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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen and welcome to Vulcan Materials Company's Fourth Quarter and Full Year Earnings Conference Call. My name is Kevin, and I will be your conference call coordinator today. As a reminder, today's call is being recorded. [Operator Instructions].
Now, I will turn the call over to your host, Mr. Mark Warren, Vice President of Investor Relations for Vulcan Materials. Mr. Warren, you may begin.
Welcome everyone to Vulcan Materials’ fourth quarter and full year earnings call. With me today are Tom Hill, Chairman and CEO; and Suzanne Wood, Senior Vice President and Chief Financial Officer.
Today’s call is accompanied by a press release issued this morning and a supplemental presentation posted to our website. Additionally, a recording of this call will be available for replay later today.
Before we begin, please be reminded that comments regarding the company's results, the projections -- and projections may include forward-looking statements, which are subject to risks and uncertainties. These risks, along with other legal disclaimers, are described in detail in the company's earnings release and in other filings with the Securities and Exchange Commission.
You can find a reconciliation of non-GAAP financial measures and other information in both our earnings release and at the end of our supplemental presentation.
I'll now turn the call over to Tom.
Thank you, Mark, and thanks to everyone for joining the call today. We appreciate your interest in Vulcan Materials Company. 2019 represented another year of strong earnings growth and demonstrated the strength of our aggregate-centric business model.
But before we talk about our accomplishments for the year, I want to spend a few minutes telling you about the good progress we made again in the fourth quarter. Aggregates gross profit was $274 million, a 7% improvement versus the prior year fourth quarter. Aggregates shipments increased by 4%, with markets in the Southeast and Southwest reporting strong growth.
For the quarter, freight adjusted average sales prices increased by 5.5%, all key markets reported year-over-year price growth. And the 70 basis point benefit from mix was due in part to above average growth in Gulf Coast markets. They are severed by our unparalleled logistics network. This growth is noteworthy.
The fourth quarter of 2018 made for a tough comparison with a 24% increase in Aggregates gross profit, 8% growth in volume, and 5% mix adjusted price growth over 2017. Gross profit per ton in the quarter improved $5.32 and was negatively impacted by three things, most of which are timing and mix related.
First, repair and maintenance costs were higher in the quarter. As we said before, certain types of repairs and maintenance are routine and scheduled. Therefore, the associated costs are more predicable.
Other repair maintenance activities are planned annually, but the exact timing is more difficult to predict with precision. You monitor the situation throughout the year to determine the optimal time to do the work and as a result the cost can be lumpier. This quarter includes several of these types of repairs.
In addition, the rigorous inspection and maintenance protocol that we rolled out as part of our operational excellence initiative in early 2019 grow some of our costs higher in the second half of the year. We expect to continue to see additional repair and maintenance costs in 2020 and have incorporated them in our guidance. Setting high standards is the right thing to do for the long-term health of our business.
Our employees are highly engaged, and they are focused intently on the mobile equipment and fixed plant inspection and maintenance aspects of this initiative. In doing so, we can preempt or avoid equipment failures, which could result in much more expensive repair cost.
The second factor that impacted our gross profit in Aggregates was actual geographic mix versus our expectations. Our fourth quarter shipments were robust in markets along the -- along the Gulf Coast, which are served by rail and water. Remote serve markets carry higher selling prices, but also carry higher cost, particularly if the tons are shipped by rail versus blue water. In the fourth quarter higher volumes from rail distribution, negatively affected margins.
The third factor was lower revenue and earnings from certain aggregates locations, which also generate tipping fees on clean fill. This result was mainly a matter of timing of projects expected to contribute to the fourth quarter. Instead, the projects were delayed, but will benefit 2020.
Finally, I'll also highlight our fourth quarter asphalt results, where gross profit increased by $4 million compared to the fourth quarter last year. This was driven by 10% improvement in shipments and a 3% improvement in average selling prices. In addition, we expect -- we experienced volume growth in California, in spite of wet weather in the fourth quarter. These volume and price improvements in addition to a 12% reduction in the average unit costs for liquid asphalt drove a 52% improvement in unit profitability in asphalt.
Suzanne will share with you the detailed numbers in a moment. But first, I'd like to summarize our full year 2019 accomplishments and talk about why we're excited about 2020. Let's start with the most important aspect of our business safety.
In 2019, our people led us to another year of world class safety performance despite being busier than ever. We also completed the rollout of all of our strategic initiatives commercial excellence, operational excellence, logistics, innovation and strategic sourcing. We believe these initiatives will help us accelerate growth towards our long-term goals.
On the financial side, aggregate shipments grew by 7% and average freight adjusted sales price was 5.6% better than 2018. Aggregates gross profit increased by 16%, and unit profitability grew by 8%.
Cash gross profit per ton was $6.74, another step forward on the path to our longer term goal of $9 per ton. And while our Non-Aggregates segment gross profit was flat year-over-year, the second half showed signs of improving trends in the Asphalt business.
Our adjusted EBITDA for the year grew by 12%. And importantly, our return on invested capital increase to 13.9%. As a whole, we were pleased with our annual results. But we aren't satisfied with just setting records. Our focus is on getting better every day and reaching our potential.
As we enter 2020, we are well-positioned to take advantage of supportive markets and deliver another year of double-digit earnings growth. Our markets will continue to benefit from both public construction demand led by highways and a resurgence in demand on the private side, particularly residential.
The public highway demand is there, as all the revenues to support the investment. As we seemed -- excuse me -- as we said before, it's not a matter of if, but rather when the projects are finally started and shipments begin. To be fair, we seem -- we've been a little bit disappointed over the last couple of months with the speed with which the states are letting work. However, we remain confident that these projects are a go in the near to medium term.
