渥肯建材 (VMC) 2014 Q3 法說會逐字稿

Good morning, my name is Bridget and I will be your conference operator today. At this time, I would like to welcome everyone to the Vulcan Materials 2014 third-quarter earnings call.

(Operator Instructions)

Now I would like to turn the call over to Mr. Tom Hill. Mr. Hill, you may begin your conference.

Good morning. Thank you for joining us to discuss our third-quarter 2014 results. I'm Tom Hill, President and Chief Executive Officer of Vulcan Materials Company. Joining me today is John McPherson, Executive Vice President, Chief Financial and Strategy Officer. We are very pleased with our third-quarter results detailed in the press release. We are happy to provide additional color today and spend some time answering your questions. A slide presentation will accompany this webcast and be posted on Company's website at the conclusion of this earnings call.

Before we begin with the actual results and projections, I refer you to slide 2 of our presentation regarding 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 measurements. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures and other related information in our earnings release and at the end of this presentation.

Now, turning to slide 3. We are pleased with our third-quarter results and how we continue the strong conversion of incremental revenues in the growth and earnings. Revenues increased 7%, driven mostly by a 12% increase in aggregate shipments. Excluding revenues in the prior year associated with our divested concrete and cement businesses in Florida, revenues increased 15%. Our earnings leverage on high revenues continues to be excellent. Gross profits and EBIT increased sharply, up 31% and 57% respectively due largely to strong earnings leverage in our aggregates business and flat SAG costs. On a comparable basis, earnings from continuing operations increased 93% to $0.54 per diluted share.

Turning to slide 4, our third-quarter results continue a trend started in recent quarters, as shown in this table of trailing 12-month key figures. Over the past 12 months, aggregate shipments have increased 9% or 13 million tons, still well below normalized demand levels. During this time, we have leveraged a 9% growth in volumes into a 38% increase in gross profit, and a more than 130% increase in EBIT. We believe we are in the early innings of demand recovery. As we continue to execute our sales and operating plans, we remain very focused on continuing the margin expansions you've seen us deliver in recent quarters.

Slide 5 illustrates the volume growth in the quarter. The map depicts the 20 states we currently serve. You can see the geographic breadth of the year-over-year volume growth across our markets. Third-quarter shipments grew 12% in total and 10.5% on a same-store basis. Shipments in Illinois and Texas were up 31% and 21% respectively, due in part to large project work. Other markets including Florida, Georgia, North Carolina, and Virginia reported volume growth between 10% and 15%.

This strong broad-based growth is driven by improving private construction activity and our ability to serve growing demand from large project work in both private and public end markets, particularly large industrial projects along the Gulf Coast. Residential construction activity continues to be solid across our footprint. New lot development is increasing, while the growth rate nationally for housing starts has slowed in recent months, many of our key markets in Georgia, Texas, California, and Florida continue to post above average growth rates. Private, non-residential demand in our markets continues to grow faster than in the rest of the US. This is driven by office, commercial, and manufacturing projects, and by significant growth in construction activity along the Gulf Coast. We are uniquely positioned to serve petrochemical plant expansions and other energy-related major projects.

In the public sector, shipments for highways remained strong due to strong contract awards in 2013, increases in state highway funding, and TIFIA funded projects in key states. Additionally, the extension of the federal highway funding through May 2015, has provided more funding certainty to state departments of transportation. Given the strength of our strategic positions and our sales execution, we expect to keep outpacing the rate of volume growth of the industry overall. Our markets, despite recently reported double-digit shipment increases, remain far below normal levels of demand.

Now let me focus on our success in converting these early gains in demand into expanding margins and profits. To cut straight to the headline, you'll see on the right-hand side of slide 6 our gross profit per ton has increased $0.43 or 12%. Cash gross profit per ton increased to $5.15, a 7% gain over a year ago. Our local management teams are doing a great job of leveraging demand growth into even higher levels of profitability. So how have we done this? It's important to remember that our improving profitability in aggregates isn't driven by average selling price increases alone. At Vulcan, we commonly think of three major profit drivers that must be managed in combination.

These are depicted on the left-hand side of slide 6. First, price for service. Are we receiving full and fair value for the quality of the products and services we provide? Are we helping our customers be successful? And are we getting paid appropriately for that help? Second, operating efficiency and leverage. Are we managing costs tightly everyday? And are we using our assets and capital as well as we can?

