渥肯建材 (VMC) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen. My name is Holly, and I will be your conference operator today. At this time we'd like to welcome everyone to today's Vulcan Materials 2014 second-quarter earnings conference call. All telephone lines have been muted to prevent background noise. After the speakers' remarks, there will be an opportunity for questions.

(Operator Instructions)

I'd now like to turn today's conference over to Don James, Chairman. Please go ahead, sir.

Good morning, and thank you for your participation in our second quarter 2014 earnings call. I'm Don James, Chairman of Vulcan Materials. With me today are Tom Hill, our newly promoted President and Chief Executive Officer; and John McPherson, our newly promoted Executive Vice President, Chief Financial and Strategy officer. Hopefully you saw our July 14 press release announcing the election of Tom and John to their new senior leadership positions.

These elections were the culmination of a multi-year Management succession process by Vulcan's Board of Directors to develop a new senior leadership team with diverse and broad-based experience, as well as demonstrated management success and leadership skills. The bios of the four members of our new Senior Leadership Team are included in the July 14 press release. Importantly, you should know that each of these individuals has been successful as a line manager in at least one of our regional businesses. We are very pleased that this new team is now in place to lead the Company.

In a moment, Tom and John will take you through our quarterly results and outlook for the remainder of the year, as well as respond to your questions. Personally, I'll miss having the opportunity in the future to engage and interact with many of you about what makes Vulcan Materials Company such a great Company, with lasting value. While Tom and John, along with Mark Warren, our Director of Investor Relations, will be directly engaged with you on investor relations matters going forward, I will continue to be available to you and your organizations as requested.

I am excited about the opportunities for Vulcan going forward, led by our new Senior Management Team. Aggregate shipments have increased sharply year to date, and have improved year over year for five consecutive quarters. Our price improvement is widespread. More importantly, earnings are growing faster than our top-line sales, and margins continue to expand.

These results build upon the sales momentum we continue to see across our market footprint, and are a credit to our employees. They have done an exceptional job of meeting our customer needs by providing a superior value proposition as we see a broad market recovery. Vulcan is extremely well-positioned to benefit from the construction market recovery and to deliver value to our shareholders, and now is a great time to transition to our new leadership team.

Before we begin with actual results and projections, let me remind you that a slide presentation will accompany this webcast, and will be posted on the Company's website at the conclusion of this earnings call. Additionally, let me remind you that certain matters discussed in this conference call, as indicated on Slide 2 of our presentation, contain forward-looking statements which are subject to risks 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 this 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 second- quarter 2014 earnings release, and at the end of this presentation.

Moving now to Slide 3, we had an excellent second quarter, and we are encouraged by the growing momentum in our markets. This slide shows the strong earnings leverage we realized on higher aggregate shipments. Earnings from continuing operations were $0.35 per diluted share, an increase of 52% compared to the prior year second quarter. On a comparable basis, our EPS in the second quarter was $0.37 per diluted share, compared to $0.13 per share last year.

Net sales increased $60 million, or 9%, while gross profit increased $42 million, or 32%. These results reflect strong performance in our aggregates segment, and improving results in our other segments. We remain focused on realizing earnings leverage from price improvement, from cost control, and from volume growth. I'd now like to turn the remainder of the call over to Tom Hill.

Thank you, Don. Also welcome to Vulcan's second-quarter earnings call. Before we get into the details of the second-quarter results, we would like to highlight the progress that we have made in our efforts to improve profitability. Turning your attention to slide four, you see that over the last 24 months, we've improved our EBIT by $169 million, on just a 4% increase in aggregate demand.

We are very pleased with this growth in earnings, and it highlights our commitment to cost control, pricing, and customer service. We've improved our core profitability significantly, and we have positioned ourselves to capitalize on the accelerating volume recovery. We remain acutely focused on our profit improvement actions, and maximizing our strong operating leverage in this time of growing recovery.

Taking a closer look at the aggregate segment results on Slide 5, you see the resulting revenue and gross-profit impact from higher shipments and pricing. Aggregates volumes increased over 10%, and pricing increased 3% on a freight-adjusted basis. This, along with our expanded product offering in transportation and materials handling services, led to a 17% increase in segment revenue.

In the second quarter, incremental earnings of higher aggregates volumes were in line with our longer-term expectations of approximately 60%. Transportation and material handling services, which are key to our aggregates business, generated higher sales and earnings versus the prior-year second quarter.

Growing our transportation services, mainly truck brokerages services, has been a focus area for revenue and earnings growth. The truck brokerage requires little to no capital. These transportation services add incremental sales and earnings, and allow us to better serve the needs of our customers.

However, incremental margins are significantly less than earnings on each incremental ton produced and sold. That said, the earnings leverage on increased volume led to 27% higher gross profit in aggregates, and a 210-basis-point increase in the percentage of sales converted to gross profit. As a result, the key metric of cash gross profit per ton hit an all-time high of $5 per ton.

