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Good morning, ladies and gentlemen. And welcome to the Vulcan Materials Company Fourth Quarter and Full 2018 Earnings Conference Call. My name is Amanda, and I will be your conference call coordinator today. As a reminder today’s call is being recorded.
Now I would like to turn the call over to your host Mark Warren, Director of Investor Relations for Vulcan Materials. Mr. Warren you may begin.
Good morning. And thank you for joining our fourth quarter and full year 2018 earnings call. With me today are Tom Hill, Chairman and CEO; and Suzanne Wood, Senior Vice President and Chief Financial Officer. A question-and-answer session will follow their prepared remarks.
Before we begin, I would like to call your attention to our quarterly supplemental materials posted at our website vulcanmaterials.com. You can access this presentation from the Investor Relations homepage of the website. A recording of this call will be available for replay at our website later today. Additionally, you can sign-up to receive future news releases through to the quick links on the Investor Relations homepage.
Finally, please be reminded that comments regarding the company’s results and projections may include forward-looking statements which are subject to risks and uncertainties. These risks along with our other legal disclaimers are described in detail in the company’s earnings release and in other filings with the Securities and Exchange Commission.
Management will refer to certain non-GAAP financial measures. You can find a reconciliation of these measures and other related information in both our earnings release and at the end of our supplemental presentation.
Now I will turn the call over to Tom.
Thank you, Mark, and thanks to everyone for joining the call today. We appreciate your interest in our company. In addition to discussing the fourth quarter and full year results, we will also touch on several other matters of interests, including our improving pricing dynamic, our view on 2019 demand and shipments, and our financial expectations for 2019. Suzanne will review the financial shortly.
But first, let me get right to the notable things about the fourth quarter that set us up for a strong 2019. The quarter was a great finish to the year. We delivered a 24% increase in gross profit in our core Aggregates segment. We enjoyed solid shipment growth, compounding price improvements and discipline cost control.
A principal driver of the strength in the quarter was an 8% increase in total Aggregates shipments, 4% on a same-store basis. These higher shipments were largely due to the growing demand in the public sector.
The many increases in state and local highway funding that we have seen across our footprint are now turning into shipments. We are in the very early stages of big growth in highway demand. Shipments in the quarter rebounded in Texas and Virginia, states that are among our more profitable markets, and solid growth continued in Florida Arizona Alabama and Illinois.
Our pricing dynamic also improved in the fourth quarter, excluding the impact of mix, our freight-adjusted pricing increased approximately 5% compared to last year’s quarter, including mix, pricing increased 2% due to stronger shipments in relatively lower priced markets such as Alabama, Arizona and Illinois.
We have seen improving pricing momentum quarter-after-quarter. This ongoing momentum sets the stage as we move into 2019. It’s supported by improved backlogs of private and public work, customer confidence, demand visibility and logistics constraints.
Throughout the quarter and the year we were highly focused on operating efficiencies and cost control. For the quarter, we converted all of our higher revenue into gross profit, finishing the full year with a 12-month same-store flow through rate of 64% in our Aggregates segment.
Overall, for the full year we, increased total revenues, earnings from continuing operations before taxes, and adjusted EBITDA, while decreasing our overhead expenses as a percent of total revenues. For the full year, we achieved record Aggregates cash gross profit per ton of $6.32.
Our safety performance, which is a leading indicator of operational excellence and proper stewardship of our most important resource, which is our people. I am immensely proud that we further advanced our safety performance improving on our record setting results from the previous year.
For 2018, our injury rate was 0.92 per 200,000 employee hours worked, which is world-class. This is a great tribute to the performance of our people throughout our company. Our performance in our core Aggregates business improved throughout 2018. The momentum we generated and these positive trends in our Aggregates business will play forward into 2019.
We continue to see growth in private demand in Vulcan-served markets. In the public sector, demand growth is coming on strong and it’s most notable in the markets that we serve. Nine Vulcan states that generate almost 80% of our revenue have passed infrastructure legislation over the last three years. These laws have raise funding by almost 60% over 2015 levels.
Altogether, state laws and local initiatives to increase transportation infrastructure revenue have added more than $20 billion annually of funding in just these nine Vulcan states. That’s nearly half as much as the federal government provides each year for all 50 states.
So the pace of the conversion of public funding and lettings into shipments continues to accelerate and while the timing of those shipments is never precise, the direction is clearly up. This creates a healthy and positive pricing environment.
Our backlogs and booking pace are in great shape and are improving. This along with our 2019 fixed plant price increases gives us confidence in the growing strength of 2019.
Now I will turn the call over to Suzanne for a more detailed view of the numbers.
Thanks, Tom, and good morning. I will cover some key points from the full year and then move on to our 2019 guidance. For the year just ended, we reported adjusted EBITDA of $1.132 billion. This represented a 15% improvement over 2017 and was achieved despite significantly higher diesel fuel and liquid asphalt costs. Diesel costs increased $26 million or 25% in 2018 and liquid asphalt costs were up $54 million or 32%.
Gross profit in our Aggregates segment increased 16% in the year, our unit profitability increased 6% and our margins expanded due to solid growth in shipments, compounding pricing improvements and operating efficiencies.
For the full year, shipments grew by 10% or, on a same-store basis 6%, mix adjusted pricing increased by 3.5% improving as the year progressed, and importantly, our same-store unit cost of sales decreased by 2%, more than offsetting the higher diesel costs, I mentioned earlier.