Third, sales and production mix. Are we producing what we can sell and selling what we produce? Are we managing inventories responsibly and are we converting each ton that we crush into cash in a reasonable amount of time? We manage these factors locally and align our talent incentives accordingly. This quarter's results again demonstrate the a high quality of work being done by our local teams and their support groups.

Despite a modest 2% or $0.23 gain in average selling price, our gross profit per ton increased 12% or $0.43. As I will touch on in a minute, the rate of growth in average selling prices will increase over future quarters. We already see clear evidence of that momentum. But in the early phase of the recovery when price lags volume gains, it has been very important for us to grow unit margins faster than price. Now this is not a new story for us.

You can see on slide 7 that we have in fact compounded unit profitability faster than pricing since quarterly volumes began growing in the second half of 2013. During the last 12 months, our average unit price has increased 2.7%, or $0.29 per ton. Over that same period, our gross profit per ton has increased 20% or $0.52 per ton. While I am pleased with our performance, let me be clear we are not hitting on all cylinders yet. There's a lot more margin out there. I will refer back to the three profit drivers noted on the prior slide.

On price per service. The expanding margins that we have delivered so far don't reflect the high to mid-single-digit price gains normally associated with cyclical recoveries. These should take hold in 2015. On operating efficiencies and leverage. While our plant managers and their teams have done an excellent job controlling costs, the fact remains that we are operating a capital intensive production business at a 50% to 60% of its capacity. We are well-positioned to further leverage fixed costs sales.

On sales and production mix. We've worked hard to maintain our core production planning and inventory disciplines throughout the downturn. As the recovery continues, and as we see a larger portion of new construction activity, we will sell the entire product mix at full value. As we move forward into recovery, we will continue to manage and balance all three of these factors at the local level, and all three are improving. We are entering this upturn in demand with unit margins close to those that we enjoyed during our last peak, a time when we were producing and selling approximately 150 million more tons than we are today. We are confident in our ability to convert incremental shipments in revenues into expanding profit margins and returns on capital.

Because of our improving margins, we have been able to deliver a very good earnings flow through. Our expanding margins per ton have allowed us to deliver strong flow through to gross profit of incremental freight adjusted revenues in our aggregates business. Slide 8 shows our incremental margin performance thus far in the recovery. By incremental margins, I mean the change in segment gross profit in our aggregates business divided by the change in freight adjusted revenues. With freight adjusted revenues defined simply as average selling price multiplied by tons shipped. This metric reflects the total gross profit generated for each ton shipped without the margin distortions of our pass-through freight revenues.

To improve transparency for investors, we have adjusted our financial statement presentation. This should make it easier for you to prepare our change in segment gross profit to our change in freight adjusted revenues for a given period. For the third quarter, the incremental gross profit margin was 65%, excluding the impact of acquisitions completed in the third quarter of this year. Aggregates gross profit grew $39 million on incremental freight adjusted revenues of $60 million. As reported, and including acquisitions, the incremental margin was 58% or $38 million of incremental gross profit on $66 million of incremental freight adjusted revenues.

As we've mentioned previously, quarterly figures can be distorted by seasonality or one-time costs. For that reason, we are also presenting the same metric calculated on a trailing 12-month basis. As you can see for the trailing 12 months, the incremental gross profit margin was also 65%, adjusted for the same acquisitions. Aggregate gross profit increased approximately $118 million on incremental freight adjusted revenues of $182 million. We have included a table in the appendix of our slide presentation which illustrates how we calculate incremental gross profit margins in our aggregates business. We believe this type of gross profit flow through is an advantage to Vulcan and its shareholders as volumes continue to recover, particularly given our strategic focus on the aggregates business.

Slide 9 highlights some of positive indicators we see in the marketplace. These contribute to our firm confidence and stronger price growth. This is demonstrated by the pricing momentum in key markets where the construction recovery is farther along, and where we are already seeing robust price increases incurring twice a year in some cases. Aggregates volume and price have a lead/lag relationship. Price growth typically follows volume growth but with some delay.

We are now coming into a more normalized pace in the cycle. We are also seeing a return of confidence for sustained recovery and that, coupled with continuing volume growth now for six consecutive quarters, will positively affect pricing power. Finally, we are seeing upward and broad-based pricing trends across our entire geography. These firming prices across the sector include price increases in concrete and cement. Putting it all together, the pricing environment is rapidly improving across all of our markets. We have the makings for robust price growth on top of continuing volume growth and margin expansion.