The broad nature of our volume improvement is notable. We saw a 10% volume increase for the second quarter. In particular, volumes in Georgia, Illinois, North Carolina, Texas, and Virginia exceeded 15%. Florida and southern California also had above-average volume growth.

We continue to experience volume momentum, as we've seen trailing 12-month volume growth of 8%. Our markets are seeing expanding growth in both volume and price. Aggregate shipments are up in virtually all of our sales regions, and the vast majority of our sales regions have realized higher pricing. This is evidence that volume and price growth are widespread.

Slide 6 highlights the favorable operating leverage in our aggregates business. Trailing 12-month volumes have increased 8%, or 12 million tons, while aggregates gross profit improved 29%, or $103 million. This is due to higher pricing, cost control, and the earnings leverage on volume growth. This type of earnings leverage on modest volume growth is a tribute to our local Management teams. Their continued commitment to earnings growth demonstrates their leadership, and highlights the opportunities ahead. Now I'd like to turn the call over to John.

Thanks, Tom. Now, let's take a look at our conversion of incremental aggregate shipments into incremental profits in a bit more detail. Slide 7 compares our growth in aggregate shipments and our growth in segment gross profit for each of the second quarter, first half, and trailing 12 months.

In the second quarter, for example, we grew aggregate segment gross profits by $35 million over the same quarter a year ago, and we did that on just 4 million tons of increase in shipments. Looked at a bit differently, we added approximately $58 million in incremental direct revenue from aggregate shipments in the quarter, and the gross profit flow-through on those incremental revenues was approximately 60%, as Tom mentioned.

Looking over longer periods, you see similar trends. Over the first half of 2014 and the trailing 12 months, we've grown segment gross profits at approximately 3.5 times the rate of growth in shipments. As you've heard Tom highlight, our team of course remains very focused on growing profits at a rate well in excess of shipments.

Now let's go to Slide 8 to look at the strong and improving unit margins that underpin these results. This slide highlights our results on a per-ton basis. As you can see, we've continued to improve our already strong unit margins significantly, despite relatively modest price increases in the early stages of the recovery.

As Tom mentioned, second-quarter cash gross profit per ton of $5 was a new record level for our aggregates business. At $4.51, our trailing 12-month cash gross profit per ton is 34% higher than it was at the end of the first quarter in 2006, our prior peak period in volume, when our annual rate of shipments was approximately 130 million tons higher than it is today. Again, these key unit profitability metrics demonstrate the successful efforts of our employees to increase profitability by controlling costs and delivering quality materials at a fair value to our customers.

Looking at the second quarter, for example, our freight-adjusted selling price rose by $0.33, or 3%. At the same time, our cash gross profit per ton increased by $0.36, or 8%, and our gross profit per ton increased $0.49, or 15%. For the quarter, most of the $0.16 differential between our average selling price gain and our gross profit per ton gain came from cost improvements, as our operators were able to offset higher repair and maintenance costs and stripping costs with other production efficiencies, and by leveraging fixed cost of sales.

You will see that similar results hold if you look at the first half of the last 12 months. We believe our unit margins are among the highest and fastest growing in the industry, and we remain intensely focused on delivering strong and improving profits per ton as volumes recover.

As a Leadership Team and as a Company we focus on the actual dollars and cents, and not just the short-term percentage fluctuations, because this higher unit profitability is what ultimately drives both higher earnings and higher returns on invested capital. Of course these factors, combined with our presence in higher-growth markets and thoughtful management of our balance sheet, in turn drive value for our shareholders.

Vulcan has the assets, people, and performance focus needed to deliver similarly strong and improving returns on incremental shipments in the future, particularly as the recovery gets past its early days, and as the pricing climate in many of our markets continues to improve. Now I'll hand it back to Tom to touch on our other segments, and our current outlook for demand.

Thanks, John. Next I'd like to talk briefly about our non-aggregates results, of which concrete and asphalt are highlighted on Slide 9. In the second quarter, our concrete segment's gross profit improved from a loss of $6 million last year, to gross profit of $3 million in the current year. This year-over-year improvement resulted from the sales of our Florida-area concrete business in the first quarter, from an 18% improvement in volume, and from higher unit profitability in our remaining operations. On a like-for-like basis, volume and price improved, benefiting from growth in private construction activity.

In our asphalt segment, second-quarter gross profit was in line with the prior year. Asphalt volumes decreased slightly from the prior year, and material margins improved slightly, due mostly to lower costs for liquid asphalt. However, drying costs and depreciation were higher than prior years.

Next, John and I would like to discuss the full-year outlook. I will first give a few comments on our current forecast for aggregates demand by end market, and then John will give some highlights about key assumptions we have made regarding our full-year earnings results. Turning now to Slide 10, you see a break-down of our expectations for aggregates demand by each of the major end markets. Product construction, both residential and non-residential, continue to lead demand growth. In the private market segment, Vulcan-served markets are growing faster than the rest of the US.

