渥肯建材 (VMC) 2015 Q3 法說會逐字稿

Welcome to the Vulcan Materials Company third-quarter earnings call. My name is Tabitha and I will be your conference call coordinator today.

(Operator Instructions)

And now I'd like to turn the call over to your host, Mr. Mark Warren, Director of Investor Relations for Vulcan Materials. Mr. Warren, you may begin.

Thank you, Tabitha. Good morning, everyone, and thank you for your interest in Vulcan Materials. Joining me today for this call are Tom Hill, President and CEO, and John McPherson, Executive Vice President, Chief Financial and Strategy Officer.

Please note, a slide presentation will accompany the prepared remarks by management and is available via the webcast. A copy of this presentation, as well as a replay of the conference call, will be available following the conclusion of this call at the Company's website.

Before we begin with actual results and projections, I refer to you slide 2 of our presentation regarding forward-looking statements, which are subject to risk and uncertainties. Descriptions of these are detailed in our most recent report on Form 10-K.

In addition, during this call management will refer to certain non-GAAP financial measures. You will 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 I'd like to turn the call over to Vulcan's Chief Executive Officer, Tom Hill. Tom?

Thank you, Mark, and thank all of you for joining us today for our third-quarter earnings call.

At Vulcan, we posted another strong quarter and we remain on track to have a very good year. Our solid performance, continued revenue growth and margin expansion are a direct result of the great efforts of our people.

Today, you're going to hear about steady recovery, solid price improvement, and about our sharp focus on the things we can control. Now we won't be giving guidance for 2016 in today's call, but as we begin our planning cycle for next year, our fundamental trajectory remains intact.

We continue to experience a gradual, steady recovery in demand and shipments. Although the details, of course, vary from market to market, we also continue to see a positive pricing climate, with appropriate increases either announced or planned for next year. We remain well positioned to convert incremental revenues into incremental gross profit at an impressive clip.

We're excited about the opportunities ahead. Our people know that they must remain highly focused on margin improvement and continue to drive ongoing improvements in our Business. We're focused on capitalizing on our momentum. Our people are engaged and entrepreneurial, and they are sharing best practices across the organization. They know that they are empowered to serve our customers and keep making our Company more profitable and better in every way. We also, all of us, remain highly focused on safe operations, protecting the health and safety of our employees at all times.

Now, to company specifics, the recovery in construction activity continued across most of our markets. As we will show you, the metrics are certainly trending in the right direction. While demand is recovering gradually to more normal levels, we've enjoyed sustained margin expansion and we continue to grow our profitability in a disciplined manner. As construction activity and materials demand continue to pick up, we are also seeing improving confidence in pricing.

Now we've had some cost increases during the last two quarters. Even though some of this is expected given volume growth, we are very focused on continually improving our operating performance. These efforts begin to pay off in September, when we saw marked improvements in our costs. We are going to stay very focused on this.

Our employees are doing a really good job turning incremental revenues into incremental profit. And let me add, we see these trends continuing. We are heading into 2016 with the wind at our back. That said, we are totally focused on finishing this year strong.

Now, let's talk about the third quarter. Demand continued to recover gradually in the quarter. Our results demonstrated the earnings leverage in our business model. With improving market conditions and our focus on profit improvements, both pricing and margins continued to expand.

As you can see on slide 4, a 19% increase in total revenues converted to a 39% increase in gross profit. This also drove a 47% increase in adjusted EBIT and a 31% increase in adjusted EBITDA. Our diluted earnings per share from continuing operations increased 82%. Adjusted earnings per share from continuing operations were $0.95 per diluted share, an increase of $0.41 from the prior year. Gross profit margins increased by 490 basis points and were supported by pricing momentum. We enjoyed strong earnings growth in Aggregates, as well as in our Asphalt and Concrete segments.

We continued to manage and leverage SAG. SAG costs did increase in absolute terms. Here, one-time items offset lower headcount-related costs. What's important is as a percent of sales, SAG is trending towards 8% for the year, down about 1% from the prior year.

All in all, I'm very pleased with our people's performance. Whether measured by margin percentage or per-unit profit, our profitability continued to improve very significantly.

Now, let's take a look at our shipments across the US. The map on slide 5 shows a breakdown of our growth in shipments of Aggregates on a same-store basis across the country. In the quarter, we saw solid demand growth, even though many customers faced bottlenecks impeding shipments. It's important to recognize what a good job our local teams are doing working with our customers to meet rising demand effectively and efficiently.

Momentum continued with solid growth in key states. Shipments in Arizona, California, Florida, Georgia, South Carolina, Texas and Louisiana each grew by 10% or more. In contrast to the majority of our markets which were up, Illinois was down about 10%. This was due to significant large project work completed in 2014. Now at the same time, California saw healthy growth in the third quarter, as major projects kicked off after being delayed in the first half of the year.

I'd like to turn your attention to slide 6, which shows our year-over-year growth in shipments. As you can see, this is a very similar pattern to the last slide, with solid year-to-date growth in Aggregates shipments of 10% in total or 7% on a same-store basis. Both our East and West Coast markets continued to enjoy healthy growth, as did Texas. Shipments in the Gulf Coast markets were also strong, with the exception of the central Gulf Coast region.

