渥肯建材 (VMC) 2012 Q4 法說會逐字稿

Welcome to Vulcan Materials' earnings conference call. My name is Kwanda, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. A question and answer session will be conducted after the presentation. Please note that this conference is being recorded.

I will now turn the call over to Mr. Don James, Chairman and Chief Executive Officer. Mr. James, you may begin.

Good morning.

Thank you for joining us to discuss our fourth quarter and full-year results for 2012. Joining me today are Dan Sansone, our Executive Vice President and Chief Financial Officer, and Danny Shepherd, our Executive Vice President and Chief Operating Officer. We have posted a short slide presentation to our website that we will refer to during the call. These slides are also available to you on the webcast.

Before we begin, let me remind you that certain matters discussed in this conference call today, as indicated on our slide 2 of our presentation contain forward-looking statements which are subject to risk and uncertainties. Descriptions of these risks and uncertainties are detailed in the Company's SEC reports, including our most recent report on Form 10-K. In addition, during the call, management will refer to certain non-GAAP financial measures. These measures are not prepared in accordance with US Generally Accepted Accounting Principles. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures, and other related information in Vulcan's fourth quarter 2012 earnings release and in the Investor Relations section of Vulcan's website.

I want to begin today by briefly discussing a few highlights for the year. Turning to slide 3, in 2012 our Company reported significantly improved earnings during continued challenging market conditions. For the full-year, we generated adjusted EBITDA of $411 million, a 17% increase from 2011 on flat revenues. We achieved this result by improving gross profit margins by 210 basis points, and by reducing overhead expense 11%. We continued to generate higher Aggregates profitability in 2012. Aggregates cash gross profit per ton increased 5% to $4.21, and Aggregates segment gross profit margin increased 270 basis points in 2012. This was driven by our cost reduction efforts and a 2% increase in Aggregates selling prices for the year.

In addition, we took meaningful steps to strengthen our balance sheet during the year. We retired $135 million of debt as scheduled, and ended the year with $275 million in cash. We also made progress on our planned asset sales, generating $174 million in total gross proceeds. These transactions include the recently announced sale of reclaimed and excess land in California, one small quarry in rural Virginia, and a percentage of future production at four Aggregate quarries in South Carolina.

Moving on to slide 4, you will see a snapshot of our full-year financial results. As you can see from this table, despite flat revenue, we increased gross profit by $50 million, and increased adjusted EBITDA by $59 million compared to last year. A significant portion of the EBITDA improvement relates to our restructuring plan initiated at the end of 2011. As a result of those efforts, we decreased SAG expense by $31 million, despite an increase in non-cash pension expense due solely to lower discount rates. These improved operating results flowed through to significant improvements in reported and adjusted EPS from continuing operations.

Moving now to slide 5. Improving our profitability was a key highlight of our 2012 results and strengthens our ability to take advantage of an improving demand environment. As you can see on this slide, our cost reduction initiatives coupled with stronger pricing enabled us to generate higher levels of profitability in 2012. Gross profit margin was 13.9% for the year, up from 11.8% in 2011. Adjusted EBITDA margin was 17.1%, up from 14.6% in 2011. We also improved profitability in our Aggregates business. Aggregates gross profit margin was 20.4% for the year. And as I indicated earlier, cash gross profit per ton increased 5% to $4.21 per ton, a 27% increase from the same measure of profitability in 2005 when volumes peaked.

With that, I would like to turn the call over to Danny Shepherd who will walk you through our segment results. Danny?

Thanks, Don.

Turning to slide 6 for a review of our Aggregates performance in 2012. Our Aggregates business generated $593 million in cash gross profit in 2012, as compared to $573 million in 2011. This bridge chart shows how improved pricing and effective cost controls have more than offset lower volumes during the year. The effects of lower volume reduced cash gross profit by $12 million. Key states including Florida and Texas reported full year growth in volumes versus the prior year. Other markets in key states such as Virginia, North Carolina and Georgia, were down modestly in 2012. Full year shipments in California were relatively flat versus prior year.