Together with our improved Aggregates pricing, this disciplined approach to cost resulted in the 64% same-store flow through for the full year that Tom mentioned earlier. These results demonstrate the strength of our Aggregates-focused business even when we experience headwinds.
As stated last quarter, we remain focused on the things we can control such as our cost base and the efficiencies and operating leverage that drive our Aggregates’ profitability. We focus on these rather than things not in our control such as cost pressures, inclement weather or the precise timing of large project starts. Our focus on accountability is a large part of our success and we will continue these disciplines.
Now with respect to the non-aggregates part of our business, it was a bit of a mixed bag. For the Concrete segment, gross profit increased by 10% year-over-year. On the other hand, the Asphalt segment had a challenging year with liquid asphalt costs negatively affecting gross profit.
While we were able to increase our own prices to customers by approximately 6% in the full year, much of the rise in liquid asphalt costs occurred in the second half and so we were unable to fully offset the higher annual costs, and as a result, the Asphalt segment’s full year gross profit declined by $35 million or 38%. We will continue our efforts to price so as to offset these costs, but the impact will be gradual as we cycle through existing contracts.
In the accompanying slide, you will find information on our cash flows for the full year, but I will quickly recap the more noteworthy items.
In the year, we spent $222 million on operating and maintenance capital in line with our prior estimate. Our growth CapEx investment was $247 million, a bit lower than our guidance during the third quarter call. While some of this difference is timing related, we do remain disciplined with our capital spending and continue our careful review of the nature and scope of projects.
In 2018, we also invested $221 million in bolt-on acquisitions, which complemented our existing positions and expanded our capabilities in Alabama California and Texas. And finally, we returned $282 million in cash to shareholders through dividends and share repurchases compared to $193 million in 2017.
So moving on to 2019, when we last spoke with you, we shared a preliminary outlook that called for mid single-digit growth in shipments and pricing for Aggregates, with the caveat that our detailed budget development and reviews were under way.
Having concluded those processes our current expectations are in line with those earlier assumptions. We expect continued demand growth in our markets, particularly on the public side and this view is supported by what we are seeing in our backlogs and new bookings.
Specifically, for 2019, we expect Aggregates shipments growth of 3% to 5% and freight-adjusted price increases of 5% to 7%. Additionally, we maintain our longer term view of an approximate 60% same-store flow through rate to gross profit on a trailing 12-month basis, understanding that like this year the rate can vary quarter-to-quarter.
Turning to our non-aggregates segments which include Asphalt and Concrete, we expect 15% to 20% growth in gross profit collectively with the assumption of relatively stable liquid asphalt costs.
SAG expenses in the year are forecast to be $355 million, reflecting higher revenues. Notably, our SAG expenses as a percentage of revenues continue to decline and we remain focused on efficiently leveraging our overhead costs.
We anticipate that interest expense will be approximately $130 million and that the category of depreciation, depletion, accretion and amortization together will approximate $360 million. The combination of these assumptions results in a 2019 adjusted EBITDA range of $1.25 billion to $1.33 billion, with the low end of that range representing a double-digit increase as compared to 2018.
Now, as you know, our business is an inherently cash generative one and 2019 will be no exception. As you model our cash flows for the year I will share some thoughts with you that will help you fill in the blanks. The most important point is that we will continue to follow our capital allocation priorities and will stay within our debt leverage target range.
We project the non-discretionary uses of cash to be as follows in the year. Cash interest expense of $125 million, operating and maintenance CapEx of $250 million, and finally, cash taxes of $160 million.
The discretionary uses of our cash involve returns to shareholders, internal growth capital and acquisitions. So let me touch on each of these. First, we expect to maintain a progressive dividend, generally growing it in line with earnings to a level that is fully sustainable through the cycle.
Second, we expect to spend approximately $200 million on growth CapEx for projects that are largely underway. These include the opening of strategic quarries in California, Texas and South Carolina, as well as improvements to our logistics and distribution network and sales yards.
Third, we will continue our disciplined evaluation of acquisition opportunities as they arise and we will only invest in those which fit our strategy and which offers superior returns and synergies.
And last but not least, we will continuously evaluate the use of opportunistic share repurchases as a means to return excess cash to shareholders.
As I conclude my comments on our 2019 guidance, let me quickly address our balance sheet strength and capital allocation priorities. We are committed to maintaining our investment grade credit rating, strong balance sheet structure and debt-to-EBITDA leverage between 2 times and 2.5 times.
Currently, our weighted-average debt maturity is 15 years and our long-term weighted average interest rate is 4.6%. This debt profile, together with our strong cash flow, gives us the flexibility to sensibly and responsibly manage our business. Our capital allocation priorities are unchanged and we will be disciplined in the use of that capital, always seeking to improve our returns and shareholder value.
And now, I will turn the call back over to Tom for some closing remarks.
Thanks, Suzanne. I am proud of our people’s performance in the fourth quarter and for the full year. Despite serious external disruptions in 2018 and large increases in the cost of liquid asphalt and diesel fuel, we still delivered strong top and bottomline growth, while also growing the business in strategic locations.
Our strategy is clear and compelling. Our operational structure is lean and locally led and our positions in attractive long-term growth markets are simply unrivaled. Our teams perform to high standards, focused on continuous improvement. We are well-equipped to take advantage of market opportunities or market challenges.
We have big goals for 2019. These goals are focused on improving our performance in our operating disciplines, how we service our customers and how we grow our people. We are leveraging our strengths and growth opportunities further building on the deep engagement we have in the day-to-day improvement of our business.
We also continue our strategic focus on logistics all across our footprint, encompassing rail, trucking, Blue Water and our barge system, with a focus on improving internal efficiencies, while continuing to enhance the customer experience.