Turning to slide 7, you can see that our pricing continues to strengthen, and for the quarter it improved in line with our expectations, up 8% over the prior year's quarter. In a number of markets, we saw year-over-year freight adjusted price improvements in excess of 10%. These increases were fairly broad based and occurred across all product types. And in more than half of our markets, we had price increases ranging from $0.60 to $1.20 per ton.

For the quarter, we didn't see this level of price increases in Virginia, South Carolina and Arizona, because we had much larger shipments of base material and fines on new construction and large projects. As discussed before, volume in base and fines can detract from price, but it improves overall profitability.

Let me emphasize the fact that pricing momentum will continue for us. There are three primary reasons that the pricing climate should remain positive. One, customer confidence continues to improve. Two, increasing demand builds backlogs. And third, construction-related businesses are increasingly focused on earning adequate returns.

Effective pricing performance remains a key focus for our management teams across our footprint. We are focused on delivering value to customers while earning a good return on the significant investments that we make on their behalf. This ties directly to providing excellent service to our customers, the right product, the right quality, the right time, and being paid the right price for superior service and value.

Now we've talked a lot on past calls about the three profit drivers that are expanding our margins and profits. That's because it's important. As a reminder, the three profit drivers are sales and production mix, price, and operating efficiencies. We call these the three circles.

As you can see on slide 8, our third quarter and current 12-month gross profit per ton increased 23% and 25%, respectively. So in the quarter, on a same-store basis, price was up $0.86 per ton and gross profit margin was up $0.90 per ton. Our sales and operations people are doing a superior job turning demand growth into higher profitability. Our local teams continue to do an outstanding job managing the combination of price, operating efficiencies, volume and product mix. This is something we will stay focused on every day.

With respect to the three circles, we've talked about the positive pricing environment and we've talked about new construction improving the impact of product mix on profitability. Regarding the third circle, operating efficiencies and leverage, we continue to emphasize production planning and operating efficiencies across the business.

Despite improvements in unit profitability and same-store costs, we are seeing some areas of rising costs. As I mentioned, I'm not satisfied with this, and neither are our people. Still, we've seen some costs rise. About 66% of these increases resulted from geographic mix and fringe benefits, often outside our control. In addition, during the last two quarters, we have begun to see a trend of rising repair and maintenance and labor costs in some areas. Even though this isn't surprising, we are not going to accept it.

Growing volumes are requiring us to run our operations longer, resulting in more repairs and higher than budgeted spending on parts and supplies. And labor costs in some areas were up in the first eight months of the year. We saw costs go up, we focused on them, and we realized improvements in September. We will continue to manage these costs very carefully.

Let's turn to slide 9. Our employees can be very proud of this chart. It clearly shows that our people are highly focused on continuous improvement and quality of earnings. We're excited about the ongoing, very positive trend in unit margin expansion. We have now seen nine consecutive quarters of expanding unit margin, and we'll continue to post improvements.

Since our volumes began to grow in the second half of 2013, our gross profit per ton has increased sharply. We are now seeing the additional benefits of strong and ongoing improvement in pricing. Our unit profitability is higher than when these operations were producing twice the volume. Again, I would expect this trend to continue into 2016.

Slide 10 shows our incremental margin performance in the Aggregates segment. This underpins the margin improvement you saw on the previous slide. Our incremental gross profit margin for the third quarter was 72%, excluding the impact of acquisitions completed during 2014.

Aggregates' gross profit grew by [$60] million on incremental freight adjusted revenues of $83 million. Including the impact of acquisitions, the incremental margin was 65%, with the gross margin on those revenues impacted mainly by higher costs at acquired operations as we bring them up to our standards and by higher costs for repair and maintenance.

Since quarterly figures can be distorted by seasonality or one-time costs, we also present the same metric calculated on a trailing 12-month basis. For this time period, incremental gross profit margin was 73%. Aggregates' gross profit increased approximately $177 million on incremental revenues of $242 million, adjusted for the same acquisitions. On a trailing 12-month basis, the flow-through rate has consistently exceeded the Company's stated goal of 60% since volumes began to recover in the second half of 2013.

Given our strategic focus on the Aggregates business, our ability to take that revenue to the bottom line is a big advantage to Vulcan as volumes continue to recover. With that, I will turn the call over to John McPherson for additional comments on our earnings performance and outlook for the remainder of the year.

John?

Thanks, Tom.

I'll begin with slide 11, and, as we did last quarter, use it to recap many of the trends Tom just reviewed. On this slide, we highlight the improved profitability of our Aggregates segment, both in total gross profit dollars and on a per ton basis since the recovery in volumes began in the second half of 2013.

On the left-hand side of the chart you see that for the trailing 12 months just ended, we shipped 175 million tons, 35 million tons more than for the trailing 12 months ending in the second quarter of 2013, just before the recovery began. Now looking to the right-hand side of the chart, you see that aggregates segment gross profit for the 12 months just ended was $682 million, or $324 million ahead of the 12 months before the recovery began. So on 35 million of incremental aggregates tons shipped so far in the recovery, we've delivered $324 million in incremental segment gross profit.