With that, I would like to turn the call over to John for some comments before taking your questions.

Thanks, Tom, and good morning, everyone. I will touch briefly on our non-aggregates businesses before turning to our full-year outlook and then a summary of our approach to capital allocation through the first nine months of the year.

Starting with slide 10, we will present the results from our asphalt and concrete segments. Earning results in each of these segments improved versus the prior year on higher sales. Asphalt gross profit improved $1 million due to higher margins and earnings from recently completed acquisitions. Asphalt volumes approximated the prior year but were short of expectations due to the delayed start of several large projects in California until 2015. Concrete gross profit was $5 million higher versus a loss of $4 million in the prior year's third quarter. Adjusting for the Company's Florida concrete business sold in the first quarter 2014, unit profitability improved and gross profit increased $3 million. Collectively, reported gross profit for our non-aggregates segments improved $12 million over the prior year quarter.

Now turning to slide 11 and our full-year outlook. Our full-year expectations for earnings growth and margin expansion remain basically in line with our plans, although we will get there in a slightly different way. Aggregates volumes should come in a bit higher than our beginning-of-year expectations. And although our growth in average selling prices for aggregates has been modest, both our per ton margins and our incremental gross profit margins are on line with our internal goals. Our execution in this regard has been very strong, as Tom mentioned.

As just highlighted our gross profits from our non-aggregates segments had been at the low end of our beginning-of-year expectations, due in large part to delays of certain jobs into 2015. As a result, our overall internal guidance for full-year 2015 remains largely unchanged from August when we discussed our second-quarter results. As we often note, fourth-quarter results can be significantly impacted by weather, particularly as we get late into the quarter. Now, before I hit the highlights of our full-year 2014 outlook in a bit more detail, I'd like to just reiterate and emphasize our view that the business has excellent momentum heading into 2015.

The recovery toward more normal levels of demand for our products has a long ways to go that we should be entering our sixth consecutive quarter of meaningful year-over-year growth in shipments. Our unit margins are strong and improving, but are yet to benefit from the accelerating gains in average selling prices that many expect over the coming quarters. And importantly, we have the organizational and financial strength required to invest smartly and growth at this point in the cycle.

I will now walk through slide 11 for a brief summary of our updated full-year outlook. For ease of comparison, the format of this slide is the same as we've used in prior calls. I'll be brief as we have of course touched on most of these items in our press release as well as earlier in this call. Since February, we have increased our outlook for aggregates volumes to reflect stronger demand growth. That stronger demand, combined with strong sales execution, has resulted in our same-store aggregates volumes increasing 9% year to date. Assuming normal weather patterns, we expect volume growth in the fourth quarter of this year to increase mid-to-high single digits relative to last year's strong quarter when weather was unseasonably mild.

For aggregates pricing, we expect full-year pricing to be near the low end of our guidance range of 3% to 5%, with recent pricing actions having more impact on pricing in 2015 as opposed to the fourth quarter of 2014. For our non-aggregates businesses, we've narrowed our gross profit forecast from prior guidance of $40 million to $50 million to the current guidance of $40 million to $45 million, again largely due to the delay of certain asphalt paving projects in 2015.

SAG, excluding acquisition and divestiture related costs, should remain in line with the prior year. We, of course, remain focused on leveraging SAG to revenues as volumes recover. Our interest expense forecast remains unchanged at $165 million to $170 million for the full year. This excludes one-time charges associated with our tender offer completed earlier. Finally, our capital spending outlook remains unchanged at $240 million, that to support improving demand as we look to 2015 and 2016.

I'll conclude now with slide 12 before handing the call back to Tom. On September 30, we announced that we had completed six acquisitions during the third quarter. You see these highlighted on the slide. Because cap allocation is an important area of focus for our Management team at Vulcan, I'd like to take just a minute to place those transactions in the context of our overall approach to that topic so far this year. As noted in our release, Vulcan has generated approximately $890 million in cash year to date from operations and asset sales.

Approximately $719 million of that cash is associated with the sale of our Florida area cement and concrete operations, the most volatile and capital intensive components of our portfolio to Argos. As a reminder, that transaction included a 20-year aggregate supply agreement. Given our aggregates-focused strategy, Argos was a better owner of those assets than we were. And we believe that transaction has been and will continue to be a positive strategic move for both parties.

