渥肯建材 (VMC) 2014 Q4 法說會逐字稿

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

(Operator Instructions)

Mr. Tom Hill, President and CEO of Vulcan Materials Company, you may begin your conference.

Good morning. Thank you for joining us to discuss our fourth-quarter 2014 results. I'm Tom Hill, President and Chief Executive Officer of Vulcan. Joining me today is John McPherson, Executive Vice President, Chief Financial and Strategy Officer. A slide presentation will accompany this webcast and be posted on the Company's website at the conclusion of this earnings call.

Before we begin the actual results and projections, I refer you to slide 2 of our presentation regarding forward-looking statements, which are subject to risk and uncertainties. Descriptions of these 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.

Before we get into details today, I'd like to speak to you about some things that are immensely important to me and our management team. We executed well in 2014, particularly in the fourth quarter, and I am proud of our people and the job they did. But we are focused on the future. When I think about the job our people will need to do in 2015, three words come to mind -- momentum, execution, and discipline.

Momentum -- we are seeing accelerated momentum and demand throughout our markets. Demand in the fourth-quarter exceeded our expectations, despite our California business being waterlogged. And recall that we are comparing against a strong fourth quarter in 2013. There is accelerating pricing momentum in many of our markets, and we are going to reap the benefits of that momentum. The momentum that we've seen thus far will carry forward through 2015, and likely well beyond, and we are going to take every advantage of it.

Execution -- our teams throughout the Company are executing very well. We are pleased with the results detailed in today's press release. And these outcomes directly reflect the great efforts of our people at all levels of the business. In particular, I'm proud of how our local businesses have continued to convert incremental revenues into incremental gross profit. We are servicing our customers well, and helping them grow, while operating our business safely and efficiently.

Despite only modest gains in pricing so far, our people are making the most of this initial phase of recovery. They have set the stage for even stronger performance ahead. My personal focus in 2015, and the focus of our management teams, will be on pricing improvements, margin expansion, smart uses of capital, and safety.

Discipline -- we are very well aware that now is the time for continued discipline, not congratulations or complacency. Our people will continue to show great discipline in the delivery of quality products and services to our customers, safely and efficiently. And we will emphasize continued discipline in how we deploy capital and in how we pursue price and margin improvement. We will be highly focused in 2015 on accelerating gains in pricing for our core Aggregates business so that we earn a fair and full return on the significant investments that we have made in our business.

We have made progress, but we are not where we need to be. It is also paramount that we continue our disciplined performance and operational excellence in cost control. We will remain extremely disciplined in our use of capital, deploying it to further build on our strategic base of world-class assets while improving our balance sheet and our return on shareholders' capital. The momentum, execution, and discipline that were hallmarks of 2014 will be our watchwords as we build an ever-stronger business in 2015.

Now, let's move on to the rest of the call. You'll see that many of these slides line up with those used in our third-quarter call, in large part because our focus on driving improved margins and fully capitalizing on the recovery and demand has not changed. The results on slide 4 demonstrate the quality of our fourth-quarter execution and how we continue the strong conversion of incremental revenues into growth and earnings.

Adjusted EBITDA was $172 million, a 32% increase. We achieved these results despite a temporary rise in SAG costs as a result of business development and performance-based incentives. Our underlying profitability continued to improve significantly, whether measured by margin percentage or per-unit profit. Earnings per share for the quarter were $0.29, including $0.02 for business develop expenses and restructuring costs.

On slide 5, you can see that our fourth-quarter results continued the trend in recent quarters. Looking at full-year results, we have seen a 38% gain in gross profit on an 8% gain in revenues. That significant increase is due to margin discipline, particularly in our core aggregates business and the positive impact of the divestiture of our lower margin concrete and cement businesses in Florida.

SAG was up, due to the items just mentioned. You will see later that we forecast a decline in SAG going forward. Adjusted EBIT nearly doubled for the year, and adjusted EBITDA was up handsomely. For the year, adjusted earnings per share were $0.91. Including the Florida divestiture and debt tender offer, earnings per share were $1.56.

Now, turning to our core Aggregates segment. Slide 6 tells the story of volume growth across Vulcan's footprint in 2014. This growing momentum is driven by strengthening private construction activity across all end-use markets and an increasing number of large projects, along with increasing highway demand. These trends gained further momentum in the fourth quarter, with shipments growing 15% in total and 12% on a same-store basis, even with the impact of bad weather in California and Georgia.

For the full-year, Florida, Georgia, Illinois, Texas, and Virginia saw shipments increase by more than 10% on a same-store basis. Aggregate shipments in California and North Carolina also realized solid growth. Shipments in Alabama and South Carolina were down slightly, with slower recovery in construction activity in these states.

Now, let's talk about how we are converting this momentum and these early gains in demand into expanding margins and profits. Last quarter, we discussed the three major profit drivers that we can focus on. As you can see on the right-hand side of slide 7, our industry-leading gross profit per ton increased $0.66 in spite of a modest overall price improvement of $0.21 per ton. Cash gross profit per ton increased to $5.18, an 11% gain over a year ago. Our local management teams are doing an outstanding job of turning demand growth into even higher levels of profitability by managing the mix of price, operating efficiencies, sales, and products.

This is not a new story for us. As you can see on slide 8, we have compounded unit profitability faster than pricing for the last six quarters. During the last 12 months, our freight-adjusted average unit price has increased 2%, or $0.25 per ton. Over that same period, our gross profit per ton has increased 18%, or $0.52 per ton. Excluding our 2014 acquisitions, trailing 12-month gross profit per ton was up $0.56, or 20%. This is a higher figure than when these operations were producing twice the volume. We are completely focused on ensuring that our unit margins continue to grow.

