MLM
#Thank you, <UNK>, and thank you all for joining today\
The first is just on guidance.
Could you give a little bit more color in terms of important drivers for assumptions, including rising diesel cost and the ability to make up for those lost volumes in 2017 from storms.
Sure, <UNK>.
We're happy to do that.
Number one, we see volume better in every major market in which we operate.
So if we you look across our states, we don't see volume down anywhere.
If we look at the elite 8 states in which we operate, meaning Texas, Colorado, North Carolina, South Carolina, Georgia, Florida, Indiana and Iowa, we see all those states up pretty markedly, and we don't just see them up in one area.
We see infrastructure being better.
We see nonres better, and we see residential being better to answer your question very directly.
With respect to energy itself, look, we do see diesel going up year-over-year, based on the guidance that we've put out, at least baked into our guidance.
It's not called out specifically.
We are seeing that diesel for the year would be up around $0.44 per gallon in '18 versus where it was in '17, but quick math is going to tell you that's going to be plus/minus an incremental $20 million.
And in case you're wondering, we used about 44.8 million gallons of diesel fuel last year, so that's how we work up to those numbers.
I hope that's helpful, <UNK>.
Yes.
No.
That's helpful.
And I assume or are you assuming that you will or won't make up for those total lost volumes from the storm.
Yes.
What we're assuming is that we will make up some of them.
We're not assuming that we'll make up all of them.
And again, we'll just see how that flows through.
But at least at this point, that's how we bake that in, <UNK>.
Okay.
Given a little choppy end to the quarter, there were some parts of the ---+ there were many parts in the U.<UNK> that did really quite well, but there were certain ones, including Texas, where they just can\
Sure.
No.
I'll try to do that.
<UNK>, if you go back over the last 2 years, what we've seen in both '16 and '17 were actually pretty mild Q1s, so we've seen better Q1s on a compare basis the last 2 years than we would have seen historically in the company.
So here's what I'll tell you.
If we go back and look at the last couple of years, and I'm looking at these percentages as a percentage of the year, so we would have seen revenues in Q1 in '16 and '17 of around 21%.
We would have seen gross profit in Q1 in '17 around 16% and EBITDA about 15% of full year.
Now if we go back and say, okay, really, what does it look like over a longer period of time and take a look at what that snapshot looks like, it looks more like revenues, 17%.
It looks more like a gross profit of 8% and an EBITDA of around 8%.
One thing that I'll remind you, and we talk a lot about this, but it's important to remember at this time of year, in particular.
Typically the first quarter is made or broken in the last 2 weeks of March.
I mean, that's what we've seen forever.
That's usually when the construction season starts in earnest.
So what I would encourage you to think about, <UNK>, is a more typical cadence to the year.
And what I've just given you, at least relative to Q1 the last couple of years but more likely Q1 over a longer term, is the way that I would think about it.
So I hope that helps.
That does help.
And then finally on fly ash.
We've been watching shortages of synthetic gypsum and also fly ash throughout the U.<UNK> impacting different industries, and we definitely noticed a tightness in ability to get fly ash in the state of Texas, in particular.
Is this something that you're also seeing.
And also clarify how that may or may not impact your cement operations.
Well, the short answer is, yes.
We're seeing it, and I think it will provide some choppiness for ready mixed producers in parts of the United States.
Keep in mind, we're the largest producer of cement in Texas.
So do I think it can provide some choppiness for people for, let's call it, 6, 7, 8 weeks.
I think it certainly could.
From a cement supplier's perspective, look, if there's not fly ash, we're happy to fill that void with cement.
And I think we can do that just fine.
So I think we're sitting in a pretty good place from that perspective, <UNK>.
You know what, it certainly is.
There are 2 things that I would tell you are in that, and it's hard to tease it all out with specificity, <UNK>.
But I do think you're going to see more infrastructure work this year than last year.
I think you're going to see more new infrastructure work than last year.
That does mean that you're going to have more base product going out.
And that's clearly, on average, about 30% lower ASP as opposed to clean stone that's going directly into ready mixed or into asphalt.
So I think that is going to matter.
The other thing that I think we've called out fairly clearly is we think growth on a relative basis is going to be more robust in portions of the West.