Now moving to the balance sheet for a moment. Year to date, we've paid down $516 million of debt. Our ratio of total debt to trailing 12-month adjusted EBITDA has improved to approximately 3.6 versus a measure of 5.9 a year ago. Our overall credit outlook is solid and improving. These moves and the other actions we've taken to improve our core profitability put us in an excellent position to make the investments we've made in the third quarter. We are well-positioned, both operationally and financially, to grow our total profits and unit margins, and, where the right opportunities present themselves, to grow our asset base.

Now touching briefly on our third-quarter acquisitions. In total, we invested approximately $320 million in attractive markets with which we are well familiar, as you see again highlighted on slide 12. Approximately $275 million of the investment was cash with the balance being in stock. Collectively, the acquired operation shipped approximately 8 million tons of aggregates in the most recent year, the figure we expect to grow in 2015 and beyond. These transactions added 450 million tons of reserves to our portfolio.

The integration of these operations has moved forward smoothly, a real credit to both our local teams and our shared support groups. The acquired operations will contribute incrementally to earnings in 2014 but should be accretive to EPS in 2015. As Tom has noted, our pipeline of potential bolt-on acquisitions remains very attractive. That said, we will remain disciplined in our approach to these investments maintaining our focus on fundamentally attractive markets where we can establish a number one or number two position.

With that, I will turn the call back over to Tom for our closing comment. Tom?

Thanks, John.

We are pleased with our third-quarter performance and we're looking forward to the months ahead. We are very excited about the opportunities we see. Our recent acquisitions are already performing well. We are excited about the volume growth, pricing momentum, and strong margin expansion we see across our markets. Our operations continue to run with great efficiency and are best-in-class in the industry. I thank our employees for their outstanding performance in these exciting times. I am very proud of our people, and our future looks great.

And now, if the operator will give the required instructions, we will be happy to respond to your questions.

(Operator Instructions)

Your first question comes from the line of Ted Grace with Susquehanna.

Hello, guys. Congratulations on a very strong quarter.

Thanks, Ted.

Tom or John, I was hoping you might be able to touch on 2015 in a little more detail. I know there wasn't kind of explicit guidance. The commentary was encouraging, or is encouraging. You know, one of your big competitors kind of laid out a framework. I was wondering if you might at least speak to an agreement on that?

And that was one that kind of pointed towards infrastructure being up mid singles in 2015, private non-res being up in the high singles, and residential being up in the double-digit range. To the degree you're comfortable just giving us a broad framework, could you maybe start there?

Yes, Ted. Right now, we are in the middle of the planning process for 2015. Let me give you a little bit of how we view it. We are continuing to see, as we stated earlier, lots of pricing momentum, demand continues to grow.

Our employees continue to give us great margin expansion. We continue to focus on those three profit drivers, sales and production mix, price for service, and operating leverage and efficiency, and all three of those continue to improve each month.

Okay. Fair enough.

This is John. The only thing I think we'd add is we do -- we're not ready to give any explicit guidance, obviously, for next year but we do continue to see all LNG segments up for 2015 directionally. I think importantly, as Tom said in his comments, we believe our markets will continue to grow faster than the industry as a whole. We like our geographic mix. They were more depressed than markets as a whole and they're recovering faster than the industry as a whole.

Okay. Fair enough. If I could ask a second. I know at the end of your prepared marks, you touched on the balance sheet, John. And exiting 2013, we had about 5 times leverage and our numbers exit this year at about 2.5 and exiting next year, we have about 2 times debt to EBITDA. So a huge improvement and a lot of strength.

Can you just talk about how you might redeploy that capital? And how you think about whether it's acquisitions or CapEx or buybacks or all the options and kind of where you are at this point?

Sure. First, I'll just say the obvious which is how we think about capital allocation and how we think about returning cash to shareholders, how we think about our capital structure, all really important topics in a business such as ours. We are always evaluating a variety of different options.

I think given the strength of our asset base, we actually have many options. I think what you can count on us for is to have a plan, not just to swing from one latest idea to another. More to the point on your question, I think we are very comfortable with the strength of our credit position and the financial position right now.

I think we have several good options for the redeployment of capital through time. Certainly reinvestment of CapEx into our business to support growth but also to support the margin expansion to which Tom referred. I think we continue to see a pipeline of potentially attractive bolt-on acquisitions of a the nature similar to those that you saw us complete in the third quarter. Always more difficult to kind of predict how those will turn out, though.

