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Edited Transcript of VMC earnings conference call or presentation 25-Jul-19 3:00pm GMT

Q2 2019 Vulcan Materials Co Earnings Call

BIRMINGHAM Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Vulcan Materials Co earnings conference call or presentation Thursday, July 25, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James Thomas Hill

Vulcan Materials Company - Chairman, President & CEO

* Mark D. Warren

Vulcan Materials Company - Director of IR

* Suzanne H. Wood

Vulcan Materials Company - Senior VP & CFO

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Conference Call Participants

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* Daniel Wang

Joh. Berenberg, Gossler & Co. KG, Research Division - Associate

* Garik Simha Shmois

Longbow Research LLC - Senior Research Analyst

* Jerry David Revich

Goldman Sachs Group Inc., Research Division - VP

* Kathryn Ingram Thompson

Thompson Research Group, LLC - Founding Partner, CEO and Director of Research

* Michael Glaser Dahl

RBC Capital Markets, LLC, Research Division - Analyst

* Michael Robert Wood

Nomura Securities Co. Ltd., Research Division - Research Analyst

* Philip H. Ng

Jefferies LLC, Research Division - Equity Analyst

* Rohit Seth

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Scott Evan Schrier

Citigroup Inc, Research Division - Senior Associate

* Stanley Stoker Elliott

Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst

* Trey Grooms

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Vulcan Materials Company's second quarter earnings conference call. My name is John, 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.

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Mark D. Warren, Vulcan Materials Company - Director of IR [2]

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Good morning, and thank you for joining our second quarter 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'd 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 home page of the website. Additionally, a recording of this call will be available for replay at our website later today.

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 other legal disclaimers, are described in detail in the company's earnings release and in other filings with the Securities and Exchange Commission.

Finally, 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'd like to turn the call over to Tom.

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James Thomas Hill, Vulcan Materials Company - Chairman, President & CEO [3]

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Thank you, Mark, and thanks to everyone for joining our call today. We truly appreciate your interest in Vulcan Materials. Our second quarter results reflected our continued strong performance. A 15% improvement in adjusted EBITDA and an 11% improvement in aggregates gross profit per ton. We are relentlessly focused on unit margin. It is one of our most important metrics and it increased in second quarter by $0.58 to $5.74 per ton.

On a trailing 12-month basis, our aggregates gross profit per ton has increased at a 12% compounded annual growth rate from the second quarter of 2013. We remain on track to achieve our full year EBITDA expectations.

Our overall results for the first half of the year and the trajectory of the principal drivers of profitability in our Aggregates business -- volume, price and cost -- were in line with our expectations. I'll spend a few minutes giving you some highlights of our performance in these areas.

Aggregate shipments in the quarter increased by 4% year-over-year or a 3% -- or 3% on a same-store basis. This growth in volume reflects the solid underlying fundamentals in our markets. Shipments in our Southeast and Mid-Atlantic markets were particularly strong. California experienced another wet quarter but despite this, shipments increased compared to the same period last year. Wet weather also affected shipments in Illinois, Tennessee and Texas.

The second driver of our profitability is price, and we performed well here also. Freight-adjusted average sales price improved by 5.9% compared to the same quarter last year. On a mix-adjusted basis, the increase was 5.4%. The 50 basis point difference was due to favorable geographic mix. These increases were in line with our expectation and the pricing gains were widespread. Every key market across our footprint posted improved pricing.

Our third key profitability driver centers on our cost disciplines and our operational efficiencies. Our management teams and our leaders across the company are keenly focused on this and are making good progress. We measure our operational efficiencies in a number of ways, but one key financial metric for Aggregates is same-store gross profit flow through. On a trailing 12-month basis, it was 65% at the end of June.

Our operational execution at the plant level keeps improving, and it's rewarding to see that the hard work of our men and women of Vulcan is translating into strong incremental earnings. We will continue to focus on these disciplines because they are a significant contributor to the quality of our earnings and our ability to compound our unit margins.

As we look to the second half of the year, the overall view of our markets is drilling on change. Shipments in the private construction end markets are good. On the public side, demand is healthy and continues to strengthen, with the increases in state and local highway funding being converted into backlogs and shipments. We believe that we are in the early stages of a longer-term growth in highway demand, which is a function of increased state and local investment in infrastructure.

Since our last call, another Vulcan state, Illinois, has passed legislation to increase revenues for roads. Since 2013, 11 states that make up 85% of our revenue has increased fuel taxes or increased other ongoing sources of revenue for highways. This supports our positive highway demand outlook and the improved visibility underpins improving pricing. In summary, our backlogs are good and our geographic footprint and capabilities put us in a strong position to take advantage of market opportunities.

Now I'll turn the call over to Suzanne for some additional comments on the results. Suzanne?

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Suzanne H. Wood, Vulcan Materials Company - Senior VP & CFO [4]

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Thanks, and good morning to everyone. As Tom mentioned, our trailing 12-month same-store incremental aggregate flow-through rate of 65% was quite good. While price is certainly an important driver of this metric, I also want to touch on the impact of our operating cost performance. Operating discipline, accountability and cost management significantly benefited our results again this quarter.

Our same-store unit cost of sales increased by less than 2% as compared to the prior year's quarter. The largest single component of this increase related to greater stripping activity, which is a function of anticipated future shipments. This accounted for about 40% of the higher costs. And for information, the effective diesel fuel costs were minor in the quarter.

Our second quarter SAG costs increased mainly due to compensation-related expense, including incentives that are tied to earnings expectations and the share price. Our incentive plans are designed to reward our people for good execution and improved earnings, both of which we have experienced. We also made investments in people and processes to accelerate the benefits derived from our sales and operational initiatives. Our trailing 12-month SAG expense as a percentage of revenues declined this year and we will continue to focus on further leveraging our SAG costs.

