margin pressure.

Our earnings and EBITDA guidance assume SAG grows modestly to approximately $335 million and to decline as a percent of revenues.

We will continue to streamline certain administrative activities while investing in talent development and customer service capabilities.

Our current management -- other current management expectations include interest expense of $125 million, excluding refinance charges; operating and maintenance CapEx of $250 million; and as Tom noted, an effective book tax rate of approximately 20%.

Our current or cash tax rate further benefits from the ability to immediately expense qualified capital investments.

For 2018, we currently project cash taxes of $80 million, excluding the benefits of credits and refunds related to prior tax years. This projection for cash taxes would have been approximately $100 million higher under the prior tax law.

As you can see, we expect to generate solid free cash flow in 2018 and beyond as the change in tax law further improves the already strong cash generation profile of our aggregates-centric business.

That said, our overall capital allocation priorities remain unchanged. We will continue to appropriately reinvest in the maintenance and productive capacity of our physical plant, and we intend to maintain solid financial flexibility and an investment-grade credit profile.

Since 2015, we've funded meaningful growth while simultaneously improving our overall credit standing. During this period, our weighted average interest rate has declined from 7.5% to 4.3%, while the weighted average duration of our debt has increased from 8 years to 16 years.

We expect to maintain a progressive and sustained dividend. As you may have seen, the board recently raised the dividend 12% to $0.28 a quarter. We will continue to invest in long-term growth both internally and through M&A activities.

For 2018, we expect to invest $350 million in internal growth projects, including new strategic quarries and reserve positions in Texas and California. And we will continuously evaluate the use of opportunistic share repurchases as a means to return excess cash to shareholders.

Although we will continue our disciplined pursuit of bolt-on acquisitions during 2018, our primary focus will remain on building Aggregates unit margins, well executing internal growth projects and fully capturing the synergies from recent acquisitions.

Tom, back to you.

Thanks, John.

As we move into 2018, we are very pleased with our portfolio. Now we're always evaluating strategic investments, divestments and swaps in order to strengthen this portfolio. Our current footprint aligns very well with profitable growth this year and ramping into 2019.

For example, we like what we're seeing with the growing demand in our Southeastern market. It is supported by new highway funding, port and intermodal transport development, superior employment growth and favorable demographics, both population and household formation.

Acquisitions such as LoJac and Aggregates USA will play an important role here. Arizona, California and Texas are also strong on these same fronts, and recent results in California are particularly exciting for us. We like our long-term position there.

California will benefit significantly from increased public spending, and our reserve base holds tremendous value. We are where the growth is from San Diego to the Bay Area. In L.A, for example, we've added additional high-quality reserves in a huge market where reserves are lacking.

In the Central Valley, we have permitted a major new quarry north of Fresno that will serve a region of that state that is expected to see the fastest growth over the next decade.

In the Bay Area and Napa, where private construction is strong and public construction is on the uptick, we've not only added reserves, we've also increased our footprint and our product offerings through Shamrock. We are also the largest supplier of asphalt in the state.

You can see why we're excited about our future in California.

Our Texas operations, after a tough year, should benefit from improved DOT lettings and more normalized weather patterns in Houston and other coastal areas. We're continuing to invest in our Texas market positions, including a major investment in a strategic rail-served quarry, which will serve Houston and other markets destined to grow for years to come.

The recently announced federal budget deal should benefit our Virginia and Mid-Atlantic business with its exposure to defense and overall federal government spending.

Summing up, even with the challenges of 2017, many things happened during the year that bode well for our future. Our world-class safe performance leads the way for world-class operational and sales performance.

Backlogs of work continue to build as the demand environment keeps improving. Public infrastructure began to kick in on top of the healthy private growth we were already seeing in key markets.

California, Tennessee and South Carolina passed major new highway bills. We completed strategic large acquisitions and bolt-ons, permitted new greenfield sites and began construction on new operations to better serve our customers.

All together, these give us even more strength and reach in strategic markets across our footprint.

We ended the year with a strong balance sheet and well positioned to reap the benefits of all the good things accomplished in 2017. We are looking at an exciting future of volume growth, pricing strength, operational excellence and margin expansion.