We are excited about 2019 and the following years for a number of reasons. Most notably, the sea change we are witnessing in the public sector investment in transportation infrastructure and the very positive impacts of our focus on growing unit margins. Moving forward, we are especially well suited to benefit as infrastructure demand in key Vulcan states continues to grow, fueled by these substantial increases in state and local funding.
Now we will be happy to take your questions.
Thank you. [Operator Instructions] We will take our first question from Trey Grooms with Stephens Inc.
Good morning Trey.
Good morning.
Hey. Good morning, everyone. First off, I guess, I want to just ask on the pricing, 5% to 7% increase this year. Can you talk about, is there any mix expectations one way or the other there and any color you can give us maybe on how to think about cadence and any other driver factors behind that guide?
Sure. As Suzanne and I both said, the pricing momentum in our business is clearly improving. We saw another big step up in the fourth quarter. If you look at ‘19, our confidence is really built on three things and three things that we have a lot of visibility to.
The first one would be our current booking prices continue to move up.
Number two, our bid and backlog prices are up. That’s something we see very clearly and it constitutes about 60% of our business.
And then, third, Trey, we are experiencing solid price improvements in our January and our April prices increases to our fixed plant concrete and asphalt customers. We are seeing price increases across every one of our markets in ‘19.
Supporting that confidence is our customer’s, the visibility they have in demand growth and it’s really underpinned by the improving pipeline of big public work and solid backlogs of private work. I am pleased with the disciplines in our sales force and how they blew pricing up over the last two or three quarters.
There may be a little bit of positive geographic mix built into ‘19 but the reality is, if you look at our backlogs our bid work and fixed plant prices, they are all just definitely up as -- from where we were a year ago.
Got it. That’s helpful. And then -- appreciate that. As a follow up, if you can give us a little more color on kind of how you build into that 3% to 5% volume. You mentioned solid growth of course in private demand and then I think you used the word strong growth in public demand. But any more color you could give us around your assumptions there, anything to note around weather or end market or you mentioned geographic mix, but just anything else that you could give us on how you build into that a little bit more granular?
Yeah. So I think it’s probably easier done if I just kind of take you around the country and talk about just maybe some different markets and it’s a little bit of a long answer. But California -- starting with California in the west, we see solid volume and price growth in 2019. The public side is showing real strength with SB-1 measures starting to flow through and those projects starting to ship.
Private side continues to grow both in res and non-res. We may see a little bit of weakness in housing in the Bay Area, but other than that, the private side is good and we had strong pricing California in ‘18, we will continue to see that in ‘19.
Moving to Arizona, good growth strong growth in public and private res and non-res continue to be strong. We have got some big highway work that we started shipping in ‘18, it will flow all the way through ‘19, good pricing momentum.
Texas, very strong highway work in Texas as Prop 1 and Prop 7 money start kicking-in in ‘19. This will benefit Vulcan both in Aggregates and Asphalt. Housing remains strong, non-res, not quite as strong, but growing. Overall good demand, very good pricing momentum. Now, Coastal Texas is particularly strong, we had seen the downturn, we are back there both on the private and the public side.
Moving to the middle of the country, Louisiana, Mississippi, Alabama, Arkansas, Kentucky, Illinois probably challenged demand, not as robust as the West Coast or the East Coast. But where we are encouraged about there is our execution on price cost particularly on unit margin and I am pleased with the team’s performance and maybe even though they are facing some headwinds.
Tennessee, highway work will be very good as the Improve Act starts kicking in in ‘19. We will see both Aggregates and Asphalt on those projects, very good pricing environment, we either backlog or bidding some 25 Improve Act projects now.
Moving to the Southeast and that would include Georgia, South Carolina and Florida in this, very solid growth in all segments, a really strength for us and also very good pricing.
North -- from there North Carolina, strong growth, again, in all segments and healthy price improvements. The highways are starting to kick up and funding is starting to pick up in North Carolina. And then Virginia, solid growth in all segments also, with prices moving up. This will be a strong year with prices, as I said earlier, moving up across every one of our markets.
All right. Thank you very much. That’s all very helpful. I will pass it on. Congrats on a good quarter.
Thank you.
We will take our next question from Mike Dahl with RBC Capital Markets.
Good morning.
Hi. Thanks for taking my question. Good morning. I wanted to actually follow up with my first question on the geographic commentary and drill down specifically into California and I was hoping that you would be able to give, if possible, a little more in the way of order of magnitude for growth on the public versus private and I am thinking within private specifically on those comments about residential. If we look at what the builders are reporting from an order standpoint, certainly some significant declines. Just curious kind of how much of that is just going to impact you guys with a lag or if there’s something else driving the offsetting strength in residential?
I will start with the public side. We think Caltrans is doing a good job accelerating to SB-1 funding and the lettings. We have already backlogged over 30 projects. We are -- we know of another 15 to 20 projects that will bid in the next few months. So they are really doing a good job of getting worked out, getting it let and we are starting to see -- starting to ship that.
Remember, in California, it does -- we are the largest Aggregate producer but we are also the largest Asphalt producer and these early jobs have a lot of hot mix in them. So we are very encouraged by Caltrans and how quickly they have taken that funding put in the lettings and we will see that work shift throughout 2019.
On the res side, I would tell you in the vast majority of markets in California, we continue to see growth in residential. As I called out, the Bay Area maybe -- would probably be the exception to that and that we will see some weakness there, when it’s still -- the fundamentals are there and inventories are still quite low in California.