In speaking to you last quarter about our incremental margin leverage, we discussed our best-in-class incremental flow-through that we enjoy with volume growth. Slide 9 depicts incremental margin performance in our Aggregates segment. As you can see, incremental gross profit margin for the fourth quarter was 79%, excluding the impact of acquisitions completed during the year. Aggregates gross profit grew $45 million on incremental freight-adjusted revenues of $57 million. Including the impact of acquisitions, the incremental margin was 65%, reduced through acquisition accounting.

Since quarterly figures can be distorted by seasonality or one-time costs, we are also presenting the same metric calculated on a trailing 12-month basis. We'd encourage you to focus on these numbers. For the trailing 12 months ending this quarter, incremental gross profit margin was 66%, adjusted for the same acquisitions. Aggregates gross profit increased approximately $132 million on incremental freight-adjusted revenues of $201 million. Given our strategic focus on the aggregates business, our gross profit flow-through is an advantage to Vulcan as volumes continue to recover.

Slide 10 highlights our asphalt and concrete results for the fourth quarter and full year. Earnings results in each of these segments improved versus the prior year on higher sales. Asphalt gross profit for the full year improved $5 million, due to higher margins and earnings from existing operations, and from the acquisitions in Arizona and New Mexico. On a same-store basis, asphalt volumes increased 4% from the prior year and unit profitability increased 6%, driving a same-store gross profit improvement of $3 million.

Full-year concrete gross profits were $2 million versus a loss of $25 million in the prior year. Excluding the Company's divested Concrete business, unit profitability improved and gross profit increased $6 million.

With that, I'd like to turn the call over to John for some comments on capital allocation and our outlook. John?

Thanks, Tom. In our last earnings release and call, we placed emphasis on capital allocation, particularly with a view toward putting the recent acquisitions we made in the context of our overall approach and plans. The topic of capital allocation remains, obviously, a critical area focus for our management team. And, with that in mind, I'd like to now use slide 11 to recap our actions during 2014, update you on a transaction we closed last week, and highlight the goals and options we have in front of us.

As you know, in early 2014 we successfully divested of our Florida area cement and ready-mixed concrete operations to Argos. Given our aggregates-focused strategy, Argos was a better owner of those assets than we were. As a reminder, our divested cement and concrete operations were among the most volatile and capital-intensive businesses in our portfolio. We remain very pleased with that transaction, and it has positioned us very well for Florida's continued recovery in construction activity.

Also during 2014, we further strengthened both our balance sheet and our core profitability. Our ratio of total debt to trailing 12-month EBITDA has improved to approximately 3.3 versus 5.4 a year ago, and it should decline further with continued EBITDA growth in 2015. As Tom has noted, our core profitability, as measured by the cash gross profit we generate for each ton of aggregate shipped, improved another 9%, compounding prior year gains, and we expect it to improve further moving forward. As I'll touch on in a minute, we expect same-store shipments to grow approximately 8% in 2015 as our recovery in construction activity progresses.

We are very comfortable with our credit position and how it is improving toward our stated investment grade targets. We spent $225 million on CapEx, excluding M&A, during 2014. This capital deployment not only maintains our physical plant but also improves our efficiencies and ability to meet our customers' needs. We have now returned to more normal levels of what we call maintenance and enhancement CapEx, and we expect this use of capital to grow more in line with shipments, moving forward.

In 2014, we deployed $332 million of capital for targeted acquisitions that strengthen our asset base, now and for years to come. We've made good progress with the integration of the seven acquisitions we made during the year, and we expect these operations in total to contribute approximately $50 million to our EBITDA in 2015. And, as we indicated we would, we began the process of growing our dividend as we grow earnings.

Each of these actions contributed to the current and long-term value of our Company. Equally importantly, they collectively improved our flexibility and optionality moving forward. As we look to 2015 and beyond, we believe we are well positioned to sustain our capital reinvestment in our current asset base, to recover and maintain an investment grade credit position, to accelerate the return of capital to our shareholders, and to prudently pursue attractive bolt-on acquisitions.

To be clear, we will also consider additional asset divestitures and swaps. We believe it is important for us and for others in our industry to challenge ourselves regarding whether we are the best owner of our individual assets and operations. This logic supported our 2014 transaction with Argos, and it underpins a much smaller transaction we closed in late January.

As noted in our earnings release, we recently concluded an asset swap with CEMEX, under which we've exchanged our Southern California ready-mix concrete operations for 13 asphalt plants, primarily in Arizona. Under the agreement, we will continue to supply aggregates to the exchange concrete operations. Given as operations and strategic focus in these markets, each party should be able to earn a higher return on the exchanged assets than the prior owner. This exchange will be immediately accretive to Vulcan and it's expected impact is incorporated into our 2015 projections.

Now, let me turn to our outlook for 2015 before handing the call back to Tom. I'll begin on slide 12, with an overview of our outlook for demand for aggregates in the markets we serve. The headline here is that we see another year of high single-digit demand growth as recovery toward normal levels of construction activity continues. The pattern of recovery is increasingly broad based, as we see growth in each of our primary end-use segments and in the clear majority of our geographies. And from what we can see, demand in Vulcan-served markets should continue to grow faster than the US as a whole.