Gross profit per ton has increased $1.35, or 53%. And a 25% increase in shipments has been converted into a 90% increase in segment gross profit. These facts, we believe, illustrate the impact of the continuous compounding performance improvements you heard Tom reference and that in many ways characterize our current Aggregates-centric strategy and execution focus.

Now turning to slide 12, which shows the solid performance of our Asphalt and Concrete businesses for the third quarter. Segment gross profit and unit profitability in each of these segments increased significantly versus the prior year, and year-to-date the gross profit from these businesses has exceeded plan.

Asphalt gross profit for the quarter was $30 million, a year-over-year improvement of $15 million, driven by improving same-store volumes, strong cost disciplines and margin management, as well as the impact of acquired operations. As a reminder, our acquisition and swap activities have added 19 asphalt plants to our portfolio since the second half of last year. On a same-store basis, asphalt volumes grew 20%, in part due to work deferred from the first half of the year, and Asphalt gross profit grew $11 million. Vulcan is among the five largest producers of asphalt in the country, and these operations complement our aggregates operations very well.

Third quarter Concrete gross profit was approximately $10 million, compared to $5 million in the prior year. Margins in this business segment have benefited from divestitures and other actions to focus our portfolio. The operations we have divested lost $2 million at the gross profit line in the prior year quarter. On a same-store basis, Concrete volumes were flat versus the prior year and gross profit improved by $3 million.

I will now wrap up with slide 13 and a recap of our full-year 2015 outlook before handing the call back to Tom for some closing remarks. In short, our outlook for the full year remains largely consistent with that presented in our second quarter call, and we are reaffirming our expectations for full-year adjusted EBITDA in the range of $775 million to $825 million. As usual, we note that weather patterns can impact results in the first quarter significantly, particularly if they shorten the total construction season. But, and as you've seen earlier in this call, the business is performing well and it is performing as expected.

Now ticking through a few of the individual drivers, we currently expect full-year volumes of approximately 177 million tons, up 9% year-on-year in total and 7% on a same-store basis. As noted earlier, we see the gradual recovery and demand continuing across most of our markets. However, capacity constraints at various points in the construction chain, for example, the availability of skilled construction labor in certain markets, have made it difficult for many of our customers to catch up fully on work deferred due to rain in the first half of the year. And the continued uncertainty regarding federal highway legislation has begun to impact timing of certain road projects on the margin.

With respect to pricing, we expect the currently positive environment to persist, and we currently expect to finish 2015 with a year-on-year increase in average freight-adjusted selling prices of approximately 7%. As we had indicated, pricing momentum in the second half of the year has been stronger than in the first half of the year.

Our Asphalt and Concrete segments have performed ahead of plan, both on a same-store basis and as a result of moves we've made to strengthen our portfolio. These segments should generate full-year gross profit of approximately $95 million. But again, please note that fourth quarter weather patterns can significantly impact actual results.

SAG remains roughly in line with plan and declining as a percent of sales. Importantly, direct salary and wage costs for SAG headcount have remained flat this year, and we do not expect the rise in pension and other post-retirement benefit costs that we've had this year to reoccur next year.

Core capital spending, excluding dollars committed to the purchase of new ships to service our Yucatan quarry, remains in line with plan. As noted in our earnings release, we may elect to pull some spending forward from 2016 in order to capitalize on certain procurement opportunities.

As has been our practice, we plan to issue guidance for our 2016 year during our February earnings call. And certainly a number of things can change between now and then, including federal highway legislation, which Tom will touch on in a moment. But as we sit here in early November, we see volume and pricing trends similar to those we have seen year-to-date continuing through to the fourth quarter and into next year. And we, of course, remain intently focused on converting that top-line revenue growth into cash flow and earnings growth to the very best of our ability.

As Tom said at that the beginning of the call, our basic trajectory remains intact. Tom, back to you.

Thanks, John.

Our employees are working hard to ensure our strong performance, continue revenue growth and margin expansion. I can't say enough good things about our people. They never quit, always try to do things better, and have enormous pride in what they do. And I see this every day.

Our priority is continuous improvement. We're going to stay very focused on the things that we can control, on keeping our people safe, on customer service, on controlling costs, and on price. We will get fair value for the major investments we make in this business. I can tell you, it's all about creating value for our customers and our Company.

Now before I conclude, I'd like to say few things about the highway bill. I reported in our last call about the significant progress in Washington towards a new bill. The Senate, with great leadership, did its job when it passed a new six-year bill, the DRIVE Act, on July 30. The House Transportation and Infrastructure Committee marked up its version of the highway bill two weeks ago. Congressional leaders believe it may be possible to conference the two bills and pass the final highway bill before the end of November. We are encouraged by the bipartisan progress that is occurring in Congress to address America's infrastructure challenges.

We have been very engaged in efforts to encourage Congress to step up to this challenge. A new multi-year highway bill will be a step in the right direction, and our nation's leaders will need to take additional big steps in the years to come. This is important for our country, our industry, and for Vulcan.