Non-res, we see strength in our backlogs and our booking phase in non-res. So we think we will see growth in California in non-res in ‘19.
Okay. That’s helpful, Tom Thank you.
Thank you.
My second question is with respect to the guidance around Asphalt and so just hoping to understand that a bit better, I think the combined three categories you are guiding for in dollar terms an increase of something like $16 million to $22 million in gross profit. So I think there’s a comment that most of that’s driven by the Asphalt part, but can you just give us a little more detail around how much improvement to expect in Asphalt and I know you mentioned timing, but just given where Asphalt costs are currently, should we expect that that whole $54 million is recouped at some point over the next, call it, four quarters to six quarters?
Well, I think, the improvement -- the 15%. 20% that Suzanne talked about in other products, the -- you are right, the majority of that is in Asphalt. Looking back a little bit ‘18 was just a really tough year for us in the Asphalt product line. We had -- wet weather didn’t help us but really we got caught with the cost of rapidly rising liquid cost which cost us over $50 million.
But with the new public funding coming through strong in Vulcan markets, we are expecting to see double-digit growth in volumes in ‘19. It’s supported by backlogs and what we see bidding in highway lettings in ‘19 which is very strong.
We believe that the liquid prices should stabilize, are stabilizing and we think we will see some modest improvement in unit margins as we work through ‘19. Remember we have been -- we raised prices dramatically all the way through ‘18 so we are starting to catch that.
We are always behind the liquid price. We are starting to catch it now, and we should see much improved performance in the Asphalt product line in ‘19 over ‘18 driven by demand and price improvements and stabilization of pricing or cost in liquid AC.
And I would just add to that in terms of the pricing, I -- in my remarks I had called out the fact that we had increased prices by about 6% in that Asphalt sector for the full year. But in the fourth quarter, we increased by about 7%, so you can see that that is on an accelerating trend as we are trying to catch up with those costs, the majority of which happened with big spikes in the second half of the year.
Got it. Okay. Thank you both very much and nice results.
Thank you.
Thank you.
We will take our next question from Nishu Sood with Deutsche Bank.
Hi. Good morning.
Thank you. I wanted to ask about the cost performance in Aggregates, you obviously had good fixed cost leverage and cost outs enough to offset rising prices, for example, diesel and other costs. As we look ahead into ‘19, should we look at the efforts in ‘18 as being more one-off efforts that might not be repeated or can you keep up the kind of pace of the cost outs in ‘19?
Yeah. Look, Suzanne and I are very proud of our operating teams and their performance improving their operating disciplines in the fourth quarter and actually throughout 2018. As I mentioned in my remarks, they finished the year with a world-class safety performance, which is -- just speaks to the discipline in operating side of the business.
And they actually lowered their cost in the fourth quarter and the full year in the face of dramatically rising fuel costs and probably some pretty wet conditions. I’d just say that’s just a job well done and great momentum that we carry into ‘19.
As you guys know this operating discipline is a key part of our continuous quest to improve our unit margins. It’s just part of that formula and the good news I would tell you is, I don’t think our operators are done. I think they still have potential out there and I kind of know this that they are working hard to implement their 2019 execution plans, while they build on that ‘18 performance. So I just tell you, I am really pleased with our operators and encouraging them that we are not done that we will keep the momentum and improve on it in ‘19.
And I will just add to that too. I mean when you think about our business, you can really drive it down to something pretty simple that sets us apart from others, perhaps, and that is our unit profitability.
Our main goal is to drive that unit profitability, that’s something that isn’t one year initiative, as Tom said. It’s going to be something that’s ongoing because you can’t stand still with that. You have got to continue to move it forward and we have got three ways to do it, you focus on pricing, you focus on volume and then you focus on operating efficiencies, and the discipline and the accountability in each of the plans.
And like Tom, I am very proud of what we have accomplished here for the year and in particular for the last few months. I especially like focusing on the operational efficiencies and driving costs at the plant level because I call that self-help.
It’s something that’s within our control. It’s not something that you are waiting for that could be impacted by a number of things, not least of which is weather. So, yes, that’s an ongoing effort and it’s something, I can tell you, we think about and talk about here every single week.
Got it. No. Appreciate the color there. Second question I just wanted to ask about the volume-price relationship. I mean, obviously, there’s a pretty well established relationship there and we are seeing it in effect, but as volumes are accelerating pricing is as well. My question is we have had a much choppier environment for Aggregates volumes growth over the last couple of years versus let’s say earlier in the recovery. Does that affect the relationship between volume and pricing in any way, I mean, we have heard arguments from investors both ways, it might depress the relationship or it might enhance it. What are your thoughts on that, if there is any change from the choppiness?
I think it’s really the visibility to the future is what impacts price and so that people know that there is volume coming and jobs coming they can take risk on the jobs they are bidding at that point. And that’s really important because as we move through the recovery, the public side moving up rapidly is much clear, those jobs are very public.
The DOTs, everybody knows within six to 12 months of what’s going to let and how it’s letting and those lettings are increasing dramatically in our markets. That does a whole lot to give our customers and entire segment visibility to what’s coming to be able to risk price.
Yeah. And I would just add to that with respect to the highway shipments, I mean, the timing might not always be precise and crystal clear on those, but the direction of travel certainly is. It’s something that we and our customers and others in the space can get their minds around.
And I think that the sales folks here really did a good job in the early fall kind of setting the tone for price increases upcoming volumes by sending out price increase letters and talking to our customers really, really early on that.