And I think you'll see us overtime have a balanced approach to reinvesting in growth and returning cash to shareholders. Now, the exact perform or timing of that return of cash is to be decided later. But I think you will hear us talk about a plan for that approach.

Okay, fair enough. Good luck this quarter. I'll get back in queue.

Thank you.

Your next question comes from the line of Jerry Revich with Goldman Sachs.

Good morning. It's Matt Rybak on behalf of Jerry. To follow-up on the capital deployment discussion. Just wondering, are there any opportunities here going forward to set up an MLP-type structure for a portion of your assets?

I think anybody can see that our aggregates business or some of our product lines likely qualify for MLP treatment. But that said, I kind of come back to my answer to Ted's question which is, we're always evaluating a wide variety of options for improving our capital structure, our capital costs. We think that's a critically important part of our jobs.

Those options could range from the mundane such as the ratio of fixed to floating debt in our portfolio to options such as MLP as it may be a bit different. I think the good thing for us is that we have a lot of options. We are very disciplined in how we look at them, and I think it's the kind of topic you should expect us to talk more about at our investor day, not MLP specifically necessarily, but our approach to the capital structure and cap allocation overall.

Great. And then turning to volumes briefly. I was just wondering if you could maybe say more on the cadence of volumes over the course of the quarter. We've heard that some highway job start dates have been impacted by the highway bill timing. September and October growth sounds like it was much stronger than July and August. Just curious what you've seen on that front?

I think the only highway jobs that we had delayed were in northern California for any significant volume that hurt our asphalt volumes. Other than that, we've seen -- we saw very good highway shipments in the third quarter. We continue to see very large highway jobs start to ship in 2014. Most of those will actually go in 2015, and with those I'm referring to some of the TIFIA jobs like the Grand Parkway in Houston.

We shipped a little bit of that this year and a majority of that will go next year. I-75, 575 in Atlanta, we have 1.2 million tons back load on that job. We will only ship -- we've not even begin shipping. I think we'll start in December and probably ship 40,000 tons in 2014, the balance in 2015, 2016.

So then we've got the I-4 work in Florida, which is 1.7 million tons of concrete rock and probably 2 million tons of base and fill. That job has actually been awarded to the contractors, but the construction materials has not been awarded. If so, we will be sure get part of that, but that will ship the second half of 2015 and 2016. We didn't see any slowdown in the third quarter, but we think it will pick up in 2014 if weather holds but for sure in 2015.

Thank you.

Your next question comes from the line of Kathryn Thompson with Thompson Research.

Thanks for taking my questions today. First on the acquired assets during the quarter. Could you clarify the revenue opportunity for these and what portion are plug-and-play versus others that may require a little bit more work?

Kathryn, I'm sorry. It's Tom. Would you repeat your question?

Yes. On the acquired assets during the quarter, could you clarify the revenue opportunity for these? And what portions are plug-and-play so really don't require as much hand holding versus others that require little bit more work?

So just the understanding that it's not an even margin with all of the acquired assets. It doesn't have to be a specific dollar amount, but just even a rough percentage in terms of understanding how much will require a little bit more work to get up to speed versus others that are really good as a stand-alone right now?

I think if you look at those assets, we had a partial quarter in the third quarter with the assets. They were already profitable in spite accounting for marking up inventories to market levels. We expect all of those are tucked into existing markets except for New Mexico. And the New Mexico market is a very attractive market when it comes to profitability. So we think we will hit the ground running with them in 2015 and they will be accretive in 2015.

Okay. This is more of a Texas policy question. Could you provide any color on the impact of Proposition 1 referendum and what that impact could be for TxDOT if passed? And when would the dollars become available if you have knowledge of that if that referendum does in fact pass.

Yes, it will mean -- it actually -- let's cross our fingers because it's being voted on today. It is $1.7 billion of new funds. It's from the oil and gas taxes paid by the drilling companies from the state's rainy day funds. Knowing how TxDOT works, I would say that they would be, if it passes, they will be available immediately, but probably you won't see that flow through to at the early second half, probably second half of 2015.

Those will be a lot of overlays because this is really driven by the damage to the roads with all the truck traffic with all the big energy plays and drilling in Texas. So I would -- and I don't know this for a fact, but my guess is that those funds -- you would start seeing volumes from that sometime second half of 2015.