Our people are eager to make the most of the promising year ahead of us.

And now I'll be happy to take your questions.

(Operator Instructions) We'll take your first question from Rohit Seth from SunTrust.

Curious if you can help me reconcile your public volume growth expectation with the strength in contract awards. And then just on the cost angle in your guidance, this

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Highways, we would expect mid-single-digit.

(inaudible)

I'm sorry? On highways, I think we expect mid-single digit. We feel really confident with that and really because we've seen, well, I'd say 9 or 10 large projects around the country kick off that we thought were going to kick off in '17. And that will just be the beginning of a ramp-up in highway spending as all these states mature their DOTs to be able to facilitate that spending in the jobs and as new money comes onboard. On the other infrastructure, I think we'd call it flat to low single digit. There's a lot of funding there, but the capital projects just haven't really kicked in yet.

Got you. And then just on the cost angle, where -- there's a number of onetime costs that were identified in 2017. Just curious how much of that you anticipate to be nonrecurring in 2018 in the guidance.

John, why don't you answer kind of what happened with the cost in '17 and then I'll talk about plans?

I'll start. In the quarter, of the $20 million or so, Rohit, that we called out, just to give you a feel for it, negative kind of product margin and pricing mix was about $5 million of that $20 million, largely related to pattern of shipments and mix of work around Houston and coastal areas, in the Southern Gulf Coast, a lot of that storm-related. But don't expect that to repeat in the same way. Diesel was about a $4 million headwind in the quarter. Diesel costs may continue to rise, but that will really get passed through in price over time and ultimately is a good thing for our business long term. So don't see the margin impact repeating in the same way. It's really a timing issue. Some certain expenses tied to acquisitions we made in the year, where we needed to put some more money into those operations. And again, don't see that repeating. That was about $3 million. And then, we had a number of transportation, distribution-related expenses that, again, don't necessarily see repeating in the same way. That was about $8 million in total. Some of that is new ship transition that we're working through this year. Some of that is barge inefficiencies that we should be able to work through. They were storm-related. And then finally, there was about $5 million of increased liability accruals related to some of our truck transportation activities. And again, wouldn't see those recurring in the same way. So to your question on guidance, for our Aggregates segment next year, our guidance would imply, and I think we called this out, double-digit growth in unit margins in our Aggregates segment. Some of that is cost recovery, but I'd tell it's really in line with stuff we've done before -- we've done earlier in the recovery. If you were to look at the incrementals and kind of take out Agg USA, which distorts the incrementals a little bit, you'd see they're higher than the 60%. That reflects -- on a same-store basis, that reflects some cost recovery. But I think it's fair to say our guidance and certainly the midpoint of our guidance doesn't reflect complete cost recovery of all the items we faced in 2017.

Yes. I would add to that, that the diesel costs and the distribution costs, while they're out there, they're a strategic advantage to us. In that, we'll get them back in time with price, but it widens our economic moat around our facilities. The other costs that John mentioned, they're real. I mean, we experienced them. We had a tough time with weather and storms and things like that. But those are unusual and timing issues. They're not trend issues. And our ability to convert incremental revenues to incremental gross profit hasn't changed. I do think that it did give us an opportunity internally to take those special costs and say, hey, look, we've got to be tough. We've got to comp over them anyway. And we've got our folks really focused on improving their operating efficiencies in spite of the onetime costs we saw. And I would tell you, they've done a nice job with that over the last few months in 3 ways. I think they really rolled up their sleeves and addressed some problem plants that we have. I think we put the right talent in some of our most challenged areas. And I think our entire team has been acutely focused on improving throughput and downtime. Now look, our people will deliver on this. I have confidence in that. They always do. And they will also execute on the discipline of continuous improvement of margins that you've seen us do year after year. So going into '18, I think from an operating perspective, we've got a good plan, and we're executing.

Fantastic. The distribution costs you mentioned, is that internal distribution costs between your plants -- your quarries and your yards? Or is that to third parties?