Because that, if you have that conversation with your customers and everyone understands what the expectations are prior to our customers speaking to their customers and going down the chain, it just gives them the time to do what they need to do and it just creates a much better pricing environment and I think with the sequential and year-over-year pricing improvement that we saw Q3 and Q4, I think it really that was a good starting point for it.
Got it. Thank you.
We will take our next question from Jerry Revich with Goldman Sachs.
Hi. Good morning.
Good morning Jerry. Good morning.
Hi. Good morning.
Really nice to see pricing cadence, it’s not normal seasonality for pricing to really accelerate into the fourth quarter. So I am wondering, if you folks can expand on just the comments you made on the drivers of price acceleration into the fourth quarter of ‘18 and as I think about what ‘19 could look like as a result relative to the guide, the starting point is plus 5 and we have price increases coming over the course of ‘19. Seems like it’s pretty easy to get toward the higher end of your guidance range for pricing if that’s the cadence, I am wondering if you care to comment on that please.
Yeah. I think that, first of all, I -- we are very pleased with the momentum and the pick-up. That’s what we thought was going to happen in the second year and it just goes to our visibility as I spoke to earlier of the bid work and the backlog pricing and it’s underscored with the fixed plant pricing that we saw in January and we will see in April.
We have done this before. We have seen it before. We have stepped up and it just over time in sequence. So I think we feel very good about it. Whereas this past year in ‘18, was very much back-half loaded. I think we will continue to grow prices as we go through ‘19. I don’t think it will be as choppy as ‘18. I think it will be much smoother. But as we work off old work and we put new work on it will move up.
Now remember, the comps will get tougher as you go throughout the year also. But -- so I would always, I think, we will see the prices ease up as we go through the year. I just don’t think it will be quite as choppy if ‘18, if I am answering your question.
Yeah. That’s helpful, Tom. Thank you. And just to take a step back in the early phases of this recovery, you folks have certainly been leading the markets from a pricing standpoint and you have highlighted at your Analyst Day that that had come at the expense of some share. Are we at a point where your share you view as normalized and we are now back to the point where we could lead the market in pricing beyond ‘19, I guess it feels like you have got pretty good momentum heading into ‘20 and I just want to make sure I understand your view of the competitive landscape, as well as we exit ‘19 at a pretty healthy pricing clip.
I think whether it’s the competitive landscape or our customers, I think, what’s really going to support pricing and I am kind of repeating myself is the visibility and the clarity to the growing public work and while we will see big growth in public demand in ‘19 and solid in private, ‘20 will be more public work and ‘21 will be the more public work.
Because remember in all of these states where we have seen increasing funding they have got to mature through the process and so the jobs and work are going to build as we are able to take those funds and put them to work and hopefully put them to shipments of stones. So that visibility and that growing demand was really what’s going to support price increases throughout Vulcan-served markets.
Heading into ‘20?
Yes. ‘20 and ‘21.
Perfect. Thank you.
Thank you.
We will take our next question from Scott Schrier with Citi.
Hi. Good morning Scott.
Hi. Good morning. I want to start off with a broad-based question on the guidance and understanding the components that go into it, volumes, price or incrementals. I am curious you have been talking about it in the past several months everybody has that we are going to be a little bit more thoughtful about the way we model weather in there that not every day is going to be a blue sky. So, with that in mind, if we have more normalized weather this year, does that mean we hit the midpoint of guidance straight and when I say normalized, I mean maybe a little bit less of the rain that we have had. Does that mean we hit the midpoint of that guidance or does that mean we are more at the high-end? I just want to see how you thought about that in the context of your guidance.
You know, I think when we put the guidance together, we were thoughtful in our guidance about the weather impact knowing that the last couple of years we have seen wetter weather. I think if you look at the last two quarters, it gives me a lot of confidence in that guidance and I will give you two, three reasons why. One, the price increases continue to accelerate and we have got a lot of confidence in that.
Two our sales volumes in the fourth quarter were really strong in spite of wet weather and a little -- that being said, that tells me that the contractors have got big backlogs and they have got to get work done. When the sun comes out, they got to make hay and we saw some of them really execute on that in Q4.
And the third, as we talked about earlier, our operators executed with real discipline in the face of higher fuel costs and tough wet conditions in the fourth quarter and we will carry that forward.
So, as we look into ‘19, I think that guidance I think we were thoughtful about weather and maybe some other headwinds and what we have to do regardless of the outside forces to make sure that we make our guidance.
Got it. That’s helpful. And for my follow-up, I want to follow up earlier on the cost question, obviously, you had very strong results in the quarter, 75% incremental. It was a pretty easy comp, so you talked about the diesel and even with that you are up on a two to -- both at for two years and three years on your cash gross profit per ton understanding 5% like-for-like pricing obviously helps. I am just curious, in this particular quarter, is there anything else that we should consider whether there is any kind of inventory build or anything in there? And then, going forward into ‘19, should we be taking into account any consideration outside of normal trends for inventory builds or stripping costs or anything of that like?
Yes. Sure. I will -- I will try to address just your first point on whether the comps were easier or not. I mean we have talked about a lot of the pressures that we had -- cost pressures we had this year and in particular in fourth quarter those continued.
Our diesel fuel pricing was actually or our diesel fuel costs were actually higher this year in fourth quarter than last year. We had, even though we didn’t call them out, because we are trying to perhaps move away a bit from calling out some of these, what I consider to be sort of relatively small items unless it’s material and unless it’s trend-worthy.
So we didn’t go through a detailed weather exercise in the fourth quarter. Although, I think for those of us who watch the weather channel obsessively it certainly was pretty wet in fourth quarter.