We certainly cannot predict the future, but we currently anticipate a gradual recovery lasting several more years before we return to aggregates consumption levels consistent with long-term trends. As you can see on the slide, we see aggregates demand from private end uses up 14% to 18% during 2015. The growth in our fourth-quarter sales to these end uses reflects the strong underlying momentum. Private growth continues to be driven by the recovery in employment and the continued recovery in single and multifamily housing.

We see demand from public end uses in our markets at 3% to 5% during 2015. Construction award momentum remains positive and stable in Vulcan markets; the South and West continue to see more growth than other areas of the US; and as state and local tax revenues approach all-time highs, they should provide the support for new public infrastructure funding. Our 2015 outlook for these end-use markets, although tailored to our specific mix of geographies, does not vary significantly from the consensus of external industry observers.

And, finally, I'll note that we have not significantly altered our 2015 demand forecast to account for recent declines in oil prices, the status of Federal Highway Bill negotiations, or shifting predictions regarding interest rates and credit availability. Certainly these factors introduce a degree of uncertainty. But, at this point, we see a continuation of the momentum witnessed over the past six quarters. As always, we'll monitor actual local demand patterns throughout the year and respond accordingly.

I'll turn now to slide 13 for a summary of our full-year outlook. I'll be brief, as we've touched on many of these items in our press release as well as earlier in this call. We are, for 2015, giving a range for adjusted EBITDA, excluding any gains associated with the sale of property, of between $775 million and $825 million.

I'll touch now on certain of the assumptions underpinning that EBITDA projection. We currently project 2015 aggregates shipments of approximately 180 million tons, consistent with the demand outlook I just highlighted as well as with continued strong sales and customer service execution at the local level. On a same-store basis, excluding the impact of acquisitions made in 2014, we project shipments to be up 8% over the prior year.

We currently expect average aggregates selling prices on a freight-adjusted basis to be up 6% over the prior year. As a reminder, our pricing decisions are made locally and outcomes will vary significantly by geography and at different points in the year. But, as Tom noted earlier in this call, as well as in our prior call, we've seen the pricing environment continue to improve with the recovery and demand. And we remain intensively focused on earning a full and fair return on the investments we've made to serve our customers.

We expect total gross profit for the Aggregates segment to be approximately $735 million. Margins per ton should expand further as we work not only to achieve higher pricing but also to leverage fixed cost and maintain strong production efficiencies and cost controls. Over the course of the full year, the flow-through of incremental freight-adjusted revenue, the segment gross profit, should remain consistent with recent trend, although, as we've said, results will fluctuate quarter to quarter.

For our non-aggregate business segments, we expect gross profit of approximately $70 million in total. This projection reflects the impact of the asset swap I mentioned previously and includes approximately $50 million in gross profit from our asphalt operations, approximately $17 million in gross profit from our concrete operations, and approximately $3 million in gross profit from our calcium business. Please note that the actual material margins and gross profit margins from these downstream businesses can vary substantially at the local market level and throughout the year.

SAG expenses, excluding acquisition and divestiture-related costs and other items, should be approximately $265 million in 2015. We remain very focused on leveraging SAG to revenues as volumes recover. We expect DD&A for 2015 to be approximately $270 million, as compared to $279 million in 2014. And we currently plan to spend $250 million for maintenance and enhancement capital in 2015, excluding our capital spending for acquisitions or significant expansion of our distribution and logistics capabilities.

Now, a couple of final notes before handing the call back to Tom. First, I should remind everyone that the projections I just noted are certainly subject to revision throughout the year. While we believe our visibility to demand has been improving as we get further into the early stages of recovery, there certainly remains some uncertainty in the macro environment, whether due to oil prices, federal and state transportation funding decisions, or other factors. That said, our focus remains on making the most of whatever recovery scenario we are presented with.

Second, I'll note that our profit projections do not necessarily account for the full production cost benefits we may realize if diesel prices were to remain at current levels throughout the year. Our production budgets are built bottom up, plant by plant, and our operators remain focused -- as of course they should be -- on the efficiencies within their control. We'll do our best to note the impact of shifting energy costs on our business as the year unfolds.

With that, I'll turn the call back over to Tom for a closing comment.

Thanks, John. We are pleased with our fourth-quarter performance. But our eyes are on what's in front of us. Last year, we put down a solid foundation. Now, we will build on it. We are going to be highly focused on superior execution of the business -- price improvement, lowering costs, margin growth, and capital discipline. The momentum that we found so encouraging in 2014, and that was so apparent by our fourth-quarter results, will only continue to grow. Along with accelerating demand growth, we're going to see accelerating momentum in our ability to secure price improvements and in our ability to continue executing on our first-class operational discipline -- controlling and lowering costs.

We fully recognize the importance of executing on price and operational discipline to give our shareholders a superior return on capital. And, as I said earlier, we will continue to be extremely disciplined in our allocation of capital. Regardless of what the markets may do, we will stay focused on the things that we control, executing on price improvement and margin expansion.

We'll also remain focused on servicing our customers so they continue to reap value from the relationships with us. Working together, we will win. I'm excited about our Company and its future, and I look forward to continuing to report to you as we keep growing and succeeding in the years ahead.

Now, if the operator will give the required instructions, we'll be happy to respond to your questions.

(Operator Instructions)

Keith Hughes, SunTrust

Thank you. I understood your comments here about not predicting the change in diesel but obviously, it's in the news. I have two questions around that. If you could give us a rough idea in 2014 how much in diesel fuel you used?