Yes, I think it's -- a big chunk of that is -- well, first of all, it's both. I would call out that the storm impact on the coast in Houston, specifically, wouldn't allow us to fully load our ships to deliver, which was very expensive. There were a lot of problems on the Mississippi that were very expensive to us. So again, the onetime costs will get passed, and the cost of diesel in that is a strategic advantage.

We'll move next to Kathryn Thompson from Thompson Research Group.

Just a follow-up on the guidance and pulling the string a little bit more. Implied in your EBITDA guidance for the year, it's helpful outlining Aggregates USA. But could you also outline what was implied in terms of bolt-on acquisition contribution, then also certain storm-related costs that would not be recurring, assuming you have a normal year?

I'll start, Kathryn. On bolt-ons, it's a little bit difficult to separate out perfectly some of those bolt-ons from the rest of the core business because they're kind of integrated within that, whether that's in the Bay Area or Nashville that you're very -- really familiar with. But to give you a rough number, I'd probably say $20 million to $30 million. But take that as a rough number, Kathryn, because again, it's a little bit hard to separate out from the rest of the [cooperation] given that those are pretty tightly integrated in the way we run those markets. I would say we're excited about those acquisitions. They're going to have great returns, they're performing well. And I'm sure that we can deploy capital in some markets and downstream businesses in a smart way. On storm-related costs, we wouldn't expect to repeat. Again, if you were to look at the quarter, for example, this $8 million of distribution-related costs, we really would not expect to repeat. We've got some work to do. Our ships will be delivered in the second or third quarter. That will drag on a little bit. We'll have some costs we're still working through in the first quarter and maybe a little bit into the second. And then, when you look at diesel, we see it trending up a little bit further in '18. But again, that's a timing issue. We expect to pass that through in pricing. It does happen with a lag, as you know. But also, as you know very well, it expands the economic moat around quarries, and is actually, net, a positive thing for pricing and margins, just a question of timing. So I hope that answers your question a little bit, Kathryn. Again, I think it's fair to say that while our guidance and our outlook and our internal plans imply a return to the kind of flow-throughs and improved unit margins you've seen us deliver before, they don't necessarily imply full catch-up on every headwind we faced in 2017.

Yes. And just as an estimate, once again, knowing this is a little bit -- it's art and science combined, would it be fair to say that the storm-related costs would be closer to a range perhaps similar to the bolt-on acquisitions, so maybe something in the -- even in the 30-ish -- $30 million type number that was a real impact to your 2017-only results?

Yes. Again, recognizing, let's call it, there's some art in that, right, as you said, from my point of view, I don't think that's necessarily way off. And let me call it margin, not just costs because the storms that impacted our Gulf Coast business so much, and Kathryn, you know this, really impacted some of the most profitable aspects of our business, particularly given the advantages that we have and shipping from Mexico and our service to that broad region. So we really saw it a little bit in sales and in pricing and in sales mix and in distribution cost and in operating cost throughout a very profitable portion of our business. So I don't think you're far off, but I think it's a little bit easier to think of as margin impact as opposed to only cost impact because it hits -- hit the business in a pretty broad way.

Yes. I would add to that, that if you look at our plan, you see us returning to that double-digit margin growth that John mentioned and much higher flow-throughs. So while diesel is going to be a headwind for a little while, so will distribution. Actually, that will end up being an advantage to us as we catch up with that. I think, we feel very good about the plan.

Okay. And just a cleanup question on kind of the cost side is with the 2 big ships that you're transitioning, you recognized the cost of those ships last year but now you're transitioning now. Where do we currently stand in terms of when they will be fully operational? Is it roughly coming online excluding weather impact?

We would expect one in the second quarter and one in the third quarter at this point.

Okay. And moving over to California. We had a chance to spend some time in the Southern California market earlier this year and certainly can appreciate the tightness in supply of aggregates in that market. But perhaps could you explore a little bit more about the rail advantage in the Southern California markets and your view of the private construction market since you spent a bit of time on the public side?