With respect to residential demand, which we've been a bit cautious, but now we're seeing a very positive turn in leading indicators, with Vulcan markets outpacing the rest of the country. Underlying demand fundamentals, including population and employment growth remain firmly in place and underpin our expectations of growth in private, residential and non-residential construction.
These demand characteristics a catalyst for positive pricing environment in 2020. And demand visibility is also an important contributor. With our geographic footprint, focus on the higher growth markets, we are in the best position to capitalize on public and private demand.
So what does all this mean for 2020? We anticipate a 2% to 4% growth rate in aggregate shipments. Aggregate freight adjusted sales prices are expected to increase between 4% and 6%. Additionally, we maintain our longer term view of approximately 60% same-store flow through rate to gross profit on a trailing 12 month basis. Overall, we are looking at double-digit growth in Aggregate segment earnings.
Moving to our Construction Product segment, we expect 10% to 15% growth in gross profit collectively. This contemplates relatively stable, liquid cost in Asphalt.
I'll now turn it over to Suzanne for further comments on our 2019 full year performance and 2020 guidance.
Thanks, Tom and good morning to everyone. In 2019, our Aggregates volume growth reflected the solid underlying demand fundamentals in our market, including growth in population, households and jobs. That is two to three times that of other markets over the next 10 years.
Shipments in certain markets in the Southeast, Mid Atlantic and Texas were particularly strong. Average sales prices in Aggregates increased and higher prices were widespread, with all major markets reporting improvement.
For the full year our costs were up 4%, contributing to a 48% same-store aggregates flow through rate. As Tom mentioned, there were several factors that affected this rate, particularly in the fourth quarter.
Our segment gross profit increased by 16%. This continued progression underpins our ability to deliver attractive earnings growth. SAG expenses while higher in absolute dollar terms decreased as a percentage of total revenues.
Moving on now to the balance sheet, cash flows and return on investment. We made progress in each of these areas. Our balance sheet structure remains strong, with a weighted average debt maturity of 14 years, and a weighted average interest rate of 4.4%. Leverage was reduced from 2.6 to 2.2 times, well within our target range.
We generated $820 million of discretionary cash flow and we followed our capital allocation priorities to determine the most shareholder returns enhancing use of that cash. In 2019, this included investments and attractive growth opportunities, as well as return of cash through dividends and share repurchases. And as a result, our return on invested capital improved by 130 basis points on an adjusted EBITDA basis.
I'll move on now from 2019 to 2020. Tom has already covered the operational aspects of our segment guidance, so I'll comment on a few other points. SAG expenses are forecast to be approximate $365 million in 2020. This represents a reduction in absolute dollars, as well as the reduction in the ratio of expense to revenue. We already have taken steps to ensure we are efficiently leveraging our overhead.
We anticipate that interest expense will approximate $125 million and that depreciation depletion, accretion and amortization will approximate $385 million in 2020. And our effective tax rate -- our effective tax rate will be approximately 20%.
The combination of these assumptions lead us to an adjusted EBITDA range of $1.385 billion to $1.485 billion for 2020. The midpoint of this range represents a 13% increase as compared to 2019.
Moving onto our cash flow expectations. Remember that our business is an inherently cash generative one, and 2020 will be no exception. We anticipate discretionary cash flow of approximately $800 million. As you model our cash flows, I'll share some thoughts to help you fill in the blanks.
As guideposts, we will continue to adhere to our unchanged capital allocation priorities in directing our uses of cash, and we will stay within our target leverage range. We expect the cash interest expense of $120 million, operating and maintenance CapEx of $275 million and finally, cash taxes of $180 million.
The discretionary uses of our cash involved returns to shareholders, internal growth capital in acquisitions. Let me cover each one of those. 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 already largely underway, as we did not spend the full amount of growth capital we projected in 2019. These projects include the opening of a new quarry in California, capacity expansion at other quarries, as well as improvements to our logistics and distribution network and sales yards.
And third, we will continue our disciplined evaluation of acquisition opportunities as they arise, only investing in those which fit our strategy and offer superior returns and synergies. And last, we will continuously evaluate the use of opportunistic share repurchases as a means to return excess cash to shareholders.
And now I'll turn the call back over to Tom for closing remarks.
Thanks, Suzanne. Now before we go to Q&A, I want to take this opportunity to thank the men and women of Vulcan Materials for their hard work and their dedication. They have taken good care of our customers and have improved our business processes and disciplines. Importantly, they promoted our strong safety culture and are responsible for delivering our industry leading safety metrics.
As we move forward, we will continue to capitalize on our strengths, our aggregates focused business, our outstanding geographic footprint and our local execution capabilities. We will also remain focus on compounding our unit margins through the cycle and improving our return on invested capital.
Now, we'll be happy to take your questions.
[Operator Instructions]
Thank you. Our first question comes from Stanley Elliott of Stifel. Please go ahead.
Good morning, everybody. Thanks for taking the question. Hey, Tom, could you talk a little bit about the cost structure kind of puts and takes as we're heading into 2020? You mentioned some of that being played in the current guide. Does any of this roll off? Just trying -- curious to see how you guys were thinking about the cost piece.
Sure. If you look at the fourth quarter, the average cost or unit profitability was, as I said, was impacted by three unique items. And pretty much equally, all three of those items are somewhat of accommodation of mix and timing. The first one is a large clean fill project, which we will we take dirt in the quarry for tipping fee. The job was temporarily stopped, but it will start back up in 2020. So, we'll see that again, we'll get that back.
The second item was really geographic mix. It was increased volumes to remote distribution rail yards on the Gulf Coast, which is a good thing. It just comes at a higher cost, with the simple reason that you experienced not only the quarry costs, but also the yard costs. And you couple that with -- we had a little bit lower volumes in the Mid Atlantic states really due to the timing of work.