I'll briefly touch on our non-aggregates segments. Asphalt gross profit was $28 million, an increase of $2 million as compared to the prior year. Shipments increased by 8% or 5% on a same-store basis due to large projects in the Arizona market. While the year-over-year shipment growth was good, it was less than we expected due to the adverse effects of weather on California and Texas volumes.

Asphalt pricing in the quarter rose by 8%. This was partially offset by liquid asphalt unit costs, which were 16% higher this quarter compared to second quarter last year. Our concrete gross profit was in line with Q2 last year, with higher prices offsetting reduced volumes.

Turning now to the balance sheet. Little has changed from first quarter except that our net debt-to-EBITDA leverage ratio declined to 2.4x within our target range. The average maturity of our debt is 15 years and our weighted average interest rate is 4.5%. Our leverage position and debt structure provide us with significant flexibility as we continue to grow our business.

On Page 8 of the supplemental slides, you'll find information on our discretionary cash flow expectation for the full year using the midpoint of our EBITDA guidance as the starting point. As a reminder, we define discretionary cash flow as EBITDA less working capital change, interest, taxes and operating and maintenance capital. On this basis, our discretionary cash flow for 2019 is projected to be $815 million. While there were no share repurchases and no M&A during the quarter, these remain important parts of our capital allocation priorities.

For the full year, we reiterate our expectation of spending approximately $250 million on operating and maintenance CapEx and approximately $200 million on internal growth projects.

And now before I turn it back over to Tom, I'll take this opportunity to reaffirm our 2019 adjusted EBITDA guidance of between $1.25 billion and $1.33 billion.

We tried to be thoughtful when we gave our initial 2019 annual guidance in February, and we have performed consistent with those expectations through the first half of the year. We believe we are well positioned to continue this execution in the second half of the year. We are mindful, however, of the storm-related challenges that can characterize the third quarter, and therefore, we remain comfortable with our initial guidance range and we're finishing the year in the middle of that range.

And now I'll turn the call back over to Tom for some closing remarks.

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James Thomas Hill, Vulcan Materials Company - Chairman, President & CEO [5]

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Thanks, Suzanne. I'm very proud of how our people have performed so far this year. And I want to take this opportunity to thank the men and women of Vulcan, especially our operations and sales teams for taking care of our customers, holding each other to a high standard of operational excellence and delivering on our financial results as promised.

Our financial performance is important, but safety is always our #1 priority. Our safety culture is strong and our safety metrics are industry-leading. It is critically important and remains our #1 priority to send our employees home safely every day.

As we move forward, we will continue to capitalize on our outstanding geographic footprint, execute at the local level, take advantage of market opportunities and continue growing our aggregates unit margin.

Now we'll be happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take our first question from Stanley Elliott of Stifel.

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Stanley Stoker Elliott, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [2]

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Congratulations on the quarter. Can you guys talk high level kind of what you're seeing regionally? Certainly a nice quarter here, particularly with the weather issues.

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James Thomas Hill, Vulcan Materials Company - Chairman, President & CEO [3]

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All right. Just in -- just from a high level, if you look at how each geographic area is performing, I'll start with the East, Mid-Atlantic states I describe the private demand slow and steady. Public highway demand is very good. Importantly, we're seeing robust pricing and margin growth in the Mid-Atlantic states in 2019.

Moving to the Southeastern United States, the Southeast states are really performing strong in the vast majority of those markets. I think the private side, we see growth a little bit of a watch in a couple of areas, Nashville and Miami. Nashville is -- the private stocks are growing but it's just long in the tooth. Miami, we're seeing a little bit of shrinkage on the private side. The rest of the Southeast states had very good private. Healthy demand from highways. So good volume. We're seeing really good margin expansion in this area driven by good pricing and also responsible operations, cost management. And remember, this is -- we're by far the largest in the Southeast United States, largest producer.

An encouraging area, Illinois, this is a market that's actually we're starting to see a turn. We're now seeing a pickup in private demand driven by airport and tollway work. We just saw Illinois pass a highway bill, which we're thrilled with, so more demand coming on, on the public side. Non-res is growing. Res is now improving. Prices are improving. This is really good news for Illinois, which has struggled for the last 5 or 6 years. It is also good news because this is a really well-run business, and with these volumes coming on, we're able to leverage that performance.

Moving over Texas, DFW/North Texas, very healthy public growth. Slower on the private side. Pricing concerns on res and non-res. A little bit slower pricing North Texas. South Texas, we see public demand is actually really hot. The private side, I see a mixed bag. Res okay. Non-res, a little bit slower but okay. Price is very healthy. Coastal Texas, this is a very strong market both on public and private. Very good pricing and margin expansion in coastal Texas. And we've not seen anything really substantial out of the energy sector. It'll be exciting for 2021 and '22.

Moving over to California, this is, despite wet weather, an exciting markets for us. Solid public growth, particularly in Central and -- excuse me, solid private work particularly in Central and Southern California. The Bay has gotten pricey on the private side so maybe a watch for us there, but our focus there has been highways. Public side is growing and growing fast and accelerating. We've got -- big backlog is growing, highway lettings. Pricing in California has been very good, is very good. We see high single digit this year. And we've seen very good cost control in spite of bad weather in California, so substantial margin growth. Everybody is concerned about California. I particularly am not. In fact, I'm really thrilled with our performance in spite of wet weather.

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Suzanne H. Wood, Vulcan Materials Company - Senior VP & CFO [4]

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Yes. And I'd just add one thing to that. I think in first quarter, you will remember us saying in terms of pricing that the pricing gains were very widespread across the country with all the markets. Our key markets up in pricing year-over-year, save one, which was Illinois at that time and it was winter, so that was another particular concern to us. In the second quarter, Illinois has joined the rest of our key markets and each of those key markets had pricing that exceeded second quarter last year. So we thought that was a very positive sign as well.