So I think again with $5 million more in diesel fuel with some disruption from rail where we had to truck items around quarter-over-quarter, I think, that that increase in EBITDA of $53 million was pretty real. I am not sure that I would necessarily consider that to be the easiest comp in the whole wide world.
You also raised the question on inventory in the fourth quarter and what we did with respect to that, and look, our inventory is based on production planning that we do every single week. We put together that production plan based on the demand picture that we see what is in our backlog and what we expect very near-term shipments to be.
And so, in the quarter we had a very slight inventory build, it was around 3 million tons or so, the delta between Q4 ‘17 and Q4 ‘18 and that had less than -- certainly less than a $10 million impact. It is mostly fixed cost that you are talking about. So pretty minor stuff with respect to that and again it was on the basis of what we expected those really near-term shipments to be and I am glad we did it. Tom, do you have anything to add?
No. I think you covered that well. Thank you.
Great. Thanks a lot. I appreciate all the detail and the color, and then, obviously, congrats on a strong finish to a challenging year and good luck.
Okay. Thank you, Scott.
We will take our next question from Kathryn Thompson with Thompson Research Group.
Hi. Thank you for taking my questions today.
Hi Kathryn.
Good morning.
Good morning. One is just a follow-up on California, and it really has to do more with conversations that we have had with a variety of different industry contacts in the state certainly are seeing a good flow of infrastructure projects, but leading into the November it’s our impression that we are really now seeing more the benefits of local measures and haven’t really seen the full effect of SB-1, would love to get your color on that commentary and your thoughts on the local measure versus seeing the SB-1 momentum right now. Thank you.
Yeah. I think your question was, are we seeing the impact of SB-1 and the local measures or either, what’s the question?
Are you seeing -- yeah. Are you seeing a greater impact of local measures right now and is there really more to come with SB-1, I mean...
Yeah. So the answer to your question is, we are seeing both the impact of local measures and SB-1 and in those projects, there is some of the local measures that I named, the 30 projects that we backlogged and the 15 or 20 that we will bid in the next couple of months, so both of those -- both local measures and SB-1are flowing through.
I think the bigger impact right now that we have seen in the projects we backlogged has been SB-1. But remember there’s $46 million of that is locals that are coming. So you are right to point out that they will really -- they will start to -- they will start to impact ‘19 though you have much bigger impact in ‘20 and 21 along with SB-1.
Perfect. Thank you. Just wanted to get an update on Aggregates USA integration and really focusing on what progress you are seeing with the revenue synergies that you had outlined previously really realistically would be fitting in ‘19 into ‘20, but if you could you just give an update on revenue synergy progress with Aggregates USA? Thank you.
So you know first of all, we continue to be really, really happy with that acquisition. It’s a great strategic fit between their distribution network, our distribution network, their quarries and our quarries and how we piece all of those pieces of the puzzle together.
Our execution has been very successful. We are actually ahead of the planned -- quite a bit ahead of the plan on unit margins. We had -- as you know, we had some rail service issues that we experienced in ‘18 that hurt us, but we think we put most of that behind us and as we look at Ag USA, we think ‘19 is shaping up to be a very good year to take full advantage of the synergies between all those operations.
Great. Thank you so much.
Thank you.
We will take our next question from Garik Shmois with Longbow.
Good morning, Garik.
Good morning, Garik.
Hi. Good morning. Congratulation on the quarter.
Thanks.
Yeah. I just want to nitpick a little bit on the volume guidance of 3% to 5%. It is a little bit less than the 6% same store volumes that you put up in 2018. So I just kind of want of reconcile some of the bullishness that you are expressing particularly on the public side versus the expected volume growth in 2019. Just wondering -- I know you had some large project shipments in I think Illinois, Arizona, just wondering if there’s maybe some timing issues that might be weighing on the potential growth in 2019 or if there is any labor constraints or anything else that you might be able to call out that is underpinning the guidance?
As I have talked about in the range, I think, we try to be very thoughtful as we went into ‘19 about both weather -- maybe wetter weather or weather issues, also as you just called out, very thoughtful on the timing of large projects. So -- and so that we wouldn’t maybe have to have those big swings.
But I think that we are confident in that guidance. We feel good about it. The private side continues to be healthy. We see growth across our footprint in the private side and the public side, as we said, that’s -- it’s our best estimate, educated estimate of the timing of those projects with new funding. As always, that can accelerate or slip and so that would be the delta in the range and also, like I said, we have had wet weather for the last two years and we try to be thoughtful about that also.
Okay, understood. And just a follow-up, just on volumes and just the cadences as you expect it to progress over the course of the year, understanding you don’t provide quarterly guidance. But you do have some tougher comparisons in the middle of the year. So just wondering if maybe you can maybe help us with expectations on how the volumes are expected to progress.
I don’t see ‘19 as a cadence any different from any other year. The first quarter is always just dicey and so weather dependent. Second quarter we start to build as the construction season comes on. Third quarter is usually the strongest quarter, obviously, we have gotten blown up a few -- for the last couple of years with hurricanes. But we -- and then the fourth quarter again can be very good if you carry weather forward.
So I wouldn’t see the changing any at all, and I think, we have got backlogs of good solid both public and private jobs, some of which are large -- some of which are large and we are already shipping. So I think that we may have a little bit better clarity on the timing of large projects than maybe we had in ‘17 or ‘18, but the cadence through the year of shipments, I wouldn’t expect any big changes to it.