We expect residential growth to continue to be broad-based across our geography, led by key states such as Arizona, California, Florida, and Texas. We're also seeing residential construction activity and aggregate demand recover rapidly in important Vulcan markets such as Atlanta, Baltimore, Charlotte, and Nashville.

In private non-residential, our markets are beginning to benefit from growth in office and commercial work, as well as increased demand for large industrial projects. These industrial projects can represent large quantities of aggregates supplied over several years, and Vulcan is uniquely positioned to serve them. This is particularly true along the Gulf Coast, where we are advantaged by our ocean ship stone from Mexico. These projects provide an exciting opportunity for our aggregates business.

We're also seeing strengthening large project opportunity in the public arena, including transportation infrastructure. Federal-funding TIFIA projects are beginning to drive additional aggregate shipments in 2014. State-led funding initiatives in several states, including Texas, Florida, Virginia, Maryland, and Pennsylvania, will improve the highway segment demand. We are pleased with the extension of the current highway bill until May 31, 2015, and the additional funding of $10.8 billion transferred to the Highway Trust Fund.

Congress continues to work towards the ultimate passage of a new multi-year highway bill. In the mean time, large transportation projects, and the growth in contract award for highways in 2013 and 2014, will provide steady growth in the demand for this market segment. Overall, we expect modest growth in shipments in the public end markets in 2014, and we're optimistic with respect to public infrastructure construction in 2015 and beyond. Now I'll turn the call back to John.

Thanks, Tom. As you can tell, we're not only excited by our recent performance, but we're also very confident in the overall momentum we see across our markets, both for the balance of 2014, as well as into 2015.

Turning to Slide 11, I'll touch briefly on our current outlook for the full year before handing the call back to Tom. For ease of comparison we have formatted the slide similarly to the one in our February earnings call. We now forecast full-year volume growth to be 7% to 9% above the prior year. That compares to our prior forecast of 4% to 7% growth. Our backlogs and recent sales momentum remain quite strong, and although we remain far below any measure of normalized demand, the recovery appears to be gaining steam, and our local sales teams are doing an excellent job in growing our business.

We continue to see full-year pricing up 3% to 5% over the prior year. Our recent pricing gains have been broad-based geographically, and as discussed, the overall pricing climate is improving across the majority of our markets. We're continuing to see improving prices as we book new business week to week and month to month.

We expect our other segments, which include asphalt mix, ready-to-mix concrete, and calcium, to report $40 million to $50 million of gross profit collectively for the full year, toward the lower end of our prior forecast. Our asphalt volumes in the western US have trailed plan due to delays in several key projects, pushing the revenue and profitability from those activities into 2015.

As previously indicated, full-year SAG costs will remain in line with the prior year, and lower on a percentage of sales business. We remain very focused on continually improving the productivity of our sales and G&A investments. Full-year interest expense remains unchanged at $165 million to $170 million, down from $202 million the prior year, not including the one-time charges associated with our debt tender transaction.

We've revised our full-year capital spending slightly from $220 million to $240 million. Given our current sales momentum and outlook, we have excellent opportunities to invest further in production efficiencies and distribution capabilities, and to do so at very attractive returns. This capital spending will allow us to take advantage of those opportunities now, and to prepare for the growth we see ahead of us. With that, I'll turn the call back over to Tom for some final remarks.

Thanks, John. In closing, we are well-positioned to capitalize on the multi-year recovery in demand that we believe is in front of us, and we expect 2014 to be another year of earnings growth. Thus far in this recovery, we have leveraged modest but accelerating volume growth into strong growth in earnings. This is due to the operating leverage in our aggregates business, and the disciplined execution of our operations and sales teams. This performance by our teams gives us tremendous earnings upside, as volume recovery continues.

John referenced opportunities to reinvest in our existing assets, to enhance our profitability and grow earnings and returns. We are also very active in pursuing value-enhancing acquisitions. In July, we closed on a transaction that added four quarries that complement and grow our existing business in the San Francisco Bay Area. We are excited about these operations, and look forward to their contributions to Vulcan's future results. We continue to see opportunities for bolt-on aggregate acquisitions. We will pursue these opportunities while staying disciplined in our approach.

Over the last three weeks, our Senior Management Team has been traveling across the country meeting with our Management teams throughout Vulcan's footprint. Our people are excited about Vulcan's future. They see what I see -- a Company that is in a new phase of robust growth that will be strategic, and very rewarding to our employees and shareholders.

The recovery that is occurring across America is encouraging, but our people are not waiting for recovery. They are making it happen every day -- creating new opportunities for Vulcan to grow ever stronger and more profitable. Our people are totally focused on strategic growth -- growing our volumes, growing our profitability, and growing our footprint in the best markets in America. We are finding new opportunities every day, and our people are making the most of them.

I want to thank these employees for their outstanding contributions to Vulcan Materials Company, and I want to especially thank Don James for the critical role he has played to grow our business strategically and dramatically in fast-growing and high-potential US markets. Don has led this Company in good times, and through turbulent times into recovery. Vulcan's shareholders can have great confidence in our Company.