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Stanley Stoker Elliott, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [5]

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Perfect. And then last from me on the cost environment. Are you seeing anything in the second half of the year, be it labor, whatever would be that would be cause for concern in terms of what can happen on the pricing environment? And then as kind of a corollary to that, you've done a nice job of putting a lot of growth CapEx and cost reduction at the quarry level and at the distribution level. Help us with that in terms of how we think about managing that cost structure going forward.

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James Thomas Hill, Vulcan Materials Company - Chairman, President & CEO [6]

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Yes. I think you saw a very good performance in cost in the second quarter. Our total cost of sales was up 2% in spite of wet weather through a number of our states, which really eats up operating efficiencies. So we overcame that. The biggest driver of the increase, as you heard Suzanne say, in the second quarter was stripping in anticipation of sales volume growth. So I'll take that problem all the time. We saw good improvements on operating efficiencies in the things that drive our costs. Our folks are very focused on this. More to come.

I can't tell you how focused our operators are on improving their operating efficiencies that really drive the cost. And based on our performance in Q2, they're winning. This is so important, as you know, because it's a big driver of those unit margins and being able to take that incremental revenue to the bottom line. So as I would describe the rest of the year, more to come. And I would expect us to keep improving our operating efficiencies.

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Operator [7]

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We will take our next question from Jerry Revich of Goldman Sachs.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [8]

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Can you talk about the pricing cadence on the spot market heading into the back half of the year? Now that we have 6 months in the books, I'm wondering if the high end of your initial pricing guidance is still achievable or if there are mixed factors we should keep in mind as well.

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James Thomas Hill, Vulcan Materials Company - Chairman, President & CEO [9]

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We talk a lot about price. I think that -- remember that most of the fixed plant was priced in January and February. We did see some successes in midyear price increases to fixed plants in a number of markets: Virginia, Alabama, the Gulf -- some of the Gulf Coast, Arizona. The other 60% of our work is bid work and we're bidding it as we speak. We always tell you that's not a spot market price increase, that's a campaign over time.

And we feel good about what we see in our backlogs and our booking pace. We think those prices will move up through the balance of the year as we bid. And all of that is driven by confidence and visibility into a growing market, particularly the very visible and very fast-growing public market and highways. So I think as you look at -- as we step back and Suzanne looked at our booking pace and how our pricing is going and the pricing in our backlogs, we're very comfortable that the balances of the year, price increases will be in line with guidance.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [10]

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And in terms of is there any potential to get to the high end of guidance? So to get to the high end, you'd have to put up pricing north of 8%. It sounds like we're probably gravitating towards the midpoint of the guidance, which implies pricing closer to, call it, 6.5% in the back half compared to the [early half]...

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James Thomas Hill, Vulcan Materials Company - Chairman, President & CEO [11]

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I would shoot more towards the middle of the range of the guidance for us. I think that's a realistic and very achievable goal.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [12]

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Okay. And then to shift gears for asphalt, in the past, you folks have gotten that business to be in the mid- to high teens from a gross margin standpoint. And I'm wondering is there anything structurally different in this cycle compared to past because when we're looking at 8% gross margins and a business that has about 8% SG&A to sales, that's not a fantastic profit contribution even with the great flow-through that you're getting in aggregates. So I am wondering is there anything structurally different in asphalt mix in this cycle versus in the past? Or when can we get back to those teens type gross margins?

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James Thomas Hill, Vulcan Materials Company - Chairman, President & CEO [13]

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Well, I think the simple answer is no, there's nothing structurally changed in asphalt. This is a function of liquid pricing and cost. And I think you're seeing a turn there. Overall, we're seeing profitability in the asphalt product line improving both in volume and unit profitability. You saw that in Q2 with volumes up 8%. And that was -- those volumes were up in spite of wet weather in Tennessee, Texas and California where -- some of our biggest asphalt states. Liquid costs were up $11 million. However, gross profit per ton was flat. This stopped a 6-quarter run of shrinking unit margin in asphalt due to liquids prices spiking. That leveled off as you remember from the time of fourth quarter to first quarter and has been pretty much flat through the first half.

Looking ahead, I would expect unit margins to be on the rise as asphalt prices are rising and liquid prices have stabilized. If you step back and look at the full year, I would maybe expect us to end up a little on the lower end of guidance in asphalt and that's really a function of wet weather in the first half of the year. We just had so much rain in Tennessee, Texas and California that we don't know that we'll have enough shipping days to get the volume we expected before the end of the year. Now that being said, our backlogs are very good, our lettings are growing and the unit margins are growing. So between rising unit margins, big backlogs, a dramatic increase in highway funding and lettings in Vulcan states, this product line has a very bright future.

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Suzanne H. Wood, Vulcan Materials Company - Senior VP & CFO [14]

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And I would add to that, that with respect to the guidance for the remainder of the year, Tom's right, we're just being a bit cautious in evaluating the number of shipping days we have left and the ability of our contractors to perform all of that work in a very compressed time frame. If you go back to the guidance we gave at the beginning of the year for the non-aggregates segment, which is asphalt as well as concrete and calcium, we said that we expected that to grow year-over-year, the gross profit by 15% to 20%. We now think that, that gross profit year-over-year growth will probably be toward the lower end of that at about 15%, again being a little bit cautious on that. And I think that in terms of consensus, most of the consensus is at about 15% anyway.

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Operator [15]

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We will take our next question from Scott Schrier of Citi.