And then the third item was increased equipment maintenance cost is really driven by our equipment inspection efforts as part of our operational excellence efforts, which we kicked off in February last year. And this is really to prevent catastrophic equipment failure. It improves operating efficiencies and actually improves customer service. And while the costs were higher in Q3 and Q4, because of these efforts, our long-term focus on maintenance is just the right decision for the company.
Now, those efforts will benefit us later this year. As over time, it improves cost by helping to eliminate expensive failure costs and really the expense of downtime. And I would expect some of these costs to continue for a bit into 2020. But all that's built into our full year 2020 guidance, and I got to tell you I'm very pleased. This takes a lot of work and a lot of effort and I please will operators performance here.
No doubt. And then sticking on the cost side, can you just speak to the leverage you’re seeing on the SAG line? I wanted to call SG&A, but I feel like that tracking below 7% of sales, maybe one of the best the company's history. Talk a little bit about how you're driving that down when your revenues are going to be up double-digits.
Yeah. Sure. I'm happy to do that. And good morning to you. The SAG area, which is predominantly corporate and administrative type costs, is an area where we are continually focusing our attention. If you look at the fourth quarter and you look at full year of 2019, while the absolute dollar amount is higher, we did reduce it as a -- cost as a percentage of revenue and that's something that we had been really focused on as part of our budgeting process.
And as we move into 2020 I mean, look, we want to make sure that we are delivering the appropriate services to our operational folks. And we have looked across the footprint, particularly in those corporate and admin functions for ways to be more efficient and effective in delivering those important services to people, and sometimes that is just finding more efficient ways to do things. Sometimes, it's using technology. You just use a number of things at your disposal to try to effect some change. So, you'll see those efforts which have already begun some -- some are completed as we speak. You'll see that reflected in the 2020 guidance and we are absolutely driving toward not just a reduction of those cost as a percentage of revenue, but also a reduction in the absolute dollar amount, and we have plans in place to do that.
Perfect. Thank you very much for the time and best of luck.
Thank you.
Our next question comes from Trey Grooms of Stephens Inc. Please go ahead.
Good morning, Trey.
Good morning.
Good morning. So, I guess, I'm going to talk more -- or my first question is more around the volume. So, one, 4Q -- the 4Q volume, you did see a little bit of a deceleration there relative to what we saw in some of the other quarters. And then seeing the volume going from 7% or so, I guess that you put up 19% in aggregates to the guidance this year of 2% to 4%, it's my first question, can you talk more specifically about how we get there and what your end market expectations are, or your assumptions for your end markets, public, private, non-resi and residential, that you have baked into that.
Hi, good morning. That's a good question. I'll just start off with a gentle reminder about the tough comp that we had year-over-year in fourth quarter, and then Tom can address some more specific comments. If we look at the fourth quarter of 2018 from the revenue perspective, it was just a really strong quarter. We had an 8% growth in volume, which led to a 24% in aggregates gross profit. So, I think with the volume increase of about 4% in the quarter this year, I mean, frankly, that's -- I think that's pretty decent growth. It's well within our guidance range that we set forward at the beginning of the year and coming off. So, very good fourth quarter we had last year, I'm not completely surprised by that.
Yeah. I would add to that. The 2% to 4% growth in 2020, I think is our -- trying to be thoughtful about taking everything into account, demand, timing of shipments whether comparing it to 2019. So, remember that this -- that we saw a little bit slower starts and leading indicators on the private side and in the third quarter kind of July to October, that has now picked up and picked up dramatically. And it could flow through a part of 2020 as a short low or it could just -- what we're seeing right now to look through it, we just don't know quite know yet.
On the highway side, funding is up, demands is up. And public works for the first time, non-highway public works picking up. Still, there's quite a bit of unknowns about -- again about how fast DOTs can get jobs let and to work. The funding is there, but it has to be about timing, I think.
We are also not going to have -- as Suzanne said, we're not going to have a first quarter 2019. Last year we had a windfall, we were 13% as we had pulled forward from the prior year. And then 2019, we didn't have any hurricanes or tropical storms that impacted us in any material way. I think the 2% to 4% volume growth in our guidance is a thoughtful approach as we pull all those factors together. I would point out in all of this, that we will see growth in all four end markets and the one that's coming on, and we're pleased to see is that the non-highway infrastructure pieces is now rolling.
Got it. Okay. And Tom you mentioned the 1Q of 2019 having a pretty good showing there, with some windfalls. How should we be thinking -- and maybe this is for Suzanne, but how should we be thinking about the cadence there, the volume as we look into 2020 in light of things like tough comps and things of that nature?
I think as always, it's going to be timing related. It'll be -- the -- we will have ebbs and flows with that, but the -- it will be timing of weather and timing of large projects.
Okay. Fair enough. Thank you. I'll pass it on.
Thank you.
Our next question comes from Kathryn Thomas of -- beg your pardon -- Kathryn Thompson of Thompson Research Group. Please go ahead.
Good morning, Kathryn.
Good morning.
Morning. Thanks for taking my questions today. First, focusing on Illinois, we are seeing a pick up the lettings in Illinois. I know you talked about lettings in the prepared commentary focusing on that. How do you expect forward you’re seeing work, what type of projects and how big an impact could we build -- only have a state that has relatively underperformed over the past several years.
I think, it's hard for me to hear you. What’s your question -- first of all, how's it in Illinois? And then what would -- what should we expect from how it worked? What type of work?
Yeah. Really. What -- we've seen lettings, are you starting to see work come from rebuild only and what are your expectations for future volumes in the state from this FAST Act?