In some markets the decline in shipments can be attributed to very favorable weather in December 2011, as compared to more normalized weather in 2012. Less large scale project work also contributed to lower shipments in certain markets, compared to the comparable period of last year. Diesel fuel increased 3% in 2012, reducing Aggregates cash gross profit approximately $4 million. We benefited from a 2% increase in pricing during the year which added $27 million to cash gross profit. Pricing in the fourth quarter remained strong, increasing 4% from the prior year period. Finally, cost improvements increased cash gross profit by $9 million, more than offsetting the earnings effect of higher unit cost for diesel fuel.

Now if you will turn to slide 7, you will see from this chart that we remain encouraged by the momentum we have seen over the last year as our Aggregates unit profitability continues to improve. In 2012, cash gross profit per ton increased 5% to $4.21, and we remain focused on driving that number even higher. Our cash gross profit per ton continues to improve from a cyclical low in the third quarter of 2011, reflecting the cumulative effect of our cost control efforts and a disciplined approach to pricing during the downturn. These efforts are establishing unit profitability higher than in 2005, which was a peak year for volumes, adding to the attractiveness of the earnings potential of our Aggregates business as volumes recover.

Now if you would turn to slide 8 for an update on the performance of non-Aggregates for the year. In total, gross profit for our non-Aggregates segment improved approximately $4 million from the prior year. In asphalt, volumes were down 7% due in part to fewer large projects in California in the second half of 2012, and the divestiture of our New Mexico asphalt business in a swap transaction completed in the fourth quarter of 2011. Asphalt volumes in Texas were up 15% from the prior year. Material margins remained steady, despite lower volumes finishing the year 3% higher than the prior year.

In our concrete and cement segments, volumes continued to recover from cyclical lows. For the year, concrete and cement volumes were up 9% and 18%, respectively. These two segments benefited from increased private construction activity during the year, as well as year-over-year growth in pricing for cement. Pricing in concrete was relatively flat with the prior year. Concrete gross profit improved by roughly $5.1 million compared to the year-ago period. Cement segment gross profit increased $1.7 million from the prior year.

As we move forward, we remain focused on maximizing the Aggregates shipments that are pulled through our downstream businesses, while improving the profit and cash flow performance of these valuable assets, much in the same way we have done for Aggregates.

With that, I will turn the call back over to Don.

Thank you, Danny.

Before discussing current market trends, I want to briefly review our fourth quarter results which are highlighted on slide 9. We improved gross profit margin by 90 basis points on slightly lower sales. Overall, SAG expenses were $67 million in the quarter, down from $72 million in the fourth quarter of 2011. Fourth quarter EBITDA including gains on sale of real estate and businesses, restructuring charges and exchange offer cost was $137 million, compared to $85 million in the prior year. Excluding these items, adjusted EBITDA was $90 million versus $95 million in the prior year.

These transactions mark important progress in our planned asset sales initiative. These transactions include the sale of reclaimed and excess land in California, and one small quarry in rural Virginia. Since1998, we have sold $450 million of reclaimed and excess land, averaging over $32 million per year. We view these transactions as an integral ongoing part of our Aggregates business, and a way to continue to add value for our shareholders. The proceeds from these transactions are used to expand our Aggregates asset portfolio, and to strengthen our balance sheet as I will highlight on the next slide.

On slide 10, we summarize our debt and leverage positions. Net debt declined 10% in 2012, and net debt to adjusted EBITDA improved from 7.6 to 5.8, all without a meaningful recovery in demand for Aggregates. We have sufficient cash on the balance sheet to fund our scheduled maturity in the second quarter 2013, after which we have no maturities until the fourth quarter of 2015. Strengthening our balance sheet remains a top priority for our management team.

Turning now to slide 11. I want to spend a few minutes commenting on the key end markets for Aggregates. Our views about highway construction are more encouraging than they were a year ago, reflecting passage in July of 2012 of a new Federal highway bill, MAP-21, that took effect October 1, 2012. On this slide 11, we have shown across the bottom, a historical time line that captures the last two federal highway bills, T21 and SAFETEA-LU, as well as the periods of time when federal highway legislation had lapsed, and funding was by a series of short-term extensions, represented on the graph by (inaudible) bill.