This confidence comes from our unparalleled asset base, and from our outstanding people. They run the best and most profitable aggregates operations in the United States. They are completely focused on building sustained shareholder value. Now, if the operator will give the required instructions, we'll be happy to respond to your questions.

Ladies and gentlemen, we will now begin the question-and-answer session, with Tom Hill, President and CEO, available to respond to your questions.

(Operator Instructions)

Ted Grace, Susquehanna.

Don, congratulations on an extraordinary career, and we wish you all the best in retirement.

Thanks, Ted. I appreciate that.

I was hoping maybe to start with John. John, could you walk through a more detailed bridge of the gross profit improvement in aggregates? I know that you referenced a Slide 7, and I don't think the deck's available yet, but maybe if you could just walk us through the impact of pricing volume. You mentioned stripping costs and repair and maintenance were up, but maybe benefits of restructuring and changes in inventory, just so we can try to understand the puts and takes?

Sure. I'll obviously hit some highlights, and then Tom will chime in. First, just to get to the question of flow-through that many folks have asked, in the quarter our incremental revenue from direct sales of stone, just as a reminder, was approximately $58 million. On those revenues, our gross profit was approximately $35 million incremental gross profit, for a flow-through on the order of 60%. Just to answer that question directly, that's where our flow-through was in the quarter.

Now going a little more into detail on the improvements in core profitability in the aggregates segment, and I apologize, this will be detailed in the deck if it's not available. Our gross profit per ton in the quarter was up $0.49, and our average selling price in the quarter was up $0.33. Again, that $0.16 differential was in this quarter mostly driven by cost improvements. Our operators did a fantastic job of leveraging volumes and driving some additional operating efficiencies. They overcame some head winds in repair and maintenance costs and higher stripping costs. We're very pleased with those results.

We think our total gross profit per ton, when you look at it on a gross profit basis or a cash gross profit basis, is likely the highest in the industry, substantially higher -- as in $1 or 30% higher than many others. We also think it's the fastest expanding in the industry. We're pleased actually that we're doing that despite relatively modest price growth. Ted, let me stop there answering additional questions, and Tom can chime in.

Ted, I think if you look at the quarter, we actually spent more dollars on stripping and on repairs. That was really in preparation for the third quarter, where we'll see higher volumes. That was to free up our operations to be prepared for that. But if you look at it on a per-ton basis, I think our operating folks did a really nice job with efficiencies on a per-ton basis, even with the spending on stripping and repair and maintenance, our per-ton cost was down.

Order of magnitude? Could give us a sense for the combined stripping and repair and maintenance costs, just so we appreciate, ballpark, what that number would look like?

Stripping was up I think about $0.02, and repairs and maintenance was up about $0.045.

Okay, that's helpful. The second thing I was hoping to touch on is pricing. I know you reported 3%, and you talked about broad-based gains. Could you help us start by understanding the impact of geographic mix and product mix, to the extent that's possible, so we can get at what the underlying improvement in -- and to go from there?

First of all, I don't think there was a lot of impact from mix. While our pricing in the second quarter was modest, it was broad-based. We had pricing improvements in all but one of our markets. We think there's a lot of momentum with pricing, and we've had continuous pricing over time. I think if you look at our trailing 12-month pricing, we were up in all but one market.

Look back a year ago, trailing 12 months in 2013, our prices were up all but one market. Then if you look back over time, Ted, we have had price increases in 13 of the past 14 quarters, so our pricing's been very steady. An exciting part about it is we are seeing pricing momentum in all markets, and that momentum is accelerating, so we're excited about that.

I think ultimately, when it gets down to pricing, you have to put that together to look at margin. We're really pleased with our team's coordinated effort in the second quarter to blend price, volume, cost, and product mix to maximize profit, and there effort generated a record cash gross profit per ton of $5. While we're very pleased with that record, based on our pricing momentum and our efficiencies in operations, we don't think that record's going to stand long.

Okay. The last thing I'll ask before I get back in questions is to come back to the margins. As we look forward to the second half of 2014, would it be reasonable to think about maintaining 60%-plus incrementals on the core aggregates business? Are there transient costs we should think about? Any hand-holding there would be great, and I'll get back in queue.

I think the answer, Ted, is yes. This is John. 60% is appropriate to think through time. As we've said before, it may fluctuate a little bit quarter to quarter. But the answer to your question is yes in incremental revenues, particularly those revenues that come from direct stone sales. Our revenues that come from trucking-related activities -- just again as a reminder, those are lower margins. But they have substantially no capital associated with them. They effectively serve to add additional profit per ton sold. For our direct stone revenues, 60% is not a bad number.