Yes, I would just -- I'll give you a couple of comments on California. First of all, California is really healthy going into 2018. It's a market that we're really excited about for not just '18 but '19, '20 and beyond. The private market continues to grow. Residential is very healthy both in Northern and Southern California. Nonres is solid. Highways, we're actually coming off a low in '17. So -- and I think the state is going to regain its footing in '18. We see big growth, as you know, in highways going into really into '19 but really into '20. Our backlogs are improving on the highway side. And actually, in infrastructure we're starting to see a little bit of growth on highway infrastructure. It is a very, very constructive pricing environment in California, and that's really through our products, our customers' products and the construction side of it. Demand for asphalt is growing, and now we'll have to raise prices fairly quickly to get over rapidly rising liquid costs, I think. And with all this, we're very happy with our acquisition in Northern California with Shamrock, and we're starting up a new quarry in Fresno, which is a big, big demand market for us. And this is something we've been working on for 10 years. So you can see why we're excited about California.

And given that the rail network is somewhat limited in Southern California, how much do you think that is an advantage for you? Or is that not necessarily -- maybe help us frame that a little.

No, it's -- I'm sorry, I missed that part of the question. Rail movements in California are very difficult. Our position, we have the best reserve position in the largest markets for truck. And as people run out of reserves in the truck market of L.A. and San Francisco, in San Diego, they're going to have to move out and rail in. It will give us a marked advantage over the next few years.

(Operator Instructions) we'll move next to Garik Shmois from Longbow Research.

Just wondering if you could provide a little bit more context around the synergies from Aggregates USA. How much of the $50 million of EBITDA contribution in 2018 does include synergies? And how should we think about the ramp, the amounts and the timing over the next 12 to 24 months?

Garik, I'll start and suggest about synergies and stuff, then Tom can comment. The $50 million for this year has relatively little of what we call synergy in it. There's some overhead synergy we'll capture, a little bit of cost synergy we'll capture. But a lot of the synergy, we would say, is yet to come, so I think of that $50 million as a number we'd expect to be meaningfully higher in '18 -- I'm sorry, in '19. And we're very pleased with the acquisition. You can tell from just looking at a map that it fits very well with their business. And this is one that's got a very broad set of synergies. They range from things that are operational, the things that are logistically oriented, the railcar utilization, to things that are commercially oriented, reaching new customers with a different level of service with a full mix of products. And as such, they're very attractive synergies, I'd say a pretty good number over time, but they'll take 18 to 24 months to fully capture them. So to answer your question, the $50 million is -- doesn't have a lot of synergy in it.

Yes. I would add to that, that this acquisition, as you know, really expands our footprint in South and East Georgia, a little bit in South Carolina. It really expands our service offering into Florida, giving us granite for asphalt into Florida. It provides optionality of how we service our legacy rail yards and how we service the Agg USA rail yards from both for our existing quarries and the ones that we acquire. So a lot of optionality into that, both in product quality, how we optimize production and sales splits. So this, as John said, we'll recognize those synergies really over '18 -- over the next 12 to 24 months. I think we're very pleased with how the integration has gone, well-run businesses, which this was, have really talented people. And they've come aboard Vulcan, making a positive impact immediately. And so that's all gone well. We talk a lot about the assets, but these are some really talented folks that came with this, so we're pleased to welcome them in our family. All of this complements our existing footprint and the new Agg USA markets. And you've got to remember, this is -- this sits in the middle of 2 of our fastest-growing markets of Georgia and Florida. So, so far, it's going really well.

Okay. I wanted to shift over to just a comment on Illinois and Houston. They've been softer markets for you in 2017 for 2 different reasons. And how you expect those 2 markets to play out in '18. It sounds like in Houston, you're poised for recovery, but any more granularity would be appreciated.

Yes. I would call those very different. I think that Illinois is going to continue to struggle. I think the team in Illinois, while in the face of really tough circumstances from the abandoned market, have done a really good job of executing to the best of their ability and their disciplines, both on operations and their efforts on sales and getting all they can out of what they've been offered. So tough -- just tough duty in Illinois with -- really with public spending. Houston, I would tell you, we're -- I think we've made the turn. It is -- been a tough place, tough economics. Just as we're starting to come out of the sink in Houston, we got slammed with hurricanes and storms, and it just hurt everybody down there. But all in all, I think Houston is going to be fine. The highway demand overall in Texas is very good, Houston including. Res is starting from a really low base in Houston but starting to pick up. Nonres in Houston, we see is picking up also. From a pricing perspective, all of Texas has a healthy climate. We had tough times with that -- with Houston because, as we talked a lot about the storm impact. But I would tell you that I would expect to see price increases in Houston and actually most of Texas in April. So where it's -- one, Illinois is going to continue to be tough. I think Houston has made the turn, and we'll see a much better '18.