The blue bars represent the year-over-year change in trailing 12 month contract awards for highways, a leading indicator of highway construction activity. As the chart shows, growth in new project activity has historically followed the passage of federal highway bills. This new legislation is providing stability and predictability of future highway funding as we move forward.

Digging a little deeper on slide 12, we have plotted the year-over-year change in the obligation of federal funds for the regular highway program. Obligations are a leading indicator of future project bidding activity, which in turn lead to Aggregates consumption. An obligation is the point in time when the Federal Highway Administration commits to fund its share of eligible projects. At that point, the project can proceed to bidding and construction by the State Departments of Transportation.

During the first three months of fiscal year 2013, which of course, is the last quarter of calendar 2012, the obligation of federal funds for new projects is up more than 90% versus the prior year. This represents the first time in 15 months we have seen growth in this area, providing an encouraging indicator for the rest of 2013. If history repeats itself, contract awards for new highway projects should begin to grow, now that MAP-21 is in place and state DOTs have more funding certainty with which to proceed. The growth in obligations may provide the first glimpse into that planning.

Turning now to slide 13. The large increase in funding from the Transportation Infrastructure Finance and Innovation Act or TIFIA, contained in the new highway bill should also have a positive impact on future Aggregates demand. We expect only limited impact on 2013 shipments from TIFIA-funded projects, but we should see a meaningful activity in 2014 and beyond from these large projects. Letters of intent -- or letters of interest for TIFIA projects totaling $77 billion in construction costs, have been filed with the US Department of Transportation. Of this total, $49 billion, or 64%, are located in Vulcan-served counties. The 43 projects in our markets are highlighted on the map shown here.

Slide 14 shows the year-over-year change in contract awards for new construction and construction put in place for other public infrastructure, that is publicly funded infrastructure other than highways. These contract awards have been increasing for nine consecutive months, and we are optimistic that this contract award growth will continue, leading to growth in actual construction activity.

Turning to slide 15, private nonresidential construction growth has also continued to slow -- to show steady recovery. US contract awards as measured by square feet are up 14% from the prior year, led by growth in commercial and office buildings and hotels. In Vulcan-served states, contract awards are up 17%. More significantly, awards in Vulcan's key states of California, Texas and Florida increased 42%, 33% and 27%, respectively.

Moving now to slide 16. Residential housing starts also continue to improve in our markets, and at an increasing rate. Leading indicators of affordability, supply/demand balance and household formations continue to improve, and point toward housing starts moving back towards structural demand levels.

On slide 17, you can see the positive effect of growth in housing starts in many of our key states, some of which were hit hardest by the economic downturn. As a result of improvement in both residential and nonresidential leading indicators, Aggregates demand and private construction is growing as well. We are seeing tangible evidence of this growth in several key states, including Florida, Texas, California, Georgia and Arizona. However, given the low point from which the recovery began, the full positive effect of these leading indicators will take time to materialize and significantly impact our shipments.

Danny Shepherd mentioned earlier, the volume growth in our ready-mix concrete and cement businesses is due to this increased private construction. Another indicator of how increased residential construction is driving volume growth is in our Florida Concrete Block business. In 2012, our concrete block volumes were up 35%, including a 54% increase in the fourth quarter. Sustained growth in housing starts in these states will benefit both our industry-leading Aggregates businesses, as well as our Non-Aggregates business, particularly concrete and cement.

Turning now to our outlook on slide 18. We continue to expect that improved pricing, aggressive cost control initiatives, and some volume growth will enable us to generate another year of earnings growth in 2012. Demand for Aggregates in our markets is expected to grow by mid single-digits in 2013. Aggregates demand from residential construction is expected to experience double-digit increases, while demand from private nonresidential buildings is expected to increase by high single digits versus 2012.

Our current visibility and expectation for growth in Aggregates demand in the public construction including highways and other infrastructure is limited, given the variability in lead time required from award of contract to the start of construction, particularly for the large TIFIA projects. As we look at the projects that could impact our 2013 Aggregates volume, we see a disproportionately greater number of large discrete highway and industrial projects. The timing of these projects is difficult to predict. As a result, our full-year shipments in '13 are expected to increase 1% to 5%, with most of the expected year-over-year growth to occur in the second half of the year, due in part to the favorable weather we experienced in the first quarter of 2012.