And then question two, if prices do stay down throughout this year, will that affect the price of aggregates in the market as the year progresses?

I'm sorry, would you repeat your first question?

First question, if you could give us a rough number of how much diesel fuel you used in 2014, gallons or something along those lines?

Total gallons we used in 2014 was just over 44 million gallons.

Okay, and if we see the prices down the way they are now for the rest of the year, will that have a negative effect on aggregate pricing just around the shipping costs?

No. It won't have any effect on pricing. We've got a lot of pricing momentum. We do not price on cost. It's market driven and the value of our products and the services to our customers so the price of oil won't have an impact on the price of aggregates

And Keith, it's John. Also keep in mind we report freight adjusted pricing so the impact of diesel and shipping costs won't show up in our freight adjusted pricing.

I guess what I'm getting towards is this could be clearly a big benefit for you this year if it stays down. Would all that benefit accrue to the bottom line or would there be some give back whether it's around driver cost or anything like that?

I don't see any place we give back cost savings on fuel. I think when it comes to fuel what we concentrate on are the things we can control which is using our procurement and management systems to buy fuel at the most competitive price as we can. And then we monitor fuel usage at every location, over 300 locations, we manage the tons per gallon of fuel we use to make sure our equipment -- we're operating our equipment as fuel efficiently as we possibly can.

Okay, final question. On slide 6, you have Texas as one of your really good markets here in 2014. We all know the questions around that. Can you give us any sort of scale for what Texas represents?

First of all, we sell very little directly to the oil patch in Texas so the immediate impact we're not going to see any. There is a lot of momentum in Texas residential nonresidential. Texas just past a prop one which was an additional $1.8 billion to the Highway funding which is also right in our wheelhouse because a lot of that's focused on rural markets where we operate. We just think there's a lot of momentum there at this point. We don't see anything happening for two or three quarters after that. I'm not sure we want to predict it but there's a lot of folks out there predicting that.

Okay, thank you.

Keith, quickly back to your first question on diesel and impacts on aggregates pricing. Just a reminder that diesel is a relatively small portion of our total production cost. 7%. Our biggest costs in our product is the stone, the assets, the quarries we own and we price to earn a return on that. So, minor fluctuations up and down in 7% of our cost isn't going to affect our pricing strategy.

All right. Thank you.

Kathryn Thompson, Thompson Research Group

Good morning. Thank you for taking my questions today. I appreciate your color on the 11% volume growth for 2015. How much of a rough estimate, how much of the 180 million tons projected for next year are contributed from acquisitions?

I think that's -- Hold on. I'll get that number for you. I believe that's between 7 million and 8 million tons.

Without acquisitions we'd be sort of in the 173-ish range, roughly. Where we've done bolt-on acquisitions there's a little bit of art to what volume comes from the acquired asset versus what comes from other quarries in the same market. But roughly speaking, I'd put you back to the 8% same store growth rate.

Okay, great. You talk about return on invested capital in your earnings release. What is your bogey for return on capital and what other mechanisms above and beyond dividends are on the table to return value to shareholders?

To your first question I don't know that we're going to give you a specific bogey. I'd underscore that our focus both now and long-term is to earn a fair and full return on the full asset base. And particularly because we've made those billions of dollars of investment on behalf of our customers to serve them well. And so while we're pleased with our current results and pleased with the margin expansion and pleased with the outlook for 2015, there's further to go on that. Much further to go. And your second question was actions to accelerate? What was it Kathryn?

What other mechanisms above and beyond dividends are on the table at least to return value to shareholders?

I'm not going to specify on that -- we're going to specify any of that. That's really a Board decision but I think we'd be open to and have in the past as a Company deployed several mechanisms. So we'll have to think about that keeping the cycle in mind. But I think we're committed to accelerating that return of capital over time.

Back to the fundamentals on some of the volumes that were impacted by weather or other project delays. How do they stand now and how should we think about modeling down into 2015?

Those volumes are in our 2015 numbers. We knew that the projects in California were going to be postponed in the third quarter and they're included in our 2015 outlook.

Okay, my final question. I know that you don't have a significant amount of volume that go specifically into the oil industry or the energy industry but have you taken a stab at quantifying your best estimate of what percentage of your volumes specifically go to the energy industry?

Well, as I said earlier, very little goes directly into the oil patch. We'll ship over two million tons to large coastal energy projects in 2015. Those jobs are underway or getting underway. They won't be postponed. There's a few jobs that have not -- there's a few projects on the coast that we're hearing rumors of delay but they would not hit until 2016 or 2017 anyway.

Okay, great. Thank you for taking my questions today.

Thank you.

Trey Grooms, Stephens

Hey, good morning, guys. Quick question on the mix impact on price? And my call dropped off for a second so forgive me if you guys did touch on this. But is that largely behind you guys or is there any anticipation that could creep into Q1 or any other period for that matter?

Well, I think the mix issue was we sold big projects up and down the Mississippi River and in Illinois. While those were at lower prices there were very good volumes. I think the fourth quarter headline pricing belies the pricing momentum that we're seeing across our footprint.

If you kind of step back and look at pricing in the fourth quarter on a market by market basis and we look at the markets where we're seeing higher growth or the recovery's a little more mature. And I'll read these off to you. We're seeing price increases in the fourth quarter 7.8%, 6.5%, increase of 5.8%, 5.7%, 4.8%, 4.6%.