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Scott Evan Schrier, Citigroup Inc, Research Division - Senior Associate [16]

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So last 12 months, you had 65% incremental margins, they're over your company norms and your target levels. It looks like you have good cost control. You have volumes to support the fixed cost absorption. Pricing in the mid-single-digit range. You got your stripping out of the way this quarter. Is it possible to maintain a 65% run rate, given the compounding profitability characteristics of aggregates? I'm not asking you to commit to it, of course taking into account all your comments on guidance. But I'm curious what would be needed and is it possible to sustain an elevated level of profitability?

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James Thomas Hill, Vulcan Materials Company - Chairman, President & CEO [17]

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I think we -- first of all, let me -- if I misspoke on stripping, I didn't mean to. The stripping is not out of the way, that will continue through the year because of demand and what we see coming particularly with the highway demand. So stripping costs will stay up for a while and I would expect them to stay up. I know they'll stay up for at least the next 6 months. Again, that's a good thing because it's anticipating big volume growth driven by public demand.

I think -- we hate sounding like a broken record, but we're going to take you always back to 60%. Not that good things can't line up in a row for a while to get you above 60%, but we point out while you have a lot of tailwinds, this sport is played outside. There's a lot of things that can happen. And to offset just the tailwinds, you're not going to have them, you're going to get some things that are going to challenge you along with the good stuff. So just from experience, can you have a period at above 60%? Yes. Can you have a period of below 60%? Yes. But I think we know we'd always bring you back to 60%.

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Scott Evan Schrier, Citigroup Inc, Research Division - Senior Associate [18]

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Got it. Understood. And then I wanted to ask another one on the cost side of things and your cost containment. And I'm curious if you could speak to some of the efficiencies or profitability you're seeing in some of the long-haul markets, either through your vessels in Quintana Roo or the rail networks. And also a little more on that, we've been hearing about some moderation in transportation costs and I'm wondering if there are some puts and takes there. One of the things that we've heard or you've spoken about in the past is higher transportation cost generally enhanced the economic moat of the aggregates business. But is there a potential that moderating costs could actually potentially open up some more competition and pressure pricing?

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James Thomas Hill, Vulcan Materials Company - Chairman, President & CEO [19]

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I think first of all, the cost I'm referring to as our actual operating cost, not transportation, it's actually the cost to produce and sell rock, taking the logistics, -- taking most of the logistics out of that. So I'm really referring to our total cost of sales to produce stone ex transportation. Going to your transportation question, we're seeing rising costs for long-haul transportation, particularly by rail. As you know, and this is a spike but it's real this year, the Mississippi River and the river transportation costs have been delayed and higher due to flooding. So I would tell you that, particularly long-haul transportation, we continue to see it escalate, not go down or nor level off. It's actually going up in a pretty good pop.

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Operator [20]

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We will now take our next question from Kathryn Thompson of Thompson Research Group.

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Kathryn Ingram Thompson, Thompson Research Group, LLC - Founding Partner, CEO and Director of Research [21]

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First really more on the policy related with Illinois and also following up on SB 1 and Prop 7. But with Illinois, could you give -- just given the increased funding, give more color in terms of what end markets you primarily serve in Illinois today and what hasn't looked back historically when there was actually funding for infrastructure. And shifting for SB 1 and Prop 7, are you seeing the full impact of those 2 initiatives? Or do you believe that funding and lettings will continue to grow?

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James Thomas Hill, Vulcan Materials Company - Chairman, President & CEO [22]

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Illinois, we really service the whole market and it's -- we're not focused on the private, particularly the private or the public, and we service non-res, res, public and highways. It's nice to see Illinois turn. The -- that highway work, that highway funding will take a while to flow through as it does in every state. However, particularly in Illinois, we think we'll get bridged because there is substantial tollway and airport funding which is very close to one of our largest quarries up there.

But Illinois doubled their gas tax from $0.19 to $0.38. It is firewalled. It will take -- that will actually double the capital expenditures in Illinois for highways over a 6-year time frame. And as I've said, we're starting to see res and non-res turn. I think what's [slowing] to us, this is a very well-managed business for us. So as I said earlier, this is exciting because we are improving unit margins regardless of -- we've been improving unit margin in Illinois despite challenges for volume. This volume growth will really put some -- put the turbos to that, so we'll enjoy that.

As far as highway spending is concerned kind of across the country, we're excited about it. And I'll run through 8 or 9 of those if you'll allow me. Florida highway lettings in 2020 will be up 25%. Georgia highway lettings will double in fiscal year 2020. We expect highway lettings in Texas to be up 25%. VDOT and regional authority should be up 20%. South Carolina, up 10%. Tennessee revenues have doubled -- or excuse me, have gone up 40% since the IMPROVE Act passed. California is very exciting. We've seen -- since SB 1 through fiscal year 2017, '18, we have seen lettings double. They will be up another $1 billion in fiscal year '20 which just started. So to your point, highway lettings are very good and dramatically improving over the next 12 months.

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Kathryn Ingram Thompson, Thompson Research Group, LLC - Founding Partner, CEO and Director of Research [23]

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Very helpful. And then shifting to the residential end market. Where are you seeing areas of strengths, weakness? And what's the cadence of what you're seeing on your -- for your major markets?

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James Thomas Hill, Vulcan Materials Company - Chairman, President & CEO [24]

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Thank you. Starting in the West, res in California is good. A watch for us would be San Francisco, which has gotten pricey. Moving to Arizona, res is quite strong. Non-res and res -- excuse me, the private side in Texas, probably I'll watch DFW where Houston is strong. The Southeast, the private market is quite good across the vast majority of our markets in the Southeast. The watch for us would be residential in Nashville, which is -- our shipments are growing in residential, we're really watching it because it's been there a long time and it's been very hot for a long time. Miami, a little bit different story, probably some contraction in the private side in Miami. In the Mid-Atlantic, I would describe the private side as steady, slow growth.