We will continue our focus on those efforts that we can control including reducing cost and improving pricing. The geographic breadth of the pricing gains achieved in 2012 reinforces our expectation for continued growth in pricing in 2013. We expect full-year Aggregates pricing to increase by approximately 4%. We also expect earnings in each of our non-Aggregates segments to improve versus the prior year and contribute to earnings growth in 2013. Asphalt materials margin increased throughout 2012, and should contribute to earnings growth in 2013. Concrete volumes and materials margin are improving as housing starts continue to recover in our key states. Cement earnings should also improve in 2013, due mostly to lower production costs.

Our outlook for 2013 reflects our previously stated profit enhancement targets. These pricing and cost initiatives should allow us to more than offset the effects of higher cost of key materials and supplies, and maintaining competitive wages for our employees. Our cost assumptions in our full-year include flat to slightly down SAG expenses, interest expense of approximately $197 million, and DD&A of approximately $300 million. Our current capital spending plan for 2013 includes about $150 million. However, actual spending will depend on business conditions and opportunities throughout the year.

In terms of planned asset sales, as I mentioned, we recently announced a number of asset sales that generated total gross proceeds of over $170 million. We will continue to work on additional asset sales moving into 2013, though the ultimate timing of such transactions is difficult to predict. Overall, we remain committed to completing transactions designed to strengthen our balance sheet, unlock capital for more productive uses, improve our operating results and create additional value for shareholders.

In summary, our earnings improvement achieved in 2012 is something we expect to build upon in 2013. Despite a challenging demand environment and soft volumes, we delivered solid increases in adjusted EBITDA and adjusted earnings per share. We continue to build on the momentum in our Aggregates business. The fourth quarter marked the fifth consecutive quarter of higher year-over-year profitability in Aggregates, as a result of our cost and pricing initiatives. We strengthened our balance sheet through further debt reduction, and made important progress on our planned asset sales program.

In addition, we have made strategic investments to enhance our Aggregates asset portfolio which already delivers among the highest profit margins in our industry, with strategic acquisitions in both Texas and Georgia, two of the fastest growing regions and urban markets in the US. We are optimistic for continued recovery in of our markets, as housing starts and contract awards for nonresidential buildings continue to improve. We are also looking forward to more predictable funding for public construction projects related to the passage of the new federal highway bill and an expanded TIFIA program.

As we look ahead, our management team will continue to focus on factors within our control, such as cost control and pricing initiatives to generate higher levels of earnings and cash flow, further improving our operating leverage and strengthening our credit profile, while building our Aggregates position in key markets.

And with that, I will now turn it over to the operator to begin your questions.

Thank you.

(Operator Instructions)

Your first question comes from the line of Kathryn Thompson with Thompson Research Group. Please proceed.

Hi. Thanks for taking my questions today.

Good morning, Kathryn.

Good morning. Did a nice job with pricing in the quarter. And once again, wanted to get a better sense of what was mix versus price increases? And also, given the overall improvement in volumes and we see more consistency, could you maybe discuss where pricing potentially could go over the next couple of years, based on your past experience?

Kathryn, we got some favorable mix, but also a lot of just absolute price increases on the same product. So a blend of the two, to get the 4% we had in the quarter.

Probably three quarters of the improvement or more was pure price.

Okay.

If you look at the history of this industry, clearly when there is volume recovery and visibility of future volume recovery, there are more opportunities for price improvement. And we certainly see that in our guidance for 2013. And certainly as we look beyond 2013, we continue to see opportunities for improved pricing and margin, particularly as we continue to get the benefit of our cost initiatives.

Could you review, what are your highest per unit price states for Aggregate product?

It tends to be -- Carolinas, Georgia, Florida, California. The lowest price markets tend to be Midwest.

Okay. So all areas -- at least a portion of the areas where you are seeing some good strength?

Yes.

Is it safe to say that these price increases will be more than enough to offset increases in cost? And maybe if you could talk a little bit more on the cost side, what you are seeing in terms of the increases there?