Now, offsetting that in some of the markets where the recovery is not as far along or where we sold some big basin finds job, we've seen price increases in the fourth quarter of 2%, flat, flat, minus 1%, or minus 1.4%. And that's not all bad because if you look at the margin expansion across that same footprint, we're seeing nice margin expansion in almost all of our markets.

As far as pricing going into 2015 there's a lot -- we're confident that the conditions and the momentum's there for good price increases. I'm focused on it. I think our team is focused on it and we're secure about our pricing outlook for 2015.

Great, that's helpful, Tom. Thank you. And then my second question is, a lot of talk obviously around infrastructure funding. The President's budget proposal called for an increase there again. I think the current bill expires in May if I'm not mistaken.

What are you guys looking for? I know you guys are pretty in tune with what's going on in Washington, what's being getting kicked around. But what are you guys looking for if you were to take a best guess on how things shake out in May? And then as we kind of look into 2015, any hopes for some type of a longer term bill?

We're seeing a lot of positive momentum for a new highway bill. Leadership of both parties stated their intention to pass a well-funded bill. The timing of that's not clear. It may be difficult to get a bill by May but and we may need an extension.

But Congress has shown over and over again that they're going to fund the highway program and so extension may have to happen and it probably they will. The lack of a highway bill is not going to hurt us. The highway bill is not in our outlook. It can only help us and we think there's a reasonably good chance of getting a bill in 2015.

So then, with your assumptions and guidance, I think you said public is going to be up 3% to 5%. It sounds like you're going under the assumption that it won't be a new highway bill in that. But what's driving the 3% to 5% in a flat kind of funding environment that's in your guys' guidance?

That's a good question. If you look at our -- we've got a number of very large jobs that we'll be supplying in 2015; the Grand Parkway in Houston 575, I-75 and 575 in Atlanta. So there are number of very large jobs across our footprint that we started in 2014 and will really kicking in 2015. But there's some other pieces of that.

We've got six TIFIA jobs that will ship in 2015 be North of two million tons in 2015 for those jobs. So you are starting to see the TIFIA program really mature from people talking about jobs or planning jobs to actually shipping materials on them. And then we've seen a number of state highways increase their funding.

In Florida, Governor Scott announced $10 billion highway funding bill for this coming year. Texas, as I mentioned earlier, passed prop one which is additional $1.8 billion. We've gotten more funding in Virginia. Georgia has got a proposal for an increase of $1 billion. So the state funding is up on top of all that.

So, Trey, one thing I'd to point out on all that is that our funding environment in our state and our markets is not flat. When you look at the TIFIA projects, when you look at the rises in state and local funding, when you look at the rises in the deployment of that funding to projects, our markets have funding increases consistent with our 3% to 5% outlook for our markets.

All right. That's all very helpful. Thanks for the color guys and good luck.

Thank you.

Bob Wetenhall, RBC Capital Markets

First off, great quarter. That was very impressive both in terms of the revenue performance and profitability. Slide 8 caught my eye. You have a big improvement in rolling gross profit per ton on a 12 month basis and I was hoping one of you gentlemen could kind of see that you posted $3.35 a ton. Where can that go to in 2015 given the demand profile in the initiatives?

I think we expect to see two things. We'd expect to see our incremental margin and incremental revenue freight adjusted revenue in our aggregates segment to remain consistent with past trend for the next year. And along with that I'd think you see similar increases in unit profitability.

I come back to the point about earning a return on capital over time. We have quite a long ways to go in terms of margin performance to tie back to the kind of returns on capital we'd like to see. So not only do we have room in 2015 I think we have room for a very long time.

You can go on a gross profit basis next year, I think if you work through the math, I think north of $4 on a trailing 12 month basis is sort of within our sites. And that's on a gross profit basis and on a cash basis you could see north of $5.25.

Keep in mind that our current levels of profitability, as Tom mentioned, on a unit basis are higher than they've been at the past while we're still operating it a little more than half the volumes we produced in the past. And with the kind of pricing we see in front of us and with the leverage of fixed cost we see in front of us, we're very focused on improving those numbers.

Okay, that's actually what I was looking for. I just wanted to ask Tom, it seems like you have some good visibility on some heavy tonnage jobs coming up. And I was hoping you already addressed kind of what you're seeing on the public side, what are your expectations for private nonresidential and private residential?

And if I could just dove tail that. How confident are you in kind of the 8% same store volume growth and the 11%? Is it more confident now than you were 12 months ago? Thanks.

I think we're very confident in our outlook. We do these bottom up and our guys and gals come in each core and each market to build that volume up. As far as, you know, we had a very good 2014 in non-res. Some of that driven by traditional non-res construction of office buildings, big-box strip malls, on top of that we saw the bump from the large projects along the Gulf Coast. We'll continue to see that. There's a lot of confidence out there in the marketplace with our salespeople and our customers for non-res. And as I said earlier, our shipments to the large energy projects along the coast will be higher in 2015 as those projects mature than they were in 2014.

Great, thanks very much.

Bob, as another reminder. Tom always points this out, but despite the good growth numbers over the last six quarters we're nowhere near normal levels of demand or construction activity in the vast majority of our markets. Nowhere near. So we both have a little bit better visibility. We've got good momentum as you've seen in the last six quarters and the fourth-quarter.

The part of our confidence, as a reminder to folks, is we're still getting volume growth just out of recovery from a deep trough in demand. It's not predicated upon dramatic overall economic growth in the US. It's recovery of construction activity to things that begin to look like sustainable levels.

Got it. Thanks very much and good luck.

Thank you.