In closing, I truly appreciate your interest in Vulcan Materials Company. Looking forward to the rest of 2015 and into 2016, I want you to know that we are very energized and engaged. We are focused on the fundamentals, on finding new ways to grow our Company and its profitability every day.

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

(Operator Instructions)

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

Thank you, gentlemen. Tom, I hate to lead off on a question on 2016, given your opening comments. And so I won't ask specifically for guidance, but just as it relates to the slope of that trajectory heading into next year, it seems like depending on whether 4Q probably comes in a little bit below plan, given some of the commentary, obviously one of your large peers gave some guidance that people are interpreting as off trend growth. So I'm just wondering if you can give us any kind of hand holding, whether it's market-related expectations on how people should think about that slope. I know John just said basic trajectory intact, but any way you could frame out anything would be helpful, if we could start there.

Let me start with demand. We're seeing demand growth in all of our major markets, the vast majority of them, and in the market segments. More than half of our markets in the third quarter saw double-digit growth. A little bit of lagging, as we've talked about with Alabama and Mississippi, kind of the center of the country. But overall we continue to see healthy demand growth, whether that's across geographies or market segments.

So we don't see anything that would give us pause for slowdown, whether the fourth quarter or afterwards. Now if you look at on the same thing on price, we continue to see very healthy climate for price increases. That's built by customer confidence and by rising demand.

Okay. That's super helpful. Maybe if I could quickly tuck one in on costs, I know you talked about being somewhat above expectations the last quarter. You mentioned some of the factors in third quarter, including more recently labor and R&M picking up, taking some proactive actions to address that. When we think about the normal framework of incrementals you've talked about, is there any tweaking we should think about in the next one or two years that could affect that to any meaningful degree, or is that still a useful framework as we think about just normalized flow-through rates?

Ted, I don't see anything that would change the fundamentals of our earnings leverage or our trajectory. It's just not there. I'll address the third quarter. Our costs in the third quarter year-over-year on a same-store basis were down about a $0.05. Built into that was diesel was down about $0.23. The increase occurred in fringes and geographic mix, was about 66% of it, which geographic mix is usually remote distribution network or higher cost markets, that will always -- fixes itself, so that will come back around. The fringes are one time or won't last.

The other piece of that was R&M which is natural for this time of the cycle. And then in some areas, we had labor costs that were up in the second quarter and the third quarter. We recognized those. I think our folks did a good job of addressing those, and we saw marked improvement in costs overall in September. So what's important here is that we focus on the things that we can control. It's imperative that we always try to improve that and, in effect, compounding effort of every day and every quarry of making it better and compounding those earnings.

So Ted, I think if you just check through each of those three big drivers of costs, none of them are really structural, in our view. One is geographic mix, shipping from higher cost locations or markets, and frankly, that comes typically with higher price in higher margin markets, as well. So that, as Tom said, will correct itself and is not a bad thing.

On fringes and those employee benefit-related costs, most of that, including the pension accounting issues, we don't see repeating next year and will correct for. And then I think Tom gave you a clear explanation for how we've addressed, to some degree already, some of the somewhat temporary headwinds we think we've seen in repair and maintenance costs and labor costs.

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

Good morning, Kathryn.

Good morning. Thank you for taking my questions today. I think that you helped to answer some of the questions I had about the higher costs, which were more one-time in nature versus embedded costs on a go forward basis. Just to clean up that question that you had, the answer that you were just giving in the previous queue, how far along are you in terms of resolving some of those costs that on these that you made progress in September, but is this something realistically it will be more of a Q1 before you really fully cleaned up, or will there be some residual, particularly from a geographic mix, that we see lingering into Q4?

Let me give you an example of labor. I think we got ahead of ourselves in a few markets in labor, where we thought volume was going to come back faster than it did. We hired too many people and actually had to go correct it, when we saw it wasn't going to happen. We also were running, at a number of places we're running four plants with two crews, and we've made some structural scheduling mistakes there which we corrected.

A lot of this, I think we've taken really good steps to recognize the problem. It's why we have good metrics, and our folks look at it really hard, and they've corrected it. And then as far as the geographic mix, that will come and go. I don't see anything structural to that. You'll get that back, actually.

Thank you. And then if you could -- I know that the year ago quarter, you made quite a few acquisitions. Could you once again just break out how much the contribution from the quarter were in terms of revenue and earnings contribution were from acquired assets versus just core?

The adjusted EBITDA for the acquisitions in the quarter was in the range of $13 million. I think overall, our acquisitions are performing well. We're pleased with the assets and the personnel that we added to Vulcan. I think I'm very happy with the job, integration job, our folks did in getting those tucked in and going. We're pleased with how it fits into our network. So overall, we're very pleased with the acquisitions and like what we've got.

And Kathryn, we can break out for you revenue or gross profit contribution by segment of the acquisitions off-line, if you'd like. I think in total, we're probably trending toward, I think we'd said $40 million or $50 million of EBITDA at the beginning of the year. We're probably trending toward the low end of that range full year.