Okay. And then just last question is just on the step-up in growth CapEx for the year, assuming that the Fresno project is included in that $350 million increase. Just wondering, John, if you could provide some context around the payback and when we should start to see some of the volumes or when these projects should ramp up and start to be accretive to earnings? And I guess I'm wondering if the step-up in growth CapEx, while we're not talking about 2019 just yet, should we expect to see maybe an elevated run rate in growth CapEx for the foreseeable future?

Yes. I'll put it in the context of free cash flow for a second, Garik, if that's okay, just to think about it in total. So I'd point out that our operating and maintenance CapEx is actually going to take a step down from about $300 million this year, a little bit less than $300 million, to about $250 million next year. That's not because of the growth side. It's just because we've been investing pretty heavily in our physical plant for the last 2 or 3 years. And so that's just our need, $250 million. So our need for core operating and maintenance CapEx is a bit lower in '18 than it was in '17. So that's one. Two, I would think of the growth capital as if it was M&A, we wouldn't be talking about it until it was finished, if we were just buying these quarries instead of building these quarries. So I would think of a good chunk of that $350 million as if it were a transaction we were closing at the end of '18. And some of that result, you really won't see until '19 because we're really building out some new quarries, and it takes time. Now I'd underscore what Tom said, as these new quarry developments have been, in some cases, 10-plus years in the making. They're just coming to fruition now. To your point of return, it's a very good time to do these things. The timing made sense for us, when we look at our hand in Texas, look at our hand in California. And there are some other developments, new distribution points in places like Charleston. The market is such and the margins are such that the returns are attractive, and now is the right time to fully develop. So we're excited about it. We're confident in it. In today's world, those returns compare favorably to your average run-of-the-mill M&A returns. I don't expect that you will see necessarily the same level of elevated internal growth of CapEx moving forward, Garik. Again, to a degree, this is the timing of when these particular new quarry developments were coming to fruition. So maybe elevated a little bit in '19. I'm not saying over the $350 million, just more to do, but not elevated in any permanent sense.

We'll move next to Phil Ng from Jefferies.

The mid-single digit price increase you guys have guided to, is that the [spice] to offset inflation you're seeing? And when do you expect to kind of catch up on the diesel side? And just given the backdrop where demand is, does you offering get a little more upside on the pricing side of things?

If you go into '18, from what we see, we actually see the pricing climate improving. And one thing I do know is our philosophy on pricing that we've executed over the last 5 years has not changed. I'll try to put some color on '18 for you. We would expect pricing to build throughout the year for the 2 normal reasons that we talk about. Number one, different markets will have different timing for fixed plant price increases. We'll see some in -- we've seen some in January. We'll actually see some in February. We'll see some in April, and you'll see some in midyear. And then the second reason is remember, bid work, which we are doing every day all day, is a long steady campaign and will build throughout the year. I would tell you that the pricing discussions that we've had with customers in the fourth quarter and January had been very good. Their confidence in the market is as good, if not better than ours. They see it's improving. They can see visibility. The continued visibility on the private side, what they can really see is reinforced now by the public side and the DOTs. If I were to highlight a few areas, it would be -- you wouldn't be surprised with them. It'd be down the coast, Virginia, through the Carolinas. Florida and Georgia will be strong. Tennessee will be good. As I talked about earlier, I think -- we think that Texas in April will start kicking in. And California would be really high on our list. So our pricing disciplines continue to be successful. If you look back 5 years, our prices have gone up 25%. And from -- with the public side kicking in, the environment is only stronger, and I have confidence we'll execute on our pricing plans in the different markets.