The answer to the first part of your question is yes, we certainly believe we will get price increases in excess of cost increases. Cost increases in our business are materials and supplies in '13, and wages. We expect to continue with competitive wage increases for our employees. And that has a -- will have an impact on our cost in 2013. Other costs that have been significant in prior years, cost increases, diesel fuel, liquid asphalt, we expect some modest increase in 2013, but at a lower percentage rate than we have seen over the last two or three years. So we think those are within reasonable ranges. So we don't see a tremendous amount of cost pressure in 2013 in the Aggregates business.

Okay. Great. And finally, a helpful detail that you gave on the public end market. Given your past experience with the increase in obligations that you have seen, maybe excluding the stimulus time line. But say, going back further, what is a typical lag that you have seen between obligations and real -- and seeing a more meaningful increase in obligations itp that realistically flowing through the market? And maybe talk -- because it is a little bit different this time, because it does appear at least based on our work, that you are getting a greater percentage of longer-term projects in this cycle versus in prior cycles. I would love your opinion on that also.

Well, I agree with you, we are seeing, largely because of the TIFIA work. But there is a -- there is likely to be a larger proportion of -- particularly highway spending, and perhaps some other surface transportation infrastructure spending like rail, high speed rail in big projects over the next, probably construction time, over the next three, four years as these TIFIA projects roll out. If you study our charts, you will see that while the obligations of federal highway dollars are up sharply, we are not yet seeing the increase in contract awards. So there is a lag there. A lot of states are holding relatively large bid lettings this spring. And once that -- we go through that cycle, we will expect to see contract awards moving up significantly, as they have in all of the prior highway bill, times in which federal highway bills have passed. Early in that highway bill cycle, the state DOTs want to go out and get their projects obligated, and then contract awards. And we don't see any reason why that cycle will not repeat itself.

Okay. And in terms of -- you alluded to somewhat in your prepared comments -- but in general, you don't expect to see any meaningful volume to flow through, at least to the back half of this year, but more likely into 2014?

And that is hard -- I would agree with that statement. There is -- depending upon the timing of when some of these large projects actually start, both TIFIA projects and industrial projects -- and I am sure you are aware that particularly along the Gulf Coast, there are a large number of big industrial projects that could begin sometime in 2013, including the Airbus plant in Mobile, several refinery and LNG projects along the Gulf Coast, some chemical plant expansions or greenfield developments on the Gulf Coast. So there are a lot of big projects out there, both publicly-funded and privately-funded, that are going to use significant volumes of heavy construction materials. We believe we are well-positioned to participate in many of those projects. But for us to tell you that shipments will begin in the third quarter or the fourth quarter of 2013, or the first or second quarter of 2014 is not terribly clear at this point.

Okay. Great. That's helpful. Thank you.

Your next question comes from the line of Ted Grace with Susquehanna. Please proceed.

Hi, how are you doing?

Hi, Ted.

Don, I was wondering if you take a step back and you think about, let's just say the next three years for the sake of argument. And it looks like the private non-res cycle is intact and you talked about some of the opportunities in the relatively near-term, and residential certainly looks like it is intact. You have got a two year mini bill, and hopefully, we got something bigger on the back end. We have got TIFIA to look forward to, and it certainly looks like a bunch of state initiatives. So as much as you would say look, there is concerns about kind of broader public spending as it pertains to roads and highways, I think people are appropriately optimistic. Do you think there is any reason why the first three years of an up cycle would look much different than what we have seen historically? When on average, you would see mid single-digit or better growth per year? Again, this is over a three year basis. So not asking you to say for 2013 necessarily, but is there any reason to think that this cycle would look different than prior cycles?

Ted, when we have gone back and looked at the last five or six construction cycles in the US, you always see very robust recovery. This cycle is different in a couple of ways. It has been both longer and deeper than anything we have seen, going all the way back to the depression. So an argument can be made, if the slope and length of the downturn is proportional to the slope and length of the upturn, which you can see in all the last five recessions, we could have a very long and very robust recovery. We are seeing it in housing.