So, I think that Illinois, I wouldn't -- we're not expecting a lot of that funding to flow through in 2020. I think it’s weighted more 2021. We still have some of the toll work and airport work which will benefit us in Illinois in 2020. On the private side, in Illinois, it's probably not one of our strengths, is probably one of the few places we're probably seeing some weakness on that. So, while the team in Illinois did good job, improving unit margins, they're not getting the benefit of big volumes, and I don't think we are going to see the highway work in Illinois, much of it until 2021.
Am I answering your question?
Yeah. No, that's helpful. That's helpful. And then also just following up on the rail network. Assume that most the volumes are out of your South Georgia ops. Could you give us -- confirm just any more color in terms of type of projects that you're seeing, that are driving demand in the Gulf? Thank you.
Yeah. So, it was -- in the fourth quarter, the rail work was really widespread, and it was really more timing. We're pleased with it. It's good work. It just comes at a higher cost. But it was across the board. I mean, it was Texas. It was the Mississippi, Louisiana/assuming Panhandle, out -- South Alabama, even into Florida. We really just had -- just had a good solid fourth quarter and weather helped it.
All right. Thanks very much.
Our next question comes from Jerry Revich of Goldman Sachs Group. Please go ahead.
Yes. Hi. Good morning, everyone.
Good morning.
Hi, Jerry.
I'm wondering -- could you talk about the pricing cadence as we think about 2020 versus 2019, any differences in timing of price increases that we should keep in mind? And can you comment on how broad the price increases is in terms of breadth of markets as we think about 2020 versus what you put through 2019?
Yeah. I would describe it is very similar -- 2020 will be very similar 2019. We're continuing to see solid price improvements at this point in 2020. We are very confident and guided that 4% to 6% price improvement for the year. Our bid work, our backlogs would support this, and our discussions with our fixed plant customers would support this kind of pricing momentum. Again -- and we’ve always pointed this out, but we're doing again, it's really underpinned by that visibility of the rapidly growing highway work. And a solid -- we think a solid performance will be seen in growth in the private side.
And then again, now we're starting to see growth in the non-highway infrastructure. Whilst it's the smallest piece of it, it's healthy. And I would tell you that we're going to see price increases across. It's really widespread. It’s across every one of our markets.
As it was in 2019.
Yeah.
And we will have -- if you hit -- the pricing guidance will have two straight years of 5% or so. Pricing gains, it's not sustainable in the medium term. And obviously, you're looking for a lower volume growth in 2010 than in 2019. I'm wondering as we think about the medium term outlook, how would you counsel us to think about sustainable level of long-term pricing gains.
Obviously, we're not going to give guidance past 2020, but I -- you saw it in 2019, you're going to see it in 2020. I think the -- again, we've got long-term substantial highway funding coming and that visibility will continue to grow. So that just supports the kind of pricing we're singing.
Okay. And lastly, in the past when you had pricing momentum in aggregates -- in your asphalt markets, you're able to achieve gross margin expansion. I could get a faster rate than we've seen so far in the cycle. Can you just comment on what's holding you back from achieving historical levels of gross margins in asphalt in this cycle compared to the past?
Yeah, well, I think -- and as far as asphalt is concerned, we're guiding to not our product lines being up 10% to 15%. Asphalt prices and unit margins are going to drive the big improvement that asphalt. We would expect gross profit in asphalt to be up double-digit. That would be probably a slight improvement -- flat to a slight improvement in liquid costs. I think the good news is that the good highway work where we experienced the big funds and the timing of that line up with our asphalt business. So the story in asphalt I think is this is we said we -- all last year we would catch and bypass liquid prices, liquid cost to improve unit margins. You saw this happen in the fourth quarter, more to come.
Okay. Thank you.
Thank you.
Our next question comes from Anthony Pettinari of Citi. Please go ahead.
Morning.
Good morning. Tom, I think you mentioned being disappointed over the last couple months with regards to the speed with which some states are letting work. I was wondering if you just get a little more color on which states you're seeing this and maybe the magnitude of the delays, relative to what you were initially expecting.
Yeah. I would describe it this way. I think at this point, where we are in the year right now, we would expect highway demand at this point be up, predict low single digit. Now that could move to mid single digit depending on the timing of large projects and really state's ability to get work let and get work started.
As I said earlier for asphalt, the good news is states where we have asphalt probably have the strongest demand going into 2020, Texas, California, Virginia, Florida, Tennessee. But if the flip side of that is places like Georgia and South Carolina, they struggled at the end of last year to get work -- to get fundings let and work started. If you look at Georgia, we are still shipping three mega projects in Georgia. So that's helping, but I would tell you that highway awards data starts have been a little slower, but then again lettings -- they do ebb and flow, they come and go. All that said, I think that single digit -- that low single digit could turn quickly to push us to mid single digit.
You got Georgia in the second half of 2019 where lettings were slow, now Georgia in the first half of 2020 is going to let $1 billion worth of work. Texas is looking to double their lettings going into 2021, that's already healthy. It's at $7.214 billion. California, we'd expect fund spending to up some 13%, embedded in that is a 25% increase in maintenance funding and that maintenance funding could go very fast. All-in-all, we'll experience growth in highways in 2020 and for years to come.
And as -- I will give you a reminder that highway starts right now while they've been maybe a little bit slower or 20% versus where they were two years ago. So, it's growing. It's just how fast in the states get it to work.
Got it. Got it. That's very helpful. And then in the release, I think you made some reference to concrete project delays. Can you talk about where you saw these project delays? And the magnitude and what do you expect this to kind of continue into 2020?