Again, just to give you a sense, Ted and others, if you take a slightly longer-term view -- again, if you look at the trailing 12 months, our price has been up on the order of 3% average selling price, but our gross profit per ton is up 20% -- 19% and change -- and actually our gross profit per ton is up about 20%. Ultimately that's the money that we can either reinvest or give back to shareholders, dollars and cents per ton. That's what we're very focused on.

Okay. That makes a lot of sense. Thanks a lot. I'll get back in queue. Good luck this quarter, guys.

Robert Wetenhall, RBC Capital Markets.

Hi, guys. This is actually Desi filling in for Bob. Thank you for taking my questions. Looking at the aggregates business, I think around 30% of your guys' volumes goes towards non-res construction activity, exclusive of roads, of course, Of that 30%, how much is going towards these energy infrastructure projects that you talked about along the Gulf? I'm trying to gauge how much you guys stand to benefit from what's going on around that.

I'm not sure I can give you that exact percentage. I'll give you some flavor on non-residential. We're actually seeing the conventional non-residential come back strong. When I say that, I mean shopping centers, buildings, and things like that. We do have a number of large projects along the coast energy related, but a lot of those are just now getting started off. We're just starting to ship three of them on the Texas Gulf, and actually the ones we had planned on shipping in Louisiana have been postponed to 2015. While that's not good news for 2014, it's excellent news for 2015.

But if you step back and look at the traditional non-residential growth -- and these are demands for what we project for 2014 over 2013. San Diego, we project demand to be up 50% in non-res, Baltimore up 36%, Houston up 32%, Fresno up 32%, Miami up 24%, Phoenix up 20%, and Chicago up 20%. There is a lot of traditional non-residential growth out there that we're experiencing and excited about. The big industrial projects that we're seeing are a bonus on top of that. Like I said, we backlog a number of those, but they're just beginning to ship. We think we'll see the majority of those big industrial projects in 2015.

Great, thanks. That's really good color. Thank you. Also, turning to SAG expenses, you guys continue to expect those will be flat year over year, which is really impressive given the revenue growth. As we think longer-term and net sales continue to grow, what portion of your SG&A expenses are truly variable?

It's a good question. I think actually very little. I think the sales expense component of that, which is -- let's call it roughly $100 million of the total SAG number -- it's probably slightly less than that. Sales expense will be more variable over time. We'll continue to invest in sales staff and sales-related expense to drive volumes, and to critically drive profitability per ton sold, and to meet the needs of our customers.

That component's to a degree variable, but still at a much lower rate. Then we'll grow shipments, then we'll grow sales, and then we'll grow profits. We absolutely plan for SAG as a percent of sales to continue to decline substantially over the next several years.

All right. Great, thank you.

Kathryn Thompson, Thompson Research.

First on pricing, thanks for earlier on that. But just wanted to follow up in terms of given that you're seeing a greater breadth of products now, not just the overlay that you saw three to four years ago, but more new projects and projects in all of your key three end markets -- res, non-res, and public. What is the differential in terms of the magnitude of price increases that you've been able to get for base product versus clean stone? That's part one. Part two, how do you see that progressing as we are in the earlier stage of recovery in both the non-res and the public end markets?

I think I understand your question. When it comes to base pricing and clean stone, in this part of the recovery cycle, normally you're able to get higher prices on clean stone than base. This year we are starting to see that turn, which is a really good sign, in that we are seeing price increases, realizing price increases in base, and we're on the cusp of that. We're very excited about it. The clean stone pricing continues to gain momentum, and the recovery will only help those prices.

Are you seeing a difference in terms of your ability to gain a greater percentage increase from base relative to clean stone -- just purely on a percentage-type basis?

Again, at this part of cycle base is starting to catch up with clean stone. Clean stone in prior quarters has out-stripped base price increases, but that is catching up, and catching up rapidly.

Kathryn, I think -- just to add -- I think the answer to your question is yes. I think the mix over time also helps us drive higher profitability per ton. As you've heard from others, the mix is improving as the recovery goes forward, too.

Shifting over to public end market, are you seeing DOT slowing in light of some of the noise we've seen around DC? I know we have a short-term fix. Our work shortly is not showing a meaningful change, but what are you seeing in terms of the states where you have the greatest exposure -- in particular, how they're approaching being less reliant on federal, and taking more responsibility for their own?

Well, I think before the extension of the highway bill and the additional funding, there was a lot of nervous states out there. I think with the extension until May of 2015 and the additional $10.8 billion, those states are much more comfortable, and have gone on with their programs. We are seeing, I guess, improvement in a lot of states, in a number of states, which I mentioned on the call, particularly Virginia and Maryland. Virginia raised the gas tax. I think they increased funding to $800 million a year. Maryland increased their funding over six years by $4.4 million. We're seeing -- excuse me, $4.4 billion.

We're seeing states take a much more active role in their own destiny when it comes to highway spending. You are aware that Florida announced over $10 billion in highway spending for 2014, 2015. Texas just ended a record spending year for their highway funding. It's encouraging, but I think the extension of the highway bill and the supplemental funding have helped the states relax their nervousness about highway funding.