We are beginning to see it in private non-res. And as you know, the vast majority of the cyclicality in the heavy construction materials business is in the private sector, and there remains relative stability throughout the downturns on publicly-funded projects. Although, there is some cyclicality there as well due to tax revenue changes. But I think we are cautiously optimistic that we have got a very good run in front of us. It is harder to say when the big turn occurs than that it will occur, but we are -- we believe there is a tremendous upside. If you look at where we are in relation to peak volumes, concrete is 35% of peak in 2012, asphalt is a little over 50% of peak. Aggregates are less than 0.5 of peak. And our improved profitability gives us tremendous opportunity to, as we have said publicly, to certainly get back to peak earnings long before we get back to peak volume. And that is all encouraging for us.

Okay. That is helpful. Second thing I was hoping to run through, and I don't know if it is you Don, or Dan, or if John McPherson is on the line. Just help me to square up kind of the impact we saw from the profit enhancement plan in 2012, and if we still think you get $75 million in 2013, as I think was the last kind of target and where we should look for those benefits?

I will let Danny and Dan, if you would like to comment on that.

Well, as Don commented earlier, Ted, our reduced SAG cost of roughly $31 million was a huge step in our overall profit enhancement program. And we remain committed not to have expense creep in that category, and our budget shows a further reduction in 2013. But we are on track. As you look at sourcing and some of our transportation initiatives, we are very confident that we can deliver the numbers that we have given you in the past. I mean, our run rates tell us that we will achieve what we have committed.

Ted, just to remind you and the other participants in the call how we framed that objective last year, we said that we would enhance profitability at current volume levels, i.e. 2011 volume levels by $100 million through a series of initiatives that affected both cost and revenue. And as we triangulate our outlook for 2013 against that stated objective, we come back and can point to the achievement of that 2013 -- that 2013 amount of $75 million that was supposed to hit the P&L in that year. And as Danny said, be at the full $100 million run rate in the second half of 2013. So again, the important measuring point is enhanced profitability by $100 million at current volumes. We stated that on the heels of 2011. So that is how we benchmark and measure it ourselves.

Okay. That's really helpful. Congratulations on that order, and best of luck this quarter.

Thanks, Ted.

Your next question comes from the line of Keith Hughes with SunTrust. Please proceed.

Thank you. I just wanted to ask a little more on the -- your view on private nonresidential construction, you talked about high single-digit growth for the year. I believe you mentioned hotels as an area that -- could you get into any kind of detail where you think the strength? And what sectors there would probably be lagging over the next year or so?

Well, if you take a look at our chart on private non-res buildings, you can see substantial growth in contract awards as we measure by trailing 12 months began really in 2011 and is continuing. We also show a line on construction put in place, which is an indicator of the lag between -- in private non-res, the contract award and the construction. We are seeing probably the most robust market right now for private non-res office buildings is in the District of Columbia, where there is a tremendous amount of construction. Miami, of all places, which at one point had a glut of high-rise condos that we thought would take 10 years to consume, is now back in the high-rise condo construction business. Texas remains strong in all sorts of ways. And Florida, if you look at the -- just the contract awards there are encouraging. Atlanta is lagging somewhat, and some of the mid Western markets are lagging somewhat. But overall, when you look at the contract awards across the country and particularly in our markets, it is pretty well diverse and we are encouraged by what we see as a -- at the macro level, as well as particularly from the bottom up in our markets.

Okay. Thank you.

And your next question comes from the line of Desi Dipierro with RBC. Please proceed.

Thanks.

Hi.

Thanks for taking the questions. On the -- with the range for volumes that you gave, minus (inaudible) the 1% seemed conservative. And I think you talked about it, that if it did come in at that range that would be primarily due to delays in public spending. And so then if that were to happen, you could imply right that 2014 would be stronger than it would normally be, correct?

Yes, it is both. Desi, it is both public -- big public projects and some big private projects. And so really the timing of those two is the reason it is very difficult for us to peg the range of projected volume increase any tighter. We will be able to update that as we go through the year, as we get better information about which projects we will participate in, and what the projected timing of shipments will be on those projects. But it is both public and private.

And we are -- I think there is very little risk in the publicly-funded side of this. Because of -- even if sequestration goes into effect in Washington on March the 1st, there is very little of the regular federal highway bill that will be affected. And I think none of the TIFIA program will be affected. The sequestration would not touch the regular federal highway trust fund. It would only touch the supplemental appropriation that is in -- that was put in the federal highway program for 2013. It would be about 5.2% of that, which is a total of about $322 million. Then there is another $38 million in another program that would be subject to sequestration. But out of the total of $40 billion or $41 billion for the federal highway program, ex-TIFIA in -- or in FY '13, only about a maximum of $360 million would be subject to sequestration, even if it goes into effect. So we aren't -- we don't think there is a risk to the federal funding of highways during the remainder of the year and into next year.