Yeah. They -- we got delayed two places. It was timing of big projects in Virginia. And then it was both weather and fires in Northern California where we got hit with -- on the volume piece of this. I would expect volumes in concrete in 2020 up mid single digit and recovering in both those markets. I would expect prices up probably mid single digit and I would expect unit margins in concrete up double-digits.
Okay. That's helpful. I'll turn it over.
Thank you.
Our next question comes from Mike Dahl of RBC Capital Markets. Please go ahead.
Good morning.
Thanks for …
Morning.
Morning. Thanks for taking my questions. So, I'm -- just to follow-up on one of the prior questions around the state lettings. What's your sense of just the underlying fundamental cause for the slower pace of lettings? Is it a -- is it a worker shortage, is it -- something in terms of the just getting things through the regulatory bodies, just a little more color on the underlying root cause there?
Yeah. I don't think it's external factors outside of the DOTs. It's really them being able to -- they got huge slug of funding, they got to mature into that and then they are going to have -- you got to get it estimated, permitted, let -- you got engineering that goes into this, a lot work for those DOTs, put projects out, while everybody has the pressures of workers and employment at -- this is not what's holding up the lettings, it is just -- it’s holding up the states, it’s just their ability to get that work planned and out and let and put to work.
Particularly as some of the projects are larger than they had been in the past. The larger the project that just adds a degree of complexity to the process.
Okay. Thanks. Second question, just thinking about the incremental margins, if I look at 2019 and on the whole, the difference if my math is right in terms of the incremental margin and what you would target on as 60% would be about $60 million in EBITDA and so understand some of the one time issues or transitory issues that you've been talking about. But it's pretty big number and this is in a year where you had everything kind of working for you in terms of volume price and your internal initiatives.
So, as we go into 20, I guess what I'm getting at is really just -- what's giving you the level of confidence that you can get back to the 60%? Is it actually -- volume was too hot in 2019? And so it gives you go into 2020, the stripping costs aren't as high or just trying to understand that bridge little.
Yeah. I will comment first and then I'm sure Tom will have a follow-up comment. I'm -- I can't say I'm quite sure about your math on the $60 million, but with respect to the 60% that is -- we say this often that is a long-term average, you're going to have some quarters and some years when you hit it some quarters, you're below it. We have had a couple of years where we were just above that. In fact, if you just look at 2019 for the trailing 12-month period ended in September we were right at 60%. So I think when you look at the flow through for this year it really does revolve around those three items that Tom called out, had it not been for those we would have been much closer to that number. And some of those were timing and mix related and to the extent it’s timing and mix related, you won't have that pressure into 2020.
Yeah, I think, fundamentally, this is not an inflationary issue. It's more about timing. We talked about the remote distribution, that's a good -- that's really good, because it's more volume for us. The fill work will come in 2020. As far as what we did in Q3 and Q4 was stripping and preventive maintenance. I think those are just got that operating disciplines. First of all, the stripping is an investment and in pits. While it's cost -- it's a one time thing for a while as you develop pits and get ready for future volumes which we think are going to grow.
On the maintenance side, it's really about -- we want to control our equipment, don't have the equipment control you and make sure you do in a timely manner. Let me just give you like a real life example of that. If you were to take a seven-foot cone crusher down, due to oil samples, it cost you $50,000. If you wait till it failed, it cost you $150,000 and that's just the tip of the iceberg cost because now you're taking the plant down which is very expensive. And if you look at underneath that where we are from really important metrics like tons per hour to a plant downtime or tons per man hour, you are seeing improvement.
It's an investment. We started February with investment in our people operations -- through this operational excellence program, allows us to maximize the long-term efficiency of operations. And I’d tell you that I'm confidence that these efforts will improve our profitability of the company. And I think we our folks have taken those into account as they created their plan and their guidance for 2020.
Okay. Thanks for the color.
Our next question comes from Rohit Seth of SunTrust. Please go ahead.
Hi. Thanks for taking my question. Just curious on if resident -- if residential construction grew faster than you expected in 2020, would there be any ASP or mixed benefits or maybe on the cost side?
No, I think it would you -- residential has a good mix of both base and clean stone. I think it would flow through like everything else. Although -- and that is something we'd love to see. So, we got our fingers crossed, but I wouldn't expect any big price mix change or unit margins mix change.
Okay. And then on your incremental margins, just kind of building on some of the things you've already said, but last three years, it's come under the 60%. I'm curious how much of equipment failure has been part of that issue?
Well, I think as we do that -- we talked about same-store and same-store in 2018 finished 65%. 2019 was -- so we have years that are up, we have years below. I think as you look at it -- and I would point out to you the same-store -- and you could have times when it's higher, you're going to have times when it’s lower, will guide you back to the 60%.
Right.
The other thing -- I'm sorry, I was just going to add. I think the other thing for us is -- the real question is we look through some of these fourth quarter cost is, is there something there that is indicative of a significant shift in the cost performance of the company, is something going on there that has materially changed the cost structure of the company. And that to me would be the real important sort of carry forward question into 2020. And again, as we go back through those items, our view internally as we've talked a lot about them is, no that there isn't something that is a significant change in the cost structure of the company. And for that reason, even though there can be some volatility in it between quarters or years, we, on the long-term basis, guide back to a trailing 12 of 60%.
Understood. And then on the M&A pipeline, can you provide any thoughts and what you're seeing out there and maybe your appetite.
Yeah. As always we've some projects both large and small that we're working. Again, as we always tell you its discipline. Everything does not fit us. It's got to be unique to have synergies for us, have the discipline that if it's too expensive won't be able to walk away from it. And really importantly is once you get it, make sure you integrate it very fast and very accurately. So, we've got a number of them working. We'll just -- again all of them don't fit us, so we'll be picky about what we buy.
Any deals of size out there?