Great, and speaking of energy, are you seeing any slowdown in energy markets given the drop in oil prices?

We have not. And it's too early for that, but we continue to see that go very strongly, particularly in the Gulf Coast projects. I think we will ship about 500,000 or 600,000 tons on those jobs on the Gulf Coast in 2014. We'll see another -- I know we have another 2 million that we back logged to ship in 2015.

And there's probably on the books, no, on paper, there's another 10 million tons to be let. Now all of those probably, all of those projects probably won't go, but even if half of them goes, it's a great shot in the arm for us.

Just to clarify. Those are more energy related versus port expansion related to Panama Canal.

That's exactly correct.

Okay.

Kathryn, it's John. Just back on your acquisition question quickly. I think if you looked at collectively, the profitability of those businesses on a unit basis should match or exceed our Company average once we get past the very early integration phase. Again, these are bolt-ons. There's not a tremendous amount of hard work to do to pull them into our business. Our folks are doing a very good job of that already.

Okay. Great. And then final question on volumes. Just any more color on the type of projects you are seeing in Illinois and Texas and what's the tail for these projects from a volume standpoint?

I think that on Texas, we mentioned the Grand Parkway, which is, I think, a total of 1.2 million tons. Of that, we will ship 400,000 or so. We will have shipped 400,000 at the end of 2014. The balance will go in 2015. Again, we've mentioned the energy projects in Texas.

I think that this proposition, you will see a lot of big asphalt work coming up. I believe that will pass. And then you know in Texas, you're just seeing all markets hit, residential, nonresidential, all of them are hitting. In Illinois, we have a number of projects at O'Hare Airport and the widening of I-90 have been two very large projects for us. But again, we are starting to see the residential and the western suburbs of Illinois start to pick up also.

Great. Thank you so much.

Your next question comes from the line of Todd Vencil with Sterne, Agee.

Thanks. Good morning, guys.

Good morning, Todd.

Tom, you mentioned that new lot development is continuing to increase, and I wanted to drill in a little bit on that. How much of the pickup have you guys seen in sort of the lot development as opposed to just you know aggregates to build houses as the recovery is starting to crank on.

It really depends on where you are. In the more mature markets, California, Texas, Florida, parts of North Carolina, and even Georgia, we are starting to see new subdivisions. And those are the places where we are starting to see the pickup. To kind of give you an idea where overall housing, we're seeing up low double digit.

But if you look at specific markets and what demands happen in 2014 with aggregates, we've seen Los Angeles up 23%, San Antonio up 23%, Dallas up 18%, and Nashville, which has been a little bit slower up 12%. Atlanta is already up 15%. And then in Florida, Fort Myers is up 37%, Orlando is up 30%, Charlotte is already up 22%, and Baltimore is up 21%. So in those markets where it's a little farther along, you're starting to see the subdivisions come in, kind of the center of the country, we're still building out lots.

Got it. Got it. Is it safe for me to assume that once you start getting those land development activities in place there a bit, sort of longer tailed and more steady than what might be sort of you know a bit more volatile kind of housing starts driven stuff?

Yes, absolutely.

Okay. Good. Jumping around, looking at Texas. Your volumes were up significantly in Texas. You didn't mention that as an influence on the average price. What does your price in Texas look like relative to the average?

Now Texas is -- the pricing has jumped already. It will -- we don't give specific pricing, but let me just give you an example on that. Depending on the market in Texas, in October we secured between $1 and $2 of price increase. We will see another price increase in April of between $1 and $2 depending on the market.

So you can tell that where the markets -- we talked about where the market recovery is more mature, we are seeing big price increases and in some of those markets, we're sing price increases every six months instead of every 12 months.

Is that across the whole state?

Yes.

Okay. That's great.

(multiple speakers) Across all states. Each one of those markets is different, but all of them have sharp price increases and they all have a lot of momentum.

Got it. Makes sense. And without trying to pin you down, would your average Texas price in the third quarter, was it above or below average?

It's well above.

Okay, good, good.

Todd, you mean Company average?

Yes.

I'm sorry. I thought you meant price increase percentage.

No. I'm sorry. Yes. Just absolute price versus the Company average price.

I think, Todd, back to not pinning us down. I think it would've been offset elsewhere by other volume changes. So the geographic exception for pricing for us for the quarter was really Illinois related.

Got it.

I think that's the best way to look at it.