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Suzanne H. Wood, Vulcan Materials Company - Senior VP & CFO [25]

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Yes, Kathryn, and I would just add to that, that again, looking at our geography, our footprint in the markets we serve, I mean the fundamentals continue to be in place. You've heard us mention those a number of times. Good population growth, good employment growth. With respect to res, still, relatively speaking, a low level of houses. I mean we're certainly not back anywhere close to peak starts. And then with the interest rate environment and the Fed signaling that it is -- while things can always change, I mean, it's relatively unlikely that we're going to have a rate rise in the next little bit. I mean those are fundamentals we watch all the time that are genuinely moving in a positive direction.

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Operator [26]

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We will now take our next question from Rohit Seth of SunTrust.

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Rohit Seth, SunTrust Robinson Humphrey, Inc., Research Division - Associate [27]

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My question on the energy projects, you touched on that a little bit in the prepared remarks. But can you just talk a little bit about the opportunity set and what you're seeing there?

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James Thomas Hill, Vulcan Materials Company - Chairman, President & CEO [28]

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Yes, we are following about a dozen projects that are multiyear, multimillion ton projects that are at different stages in the pipeline, and all of them are different stages. Most -- the vast majority of this work will ship between 2020 and 2023. So we're not there yet. There's a little bit shipping around the fringes of few of those. So we're trying to help those folks get numbers and get those projects ready and get them started.

Remember that with our Blue Water capacity, it gives us an edge here with these projects. They'll be exciting. We're working on them, but I wouldn't expect them to start impacting us until sometime midyear 2020.

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Rohit Seth, SunTrust Robinson Humphrey, Inc., Research Division - Associate [29]

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Okay. And then I just wanted to talk about your backlog. You guys used to put a slide together in your deck that showed the highway backlog. Would you characterize that as moving up, down or kind of stable?

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James Thomas Hill, Vulcan Materials Company - Chairman, President & CEO [30]

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I would describe highway work dramatically moving up and that will continue to escalate over the next 5 to 7 years.

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Operator [31]

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We will take our next question from Trey Grooms of Stephens.

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Trey Grooms, Stephens Inc., Research Division - MD [32]

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First would be on just, I guess, some housekeeping here on the mix benefit that you guys realized in the quarter on price. Was that more of a product-related mix benefit or was there a geographic benefit there? And then any expected mix impact in the third quarter?

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Suzanne H. Wood, Vulcan Materials Company - Senior VP & CFO [33]

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Yes, the 50 basis points was geographic mix.

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James Thomas Hill, Vulcan Materials Company - Chairman, President & CEO [34]

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Now as far as the second half mix, I wouldn't expect -- there'll always be some kind of mix with geography and a little bit of product, but I wouldn't expect it to be dramatic in the second half of the year.

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Trey Grooms, Stephens Inc., Research Division - MD [35]

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Okay. Fair enough. And then you also -- you mentioned the stripping costs and of course that can happen from one quarter to the next, and I think you said that it's going to be ongoing. And then also with freight costs, you said still going up for you guys on the longer-haul stuff. But as we look at the increase in COGS that we saw in the quarter, I think it was the 2%. Is that a similar kind of rate that we should be thinking about as we look in the back half when we're looking at these costs?

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James Thomas Hill, Vulcan Materials Company - Chairman, President & CEO [36]

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I would tell you that the short answer to your question is yes. I think that our folks are doing a good job as I said earlier executing on those operating disciplines that drive cost and the efficiency with that. I think it's important in this that you take that cost and take it to unit margins. We saw unit margins in the second quarter up 11% to $5.74. We've now put together 3 quarters in a row with double-digit unit margin improvement, and that is a combination of solid pricing but very good operating execution. And it's not about spending money, it's really about the execution of the operating disciplines that drive cost.

So you heard me thank our folks, the men and women of Vulcan, that drive those unit margins, I'd like to do that again because they're now consistently turning in double-digit improvements in gross profit per ton. So I would expect us to continue our operating disciplines, and the costs to follow.

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Trey Grooms, Stephens Inc., Research Division - MD [37]

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Yes. I know that the operating execution has really been a focus for you guys. Congrats on the good results there. Last one from me is just on of course, the Illinois market, you mentioned, and Texas and Tennessee saw delays. But to Suzanne's point earlier on, I think we were talking about ready mix, but there's only so many hours in a day and so many days in a quarter and in a year. So as we're kind of looking at these -- the delays that we saw in some of these markets for you guys, I know the underlying demand is there, that's pretty clear, but how do we think about the opportunity to kind of execute or realize on some of this maybe pent-up demand that might be there?

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James Thomas Hill, Vulcan Materials Company - Chairman, President & CEO [38]

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Yes. So you're right, you're exactly right. There's only half the year left or less than half a year left now. We also have some bottlenecks with transportation. I think the underlying demand is there. That demand is not going away. So whatever we don't ship in '19, we will ship in '20, that you saw the -- the perfect example of that is in January of this year when that the work, the pent-up and shipped in January. So it'll really be a function, to some degree, of weather and timing on some large projects.

I think -- if you don't mind I'll stop and step back and kind of let you know how we look at the second half of the year. As you heard Suzanne say, we are very comfortable with our guidance. I think we try to be thoughtful when we gave you guidance in February. We said the upper end will be good weather and jobs starting on time. Lower end will be inclement weather and jobs delayed. As you look at us giving guidance, staying in that guidance range for the balance of the year, I think what we want to do is to be prudent about weather and timing on jobs. We had a really good start to the year with January extremely strong with that flow-through of work from '18 pushing back.

The rest of the year shipments, the other 5 months, has actually been at the high end of our guidance, ex January. But now we need to remember that the third quarter is our most volatile quarter. It is the peak of the construction season. At the same time, it's also the heart of the storm season. We've already experienced one storm and luckily didn't clip us too bad. So we're just trying to be realistic and transparent about storm threats in the middle of peak of construction season.