There are -- it's both. It's both -- some large ones and some small ones. I don't think there's any mega ones out there, but I would -- this full gambit.
Understood. All right. Thank you.
Thank you.
Our next question comes from Michael Wood of Nomura Instinet. Please go ahead.
Hi, good morning.
Hi, Michael.
I was hoping you could quantify the repair and maintenance a little bit more. Curious if you could tell us how much it is as a percentage of COGS? And should we think about this is a purely variable next year in terms of increasing alongside volume, or could it maybe decline after being elevated this year?
I think what -- we would guide you to that -- this is that I think you may see a little bit more of this in the first few months of the year. And then, I would expect it to level off to meet the guidance that we've given you. And I would call that out is both some stripping and some repair and maintenance, but I think we're confident as we look at our hand for the full year guidance of how that flows through -- our cost flows through for the year.
Okay. In 2019, I know you were talking about throughout the year -- earlier in the year, some lower mixed ongoing on to the larger highway projects. I'm curious if you can give us an update on that? Is that continued, or you seeing kind of mix up as those projects mature?
I think what we saw in -- the mix that we saw in the quarter was a little bit of geographic and a little bit of product mix. As we called out, I think was that for the year our performance was right in line with guidance. The full year was 5.5, mix adjusted 4.8, and it was in the impact of asphalt size is it really driven by highway work. Geographic mix, a little bit higher volumes on the Gulf Coast and the Southeast.
Okay. Thank you.
Our next question comes from Phil Ng from Jefferies.
Hi, guys.
Good morning.
Good morning.
Good morning. Appreciating that there are some delayed lettings and potentially some downdraft from private, couple of tougher comps. Would be helpful, Tom, if you give us some color how to think about the shape of the year from a growth standpoint?
Yeah. Good question. I would expect -- first of all, you have got a really tough comp in Q1, because volumes last year were up 13% and it was really that you had the pull forward from 2018 into 2019. And other than that I would call it one of timing of large projects and timing of weather and we also had a very -- the weather in the first quarter of last year was -- with exception of California was quite good. So -- and you guys can look outside and see what's happening right now with the weather in first quarter this year. So, all-in-all, I think it's timing of weather in large projects.
And Tom, you're not calling for any delay of larger project at this juncture, which would you can't predict at this juncture, if I'm interpreting your kind of ...?
Yeah. So -- yeah, we're shipping a lot of big projects right now. We called out three in Georgia. We've got a number of different places. I believe it's going to be how fast the highways can get the jobs let and to work.
Okay.
And we talked about that a little bit where there was fast and we were slow what we call it out with Georgia and South Carolina, which slot. The second half of last year's lettings which flow into 2020 and slow, but the first half of this year they've got huge letting. So, we'll see -- how fast the work get started.
Got it. And then based on your guidance for your downstream business for 2020, it's a touch below what you thought actually, coming into 2019 initially, just given some of the project delays you saw last year and frankly a more manageable liquid asphalt price environment. I'm little surprised you're not expecting more strength. Can you give us some of the puts and takes?
Yeah. I think what we see is real strength in unit margin improvement in asphalt and up double-digit. We're calling for liquid being flat to slightly down. And our volumes are just up slightly. And the -- that again will be determined by the timing of this DOT work and how fast it gets started.
You got to remember we had two -- we had big projects in asphalt in Tennessee and we had the big 202 project in Arizona, which neither one of those were repeating going into 2020. So, they were windfalls in 2019, they are not going to repeat, even with that we're seeing slight improvements in volume and so that get much bigger -- they'll have to accelerate work is in some of the lettings that I talked about.
Got it.
The thing I'm encouraged about -- I said in asphalt is -- you saw those margins turn in the fourth quarter, we have been predicting that kind of chasing that through the year 2019, now we see -- we carry that momentum into 2020.
And just one cleanup question, Tom. When you said flat to down liquid costs, are you calling sequentially or is that more on a year-over-year on …?
But I think -- importantly with that we're going to manage what -- a number of what happens the last fall, we're going to manage that unit margin in asphalt appropriately. So, the liquid prices fall, we'll see that accretive to unit margins. And like I said the good news is -- we call it and keep growing it and I think we'll see that as we continue to perform in 2020.
Okay. Thanks a lot.
Thank you.
Our next question comes from Seldon Clarke of Deutsche Bank. Please go ahead.
Hi. Thanks for the question.
Sure.
Could you just give us a sense of how the margin differs on your shipments by rail? Is this a dynamic that's coming solely from higher demand in these particular areas, or has the cost of service provided by the rails change with some of the ongoing initiatives that they've been putting into place?
Okay. I would point out this way. In general, the rail tons is just going to be a little lower margins where -- and that's -- and higher price, higher costs, a little bit lower margins, but very good margins. So, it's good work. I mean, the volume being up is a good thing. I would point out that in contrast, the blue water tonnage is much higher margins, it would be higher price, higher cost and higher margins than the whole. So --- and what we saw in the quarter was just a timing of good work along the rail that happened to ship at a higher rate.
Okay. So, nothing to do with them putting process rail in place. Okay.
No.
No.
A simple thing with quarry cost versus rail distribution, you have rail distribution plus the quarry costs which just comes at a higher price and a higher cost.
Got it. Okay. And then just a question on the 2020 guidance, there is about 700 basis points of differential in the high and low end as it relates to the year in your growth. Could you just give us a sense of maybe what's embedded in the low end of guidance, and what would you really need to see to hit the higher end of that range?
I think -- I would tell you is probably going to be mostly volume. I go back to timing of shipments, I go back to do we get -- do you get hit with the tropical storm or two or three. Those would be the big variables, so I think between the high end and the low end and how it lines up would be the delta.