Still very satisfied with the performance. But as we've noted, we've had some increased investments to better manage some mine plans and improve production capacity of certain product types in some of the acquired facilities. And that explains some amount. That explains part of why we're at the lower end of that range. But that's basically where we're tracking around, around $40 million, but not toward $50 million.

Perfect. And then my final question is around Aggregate pricing. You've seen some accelerating in pricing as the year has progressed, and really actually from prior year carrying into Q3. Two-fold question. Are there certain markets we're seeing greater pricing leverage? And then two, we've just received anecdotal feedback from the field that, particularly in the Southeast, you have, I wouldn't say changed your pricing structurally, but are certainly being more proactive in terms of gaining pricing equally across all of your main product segments, being base, fines, and clean stone. Maybe if you could either confirm or flesh out that feedback that we've been getting in the field. Thank you.

I think that the pricing trends we see right now are very positive and very predictable with the pricing following the volume. I think the good news is, what we're seeing going at the end of 2015 and going into 2016 is a very healthy pricing environment. We've got steady rising demand in the vast majority of our markets. That's driving customer and construction industry confidence, which is always a good thing for pricing.

But one of the things we always have to remember is pricing is a campaign. It's something you do every day. It's thousands of pricing decisions every week. And it's also is about the compounding improvements over time of not just pricing, but margin expansion. So our employees are striving hard to improve the value for our customers. And I think that if you step back and look at it, the environment that we're in right now and that flows into 2016 is very healthy for pricing improvements.

Great. Thank you very much.

Your next question comes from the line of Garik Shmois with Longbow Research.

Thank you. Just wanted to touch on demand. Maybe if you could speak to any change in trends with respect to the demand segments,, whether it's infrastructure, non-res or residential. I know you've commented that you 're seeing steady progression on volumes, but has there been any, whether it's change in bidding or acceleration or deceleration, any of these --

Yes, I think that, as I said earlier, we're seeing good demand growth across all segments. Now, in the non-res piece, like you, we see the leading indicators, and we've seen them dip a little bit. But on the ground, whether it comes to shipments or bidding projects, we have not seen any dip in non-res demand. The good news is we're starting to see improvements in residential and in highway work. So overall, we're continuing to see good, steady growth, demand growth.

Garik, a few pieces of additional color, since we know this is an area of focus for folks. From a geographic point of view, it's almost easier to talk about the ends the spectrum. So in terms of recovery toward normalized demand for us, on one end of the spectrum, certainly we have some Texas markets that are a bit further along in the recovery, in our view, still doing quite well, but a bit further along. And on the other end, as Tom has mentioned before, we have our Mississippi, Alabama, Illinois, kind of our middle of the country markets, that really haven't gotten much momentum yet in terms of the recovery moving along. But everything else is making pretty good progress. The facts and circumstances vary by market, but everything else is making pretty good progress.

The one issue that we do continue to see in some markets, and it will inform all of our plans for 2016 when we get there, is just the pace at which this growing demand and recovering demand really gets turned into aggregate shipments. And again, in some markets that's a function of large project timing and how quickly DOTs can get their raised level of funding out the door into new projects. So we'll monitor that closely.

And in other markets, that's a function of these, if will you, bottlenecks in the construction supply chain that we've referenced, where availability of crews or equipment or developed land or skilled trade labor, those can really be the determinants of how quickly we grow. So net-net, we continue to see across our portfolio a steady, gradual, repeating recovery that's basically on the same kind of trend we've been on for 2015.

Great. That's very helpful. Just wanted to dive in a little bit around the fourth quarter and your annual guidance. It's a fairly wide range that you've left for EBITDA for the fourth quarter. Just wanted to be clear on that range and what could drive the upper and lower end. Is it really just a function of weather and project timing, or is there anything else that we should be paying attention to?

Garik, it's John. We're not trying to signal anything by the breadth of that range, so I wouldn't read too much into it, first. I'd read it as unchanged from our last call. That would be probably the main message. Because as I went through, most of the underlying drivers that we see are basically still on track with our last discussion and our last call.

So I think the read is largely unchanged. Yes, weather can affect it one way or the other. But I don't know that I would try to read too much into the fact that we didn't change or narrow the range.

Okay. That makes sense. Lastly, highway bill question. You sounded a bit more optimistic and certainly the discussions in Congress have been more optimistic and there's greater hope that the highway bill gets passed relatively soon. If so, could you maybe talk about how this might end up impacting Aggregates demand, whether it's 2016, 2017, and what the medium- to long-term impact would be from the highway bill?

First of all, we're very optimistic that the bill is going to get passed. We believe that the House will vote on the bill this week, as a matter of fact. When this happens, it will give certainty for states. So you will see a number of states which are starting to have held back funds for large projects, which is Arkansas has done that, now we've had Georgia talking about it, a number of states have done it. They'll have certainty for the future going forward, which will be very good for us. That is a compounding impact, because a number of states have raised their funding.

But you've got to remember, there's going to be a lag here between whether it's the increase in state funding or the federal funding, just because they've got to be able to get the funds and then they've got to be able to set up plans and let the projects, and the projects to have start construction. So at best, I would say it would be the end of 2016, but I think the highway bill, the impact of that you will really see toward the very end of 2016 and into 2017.