Garik Shmois, Longbow Research

Thank you. Just wondering if you could talk a little bit about how we should think about costs in the aggregates division? I appreciate that diesel's a relatively small portion of the cost but we also are aware that the sensitivity of a 10% movement in diesel's pretty significant.

So, as we think of potentially lower diesel, think about incremental margin, at least within your guidance it's consistent with prior trends. Are there any costs offsets to the potential diesel benefit, whether it's in blasting or explosives or contracting services or any other items that we should be aware of?

First of all, when we do these plans they're from a bottom up perspective with over 300 locations across the country. So everybody's fuels using a different fuel cost. Embedded in that is also off road and on road diesel and that mix changes. So trying to get a solid comparison for a diesel price is really tough.

There may be some savings embedded in it. But as I said earlier, our focus will be on the things that we can control which is how we buy it and buying it as economically as we can. And then how we use it, was measured in tons per gallon. So there may be some embedded there but that's really hard to define and take apart across our footprint.

As far as other costs are concerned there's always different commodities we use. We do have price increases in a number of those. I think we also have the operating leverage but I think we'll turn in, continue to turn in, improved pricing numbers as the year progresses. And I think our folks are really doing a good job at focusing on the key drivers of cost.

Now, you also got to remember we're still operating a little north of 60% of our peak volumes. So we've got a lot of room to be able to optimize our operations and our costs as volumes continue to grow.

Thanks for that --

Garik, it's John. There's only one area in cost where I think we see a major trend that we're wrestling with, that our guys are wrestling with, that jumps out. It's not direct offset to diesel per se but repair costs remain an ongoing challenge for us. Not a major thing but something we're working on that ties to our CapEx focus over time.

But we don't see major increases, I'm calling it inflationary increases, at the moment. And keep in mind we own our major input.

Thanks, for that. My second question is on asphalt. Your guidance implies, I think it's about a 30% increase in profitability. Your volume guidance, when we look at infrastructure demand for the year, a low to mid-single digits. That's a strong leverage.

I was just wondering maybe if you can provide a little bit more color on the drivers behind the asphalt profitability? Is it a margin expansion off of lower liquid asphalt costs or is it in the markets that you're servicing on the asphalt side?

You're seeing accelerated volume growth or (technical difficulty) is it the acquisition or the asset swaps that you engage in that's going to be driving most of the profit improvement?

I think we do some improvement in our existing operations there's a little volume there and some margin expansion. But the big jump there is with our acquisitions and the swap in the asphalt operations that we acquired. I think if you looked at the asphalt business, we're going to show a gross profit improvement of about $15 million. About $12.5 million of that is acquisitions. About $2.5 million of that is improved volume and unit margins on existing businesses.

Great, that's super helpful. Thanks and congratulations.

Thank you.

Ted Grace, Susquehanna

Good morning. I was hoping to kind of focus on capital allocation and just kind of get a sense for how you'd encourage us to think about the dry powder you've got. To your point, John, you exited last year at about 5.5 times leverage. This year, you'll be exiting at about 3. On our numbers at the end of 2015 you're kind of sub 2. And so, I just want to kind of revisit how we should think about your targeted capital structure across the cycle? Is kind of the first question.

Let me start with where we are and then a couple comments on cycle. We'll probably touch on this topic more later. First, we're very comfortable with our current leverage ratio, current amount of leverage. I think what we'd highlight as we've taken a number of actions over the years to get ourselves in a position where we can a little bit do all of the above. So we can reinvest in our business if we need to.

In our plant and equipment and our asset base. We can achieve and maintain an investment grade credit rating which matters to us so we have access to capital at all points of the cycle to your question on the cycle.

So that we can accelerate the return of capital to shareholders whether that's through dividend or other mechanisms over time. So I'd expect to see us have more of our cash though each year go back to shareholders as part of the mix and so we can still pursue prudent acquisitions that have a strong return like you've seen us do in the last year.

I thinks we've got ourselves in a spot, to your point on dry powder, that so long as we're prudent and cognizant of the cycle we can do all of those things.

In terms of how we think about it through the cycle, let me just say now we're still close to the trough of the cycle than anything that's normal. We think we've got several years of growth and margin expansion in front of us. And if we deliver a year, like you said Ted, per your model your expectations we're going to have a lot of options. And I think the good news is that we're going to have a lot of options.

And we've worked hard to be in that position but I think we'll have more options than if you will we'll have trade-offs. I think we'll be able to do again the right mix of all of the above.

Okay and maybe as a follow on to that, could you just talk about what the M&A pipeline looks like right now?

It's still healthy. There's still a lot out there, Ted, but I think the important piece of that is discipline. We have to be disciplined about what we're going to buy. Disciplined about what we pay for it and then as important as anything, disciplined about how we integrate it and as quickly as we can bring it up to Vulcan standards of profitability and unit margins.

So while there's a lot out there we'll just have to make sure we're disciplined. I think we're pleased with our 2014 acquisitions and I think so far we're very pleased with integration and looking forward to their adding to our profitability in 2015.

Okay, that's great. I'll jump back in queue but congratulations on the quarter and good luck this year guys.

Thank you.

James Armstrong, Vertical Research Partners

Good morning. Thanks for taking my question. Most of my questions have been asked but looking into 2015 are there any regions which your capacity constrained and utilization is higher than that average 50% to 60% you saw in 2014?

We had that problem. No. As I said earlier, we're still operating 60% of where we were at the peak. We've got a long ways to go before anywhere we consider capacity constraints.