Since you mentioned inflation, just a couple of quick comments. I'd encourage you to just kind of keep in mind that our aggregate-centric business doesn't have the same kind of inflationary exposure that people might be worried about with other industrials. We own our main input, the quarries, the rock. Think about the long-term pricing history of the industry. Think about pricing climate that's actually improving and where things like diesel cost rises actually improve the pricing climate and the competitive dynamics at a local level because they expand the economic moat around a quarry. Yes, there's a set of timing issues around that, but we don't -- I'd just say inflation is not a big concern to us right now. Let's just put it that way.

Okay. That's helpful. And I think, John, you might have teased this in your prepared remarks about appreciating the cadence of 1Q just because, seasonally, it's been warm the last 2 years. How should we think about the EBITDA contribution over the quarters throughout the year and then some of the incremental dynamics as well, just because you had some one-offs last year that should reverse in the back half?

Yes, I think this is an important point. We just want to remind people, it's not a surprise, but it's nothing new here. Just a reminder that Q1 has been stronger on the volume side for the last 2 or 3 years in total. And there's been a higher proportion of annual volumes than it would typically be if you looked at longer-term seasonality patterns. So certainly, the comps, if you will, are harder in Q1 and should get easier in Q2 and Q3 and Q4 both from a volume side and from a cost side. And as Tom said, we'd expect some pricing to be building throughout the year just given the normal cadence and the way it works in an aggregates business. I don't want to give you kind of a spread of EBITDA throughout the year because it's very difficult. And particularly in Q1, a lot of it comes down to a couple of weeks in March. I almost just think it would be misleading. But I do think it's worth calling out that Q1 is a more difficult comp, just given the patterns of the last few years. And then certainly, the comps get a little bit easier through the rest of the year.

Okay. That's really helpful. And just one last one for me. Just based on some of the timing of these state-level initiatives, which is obviously quite positive, and as [STASH] kicks in, is this low single-digit growth on public spending a good way to think about the growth trajectory in '19 and '20? Or could we see some acceleration?

I think, first of all, I would call that mid-single digits growth in highways. I think it will build. And we talk a lot about this. There will be a layering effect both within states as they bring work on and as the DOTs mature to be able to handle work. They're not just going to wait to finish one job before they start another one. And then on top of -- within a state, you'll see state on state build. So places like Texas or Florida or North Carolina, where the money is already mature and they're spending it and then they're shipping it. You're going to see Georgia layer on top of that, and after 2 years, they're starting their jobs. And then you'll follow up with California. In a couple of years, you'll follow up with California, Tennessee and South Carolina, which will also start to ramp up and layer on top of it. So while highway is mid-single digit this year, I would expect it to ramp up in '19, '20, '21, roughly for the next 5 years.

We'll move next to Adam Thalhimer from Thompson, Davis.

On the Shamrock acquisition, can you talk a little bit about your experience with that asset thus far and then also, kind of specifically, your outlook for the Bay Area?

Yes. Well, first of all, I would tell you, much like my comments about Agg USA, that was a very well-run business, and the management team that we got with Shamrock is very talented. And it's been a really good marriage with our folks in how much -- in how they've integrated so quickly not just the business but also the management team. So we're thrilled that they're onboard with us. That acquisition has performed, both the aggregate distribution and the ready-mix concrete, have performed superior than our original plan. It has integrated very, very well. We see good growth in that area on the private side, as we talked about, both res and nonres. Highways, not so much, probably for another couple of years. But it's -- so the market has performed very well. We expect it to continue to perform very well and actually kick in even more in a couple years when the public side starts up. But I'm very proud of the team in California and the Shamrock team.

Okay. And then lastly, what are your high-level thoughts on industry M&A this year? Do you think it could be as active as it was last year?

It is active. And we've got M&A going on. We're always working on those things. I go back to, for all this, it's about discipline. And we say this all the time, but it's about what are you going to buy? And what market are you going to buy it in? Does it fit us? What synergies are unique to us? And how do we -- and then what are you going to pay for it? And don't overpay. And then once you get it, you really got to work hard to integrate it and get it tucked in as fast as possible.