Yeah. I will just add to that. I agree with what Tom said as part of coming in relatively new here. One of the things that I spent time looking at is really how -- I looked at it not just on a revenues basis but also from an EBITDA basis in terms of what is the phasing during the year.
You are right, we don’t give quarterly guidance, but I found it interesting that if you go back for a three year historical period or a five year historical period and you sort of look at how these things -- how our business phases by quarter. It’s actually a much more narrow band than you might think it is. So I would encourage you to go back and just have a look at it in that historical way. Yes, there will always be some puts and takes between quarters but it’s a bit tighter than you might think.
Okay. We will do that. Thanks again and best of luck.
Sure. Thanks.
We will take our next question from Phil Ng with Jefferies.
Hey guys.
Hi. Good morning, Phil.
Good morning.
Good morning. You are expecting a pretty noticeable uptick in pricing for your Aggregates business. But if pricing falls let’s say a little short, closer to the lower end of the range that you have highlighted. Do you have enough levers on the efficiency front to kind of deliver your 60% incremental margin target?
Short answer to your question is yes. And I feel a lot more confident about that based on the performance of our operators and their improvement in efficiencies in the second half of 2018. They worked very hard on focusing on those efficiencies, particularly in our larger operations and now we are carrying it through all of our operations as we head into ‘19.
So I think we feel very confident that our cost will pull-through no matter -- that our costs will come in as expected, no matter what gets thrown at us, and quite candidly that’s what our operators will tell you their job is.
Okay. That’s excellent. And I guess, when you think about government shutdown risk, that’s obviously dissipating right now, but how do you think about the prospect that the two parties come together and get an infrastructure bill negotiated this year and what’s the risk that projects get delayed on the public side next year with funding winding down on the federal side by 2020 if no new bill gets passed? Thanks.
The short answer is shutdown was really no impact. We had a few states that pushed jobs back about a few months into later lettings, but really no impact on us, and as you know, the Feds already distributed the funding for ‘19.
On the federal highway bill what we know this, is that House T&I Chairman Peter DeFazio is working hard on an infrastructure bill. DeFazio wants to solve the Highway Trust Fund issue. We for sure want to support him in that and our country needs that. So the need is there, both parties want this to happen. But I wouldn’t venture to guess what’s going to happen with that yet.
Now if -- as we go into ‘20 and we have seen -- I don’t see any pushback or problems with the FAST Act in ‘20. If you get to the end of it, it runs out, the Feds are not going to let funding go down they are not going to let it to be unfunded. Now that gives some -- I believe in ‘21 that will give some -- maybe some short-term views for problems for DOTs.
But remember you also have massive state and local funding improvements and as we called out in the prepared remarks, the federal highway bill is $45 million. That’s not going to go away, but in our markets -- per year, but in our markets, $45 billion, excuse me, but in our markets you have an improvement of another $20 billion per year that’s just now starting to flow through in increase.
So I am always worried about the Highway Trust Fund. It’s something we work hard on. It’s something everybody needs. But I think we will be fine as long as our federal government works hard to fix that problem and it may take some time and some effort to fix, but I believe it will be fixed.
Okay. Thanks a lot.
Thank you.
We will take our next question from Stanley Elliott with Stifel.
Hi. Good morning.
Good morning guys. Thank you all for fitting me in. Quick question, when you talk about the CapEx piece and you mentioned kind of the extra $200 million of growth CapEx. How long do you foresee that -- the plans, I guess, on a go-forward basis, because at some point, right? I mean you are going to be close to the low end of your leverage target by the end of this year. Certainly by next year for sure and depending upon kind of that swing flex piece on the CapEx side, it could leave you guys in a pretty interesting situation?
No. That’s right and good for you for getting to that math quickly. You are right. If you run that through we will be well within that that 2 times to 2.5 times adjusted EBITDA debt band that we always talk about or leverage brand.
I think it’s management’s responsibility to make sure that we have a good balance sheet structure and we have a responsible, somewhat conservative leverage target. I believe we absolutely have those in place. I think it’s also our responsibility to create as much flexibility and optionality as we can for the company and I think being well within that leverage target certainly gets us there.
If we find ourselves approaching the low end of the leverage band or even outside it, as we go forward, what we would, I mean, we will go back to our capital allocation priorities. I mean that’s really why we have those in place and there is a priority waterfall to them which is investing in our same-store growth.
It is the least risky and it is the most profitable for us. Then we look to internal growth projects that are high returning. Then we potentially look to M& A being very disciplined in our approach to that. It’s got to be strategic and it’s got to add value to the company and have a high return and failing that then we have the opportunity to return excess cash to shareholders.
So I think our view now is that we want to set ourselves up to have that flexibility and optionality with the cash and as we begin to approach that point, I am sure at the board level, we will have -- be having discussions about exactly how to invest that cash and how to distribute it in such a way that we will drive shareholder value and so I would characterize it as a quality problem to have.
Yeah. No doubt. And then last one, do we still think about kind of the business kind of the 255 million tons kind of a mid-cycle number or normalized number that equates to $8.25 cash gross profit per ton or have those numbers changed either through internal efficiencies, better logistics, a larger footprint, anything like that would be helpful.
Fundamentally, we still think about it the same way. I think if you would ask us five years ago, where are you on that curve, I would tell you a tale of two different answers. One I think we would have thought that some of the public would have come on earlier and we may be a little ahead, we would have been a little bit ahead of volume. If you look to unit margins, based on where we are with these volumes, we are ahead of the curve I think and moving up rapidly. So, but fundamentally the answer to your question is yes that’s still the way we look at it.