Another follow-up question. This is -- can straddle both non-res and public to some extent. What are you seeing in your key markets in terms of volumes that are contributing to preparation for the Panama Canal expansion? How do you see that progressing over the next 18 to 24 months?

I think in a lot of planning with not much action at this point. I'd tell you that most of the ports we're seeing talking a lot about it. People have projects that they're planning, but not a lot of action at this point. There's also DOT's, for example, in Charlotte, South Carolina, that are talking about expanding the access to the port. It's in the very early stages of that, and not seeing a lot of activity, more discussion than planning.

Catherine, it's John. I think maybe not in direct response to your question, but just to add on, some of the incremental investment we're making in CapEx is focused on our blue-water distribution capabilities. Our rail yard facility in Savannah, beginning to increase in capacity out of our Mexico operation, so forth and so on. While it's not here just yet, we do see it as an important long-term trend, and we're well-positioned and investing accordingly.

Okay, great. Final question on your truck broker services. How big do you want that business to be?

Well, I think we still have growth in that. The focus of that business is to take an active role in managing our logistics. It allows us to save costs, improve customer service, and it also allows us to secure transportation in times when transportation is scarce. We're seeing a little bit of out that out there, so we're pressing on it. I'm not sure I can quantify the exact number, except for this was part of our profit-enhancement plan that we worked on -- have been working on for the last two years, and just an extension of that.

Perfect. Thank you so much for taking my questions today.

Garik Shmois, Longbow.

Thank you. Congratulations, everyone, on your new roles. First question is just on your volume guidance. I think previously something that was maybe holding you back from not having a bigger guidance to start the year was some of these large Gulf Coast projects, You highlighted some are getting under way this year, some are getting pushed out to next year. Was there any change in the cadence in these big projects that influenced your guidance?

Secondly, as a follow-up to the guidance question, just because I don't believe the slide deck is yet up on the website. If you can maybe identify which of the end markets is coming in specifically stronger than you had anticipated since the beginning of the year?

As far as the large -- the mega-projects, I don't think we're seeing a lot of timing differential in any of those. We've back-logged a number of those and are very pleased with them. We're shipping some of those in 2014. The lion's share will come in 2015. But I don't think that's what changed our guidance. It's more the underlying demand in our fundamental markets, particularly non-residential. When it comes to we upped our -- we increased our demand in the non-residential markets. That's really driven by the fundamental stores, buildings, office buildings that we're seeing in all of our major metropolitan markets.

Okay, thanks. Has there been any --

Garik, just to be -- relative to prior guidance, just to add on -- I think it's really despite a reduction in our housing outlook, although that's still quite strong and robust; despite some delays in those adjuster projects in the Gulf Coast not coming through this year. Despite those things, which are still demand right there for 2015, we're still raising our forecast. I think the message, your take-away, should be that our underlying sales momentum, as Tom said, is very strong.

Okay. Thanks, and I was going to ask about the housing piece. That helps address it. My other question would be related to uses of cash moving forward. If you could prioritize your view on additional bolt-ons, how that pipeline is looking, and how you balance those opportunities versus potentially continuing to up the dividend, and maybe taking a look at buy-backs?

I'll start, and let Tom chime in. We actually have a very attractive pipeline, as we said before, of bolt-on acquisition opportunities. Those investments are both attractive in their own right, and improve the returns from the rest of our asset base. We'll continue to pursue those in a very sensible and disciplined way -- the recent acquisition in the Bay Area being a very good example.

But over time, and I think as has been the legacy of Vulcan, we'll have a balanced mix between reinvesting capital in the business and returning it to shareholders. The exact form of that return -- dividend, share repurchase, what have you -- is really a Board decision and something we'll work through over time. But you can expect us to have a balance of returning cash to shareholders and reinvesting in what we think is the most valuable aggregates footprint and set of markets positions, arguably, in the world.

Okay, thanks. One last question, just quickly. Tom, you mentioned you're starting to see a little bit of trucking constraints in your transportation businesses, supposedly set to address some of those issues. If you could provide a little bit more color around that issue, and how significant of a risk this could be as volumes come back into the system, potentially faster than anticipated?

Well, in this part of the cycle I think trucking shortages are always out there. We're hearing some rumblings of them in some markets. We don't have a lot of concern about that. We have ample trucking resources, but when those shortages happen, they are cured very quickly. The market responds fast with trucks coming into the market when prices go up. We don't think there's significant risk when it comes to trucking. Actually, it's probably an opportunity for us, because if there is a shortage, we control based on our strategy of truck brokerage a number of those trucks, so we feel like we'll be served first.

As far as transportation shortages in rail, again in this part of the cycle that's a possibility. We get comfortable with that because we have so much flexibility on numerous rail lines, but also we control our own destiny in a lot of those markets with brown-water and blue-water sources, where we can mix and match supply.

Okay. Thank you very much.

Jerry Revich, Goldman Sachs.