Yes, one thing we pointed out that we'd talked about internally, it's possible that tax reform having passed and as being done and behind us is going to shake some things loose, if you will, in terms of opportunity set. But at the same time, it really raises our need for discipline because if you're not really careful, the benefits of lower taxes just get very competed away in the M&A market. So you've got to really, really be extra disciplined. We talk here about lower taxes can make a really good deal a great deal, but they don't make a bad deal a good deal. So we think a lot about that. I would say it's a little bit different on taxes in our core business. And somebody had asked about inflation, so I just want to mention this. But our after-tax cash flow in '18, we think, is about $100 million higher than it would have been under the previous tax regime. And given the nature of an aggregates-focused business and the pricing dynamics over time and the focus on earning returns on capital, difficulty of new entry, we actually don't expect that to be competed away in our industry, not at all. So internally, a lot more after-tax cash for the assets we already have. In the M&A environment, we need to be, if anything, extra disciplined.

We'll move next to Jerry Revich from Goldman Sachs.

I'm wondering if you could talk about, on the organic quarry development, how much reserves are you adding or how much of your reserve position will become effectively addressable as a result of the investments? And can you talk about over what time frame do you expect capacity utilization in the new facilities to ramp up towards levels you see across your existing footprint?

Kind of combined because I don't want to call out individuals. I'd tell you it's over 300 million tons. And I would expect those projects to take 18, 24 months before we're operating them. Now remember, these are in markets that we're already in. It's to build out our hand. But it's going to take some time not only to start -- and remember, these are both serving big, big growth markets. And they're to -- the design of this is to grow into that demand and to capture that demand, which other folks would -- can't capture. It's just not -- the capacity is not there. So as John mentioned, both of these projects, the one in Texas and California, have taken over a decade. And it just takes that much time. I think our folks have done a great job of working with the local communities to make sure we got those permits and had permission to operate. And we'll build them out and tuck them in like we would an acquisition, integrate them into the rest of our network.

Okay. That's helpful. And then on Aggregates USA, on prior transactions, you folks have targeted synergies equivalent to 25% to 50% of stand-alone EBITDA. I'm wondering if you can comment on how you see Aggregates USA stacking up relative to that historical target you folks have had.

Jerry, I'll start and I'll repeat things we've already said about Aggregates USA, I think, but I'm not going to give you a specific number just because I don't want to confuse guidance, which is the $50 million this year. A very broad range of synergies in what we kept, probably toward the higher end of synergy mix of deals we've done. But because of the breadth of those synergies and the nature of those synergies being not just overhead, not just operational cost improvement, not just logistics, not just commercial opportunities, but all of those, I think it'll take a little bit longer to capture. But certainly, very exciting. And as you can imagine, we're happy with that deployment of capital.

Yes. I would add, if you just look at the slide, the map that shows the overlay of our existing operations and rail network in South Carolina, Georgia and Florida and then what we overlay with them, it is -- this is one that is rich with synergies just because you can mix and match so easily, both what quarries we ship from into their rail yards and vice versa and how you match all that up, how you marry those markets, because we had some gaps and they filled in the gaps for us, and the new product offering into Florida. So as John said, this is one that is particularly rich with synergies. And that will take some time to mature, but our folks are all over it and working on it. And as I said earlier, the team we got is not stagnant. They understand how to put all that together. And so it's been a fun integration to watch them succeed in that. It'll be fun to watch over the next year to 18 months.

Jerry, you may also -- you've looked at this, I know, as have others. But it's also just really well positioned against some of the specific things that the Georgia DOT plans to do, which will be happening over a period of years, whether that's intermodal project developments at Savannah port, roads out of Macon, et cetera, et cetera. So that's the -- it's really good positioning. Now that's not an '18 issue or even a '19 issue, but it's a really attractive aspect of the transaction and not -- I'd say not accidental.

Okay. And then lastly, Slide 6, is a helpful layout. So obviously, the past 2 years have been pretty tough for everybody. When you folks say that first quarter faces tough comps, are you trying to condition the market to year-over-year volume decline in the first quarter? And I guess the reason behind the question is it feels like the backlog on the highway side has been building for about 1.5 years. And so if the first quarter is indeed down for the industry, I guess, how do we get conviction that it will reaccelerate in the construction season?