If you move to pricing, our pricing has consistently, through the year, been in line with guidance. We would expect that to continue for the rest of the year. And our look at that is solidly on our guidance. As we talked about our operating disciplines, we have executed well and created cost savings. All of that has driven double-digit unit margin growth for the first half of the year. We would expect that to continue for the balance of the year. So I would think we'd be on the high side of aggregates volume guidance.

Moving to asphalt, asphalt work was -- as we talked about was delayed in the first half because of rain in Tennessee, California and Texas, those are 3 of our biggest asphalt states. So in spite of very big backlogs and growing lettings and growing unit margins, some of that work may get pushed back just because of what we talked about a number of times. As Suzanne mentioned, a bit extra cost in incentives and investment in unit margin on SAG. So I would expect the year to play out this way: a bit stronger on aggregates earnings, a bit lower on asphalt earnings. You put all that together, I would tell you that Suzanne and I are confident in the year in the middle of our guidance range.

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Operator [39]

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We will now take our next question from Garik Shmois of Longbow Research.

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Garik Simha Shmois, Longbow Research LLC - Senior Research Analyst [40]

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I wanted to ask, your backlogs are very strong, you've got a stronger outlook across your geographies. And I know we're not talking formally about 2020 yet, but if you look out over the next 12 to 18 months, what would be the limiting factor outside of, say, weather to drive volume growth as you see it? It just sounds like your visibility has gotten better. So is there certain capacity constraints in the market that would limit your ability to continue to grow it, call it, this low to mid-single-digit volume clip? Or anything else out there that could be, I guess, an inhibiting factor for you?

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James Thomas Hill, Vulcan Materials Company - Chairman, President & CEO [41]

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I don't think I see inhibiting factors that would limit mid-single -- low to mid-single volume growth. I think that's achievable. I think when you get above that, it gets tougher because of things like transportation and labor for our customers, not for us but for our customers.

You're also seeing maturity of a lot of highway dollars. And mixed in that are bigger and bigger more complex jobs, the timing of which can be all over the place. We've had a few jobs delayed even this year with some big highway work and still we're shipping well within our -- at the top end of our range of guidance. So to answer your question, I don't see it for the numbers that you're saying. Now if you want to get to high single digits, yes, you start to get compressed with labor and transportation and just customer's capacity.

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Garik Simha Shmois, Longbow Research LLC - Senior Research Analyst [42]

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Okay. And I just wanted to ask just on SG&A. Just given the bump due to the performance compensation in the quarter, how should we think about G&A costs through the balance of the year?

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Suzanne H. Wood, Vulcan Materials Company - Senior VP & CFO [43]

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Yes, it's a good question. The -- we had initially guided back at the start of the year to around $355-ish million. We now expect that number to be somewhere between $360 million, $365 million. Obviously, we will continue to look for ways to leverage that. But year-over-year, that will put us -- put our SG&A expenses or our SAG expenses, I should say, as a percentage of revenues basically in line with where they were last year, maybe just a tick below.

And it's important that we made some of the investments we did because, again, we are on a very serious course here to improve our unit margins. We have a number of operational initiatives underway. And so I think making investments there to help further those initiatives and hopefully deliver results a bit quicker are good investments to make. So hopefully that updated guide is helpful. I think the consensus on SAG expenses for the full year is about $360 million. So pretty much in line with that.

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Garik Simha Shmois, Longbow Research LLC - Senior Research Analyst [44]

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Okay. I just wanted to ask just one more question, just on pricing. Are you seeing any markets -- I know you don't like to formally talk about mid-year price increases because you're continuously evaluating pricing on a job-by-job basis. But are there any markets that are structurally, just given the demand stream of coming in maybe towards the higher end of your guidance, that are tighter on supply, in turn fundamentally seeing a more attractive supply-demand environment and in turn a potentially a better pricing environment?

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James Thomas Hill, Vulcan Materials Company - Chairman, President & CEO [45]

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I think there's a few markets where certain sizes are tight and there is pricing opportunity. But I think the big driver on pricing is the visibility on demand that's coming and the people's confidence that they have work and they can take risk on pricing and profitability. And I think that's pretty broad spread. And it's followed -- a lot of it has followed the increases in state and local funding, as we talked about in all the states, that drive the vast majority of our revenue. So while that's out there, I think the big driver is more fundamental and more ingrained, which is a good thing because it means it's more long term.

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Operator [46]

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We will now take our next question from Phil Ng of Jefferies.

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Philip H. Ng, Jefferies LLC, Research Division - Equity Analyst [47]

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Nice to see the acceleration in pricing this year in aggregates, backlogs are quite strong, I'm [pretty sure] there's some bottleneck from the shipment side. Is this level of momentum and growth on pricing sustainable for the next few years?

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James Thomas Hill, Vulcan Materials Company - Chairman, President & CEO [48]

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Short answer is -- I think the answer is yes. And the reason I have confidence in that is because of the long-term growth -- substantially growing funding and on the public side and highways and how visible that is and how sure that is. And so you put those that you pick that is growing, that is very visible and that is sure and protected gives people the confidence throughout the construction sector that they can take risk on price.

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Philip H. Ng, Jefferies LLC, Research Division - Equity Analyst [49]

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Got it. And then just on that note, appreciating that most of the highway funding has been driven more at the state level. But with funding on the Highway Trust Fund expected to wind down next year, what are some of the mileposts that you are looking at from a timing perspective before you think if nothing gets done, you could see some of these projects push out or stall a little bit?