That's right. And that's a very similar approach to what we took at the beginning of 2019 when we gave the volume guidance then, a range of 3% to 5%. And luckily and happily we wound up being ahead of that for the year. But Tom is right, it really comes down to what happens with the timing, it's shipments and weather as to whether you're at the lower end or the higher end. And as Tom said, we'll continue to watch with interest how residential -- how those starts, continue to improve throughout the year.
All right. Thanks for the time.
Thank you.
Our next question comes from Garik Shmois of Loop Capital. Please go ahead.
Hi. Thanks. Just one more ...
Good morning.
Good morning.
Hey, good morning. So, just wanted to follow-up just on the highway outlook, just being an election year with the FAST Act expiring in the fall. Do you think that could lead to additional letting delays in 2020? Just curious how these factors might play into the highway outlook and some of the sluggishness that you can see?
Yeah. We talked about the cadence and highway lettings, and some that they have been slow and now coming on strong and the timing of it, I wouldn't think the election year would have any impact on state DOT lettings and the least I don't think it's going to have -- it won't -- for sure will have any an impact on the FAST Act or funding from the Feds. I think people in Washington are working hard towards the highway bill, a lot of progress made on that both on the build side and the funding. I don't expect to get a highway bill in 2020. At the same time, when the FAST Act expires, I don't expect any of that funding to go down, we'll just do an extension. So, I don't see a big impact on it. I don't see any impact on state DOT lettings due to this being election year.
Okay. Thanks. And then, just given some of the repair and maintenance costs here and some of the other items that you called out, is this all -- just to be clear within your plan as you think about your $2 billion EBITDA target you laid out your Investor Day and thinking about how that could be potentially achievable once you reach 230 million to 240 million tons of volume.
Yeah. If anything -- I think the four strategic initiatives, including the operations excellence initiative are giving me more and more confidence in our ability to get to the $9 that we planned. I think that our operator -- if you look -- if you were to look beneath the surface in our operations, while the headline is higher stripping and repair and maintenance costs. Behind that, I think you're doing the right things in the investing in the business for the long-term. Really importantly though is you're starting to see the key operating parameters which we measure things like tons per hour throughput through individual plants, downtime individual plants, tons per man hour individual plants, we're starting to see improvement. I think we are teaching our young people the right things to do. We are leveraging the collective knowledge and experience of Vulcan across 350 plants.
So, while we see some headline things, the ultimate work that goes into this from those initiatives is starting to gel. The commercial excellence initiatives is mature. It is working, and we're very pleased with our progress there.
Great. Thank you.
Our next question comes from David MacGregor of Longbow Research. Please go ahead.
Good morning.
Good morning. Just getting back to the 2% to 4% volume guide, and just a question I guess on construction capacity and if we get a large increase in awards and lettings. What are the downstream bottlenecks that most concern use or constraint to your volume growth? And how you accounted for that as potentially conservative element within your guidance?
Well, first of all, for Vulcan internally, I don't think we see any bottlenecks we can handle it. We love to see it grow as much as it could, and we will be there both from an aggregate prospective and asphalt prospective or concrete perspective.
On -- as far as if lettings were to increase dramatically, I think what you see is the work would happen. The big bottleneck as always the people ask about is labor and all the labor shortages, to answer that question is, yes. I don't think it's going to hold up work, but I think it will hold up is ability to catch up once work is delayed. So, if you had a month in the wintertime, which was all rain and really cold trying to catch that up or if you had a big tropical storm come through, it's going to take you a little longer to catch it up just because they don't have the firepower to do it fast. That's how I would describe it.
Okay. Have you factored that in your guidance? Is that -- there is an element potentially the discrepancy between 2% to 4%, which seems fairly conservative versus the story, which seems pretty bullish?
I think that -- I think when it comes to volume, as I've said we tried to pull all of those factors and as comparing last year the pull through, the weather aspect of it, a little bit of a air pocket and leading indicators in the rail side and the timings of highway lettings and state's ability to get that work and when we pull all that together and the upside potential, the risk piece of it, that's what we got -- we try to be thoughtful about the 2% to 4%.
Yeah. That makes sense. And then second question on mix. And if you could talk about the pace of growth in your backlog. And is as your backlog building faster in your higher margin products and geographies?
I think -- I would describe this. I think when we looked at the 4% to 6% is best we can. If you take the mix of products of -- when I say mix both geographic and product mix together. I think we have seen good improvement in base in our backlogs. We've seen good improvement in clean stone in our backlogs and our booking pace right now as we look at it both in price and in volume will support our guidance.
Thank you very much.
Thank you.
Our next question comes from Adam Thalhimer of Thompson Davis. Please go ahead.
Hey, good morning, guys. What did shock you if EBITDA was flat to down in Q1?
Well, we -- we can't give Q1 guidance. I think as we said we are comping over a year in the first quarter of 2019 with -- which was very good weather and we had the windfall of pull forward of 13% volume from the year before. I don't think you'll see that pull through. You guys can look outside, know what the weather is doing in the fourth -- in the first quarter. So, again, we're halfway through it, we'll just have to wait and see.
And then Tom, can you walk us through the demand you're seeing right now in California and Texas?
Sure. I would describe California this way, I think that the -- well, let me start with Texas. The public side is very strong. The TxDOT has done an excellent job of lettings and getting work out. There is big work -- there is shipping right now, there's big work on the horizon. And as we said next year they're going to go from a wow factor of $7 billion to $14 billion.
On the private side, I would describe North Texas is being driven by non-res. I'd say res is fairly flat with some exceptions, some big development North Fort Worth. South Texas housing strong, non-res, a little bit soft. Coastal Texas everything strong. And you could see some LNG work start on Coastal Texas in the second half of 2020, a little bit going now.