Let me be clear. The demand is there. As you saw in the fourth quarter, where our volumes were down a little bit in October, the sun came out, it was dry in November, December and we had double-digit volume growth. So the demand is there. That is a combination of core demand on the private side. It is the new DOT work kicking in. There's some delayed work there, so it's a combination. So as you look at the first quarter, let's be really clear about this, the demand is there. This is about being -- this is about days to ship in the first quarter, which is always dicey. If you look back at '16, and particularly '16, and then again not quite as good in '17, we had very good first quarter weather. So when we talk about comps, as we always say, the first quarter is always dicey because you don't know if it's going to be 60 degrees or 22 degrees. Is it going to be snowing or is it going to be sunshine? And so -- but the underlying demand is there. And I think November and December is really good evidence of that.

And Tom, just...

Jerry, just to pick up on that. I just want to be clear. We're not trying to suggest specifically that volume in the first quarter will be lower than in the prior year. We're simply trying to remind everyone that it is a tougher comp, but it would be inappropriate for us to try and even give any kind of specific Q1 guidance just because it's so dependent on weather in March anyway. So it's both a tougher comp and more uncertain. I take Tom's points as the key things, which is the work is there to be done.

We'll hear next from Stanley Elliott from Stifel.

A quick question with all the moving parts. And as we're thinking about double-digit unit margin growth for the year, is it fair to assume that the incrementals in the first half of the year are going to be maybe a little bit soft and we're looking at a big ramp in the second half of the year in terms of allowing price to catch up, allowing some of the easier comparisons? I hate to kind of get to that level of granularity, but it's just kind of a different set up than we've had in the past.

I'll start and I'm sure John will have something to add to this. But as we said and we talked about pricing, that it would accelerate through the year for the normal reasons of timing of pricing in different markets and then pricing is a campaign particularly with bid work. So we would expect normally for price to build through the year. Again, the comps in the first quarter are going to be tougher. They get easier with the -- when we saw wet weather in the second and third. I think that when it comes to operations and discipline, I think we're kicking in, and that will also improve. Obviously, that improves with that weather also. I mean, it's easier to operate in June and July and August than it is in January and February, particularly if you're in some place like Illinois or Virginia. So for those reasons, and I don't think anything is out of the ordinary there, and we've mentioned the first quarter stuff, that's how we would see the year shaping up.

Yes, I don't have a whole lot to add to that, other than just keep in mind, we're, as an industry, coming out of a period of sluggish shipment growth into a sustained period of returning to growth. And with that shift, I think you're going to see some normal pickup of pricing and kind of build throughout the year. You're going to see a little bit better operating leverage throughout the year. So I think it's really kind of as you'd expect probably.

That's fair. And then with the change in the tax code and kind of the new, improved free cash flow for you all, does it change how you think about debt levels near term for -- should an acquisition pop up or anything along those lines just given that it's kind of more of a structural change to the operations?

I think the short answer is no, and that we are sustaining commitment to investment grade. We need -- the way the agencies work, we need to keep an eye on debt to total EBITDA. But I also then would say that, from an overall financial value and flexibility point of view, it does give us more flexibility, and it just gives us more of our own operating cash flow from which to fund investments. Adding $100 million of after-tax cash flow is not an insignificant thing. And then the '18 year, we're going to get another $170 million of cash from tax refunds and tax rebates that are also tied to tax reform. It's a onetime thing, but it's more than $1 a share. It's not an insignificant amount of money. So it certainly gives us more flexibility. It certainly makes us more valuable. It certainly makes the transactions like Agg USA that we did, under assumption of a higher tax rate, much more valuable. But it has not changed our core priorities or our position on the balance sheet or our view that what we want to do is maintain flexibility through all parts of the cycle. So it really doesn't change our priorities or our policies. It just gives us a much stronger free cash flow profile.

That does conclude the question-and-answer portion of today's conference. I would like to turn the conference back over to Tom Hill for any additional or concluding remarks.

We thank all of you for your interest in Vulcan Materials. We look forward to what is shaping up to be a very exciting 2018, and we look forward to updating you on our progress. Thank you very much.

That does conclude today's teleconference. We thank you all for your participation.