I'm wondering if you gentlemen are willing to step us through what parts of your network have you rolled out? The truck brokerage business model, and for areas where you've rolled it out, what's the penetration rate today versus where it could ultimately be? Perhaps you could calibrate us on the margin profile? I guess the stand-alone truck brokerage companies are running in the mid- to high-single0digit range. I'm wondering if you could calibrate us relative to that benchmark?

Our trucking business, like our aggregates business, is a local business. Each one is different. Each one is structured different. The profitability at each one is different. We are active in California. We are active in Texas. We are active with this in the Midwest. We are active with it in the Southeast. But as far as trying to put a number on the percentage profitability, again, it varies by market, and it varies widely by market.

Okay.

It is safe to say it's well below, on a percent of sales basis, our core stone business, which is why we're trying to give you some transparency to it. But again, reminder, we're not owning trucks. It's very low capital for us. We think of it as incremental returns to us, and on that basis, very attractive.

Yes, absolutely. I guess we're trying to understand how much runway you have in front of you. Maybe you could quantify what proportion of your shipments do you currently handle with the truck brokerage operation in areas where you're relatively far along in that process, just so we can think about what the ultimate opportunity from Vulcan's standpoint is?

I think at this point it's a small percentage of our aggregates. We have a lot of growth in this area. Most importantly, this is to secure transportation and secure customer service, as well as lower cost; but we have a long ways to go from a trucking perspective.

Okay. Then I'm wondering if you could talk about within aggregates just the cadence of price realizations from here, based on the mix of jobs that you have coming up in the back half of the year? Can you just give us a flavor for what you expect to ship based on visibility that you have, and how the pricing levels compare versus a year ago?

I'll start, and let Tom give a little more flavor. As I mentioned in the script, I think what we're seeing week to week, month to month, in pricing is very positive. The climate, or pricing climate's improving in the vast majority of our markets. It's always a little bit difficult to predict for us the exact cadence, because as you've heard us say before, we don't manage pricing in any kind of centralized way.

That said, and Tom can give a little more flavor, all of the signs across the vast majority of our market, the lights are flashing green in terms of the improving pricing climate. Again, we're very pleased with the gross profit per ton improvement our guys have delivered, given steady 3% pricing. We're pretty darn excited about what those numbers can be when we get higher pricing flowing through.

We are excited about the pricing momentum. When I say that is, it continues to grow. Part of that is just the feel from our customer base. They are more confident in the market. They are more confident in their profitability, which allows pricing momentum for the aggregates business.

Okay. Lastly, I'm wondering if you could touch on the concrete business that you have remaining in the portfolio. Can you talk about the competitive landscape in terms of -- I would think with some of that capacity utilization improving, we should see greater pricing momentum in concrete in areas where your competitors are vertically integrated. Are you seeing that? Are you seeing pricing accelerating further in concrete, where you are vertically integrated?

In the second quarter, we experienced good pricing increases in concrete. We think that as the residential and non-residential, the private sector grows, the margins in our concrete business will continue to grow, just as in aggregates. We're excited about it.

All right. Thank you.

Jack Kasprzak, BB&T Capital Markets.

First question is Illinois you call out for the volume strength there, which I suppose might be a little surprising. What's driving the good volume performance there? Is it just good weather after a tough winter?

Well, good weather always helps, Jack. But what's really driving those volumes is large projects. We've secured and are shipping on a number of large transportation infrastructure projects, and O'Hare Airport projects, which is helping our volumes. But we're starting to see the residential improved in west Chicago. I think that will come on strong in the next six months to the next 18 months.

Okay, thanks. I guess this question might be for John. You made a lot of comments around CapEx and the slight increase there. I know you won't give guidance for CapEx for next year, but do you see more of these types of projects? Do you think CapEx, given a volume recovery, trends up a bit over time? Maybe directionally you have some commentary that might be helpful?

I think directionally, CapEx is not going to trend up substantially over time on a per-ton basis. Obviously we'll raise it as we support higher volumes. But nothing that we see from -- I'm going to call it replacement operating CapEx view -- is changed beyond past experience. I think those trends will continue. We'll continue to have opportunities to invest in growth -- capacity additions, additional reserves, additional distribution facilities. I think we'll have smart opportunities for adding to our portfolio, and for building out our network; but the core CapEx, the core replacement CapEx, those trends, I think, will remain the same.

Okay, because it seemed like the increase -- you were calling out some very specific opportunities, rather than the need to make some broader investment?

Yes, thank you. Sorry, let me be more clear. It's more specific opportunities, than it's any kind of fundamental change.

Got it.

We just wanted to be complete in the guidance, frankly. It is additional capacity in Mexico. It's a rail yard in Savannah. It's some additional land and reserves around things we've recently acquired. It's growth and profit-adding type capital, not any change in our fundamental operating CapEx.

Yes. Okay, got it. Thanks very much, guys. Appreciate it.

Keith Hughes, SunTrust.