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James Thomas Hill, Vulcan Materials Company - Chairman, President & CEO [50]

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Well, first of all, I don't see the demand stalling because of the federal funding. If you take -- let's step back and look at federal funding first and then we'll go into the total highway demand. The House and the Senate are working on a highway bill. Our policymakers and key committees are working on the reauthorization package now. Recently, the Senate Environment and Public Works Committee is right now working on a bill which would increase funding by 28%. We'll see what happens with that. And funding is a big part of the ongoing conversation.

But that being said about the highway bill reauthorization, you've got to remember 2 really important facts when it comes to highway demand. Number one, the feds are not going to let the highway funding go down even if the FAST Act expires. They'll just -- they'll make extensions and keep the funding there regardless. Number two, our states are extremely well -- our states and local governments are extremely well funded. So funding in Vulcan states is up 60%, that's an increase of over $20 billion per year in 11 states. Now remember, put that in perspective, that's $20 billion in 11 states versus a federal bill which is $45 billion over 50 states. And that funding is really starting to flow through those -- we're starting to ship on it and you're seeing the lettings grow. So highway demand will grow -- absolutely grow over the next 5 to 7 years.

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Suzanne H. Wood, Vulcan Materials Company - Senior VP & CFO [51]

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And I would just also add to that, that historically at times in the past when it was time for a federal bill to be renewed, states have operated in this federal bill extension mode so they understand how to do that and are comfortable with doing that. And I think the other point I would make is that if you divide the highway spending among federal, state and local level, it's about a third, a third, a third. So that's why we keep talking a lot about this state funding and local funding and the importance of it because that represents about 2/3 of the spending.

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Philip H. Ng, Jefferies LLC, Research Division - Equity Analyst [52]

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Got it. That's really helpful color, guys. And just one last one from me and a question for you, Suzanne. Based on the outlook in the next few years, from a growth standpoint, it definitely sounds strong. Directionally, how should we think about CapEx and capital deployment priorities? In other words, obviously a few big deals in the market a few years ago, but just curious how you're thinking about the M&A, the pipeline and just directionally on the sizing of some of these potential targets.

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Suzanne H. Wood, Vulcan Materials Company - Senior VP & CFO [53]

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Yes, absolutely. I mean if you've looked at the M&A we've typically done in the past, it's been more of the bolt-on variety as opposed to big M&A. I mean deals come and go in the market, we take a look at the deals when they arise because that's just good practice to do that. But we had been very disciplined with our approach to M&A and we would continue to be so.

We have pretty big hurdle rates that deals have to get over. They have to be very strategic to us. They have to be accretive to our return on investment profile. They have to be something that significantly extends the value of the franchise. And they have to be something -- they have to be deals that we can integrate quickly and efficiently so we are able to derive the synergies from them. So we continue to look, but again we're disciplined. We'd wait for the right thing, and we're not going to be crazy about multiples. That is not helpful in any event.

If we think about other uses of that capital from a growth perspective, I mean, remember, we're going to be spending about $200 million this year on growth CapEx, our internal growth projects. We're really excited about those. It is a way to enhance and generate EBITDA without a lot of risk and without paying some blue sky goodwill that you might have to pay if you were to do a bit of M&A.

And just as a reminder, some of those growth projects that we are working on this year and which are embedded in that $200 million projected spend are some greenfield quarries that are in geographic areas that are beneficial to us -- California, Texas, South Carolina. And in addition to that, and personally I'm very excited about this part, we also have a number of sales yards strategically located in the U.S. that when they come online would extend our franchise and our ability to reach customers. So M&A is one pathway. But for me, low risk, EBITDA enhancing, extend the value of the franchise, I quite like some of these internal growth projects. And again, we put those through a pretty strenuous return-on-investment review, and they are accretive as well.

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Operator [54]

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We'll take our next question from Michael Wood of Nomura.

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Michael Robert Wood, Nomura Securities Co. Ltd., Research Division - Research Analyst [55]

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I wanted to ask are your markets in cement are impacted at all by the merger of the 2 large state-owned [enterprises] in China and if that's had a positive or a negative impact on pricing in concrete?

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James Thomas Hill, Vulcan Materials Company - Chairman, President & CEO [56]

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I wouldn't see it affecting our markets in concrete, positive or negative. I just don't see a lot of impact for that. Now that being said, we saw -- go ahead, I'm sorry.

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Michael Robert Wood, Nomura Securities Co. Ltd., Research Division - Research Analyst [57]

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I'm curious since you improved that segment as well in 2Q versus 1Q but you still had lower gross profit year-over-year, so I just -- if you can also talk about your confidence in the back half and how you're seeing pricing in the market.

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James Thomas Hill, Vulcan Materials Company - Chairman, President & CEO [58]

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Yes. The -- actually our volumes is what we were -- gross profit was actually slightly down 2% and that was really driven by volumes being down, some of that was rain in Texas, some of that was timing of work in Virginia. Our prices were actually up 5% and unit margins were up 5%. So assuming we can get our projects going and get a little sunshine, I think we'll be fine the rest of the year in concrete.

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Michael Robert Wood, Nomura Securities Co. Ltd., Research Division - Research Analyst [59]

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And on the aggregates, can you give us some clarification of the weather impact to the loss shipping days in the quarter?

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James Thomas Hill, Vulcan Materials Company - Chairman, President & CEO [60]

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Yes. I mean that's a dramatically -- that's a big mixed bag, where in the quarter -- I'll give you a few examples in big margins where we got hurt. Dallas had another 15 days of rains. San Antonio had an increase of 24 days of rain. Houston had an increase of 6 days. In California, we saw LA up 5 days, San Francisco up 9 days. So I guess that kind of gives you a feel for what that was like. And Knoxville was up dramatically, but I don't remember exactly the number of days in Knoxville. So -- and then if you look at Illinois, we lost a full month. We lost 22 days in Chicago.