Got it. And then final one for me right now. Just looking at that slide 5 where you sort of go state-by-state on the volume increases. Poor old South Carolina is the one that jumps out as being the only one that's not green. Anything particular happen there?

Yes. The guys in South Carolina are probably listening to this call hanging their heads. It was only down 2% and the impact was not so much demand. It was the fact that we had some very large project work last year that we don't have this year.

Got it. Perfect. Thanks so much.

And your next question comes from the line of Robert Wetenhall with RBC Capital Markets.

Hello, guys. Good morning, and congrats on a very strong quarter. I wanted to ask Tom, maybe if you could provide some color. You're doing $3.93 gross profit per ton, up 12% year over year. How should we think about that going forward? And I just wanted to get a deeper understanding. You were talking about price for service. And it sounds like you have some good pricing power, expect to see that in 2015. Does that imply that your 60% incremental margin can actually move higher if you realize that price?

I think on average we stick to the 60%. Obviously, price increases will help that, and obviously we are operating at 50% to 60% of our production -- our peak production. The operating leverage in the plants continues to get bigger. But I think over time, it will shoot up and come back down, but over time I think the 60% is probably in line with what our expectations are.

I think the take away, Bob, is we have a long ways to go in the margin expansion deposit flow through. That story is still just like the volume story, it's still in its early innings.

Okay. But you're doing kind of margins consistent with where you were at 150 million more tons. So it seems like you've taken a lot of cost out of the system. And I'm just trying to figure out how to think about profitability and assuming your volume strength continues into 2015.

I think you're asking the right question. I'd encourage you keeping profitability at a per ton basis, and that's the way we present our financial statements. And that per ton profitability will of course be affected by pricing through time which we're focused on every day, and we have some tailwinds there that will be affected by operating leverage and operating efficiency, their plant level, and it's of course, affected by a healthier product mix through time.

I think all of those three things we still have a long ways to go on, and our take away is that despite being, if you will, near previous high levels of unit profitability, we are nowhere near a cap or ceiling.

Got it. And then when you're talking about the sales and production mix, what's the opportunity look like they're from a mix standpoint if you get better demand across the product line?

With new construction, you will see the increase in sales for fines and base, which just allows us to sell the complete product split, and it just -- while those are low-priced, they're very high margin and they fill up our hand in selling the complete product line.

Okay. And then --

We saw little bit of that in the current quarter. Our product mix hurt our average selling price but we still drove significant improving margin per ton. That was one of the factors in this quarter.

Yes, it's just tough to grasp externally a little bit, just because of the moving pieces. John, just also wanted to understand on your guidance for 7% to 9%. On that 7% to 9%, what's the contribution from the recent acquisitions? Is that like a point or a half point?

If you're talking about the volume guidance? Is that right, Bob?

That's correct.

I would think a high end of that range on a same-store basis, excluding impact of acquisitions for the year.

So what percentage in the 7% to 9% should we attribute acquisitions?

Zero.

Zero, so it's negligible. Great quarter, guys. Good luck. Thanks very much.

Thank you.

Your next question comes from Keith Hughes with SunTrust.

Thank you. Just a question on transport costs. It's been in the news here. Is there any impact in the quarter or any impact in the future on (technical difficulty).

Keith, we can't quite hear you.

I'm sorry. The question's on transport costs. Just was there any transport cost impact in the quarter and should we expect any in near-term quarters?

We didn't see any impacts from transportation costs, rail, barge, or ship. In fact, rail was flat for the quarter. I think barges were relatively flat.

Keith, the way we present our financials and freight adjusted pricing and the way we flow that through, you wouldn't expect to have a significant impact for us when we report our financials.

Okay. But from a cash perspective though no impact in the period outside of your expectations.

No impact. Year over year, no impact.

Okay. Secondly, looking at -- of course, we have another temporary highway bill taking us through the spring. Any new views there, your trade groups, things along the (inaudible)?

Well, we continue to see growing bipartisan commitment for infrastructure. Last month, Senator Boehner urged President Obama to work with Congress in 2015 for both tax reform and a multi-year transportation bill. Leadership in both parties want to find funding solutions and all of them are tired of going back to the general fund and getting embarrassed about it.

Last week, we did have House Majority Leader Kevin McCarthy tour our Chula Vista operation in San Diego. And while he was there, he stressed congressional leadership's intention to get a highway bill passed in 2015. So we continue to see momentum behind it. I wouldn't expected it in the lame-duck session, but we have got our fingers crossed it will happen in 2015.