Getting back to the truck brokerage revenues you referred to, can you give us any kind of sense of how much that's grown year over year in the second quarter, and how much in the first half?

I think -- let me give you -- I'm going to call them the revenues that are from all of our transportation-related activities -- the revenues in our aggregates segment that are not from direct stone sales. Just to give you a rough sense, those revenues in the quarter -- again, this is the revenues in the segment that aren't from -- that you wouldn't get if you multiplied tons times average selling price. For the quarter, that was on the order of $112 million of revenue. Prior-year quarter that was about $83 million in revenue. About a 35% increase.

A good increase. What would it be for the year? Do you have that?

For the year to date? I don't have it right here, but I could easily get it to you. I think for the six months ended, it's about $192 million of revenue, versus approximately $143 million of revenue in the prior year.

That's close enough. I hear what you're saying.

Again, just to be clear, that's not all trucking. That includes some shipping-related revenue and some other transportation-related revenue.

You've hit what's in the aggregate. That's what the question was about.

Yes.

If we go back several years ago, how much has that revenue grown? In just general sense -- you don't have to give me specific numbers -- how much in a general sense has that grown from pick whatever time. Has it been exponential growth, or is this recent growth we're seeing kind of new?

I think the trucking components of it, as opposed to some of the shipping components, is exponential growth. But again, starting off a very low base. I think what we're focused on is less the revenue growth given the nature of this, and more the incremental gross profit we derive from it. At the end of the day, it increases the gross profit that we receive per each ton that we sell. As Tom said, we've got a good ways to go on that incremental gross profit. We're pleased with the results so far, but we're still in the early stages of this effort.

Okay. Second question, you talked a little bit about the highway bill, with the extension through May of next year. Given that it was another short-term extension, going back to the old days of short-term extensions, what are you hearing from the states as they think about spending for next year, changing their plans at all, or do they just expect it to be longer extended after this May patch is done?

Well, first of all, I don't think we're hearing any negativity from the states based on the extension we've got. That's a pretty substantial extension to May with the $10.8 billion, so that buys them a lot of time. I think we're all cautiously optimistic that Congress will get a bill done in 2015. There is a lot of momentum in the capital for getting a highway bill -- a long-term highway bill with strong funding. You're seeing both parties in support of a long-term bill with more substantial and more solid funding. The states are seeing this also. I don't -- we don't detect any kind of nervous behavior out of the states at this point.

Okay, thank you.

Mike Betts, Jefferies.

I had two questions, if I could, please. The first is on asphalt. It had a great first quarter, not such a good second quarter, which you said was due I think to delayed projects in the west. I'm trying to look at the outlook for the rest of the year. Is it likely to be more like the second quarter with anemic growth with pretty much these big projects delayed, and what has caused those delays, if I could ask please?

Secondly, you mentioned four quarries you acquired in San Francisco Bay area. Can you give us some idea of either the size of investments or size of quarries, what we're looking at there? Were the acquisition costs referred to in the second quarter, were they related to that acquisition? Thank you.

Taking the asphalt first, the jobs are in California. They were state jobs that actually just delayed from the state It's not that we won't do those jobs. We're just not going to be able to have those jobs in 2014. We'll service those jobs in 2015. We're pleased with our asphalt performance over time. It gives us very nice returns. As far as how we see the year going forward, I think our asphalt business will have better quarters than we did in the second quarter. But again, the volume will affect that.

Okay.

The quarries that we purchased in the San Francisco Bay area, there were four operations, two of which were operational. We acquired about 120 million tons of permitted reserves, which as you know is very important and hard to do in California, so we're very pleased with them. It's complementary to our operations in the Bay area, and we look forward to having those operations in the Vulcan family. As far as a price, that's confidential and we could not reveal that.

Understood. Can you reveal the annual production? Is it a couple million tons? Is that the sort of level that you've seeing coming out of those at the moment?

Probably a little under a million tons at this point.

Understood. Thank you very much.

Stanley Elliott, Stifel.

Most of the questions have been answered. Quickly, for the analyst event coming up in September, can you guys give us any sort of high-level thoughts on what investors should expect as we're heading into the event, by chance?

I think as you'd expect, we would like to take advantage just to, frankly, as a new Management team and new leadership team, have a chance to interact with the investment community longer than we can in a call or another meeting. We would also like to lay out what our vision is as a Management team for what the Company can do going forward. You should not expect it to be some dramatic announcement of a strategy shift. That's not it. We would like to tell you where we think the Company can get to in one, three, and five years. That's the kind of discussion you should expect.

Perfect. I'll look forward to hearing about it, and best of luck.

Thank you.

Thank you. Now I would like to turn today's call back over to Tom Hill for some closing remarks.

Thank you very much for your interest in Vulcan Materials Company. We're excited about the markets and the demand going forward. We look forward to seeing you and talking to you in the third quarter. Thank you.

Thank you for your participation on today's conference call. You may now disconnect.