Okay. Thanks. That's very helpful. And then on -- when you think about these large, disproportionately large projects, is that something you would expect to be a trend over the next several years? Or is that something you are just seeing this year?

Well, there are two things going on here. One is that with the three year absence of a federal highway bill, and a series of short-term funding extensions, the state DOTs tended to do more maintenance and small projects, because the visibility of future funding was not out there. TIFIA is designed to fill that gap. And almost by definition, these TIFIA projects are great, big, multi-year projects that have various funding sources, in addition to what we would call the regular federal highway program.

So I think the answer to your question is yes. Both because of the hiatus of a regular federal highway bill for three years, up until July of 2012. Plus -- and as you look at the stars on our map about where those big projects are, they are almost all in high growth markets, where the need for new construction and new highway capacity is greatest. And also where people have sort of gotten over the issue of tolling. And these projects are almost all toll roads. And in big, high growth states, there is a saying, it is either a toll road or no road. So I think while in some of the low growth states tolling is not politically popular, but you start looking at California, Virginia, Texas, now Georgia, tolling is an increasingly viable source for highway funding which enables these large TIFIA projects.

Great. Thank you.

Your next question comes from the line of Adam Rudiger with Wells Fargo Securities. Please proceed.

Hi. Thank you. I just had one question and it relates to the guidance for '13. And maybe I am reading a little bit too finely into what you said. But you suggested that demand should be mid single-digit, but your volumes expect to be up 1% to 5%. So my interpretation of that is that you are underperforming the demand or underperforming your markets? So can you correct me, or tell me what the discrepancy is if there exists?

Sure. Demand is based on macro factors, when you start taking a look at contract awards and all the other moving parts, then our volume forecast is based significantly on our bottom-up view. The reason there is a disparity, really goes back to what we have talked about in response to several questions, and that is the timing of those projects. And we are being I think intentionally conservative by saying 1% to 5% in the face of a mid single-digit or 4%, 5% demand increase in our markets. But I think in this large project work, we are uniquely positioned vis-a-vis many of our competitors to participate in those projects. Because they are large projects, a lot of volume. We can supply those projects from multiple sources. So we are feeling very good about our ability to participate in those projects, and we wouldn't characterize it at all as underperforming.

I think we believe we will get a fair share of those projects. It is really for us more a question of the timing of when those projects actually go. And I don't think the macro top side view of those projects is anymore accurate than we are with respect to timing. They are out there. They exist. They are -- will be funded in most cases, and they will go in most cases. But it is really a question of whether enough of them kick off in the second half of the year for us to get to the top end of our guidance range or not.

Okay. That's helpful. Thank you. And the second question is, you were talking about the highway trust fund. And we have been -- you have been -- a lot of comments talked about '14 and beyond, and the stage of this recovery, and whether or not it will be longer or different. On thing though, that I am wondering about still is the highway trust fund. The CBO is projecting I think it to be back insolvent again by '14 or '15. I can't tell from the chart. Nonetheless, there is still some structural problems there. So I was wondering given your insight into potentially DC, what you are hearing or seeing or thinking about that?

Well, I think you are correct, that by the end of the current federal highway bill -- end of FY '14, which would be September 30, 2014, the highway trust fund will have an essentially zero balance. I spent last week in Washington talking to many congressmen and senators in both parties. Everybody is looking for a solution. To say that there is one currently, it would be way too optimistic. But I don't think anyone believes that the federal highway program and the funding levels that we have experienced in the past and including those today, are adequate to meet the needs of the upcoming years. How that is going to be funded remains to be seen.

I think you are seeing a fair amount of movement in various states in looking at alternative funding mechanisms. You are probably aware in Virginia for example that the governor has proposed a new sales tax to replace a gasoline tax, and increase the amount of funding for highways. I think it passed the House. A different version just passed the Senate, and ultimately that will be resolved in some form or fashion. But states are looking at alternative funding mechanisms, and hopefully those will provide some precedent for how the federal government will look at that. There are a lot of different discussions going on about tax on vehicle miles traveled rather than fuel consumption. There are a lot of issues with that.