Does a Republic Senate help you or hurt you towards that goal, or do you know?

I think, like I said, we're seeing bipartisan commitment and I'm not sure it helps or hurts us because they all want to fix the problem.

Okay. Thank you.

Your next question comes from line of Trey Grooms with Stephens.

Good morning. Just a couple of questions left for me. One, you talk about the M&A environment and you said some potentially attractive acquisitions. Can you talk about just kind of the valuations and how those are looking out in the market now versus what you've seen over the last few years? Are people starting to get a little bit more rational? Just any color you can give us on that please.

Sure. There's a lot of activity out there and we see a lot of opportunities. With that activity, there's a lot of them that are very unattractive. There are some that -- you know, there are a lot of them that we're looking at for our footprint that make a lot of sense for us. I think they're fair deals. And I think there are also acquisitions that we can improve dramatically by fitting them in our family. But it is busy, and there's some great stuff out there. There's also some junk.

Okay. That's fair. I guess just on the valuation front, you've got some junk and some others that are attractive. I guess those are being priced accordingly then.

I think, you know, Trey, I think that a lot of this comes down to a lot of the reasons were focused on bolt-ons are the synergies you bring to a transaction, which typically we don't pay for in a deal. And I think if -- we're not going to get into the valuations of individual deals we've done. If you looked at them all collectively, again in the most recent year producing 8 million times roughly. That has a lot of growth behind it, at or above our per ton profitability as a company.

You can kind of draw your own estimates for valuation collectively. Again, individual deals vary. But I think what really drives it from our point of view and we are very, very focused on is obviously the synergies and the rest of our market positions.

Okay, that's fair enough.

That's what makes it go from, you know, good deals to very good deals, and a lot of what will drive the accretion in the next year for us.

Got you. And then Tom, you mentioned you touched briefly on some of these bigger energy programs down there, jobs that are being done over the next few years in the Gulf. What is, if you kind of look at that market, I know Texas overall is priced lower. But that market specifically, is that a higher-priced market than Texas overall? And kind of how do we think of that from a profitability standpoint since that is one of your long-haul markets?

It is a very profitable business for us. The pricing has very much improved over the last 18 months. But it also, you've got to remember we are in the unique position to service those out of Mexico. So we have a dramatic freight advantage which improves our profitability to service those markets.

That make sense. And then last one is kind of housekeeping here. You know with the pullback in oil and just trying to get a sense for any kind of benefits you guys may see going forward, how much diesel are you guys using in your quarries now, kind of post some of the recent acquisitions and divestitures and how that has moved?

I think one way to look at diesel may be to look at it on what happens to the per gallon cost of diesel because it's -- we've got diesel cost in quarries, we have it in asphalt, we have it in Redi Mix. But right now, a dime movement per gallon of diesel would mean about $4.5 million for us annually.

Great. Thanks for the color. And congrats on a good quarter.

Thank you.

Your next question comes from the line of Stanley Elliott with Stifel.

Hello. Thank you for taking my questions. Congratulations as well. Quick question on the M&A environment. Do you expect to see more -- I guess there's more some of the private smaller type transactions out there. Do you expect to see a more downstream assets like what you picked up in New Mexico as part of the deal on a go forward basis?

Every one of those is different, and our focus is aggregates. We don't have any interest in picking up downstream unless it has aggregates attached to it. When you look at those, some of those markets that have the downstream business attached to them, those downstream businesses are very profitable. And if they are and we run them with a good return, we'll keep them. If not, we will keep the aggregates and sell the downstream product lines.

Perfect. And then I apologize if I missed it. But on slide 6, you highlighted the three profit drivers. Is there a way to rank order them from most contribution out of those three?

I'd say no. I think the point is that you have to balance these and manage them in combination. I think just the very heart of the business is you can't rank order them. You've got to make trade-offs at a local level between these factors.

I would agree with that. I would also tell you that as the volumes come back and demand comes back in new construction, the balance between those three gets a whole lot better and as so, our unit margins improve.

Very good guys. Thank you very much.

We have reached our allotted time for questions. I would now like to turn the call back over to Tom Hill for closing remarks.

Thank you for your interest in Vulcan Materials Company, and we look forward to speaking to you during our next earnings call. Have a good day.

Thank you. This does conclude today's conference call. You may now disconnect your line.