California, Northern Cal public is very strong both for aggregates and asphalt. Private side looks good, maybe a bit flat in the Bay. Non-res is a bit soft, but leading indicators were improving. Publics on Southern California, again public very strong, highway strong, non-highway is strong. On single private -- in Southern California, probably a little bit of a watch for us with leading indicators a bit, were a bit softer in the last three months of indicators, were up over 20%.
So, all-in-all, I think pretty healthy growth in both states. And I would tell you that I would expect good margin improvements -- unit margin improvements in both locations, both in aggregates and in asphalt.
Good color. Okay. Thanks, Tom.
Thank you.
Our next question comes from Adrian Huerta of JPMorgan. Please go ahead.
Hi, good morning everyone and thank you for taking my call, Tom and Suzanne.
Good morning.
Good morning. Quick question on cash taxes -- can you tell us how they ended last year. I believe they probably ended way below what you were expecting early last year. And right now you're back into expecting $200 million. If there is any chances that there could be lower than your guidance?
Sure. And the main reason for the reduction in cash taxes through the year was that as we started the year. We have not made a determination as to whether we were going to take advantage of the bonus depreciation or not that's a calculation that we have to go through each year because there is some interplay between it and depletion allowance that we get, when we file our tax returns as well as some other things.
So, there is an actual -- while it might seem obvious, you would want to take advantage of the bonus depreciation there is actually a calculation that you need to go to ensure you are selecting the calculation methodology that gives you the most tax benefit. So, we started out the year under one assumption. We determined in the second quarter and called this out at the time that we were indeed going to take the bonus depreciation, that resulted in for 2019 us paying quite a bit less tax than we had initially intended and the estimated -- the cash tax rate was between 7% and 8%.
As we start off in 2020, we are guiding to an effective tax rate of 20%, we will go through the same process again and make a determination as to what depreciation methodology we're going to use. So, there is some chance the cash tax may be lower. But we will -- we'll work through that process in a similar fashion that we use this year. Even under the -- even under the assumption of having higher cash taxes in 2020 as compared to 2019, I just point out, we still would throw off about $800 million of discretionary cash flow. So very healthy, very substantial and that $800 million could be put on a discretionary basis toward growth projects, potentially M&A, if something comes along that meets all the criteria that Tom outlined, your dividends and share repurchases.
That was very clear, Suzanne. And if I may ask another question. Can you share with us any details on the quarry that is expected to open in California in terms of when and the size and potential volumes on an annual basis that that quarry could take?
Yeah. So it's, in Frisco, we're not -- it probably won't open until beginning of next year -- first or second quarter of next year. Size, we're not going to actually disclose that at this point. We have a closer to -- we will talk about those things. It's been a very good market. It was taken us some 10 plus years to get this done. The team has worked very hard, and now they're working hard to build it out into a market that is -- it is very healthy and quite profitable.
Excellent, Tom. So, it's totally new market for you?
No, it's a market we've been in before.
Okay. Excellent. Thank you so much Tom and Suzanne. I appreciate it.
Thank you.
Thank you.
Our next question comes from Paul Chabran of On Field Investment Research. Please go ahead.
Hello, everyone. Good morning and thank you for taking my questions. First of all, concerning the rail deliveries, I think you talked about that extensively already so and my apologies you already answered. But how should we think about it for 2020 the evolution of rail deliveries. Is there any chance that it could impact your margins as it did in Q4 2019?
I'm sorry. The beginning of your question -- I'm sorry, beginning of your question I couldn't hear.
I'm sorry. The question was related to the evolution of rail deliveries in 2020. How should we think about that, does change -- they could impact your margin as it did in Q4 2019?
The repairs and maintenance, is that what you're asking about -- the connection was a little poor -- I just couldn't hear. I'm sorry.
Yeah. Apologies. It's concerning the rail deliveries. They don't defense rail deliveries that had an impact on your margin in Q4?
I wouldn't expect -- the rail happen to be a timing issue of big shipments in the fourth quarter. And I would not expect -- I think we've got those -- the volumes that we do out of those that rail distribution network embedded in our 2020 guidance, and I would see very little impact.
Okay. All right. Thank you very much.
Thank you.
Thank you.
Our next question comes from Brent Thielman of DA Davidson. Please go ahead.
Good morning.
Good morning.
Hey, good morning. Just wanted to -- for I think for you, Suzanne, just on the SAG expense, can you help us understand the sensitivity to growth this year. In other words, if things are going to lineup well, through the year, you start seeing 5%, 6%, 7% volume growth, can we sustain SAG below 2019 level?
Yeah. I think we can. As I said, this is a matter of what's driving that cost reduction year-over-year or the changes we talked about. Some of that is being more efficient in the way we do things. So, it's not like -- it's a variable kind of expense. It's more what I would call on the fixed side that we are making some changes and so, I think that that would be sustainable, yes.
Thank you. That's all I had.
Our next question comes from Michael Dudas of Vertical Research. Please go ahead.
Good morning.
Good -- I think afternoon. I think you may have gone into 12 o'clock. So, in light of that you've been very good job in answering and being very descriptive. So, all of my questions have been answered. Appreciate it. Thank you. Good luck.
Thank you.
There are no further questions at this time. I would like to hand the call back to Tom Hill for any additional or closing remarks.
Well, thank you for your interest and support to Vulcan Materials. We've enjoyed talking to you today. As you can tell, Suzanne and I are very excited about 2020. And we look forward to sharing the team's news of how we continue to make progress toward our longer term goals of $9 a ton, cash gross profit per ton. We'll talk to you throughout the months to come. Thanks.
Thanks. Goodbye.
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