Okay, that helps. And then just a clarification. You paid down a lot of debt in 2014. What's your interest rate likely to be as you go -- interest expense likely to be as you go into 2015?

I'd say roughly 160. But I think you should expect us to continue as a company and take a hard look at our debt portfolio and its coupon cost and its duration and those kind of things. Back to Ted's questions about some of the options we have in front of us. But if you're modeling, I think about $160 million roughly in interest expense I think which is roughly consistent with last year.

Part of our debt pay down last year was the use of proceeds from the divestiture of Argos. We're now at a position where, as I said, we're very comfortable with our current level of debt and our credit standing.

Very good. Thank you, very much.

Thank you.

Timna Tanners, Merrill Lynch

Hello, good morning.

Hello.

I just want to clarify one of the things you said earlier and I've asked you this in the past and I just kind of wanted to get your take on it. When you talk about your visibility improving as the demand grows, what does that mean exactly and how far out is your visibility?

I think we're looking -- what we're really talking about is 2015. And the reason the visibility gets better as you're starting to see, your backlogs are solid, you have confidence of jobs coming up in your contractors and your sales force. You can feel the momentum, for like example, in residential you're not building out subdivisions anymore they're starting new subdivisions which are much more aggregate intensive. So you just get a feel for the confidence and you start to see the jobs that you have secured much larger and more numerous.

Okay, and along those lines, if we were to get some sort of action from the government regarding a way to finance and finally pass a multi-year highway spending program, is it fair to say that the real benefit would start to flow through more into 2016? 2017? How do you think about what that would look like?

I think based on the timing, that's spot on, that with the bill it has to flow through, you have to get jobs ready. So I think you'd be looking at 2016 and 2017.

Got you. That's all for me. Thanks a lot.

Thank you.

Stanley Elliott, Stifel

Great, guys. Thank you very much quick. A quick question just from a timing perspective with some of the weather issues last year. Should we expect the cadence of the volumes through the year to be materially different or kind of more of a normal seasonality?

If I could predict the weather I'd answer that question. The first quarter and the fourth quarter are always dicey. You just never know what's going to happen. What we were talking about in the presentation was last year our fourth quarter had great weather, was really strong. So we were very pleased with the performance in this year's fourth quarter versus 2013. I don't know how to answer that except for -- if you looked at it, we just have to base it on normal weather patterns which would mean the first and fourth quarters are always a little dicey.

Fair enough.

This is John real quick. This is not quite an answer to your question directly but maybe a related point. Which I think there is historically been a tendency as you all model quarterly results to, if you will, over model the first quarter.

And just I would remind you that first quarter results given typically low volumes and erratic weather can be a little more unpredictable. Whether that's a question on price or cost. So I would say that people often fail to understand some of the volatility that's inherent in our first quarter.

Very helpful. And as far as the SAG costs, nice leverage in the coming year. But outside of acquisitions or incentive comp is there any reason to think that number cannot continue to be leveraged on a go forward basis into 2016 and beyond?

No, we fully intend to leverage that number in 2016 and beyond and Tom would say exactly the same thing. You know, when we took a bunch of actions to reduce our SAG costs we worked hard to do it in a way where it could be leveraged going forward including systems investments and other things we've done. So that is our intent and focus.

As John likes to say, we've been through that pain and we're not going back there.

That doesn't mean the number won't go up some but obviously, if our volumes go like we think they will. But as a percent of sales, it should decline significantly over time.

Exactly. Thanks and best of luck guys.

Thank you.

Todd Vencil, Sterne, Agee

Hey, guys. Good morning. If I go back to your original comments, Tom, about momentum. Obviously, you are seeing momentum and volumes continue 2014 and 2015. You see a momentum in price sort of picking up 2014 and 2015. You've talked about a gradual recovery lasting several more years.

Can you give us some sense of whether you think as we look beyond 2015, given that you don't have a crystal ball, but can you give us some sense of whether you think momentum can continue to sort of grow and rates of growth can stay at the levels they've been or even expand on price and volume?

As far as confidence beyond 2015 and our outlook there, what gives us confidence is we're so far below the structural demand of aggregates even with our outlook in 2015. And for our country to stay healthy and strong like it is, that structural demand has to continue to grow or get back to more normalized levels.

So a lot of confidence there. It's also the momentum you just see out there in all segments of the market. And yes, as far as continuing to expand margins we plan on, as I said earlier, continuing disciplined execution of price and our operating disciplines.

Todd, one of the focal points of our Investor Day will also be, maybe to your question, what's the earnings power of our business at normal demand? And what are we planning to do to get there as a management team? So not to put off your question but we'll dig into it deeper in that setting.

Shoot, John. You could give me a preview right now if you wanted to. I'll let you go.

I guess I don't want to, Todd.

Fair enough. And thanks for that by the way. I appreciate that answer.

And thinking about the 2015 guidance, are there any -- where are the sort of points of sensitivities or push points in that where you could have come out above the guidance as you are or below? Or put another way, what could happen this year to bring you in above your guidance or below it?

I think Todd, the official answer, one, I can't give you an answer on Investor Day early and no, our guidance is our guidance. To answer your question within that, I'll just refer you back to some of our comments.

We haven't tried to bake all the potential benefits of lower diesel prices into our estimates because we don't know what diesel prices are going to be. So that could -- for this year that could swing a bit obviously in our production cost as it did in the fourth quarter, so that's an example.

But I think you could go through a lot of things and have an example. But that's one that's kind of outside our control, if you will, that we would think about. And again, for that reason we didn't try and bake in some assumption that we can't control into our models.