There is not a resolution, but there is clearly a very strong awareness of the issue. The new head of the House Transportation and Infrastructure Committee, Bill Shuster, is very aware of it, very committed to solve the problem. His Democratic colleague from West Virginia, Nick Rahall, equally is aware of the problem and committed to a solution. On the Senate side, the -- Senator Boxer from California led the bipartisan effort in the Senate EPW Committee to come up with the compromises necessary to get the current bill passed. And as you recall it came out of that committee with an 18-0 vote. And then Senator David Vitter from Louisiana is the ranking Republican now on that committee, and he is also very committed to a new highway program and adequate funding. So we are in communications steadily with those leaders in Congress. And while there is no solution, there certainly is a lot of energy and interest in finding the solution.

Let's hope they can find one. Thanks for taking my questions.

Your next question comes from the line of Seth Yeager with Jefferies. Please proceed.

Hi, good morning. Thanks for taking my questions. Just based on some of your guidance and the outlook for just overall construction activity in the current year, I would imagine you should be generating a fair amount of free cash flow. You do have a stub piece of debt coming due this year. What is the overall thought on allocation of capital? Looks like you are increasing your CapEx a little bit. But longer-term, is the expectation to try and get back to investment grade, return cash to shareholders? I guess how are you prioritizing at this point?

I will give you my short answer to that, and then ask Dan Sansone to comment further. But clearly, we will -- our plan is to repay the bonds that are due in June. I think that is $140 million. We don't have any of other bonds due until the end of 2015. Generally, our bonds are trading at a premium. So for us to go buy them back today is a pretty expensive proposition. Clearly, we intend to get back to investment grade. That is a goal of the entire management team.

We can get there by improving EBITDA, or paying down debt or some combination of the two. So that is really -- we have several levers to pull there. We will in addition to debt reduction, our priorities for cash flow include reinvesting in our Aggregates business, including bolt-on Aggregate operations in the kinds of markets we like, which are generally fast-growing markets where the barriers to entry are significant. We would like to begin to restore a meaningful dividend. That is also a priority for our management team and our Board. So I think among those debt reduction, reinvesting in our Aggregates business, restoring a dividend, those are the principal priorities for cash flow. Dan?

And the only thing I would add to that is in the near-term, we would want to preserve sufficient cash to have flexibility to respond to these investment opportunities that may come along, without having to be dependent on having to do a capital market transaction in a very short period of time. So as we transition through this recovery into the retirement of the existing debt, there may be points in time where we have more cash sitting on the balance sheet than we otherwise would. But some of that is intended to provide the financing flexibility to be opportunistic on these modest bolt-on opportunities, be they acquisition of operating assets or further investment in reserves to enhance our position in existing markets.

Thank you. I appreciate it. And just maybe as a follow-up, on the M&A front, are you seeing more opportunities for existing sellers that are sort of coming out of the woodwork? Or are you still continuing to look at more greenfield opportunities as well?

Greenfield opportunities are very difficult as you know. While we have some greenfields identified, and are -- would anticipate opening those as demand would dictate, there are far more opportunities for bolt-on acquisitions of existing Aggregate quarries. As you know, there are some large global companies that are actively selling Aggregate operations in the US, and we view those as real opportunities.

All right. Thanks a lot. Good luck.

I would now like to turn the call over to Mr. Don James for closing remarks.

Well, thank you all for joining us today. We are pleased with our results in [2012], given the fact that the economy -- construction economy has remained difficult. We, as indicated, are certainly looking forward to 2013 and beyond, because we believe we are at a point in the construction cycle, given all of the work we have done over the past few years to be ready for the upturn, and to be more profitable going into the upturn than we have been in prior cycles. All of those things together, give us a great deal of optimism for the future. We appreciate your questions, your interest, and look forward to continuing to talk with you in subsequent quarters. Have a good day.

Thank you for joining today's conference. That concludes the presentation. You may now disconnect, and have a great day.