What is hidden in there is you will start to see states have great relief with unlocking large multi-year projects, that even if they said they're not doing it, they've got a number of them that are just hesitant to do anything until they see that bill, and that, I think, will start to flow through in 2016, but the real impact, I believe, will be 2017. John?

I think that's right.

Great. Thank you.

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

Good morning. Just one point of clarity. I know you've talked about some of the states there in the middle of the country that you guys are in that have been laggers, but going back to the slide deck, it looks like year-to-date, North Carolina was in the greater than 5% category, but then if you look at just for the third quarter, it was in the flat to down category. Can you talk about what's driving that? Have you seen deceleration there? Just your thoughts around it. That stood out to me.

I wouldn't read anything into that, Trey. North Carolina, last year, we had two very large paving jobs that we completed that weren't included in the shipments of this year. So I think that as you look at North Carolina, the demand is still healthy, it's across a broad range, whether it's res, non-res, highways or infrastructure. In fact, the North Carolina DOT just passed a bill to substantially up their funding in that state. So overall, we feel good about North Carolina. We feel good about demand growth. I think it will carry into 2016, and we'll start to see some flow-through of the $700 million increase in state highway spending. Now that won't come through right away, but you'll start to see some of it probably the end of 2016, but healthy.

Trey, you might even take that as an example. I know you know this very well, but that's why it's a bit dangerous to extrapolate too much in our business from single quarter trends, and that's, of course, on the volume side why we include both the quarterly view and the trailing 12-month, or year-to-date view. Whether it's a volume trend or whether it's a pricing or cost trend, we're always going to encourage people to make sure you also take a slightly longer term view and don't focus only on one quarter, just because there can be so much volatility.

Understood. Thanks for the clarity there. And also, as a follow-up, you guys had been fairly acquisitive, with some tuck-in deals that seemed to make a lot of sense. More recently, you've taken your foot off, at least apparently, taken your foot off the gas a little bit there. Can you talk about what you're seeing out there and how multiples are trending in the space? And then with that backdrop, update us on your thoughts around capital deployment?

I'll start, John. I think, Trey, there is a really good pipeline of acquisitions out there. As we talk about a lot, they will come when they come. That's something we can't control. Last year, they all seemed to bunch up in the third quarter.

I think what's important for us -- well, the timing of that's unknown -- what's important is the discipline of what we buy, what we pay for it, and then how we integrate it. And we need to be real clear about the synergies that are unique to Vulcan and how we leverage those. So don't read -- because something hasn't happened that the pipeline's dried up, because it hasn't. And we have not taken our foot off the accelerator at all.

And then Trey, on overall capital allocation priorities, I think the key message is that our priorities have not changed and that we're making good progress on the direction we've laid out. Just to quickly tick through a few, as I mentioned, our core CapEx, reinvesting in the franchise maintenance enhancement capital, that remains on track and is being executed well. In terms of financial flexibility and our overall balance sheet, making good progress. And again going forward, that's not a use of cash to delever, and we've also reduced our average interest expense a bit. We'll continue to look at that, of course. We remain committed to a dividend and the return of capital to shareholders through that dividend that grows with earnings. That's a Board decision, but nothing's changed there.

Tom just touched on opportunities for M&A -related growth, where we have many. It's just a question of discipline and, to some degree, seller expectations that may be ahead of where they need to be. And then, of course, as we continue to generate substantial free cash flow through time, substantial operating cash flow, we expect to have a balanced approach of reinvesting that, whether that's CapEx or M&A-led growth, and returning it, whether that's through dividend or share repurchase.

That all sounds good. Thanks a lot and good luck.

Thank you.

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

Turning back to the highway bill, the various proposals out there have some level of inflation factored in their six-year view. Can you just remind investors, would the impact of that be greater than the actual dollar, because of the types of projects and the long-term nature of projects? Just any sort of feel for, we haven't had a six-year bill in so long, it's sort of a refresher course of what to do with those numbers.

Let me start with the escalators. The Senate bill escalation is 3% annually, which would mean you start a baseline of $41 billion, in year three, it would be $45 billion, and in year six, it would almost be $49 billion. That compares to a House bill, the draft of the House bill, which is at 1.9% annually, so a little less. Now where we end up, our vote is for the Senate bill, obviously, or something beyond that, but who knows how that's going to turn out.

While those increases are really important and we'll take all the funding we can get, but more importantly, our country needs it, the confidence that this gives the states to move forward with long-term projects and very large projects is really important. It also -- even if it's a six-year bill that's only funded for three -- it locks in policy for six years, which also builds confidence, not just for the states, but for the entire construction material cycle.

So you will see this also builds on that confidence we talked a lot about for pricing momentum, because there will be funding out there which means there will be projects out there which means there will be work out there for our customers. So that overall confidence is really important, not just for our customer base and pricing, but also for the states. It will allow them to free up more work and drive demand.