Got it. That's perfect. Thanks a lot

Thank you.

Adam Thalhimer, BB&T Capital Markets

Good morning, guys. Congrats on the nice quarter.

Thank you.

Obviously, a lot of questions have been asked. I just wanted to ask a little bit more on your gross profit per ton and the operating discipline you talked about. How much of that is volumes coming back and you guys just being prudent on adding back fixed costs? And how much of that is true productivity improvements you're making to the business?

I think there's a lot of that in true productivity improvements. As I said earlier, we're operating at 60% of our peak volume. So you've got plants in some markets where we're having two crews run four plants and there's just a lot of inefficiencies with that along with a lot of fixed costs in these plants.

We also need to go back and look at when you look at margin improvements that mix, the slide that has the circles on it, it's a mix of price, of cost and then the blend of the products we're selling that give you the total maximized profitability of an operation where you make as much money as you can. And that's why we call it a local market. Because just the plant manager or the salesman, they have to be there looking at the stockpiles, knowing what the markets going to have, where they can go with price to put all that together to maximize profitability.

Okay, and then I guess as a follow-up to that. I can't believe you gave as much color as you do on incremental margins in 2015 and you said it should be consistent with recent trends. Is there a point where that inherently starts to trail off, the incremental margins? Either -- you've been talking about three years out you'll be back to normal aggregates volume. Is that when you might see a trail off?

I think you got to go back to the fact, and I think I keep repeating myself but it's so important, that we're still operating at 60% of our peak volume. So you've got so much productive capacity that you'll reap the benefits from as volumes go up as far as being efficient in those operations.

Okay, thanks so much.

Just to clarify, by the way, I don't think we said that we think we'll reach normal volumes in three years.

Okay.

So, we've got a good long ways to go but we haven't given a prediction about that timing.

Mike Betts, Jefferies

Thank you very much. Just two quick questions from me guys. Firstly, the SG&A going down slightly in 2015. I presume the incentive compensation goes up again significantly given the increasing gross profit you're forecasting.

What's bringing it down? Were there some one offs I guess I'm asking in 2014? Or maybe a bit more explanation of what's bringing it down?

And then the second and final question, assets held for sale I noticed are up $4 million to $5 million in the balance sheet. In your forecast for 2015, is there any assumption of higher ongoing quarry and land sales in 2015 and in 2014? Thank you.

Mike, I'll take a first shot at those. First, on SAG. And I'll just give you a rundown of some of the kind of things we saw in the fourth quarter. A lot of it's business development related, more than a couple million dollars. We had some incentive comp that was really tied to our Florida divestiture and the gain on that sale is part of our system, so that's kind of a one-time event.

We had a significant land donation, another $1.5 million roughly, which ends up as an SAG cost and then down as a gain on sale of land so it negatively affects EBITDA. We had other costs associated with the acquisitions we made. So a lot of the things that drove SAG were not repeating themselves.

Yes, the core incentive comp we'll keep an eye on as part of the overall business mix but much of the factors driving the $8 million variance in Q4 and really the variance for the full-year had to do with one-off or nonrecurring items. On your question about assets held for sale, I believe the answer, if you're looking at the same part of the balance sheet I am, is that those were held for -- that was the Simex swap.

And that we knew we were working on that transaction, expected to conclude it, we concluded in January. So at the time of the balance sheet we were holding those assets for sale. Rough fair value associated with the asset swap for both sides is about $20 million just to give you a sense of the size of the transaction. No cash involved.

That's great. Thanks very much, John.

Jerry Revich, Goldman Sachs

Hi, good morning.

Good morning.

I'm wondering if you gentleman could talk about the cadence of pricing over the course of the year? You're exiting a 4% guidance, up 6%. Can you get to that 6% in March at the beginning of the construction season? Or are you anticipating an acceleration over the course of the year?

Thank you. That's and insightful question. When you finish the year as an outlook as an average of 6%, that will take some time to flow through. Normal cadence with that is to be a little lower in the first quarter and grow as the year goes along and that's what we would expect.

Okay And in terms of the additional price increases over the course of 2015, can you talk about how many markets you'll be pushing pricing multiple times in 2015 versus how many markets in 2014 you were able to do that?

I'm not sure I have that. We will push price in every market that we have and work on it hard. Normally, every market is different as far as timing and amount. Normal cycle with that is January/April in a lot of markets. But some you'll have mid-year and some you'll have in October. So it's really all over the place. We'll work on it in every market that we're in.

Okay, thank you. And then, just following up with Ted's question just related to the May pipeline. Any opportunities that you see for a potentially meaningful asset swaps? Or, how intense are those discussions or was your comment earlier, Tom, the fact that you'd like to see more of those? I'm just trying to gauge your prior comments.

I think what I was saying was that the pipeline has a lot of acquisitions in it which we'll obviously have to be disciplined with. I don't know of any that I would be prepared to talk about any potential swaps out there. But again, we have to be picky about that. We have to be disciplined and be able to integrate them.

Okay

I would underscore is as we think about capital allocation discipline it's not all about acquisitions. It's also sometimes about divestitures and swaps. And I think it's important thing for the industry to stay focused on.

All right. Thank you very much

Thank you.

There are no more questions at this time.

Well, thank you for your questions. Thank you for your interest in Vulcan Materials. We look forward to speaking with you on our next call and many of you at our upcoming Investor Day. Have a good day.

Thank you, and this does conclude today's conference call. You may now disconnect.