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Suzanne H. Wood, Vulcan Materials Company - Senior VP & CFO [61]

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And if you go back and look at the shipment volume guidance range we gave at the beginning of the year, which was 3% to 5%, you'll remember we talked about what would put us at the top end of the range and what would put us at the lower end of the range, the 3%. And the 2 things we called out that would put us there would've been delay of some big projects that sometimes is just unavoidable, it's outside the control, and also weather. And so given the fact that Q2 was wet, as Tom just described, I mean we were -- frankly, we were pleased to have our volume growth come out at 4% in the quarter. Because don't forget, California and Texas, 2 of the markets we've called out as being quite wet as have others, those 2 markets comprise about 30%, give or take, of our volumes. So we were pretty pleased.

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Operator [62]

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We will take our next question from Mike Dahl of RBC Capital.

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Michael Glaser Dahl, RBC Capital Markets, LLC, Research Division - Analyst [63]

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Suzanne, I want to pick up on that last comment. And if you think about the performance in the quarter despite some of the headwinds, it doesn't actually seem like that much of a heavy lift to get not just to the top end of the volume guide but maybe a bit above the volume guide for the year. Now Tom, I know you made the comment and maybe it's the high end of that and so the 5% range. But just more specifically thinking about what you've seen quarter-to-date, is there anything you'd point out as far as volume cadence and kind of what to expect for magnitude of growth in 3Q versus 4Q?

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James Thomas Hill, Vulcan Materials Company - Chairman, President & CEO [64]

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Yes, I think let's just concentrate on the third quarter and as -- and really for the balance of the year. But I think what you heard me say was we're trying to be prudent going into the third quarter. And the underscore there is the third quarter is the peak of the construction season, but it's also the peak of the storm season. So that can go really, really well or they can go really, really tough or it could be a mixed bag. And so I think us telling you the high end of our guidance is trying to take some of that into -- for volume is trying to take some of that into account. The perfect example of that is what we saw in the first half in California. And so it's really trying to be thoughtful and trying to give you our best educated expectation of what we expect based on history and based on our backlogs and based on what we see is the booking pace.

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Suzanne H. Wood, Vulcan Materials Company - Senior VP & CFO [65]

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That's right. And I would just add to this. I've got the numbers here for the second half last year in -- I have the third quarter as well. But let's not forget, last year, in the third and fourth quarter, those were not -- I don't really consider them to be terribly easy comparisons. If you look at the second half last year, our volume grew 9%, our gross profit per ton grew 11%. And for the 2 quarters combined, our flow-through was about 63%. That's a pretty good performance that we would be talking about overachieving here. Price was at 2%, perhaps there's some upside there. But it was a pretty strong volume and gross profit per ton second half.

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Michael Glaser Dahl, RBC Capital Markets, LLC, Research Division - Analyst [66]

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Great. Appreciate that. But I guess it's good to hear that, that upper end sounds like it actually does incorporate the -- some conservatism around the weather, which is great. The second question I had is, bigger picture, you've kind of alluded to a few different times, some of the internal initiatives and some of these are earlier stage than others. But can you give us a flavor on some of the internal initiatives that you're using to drive unit margins over the next couple of years? Where are we at on some of the big initiatives? And can you quantify any goalposts for us to be thinking about in terms of impact?

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James Thomas Hill, Vulcan Materials Company - Chairman, President & CEO [67]

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From a very high level, what drives our quality of earnings is what drives gross profit per ton. Again at a high level, that would include 4 areas of focus: commercial excellence; logistics efficiencies; number three, how we procure our goods and services; and the fourth, our operating disciplines and the disciplines around those efficiencies that drive cost.

Now we've been working on these at different stages over the last few years. We've invested in people and processes and systems to improve our metrics and our disciplines. And what you're seeing is results -- improvements in our gross profit per ton. Again, I bragged on our people on this earlier, we've put together now 3 quarters where we've had double-digit improvement in unit margins. So solid work. But as you pointed out, we are far from being done, we've got a long ways to go.

And when you start talking about goalposts, this -- remember this is an ultra-local business. And every one of our markets and submarkets has their goalposts, but putting those together is not as nearly as important as what happens on that local level. So this is exciting. We've done a lot of hard work. We've got a lot more hard work to do. So -- but I congratulate our folks for being disciplined and being diligent with this. But more to come on these efforts.

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Operator [68]

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We will take our final question from Robert Muir of Berenberg Capital.

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Daniel Wang, Joh. Berenberg, Gossler & Co. KG, Research Division - Associate [69]

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This is actually Dan on for Rob. Just a quick question with regards to the split between the 3 end markets. Is there any way to quantify the performance of like infrastructure res and non-res? In particular, I remember last quarter, around the Southeast, non-res was particularly strong. I was just wondering whether that's continued and what you've seen across your geographic footprint.

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James Thomas Hill, Vulcan Materials Company - Chairman, President & CEO [70]

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I think that we would describe the private side in most of our market as growing and steady growth, a few places a little higher than others. The public side is growing and growing faster and will continue to grow faster. I would call on the public side, absolutely across our footprint, we see growth.

Again, as Suzanne said, the fundamentals for the private side which are population growth, employment growth, very low inventories of houses and now we expect lowering interest rates, that is a good formula for private demand growth. Put that with the dramatically growing funding from highways and that maturing into lettings and now into shipments, that is a great formula for public demand growth. So I would call it solid and I would call it exciting, and I would call it solid and exciting across our footprint.

Well, thank you for joining us today. We really appreciate your interest in Vulcan and your time this morning. And we look forward to discussing the company and our results and our performance throughout the quarter. Look forward to seeing you.

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Suzanne H. Wood, Vulcan Materials Company - Senior VP & CFO [71]

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Thank you.

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Operator [72]

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This concludes today's call. Thank you for your participation. You may now disconnect.