So a 2% to 3% increase, whatever it ends up being, in dollars allocated, could we assume, when they hit, it would grow the infrastructure piece of your business greater than that?

Yes. Keep in mind that the parts of that funding that are non-federal are growing, typically in our markets, at a higher rate. So the state and local funding is growing at a substantially higher rate in many of our markets than you see the federal dollars. But as Tom explained, a long-term federal program is certainly helpful to getting those state level funds and revenue sources from being collected to actually being spent on key projects.

Along those lines, while we've had a number of states in our footprint increase their funding, we have a number of them right now that are critical that are debating increasing their funding. This will give confidence and it will give -- it creates momentum for those states to go do their part in much needed funding from a state and local perspective.

And at one point in the DRIVE Act, there was talk of elimination of TIFIA. Is that still a topic that would be potentially on the table?

Yes, that's really a reduction of TIFIA. TIFIA was budgeted at $1 billion a year. The DRIVE Act cuts it down to $300 million. And actually, truth be known, that's not bad news for us, because we weren't getting -- $300 million is about as good as anybody got to, if it got that far, to using those funds. So more than half of those funds went unused. That will go into work on intermodal and infrastructure projects. So what our view of that is, it's actually pretty good news, and it will get what we're using in TIFIA. The unused funding of that will go into major projects to address intermodal, in which such projects we'll actually ship materials on.

Okay. Thank you.

Your next question comes from the line of Bob Wetenhall with RBC Capital Markets.

Good morning. Just wanted to ask you, you've had a lot of success in driving gross profit per ton from $2.55 up to $3.90. How do we think about your ability to keep driving that? Because I've got to credit you, that's a ton of incremental improvement. How much more runway is left?

Bob, it's John. Our view is pretty straightforward. We think there's substantial runway left. As you'll recall from our investor day, and we laid this out on a cash gross profit basis on investor day, but as we continue to move forward in the recovery, continue to move back toward normal levels of demand with the kind of pricing environment we expect, we should be able to continue converting that incremental revenue at about 60%, and doing that through this period of time gets us to a cash gross profit number that instead of being a little bit less than $6.00 this quarter would be a little bit above $8.00. So substantial room left.

I'd remind people that as an entire construction complex, more and more people are appropriately focused on earning fair returns on capital, and earning these kind of incremental margins is consistent with that view. So we're very, very focused on it. And we don't see anything, from where we sit, that should limit our progress on that dimension in the near term.

Cool. That's encouraging. Tom, I haven't heard you this bulled up in a long time. It's a really solid quarter operationally. It looks like you're getting price for service. In your forecast, you're looking at a 7% price for the full year, and you obviously gave a confident view of demand trends going into 2016. So I'm trying to reconcile a little bit how we should be thinking the about pricing trends next year. You have a tough comp if you're up 7% this year. Should we expect pricing next year to be low single digit, more consistent with this year? Thanks and good luck.

Thanks. It's all about the environment and, I think, momentum. As you go into the fourth quarter this year and into next year, as I said earlier, we've continue to see that demand going up and very steady demand. It's about customer confidence. They have backlogs, they have backlogs with profitability in it, so they can raise their prices. So it's that confidence in the pricing environment that is so key, and we talk about it a lot, it's very predictable trends that as that volume continues to trend up, pricing will follow it. So as we say earlier, it's the campaign of pricing and those compounding improvements over time. But going into the fourth quarter and into 2016, what I can tell you is that pricing environment is very healthy.

Could you just get a little more specific in thinking about 2016 to guide us? Is it more like, hey, we had great pricing, a lot of demand, we're up 7% in 2015. Against that comp, would you expect to be at the low single digit end of the range next year or on a level more consistent with like 5% to 7% or 6% to 7%, like this year, in 2016?

Hello, Bob, it's John. While I appreciate the effort, we're not going to give guidance for 2016 on this call. But I would just reiterate what we've said which is, as we sit here today in early November, the core trends that we see in terms of demand recovery and the pricing environment, we see continuing into the fourth quarter and into 2016. So we don't see a significant shift in overall trajectory, but we're not prepared at this time to give specific guidance.

Totally cool. Good luck.

Thanks.

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

Thanks, guys. Let's take, hopefully, a short shot at beating that almost nearly dead horse here one more time. Just real quick, and briefly, I think, are you guys seeing deceleration in any aspect of your business anywhere? And if you are, where?

I think we've got some watch points. I'm not seeing deceleration anywhere. The watch points, as I mentioned earlier, one was non-res, just because of some of the leading indicators. As I said earlier, we're not seeing that on the ground, what we're bidding and what we're shipping. But we see that, we watch it. I think our folks, in talking to, are very confident.

The other place to watch is, as we talked about earlier, is to watch Texas, with the reduction in exploration drilling and the impact on jobs. While we've not seen anything impact yet, it's been an odd year in Texas, where it was the rain in the first half of the year back loaded the year. So if there is a drop-off, it would be masked. And some places we're watching. But other than that, I think we're pretty confident.