Perfect. Thank you. Appreciate it. Best of luck.
Thank you.
We will take our next question from Adam Thalhimer with Thompson Davis.
Good morning Adam.
Thanks guys.
Good morning, Adam.
Good morning and congrats on a great Q4.
Thank you, Adam.
I wanted to zero in on the M&A pipeline first, Tom, do you think this is a good environment, I mean the privates want to sell right now and then are you seeing large companies for sale small companies for sale or both?
I don’t -- the timing of that is always you got to watch whatever comes up when it comes up and you can’t control the timing of M&A projects. There are some buzzers around out there. We are always looking at those. But it goes back to our simple answer which is discipline, choose the markets you want to be in, what are the synergies that are unique to Vulcan, what can we do with it, make sure you buy it at a price that is reasonable and once you get it, make sure you integrate it effectively, efficiently and fast. So we are always looking, there is always something bubbling out there, but the timing of that and the disciplines are key.
Okay. And then also wanted to ask you about the Texas Gulf Coast, you mentioned that quickly, but can you give us some additional color on what you are seeing there and what impact that could have on your business in ‘19 and ‘20?
Yeah. So Houston really saw a downturn in ‘17 -- kind of late ‘16 early into ‘17. It has rebounded both on the public side, and then in Texas you also got added to that massive funding in highway projects throughout Texas, many of those are along the Gulf Coast, including the best part in Houston. So economy and demand in Gulf Coast and in Houston will be very healthy we think in ‘19 and ‘20 driven by both the public side and the private side.
Now there are also along the Gulf Coast both in Texas and Louisiana there’s a lot of projects in the pipeline at various stages of development from an energy perspective, particularly LNG and refinery expansion.
We are tracking 10 of those projects right now in Louisiana and Texas. It’s a little early predict for ‘19 when -- at where we are in ‘19, when those projects will ship. Now these tend to be very large, very fast projects that are right in our wheelhouse because of our unique Blue Water capability and the massive delivery you can do in one swath with those 60,000 tons ships.
We believe we will see a lot of these projects start in the next two to three years. We may see a little bit of that in volume at the end of the second half of ‘19, but I wouldn’t make a call on that at this point.
But it’s in the pipeline and we will follow it and we think they are going to go but the timing and that’s permeating in all those kinds of things we just wait and see, but good stuff to come along the Louisiana and Texas Coast.
Perfect. Thanks Tom.
Thank you.
We will take our next question from Brent Thielman with D.A. Davidson.
Great. Thanks.
Good morning.
Hi, Brent.
Good morning. May be back on the growth CapEx, if you sort of look at the slate of other internal things you could be doing over the next 12 months. I am curious sort of the sensitivity to that estimate for the year, could it be far too modest if you just pull a trigger on a few of those items, call it, prospective kind of near-term investments?
Yeah. No. It’s a very good question, I mean, again, we went through that thoughtfully, we went sort of project-by-project talking about the ones we might kick off in ‘19. Although, I will tell you a lot of the money set aside for ‘19 is really to finish off projects that were begun in ‘17 and ‘18 because some of those are sort of what I will call long lived projects, particularly as it relates to opening new quarries in markets that are going to be really important to us like California, South Carolina and Texas.
So we have put together what we think is an appropriate level of guidance in spending $200 million, we will look at if other projects are brought to us to look at that we think might be incredibly meaningful and returns enhancing to the customer, I mean, to our company then we will certainly consider that and we will keep you updated on that as we go forward through the quarter, but we are pretty comfortable with the $200 million that we have given at this point for ‘19.
Yeah. I’d add to that that remember these -- the greenfield projects are some of our highest returns. They are like an -- they take a long time to do. They are very expensive to get permitted and get up and take years, but once you get them, it’s decades and decades long quarry. They look like an acquisition without paying the blue sky. They also take a little longer to ramp up, but once you get one of those quarries developed, the returns are quite enhancing.
Okay. Appreciate that. And then maybe a follow-up back on Asphalt, I think, Suzanne, you mentioned sort of this gradual impact of offsetting the higher liquid asphalt costs as you go through these contracts. This isn’t -- you guys have been through this many times before obviously. But would 2019 look any different than past cycles where you have seen these costs fluctuate maybe because of jobs you are working on are larger than usual?
I wouldn’t think they look a lot different from past cycles. I have seen too many of these to count I think. But I wouldn’t say you look a lot different than other cycles. The big question is, we have seen liquids stabilize. We think it will maybe stay at where it is or maybe come up a little bit in the year, but not the big spike in ramp up that we saw through ‘18 and in doing that you will have that time which we are already catching up on to raise prices and get that material margin where it ought to be.
I think we are already seeing that. I believe that based on our hot mix prices and our liquid prices, but I’d also tell you, the first quarter is a tough barometer there because the Asphalt business is just tough in the first quarter. The weather keeps just cold and wet so it keeps just -- so the tale of that will be how do we -- how does that come across in Q2 and we will have obviously better visibility of that when we get to the end of the first quarter.
Okay. Thank you.
Thank you.
At this time I’d like to turn the call back over to Tom Hill for any additional or closing remarks.
Thank you. Suzanne and I are very proud of the performance our operators and our teams did in the fourth quarter and the second half of ‘18. We carried that momentum into ‘19 and it gives us a lot of confidence in our guidance. But we want to thank you for your interest in Vulcan Materials and we look forward to talking to you throughout the quarter. Thanks for joining us today.
Thank you.
That concludes today’s call. Thank you for your participation. You may now disconnect.