This isn't a direct answer to your question, but I would remind folks on this, as Tom was saying, on both price and volume there is, of course, as there always is, a lot of variability across our portfolio geographically. So if you were to look at the rates of volume growth to the rates of price growth, they're pretty well dispersed around the average. And so we have, of course, as we get a little more clarity on our 2016 plans, we're going to have some geographies that are certainly slower growth than others and some that are faster growth than others, and we'll have to incorporate all of that into our guidance for next year.

Perfect. Thanks for that. Second question, you guys talked about bottlenecks in some places. This is something that we've heard from builders and contractors and guys who use contractors. Can you talk about how much of an impact that's having and if there's any rhyme or reason, is it certain geographies, is it certain trades that you're seeing?

I don't know that I could put a pattern to it, but we have seen a number of our customers run into bottlenecks which impacted third quarter shipments and will impact fourth quarter shipments. Now that volume is not going away. It will be shipped. So whether that's in ready mix business, it's trucks and drivers, it's finishers. In the asphalt business, it's crews and lay-down machines, and they're not going to ramp up -- they'll ramp up a little bit, but not that we're going to add, just have it slow down.

I think what is key to what we saw in the third quarter, and see happening at the end of this year versus last year, is the sense of urgency by our customers. When I say that, last year if they got delayed, they just put it off for the next week or until the weather got right, whereas this year, we're seeing contractors work on Saturdays and Sundays. We're seeing a lot more sense of urgency of getting these jobs done, which is very good news for us because that means they have backlogs now that they've got to get this work done so they can get onto their other work, which really signals, from a macro perspective, that there's more work out there, and we continue to see the steady growth.

Got it. Thanks for that.

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

Good morning and congratulations. Quick question on the pricing. Did you guys highlight what the regional mix was versus the absolute pricing?

I think that, as we said earlier, usually the places where we are further along in the cycle, we see better pricing. So we saw better pricing in Texas and in a number of places where the cycle is further along. And as we go into next year, I think that pattern, that trend tends to hold true that the places where the cycle is a little more mature, you have a little more confidence in momentum and pricing.

Stan, this is John. One thing I'd continue to underscore for those on the call, is just as with volume, and I'll highlight both, but if you look at pricing by our, we call them general manager areas, if the average for the Company was around 8% for the quarter, we have -- and I'm just looking at the numbers we have in front of me, we have some that are 14%, 12%, 12%, 11%, 9%, and we do have a couple that are 3%, 2%, negative 1%, negative 3%. So there's a lot of dispersion based on local market factors, and in a single quarter, mix of business and other things.

The same is true on the volume side of the business. If the average volume is roughly 7.5%, then you've got some that are up 20%, 19%, 13%, 11%, 10%, 10%, but you also have a couple, as we highlighted, that are nearly, like Illinois, nearly down 10%. And so again, any single quarter view is going to have that kind of dispersion amongst our geographic businesses, and therefore all the more reason to make sure you also take these trailing 12-month or longer term views of the business.

I appreciate that. What I was trying to get at is some of the markets that have, say, mid-teen absolute pricing compared to some of the low double-digit pricing, just how that's influencing the overall, and my guess is as some of those higher ASP markets continue to improve, that the whole pricing complex will improve, as well. The comment about the bottlenecks and allowing some of the volumes to slip over into fourth quarter or even into 2016, was that a material amount, or is there any way to put a number around that?

That's really hard to put a number around. You know it's happening. You can see it happening, when you talk to your customers and in the different markets, it's pretty widespread. But to put a number on that's pretty tough.

Sounds fair. Thanks, guys, and best of luck.

Thank you.

Your next question comes from the line of Adam Thalhimer with BB&T Capital Markets.

Good morning, guys. The environmental charge in the quarter, is that something we could see going forward or is that really a one-time issue?

I think it's primarily -- this is John -- primarily a one-time issue. And you saw some, if you will, elevated above recent trend costs and relating to other income and expense, and a lot of that had to do with some one-time environmental charges, including some settlement of past liabilities. So I would think most of that is one-time.

Okay. And then you mentioned that there were some places where you had ramped up labor in anticipation of demand that wasn't quite as strong as you had hoped. Where was that?

Southeast.

Okay. Thanks.

Let me had add to that, that wasn't the demand was off. Demand was poor. It just wasn't as good as they had hoped it would be.

And Tom, we've talked about it a lot. There are going to be, as we continue to transition our crews and our scheduling levels, like many in the industry, from operating most of our plants with shared crews to having fully staffed plants again, there's going to be a little -- the transition is not going to go perfectly. The key for us is to monitor it, manage it, correct it, and to stay on top of it. But there are going to be some things like this as we transition from such historically low shipment levels back to something that's more normal, particularly given that we've been operating in some of these markets with shared crews across two or three plants. Just changing that staffing model is not going to be frictionless.

Great. Okay. Thanks, guys.

That concludes the Q&A portion of the call today. I will now turn the call back over to Tom Hill for any closing remarks.

Well, thank you very much for your interest in Vulcan. As you can tell, we will finish 2015 strong, and we're very excited about what lies ahead of us for 2016. We look forward to talking to you next quarter. Thank you.

Thank you. That concludes today's conference call. You may now disconnect.