So again, if we're looking at places like Texas and Colorado, those markets are still, let's call it, 70% of a corporate average.
So there's clearly some of that.
So when we're looking at the 3% to 5%, you could probably take that up half a turn-ish or so as we look at what pricing would be if you are really looking same on same.
And the other thing that I would tell you is there were a couple of things last year, too, that are important to remember relative to the pricing that we reported.
Number one, we did see some product mix issues in Texas in 2017 because I want you to remember we did finish some large energy-related projects at the end of '16 that were principally using clean stone.
If we really do a same on same, then you probably would have seen another percentage, maybe a little bit more than that up just in the Southwest division all by itself.
And we also had some excess fill product, in many respects what's almost a waste product that we sold, for fill on a bypass job in North Carolina.
And we sold about 1 million tons of that at $1.76 last year.
I give you all that background, number one, as a reminder that those were in last year's number; and two, just to give you a sense of how constructive we think that piece of the business continues to work overall last year and what we feel like is a very attractive outlook for this year.
It can come relatively quickly depending on the nature of the project, so it could be anywhere from 2 to 6 months would not be unusual lag times, again depending on the time of the year.
And you make a very good point.
If base stone is going down, the day and the hour is going to come that asphalt or concrete is going to go on top of that base stone.
So it's important to recognize when we're having a conversation with you around more base stone, from where we sit, that's a very good sign.
And it goes back to the comments that I gave in the prepared remarks relative to this being an extended cycle, and those were some of the very few reasons that we think the cycle will be extended.
Well, here's what I would say.
The process with DOJ is going exactly as we thought it would, so there have been no surprises there.
As you may recall, we spoke last time about entering into a timing arrangement with them.
So we continued to work in a fashion that we think is really constructive.
We are not seeing anything from that process that makes us think about this transaction any differently than we did the day that we announced this transaction.
So to the extent that there are divestitures, the divestitures will not be such that they're value-destructive to the transaction, so again exactly the way that we thought of it.
We have also not changed the way financially that we think about this deal.
It will be accretive on EPS and cash flow during the first full year.
We'll obviously talk to you more about that in granular detail once we own it.
Since we don't own those assets yet today, we still have to be careful about what we say in public that we haven't already.
But again, we're excited about that deal.
We like the fact that we're picking it up when places like Georgia are 20% below mid-cycle.
We're seeing literally billions of dollars worth of work coming in Maryland.
We think we're the right owner.
Those are the right geographies.
It's got a very bright future.
And we're very comfortable with where we are in the DOJ process, and our timing has not changed on the transaction.
<UNK>, thanks for the question.
I guess a couple of things that I would say.
Number one, I think if we generally spoke to people who were looking at their businesses at a granular level back in October and November and said, "How did you feel then.
And how do you feel now.
" I think, generally speaking, people feel better today than they did then.
And your question is why.
I think for several reasons.
One, if we talk to our customers and we\
Well, I guess there are couple of things that happened there.
Did we have good pricing.
We did.
Did we have good cost control.
And did we put some more inventories on the ground anticipating a busy 2018.
We did some of that, too.
I don't want to completely overshadow the fine performance that the team did.
But yes, I would highlight there were some inventory builds out there, but the majority of it was the pricing and what we're doing from an efficiency perspective, but you did have that one-off.
I mean, you had incrementals with a 100 in front of it, and that's not usual for a Q4.
But still, it was a performance that we are justifiably very proud of.
No, sure.
Happy to do that, <UNK>.
Keep in mind, we are the cement volume leader in Texas, and we got 2 plants there, so one in Midlothian in North Texas; one at Hunter, just outside of San Antonio.
I guess a couple of things.
One, we saw a good finish to 2017.
We think that really set the stage for a positive 2018.
Q4 volumes were positive in both North and South Texas, and we have an expectation that we'll see volume and pricing increases in 2018 as well.
We think there continued to be very strong underlying economic conditions in that state.
We think we're going to see a better DOT this year.
I mean, we're seeing that DOT delta up from a $6.2 billion last year, TxDOT, to $7.9 billion this year, so that's $1.7 billion more just in that all by itself.
We also have a new yard in New Caney outside Houston.
We also have some material we're going to be supplying a little bit in Western Texas as well.
And really, that's more focused just on the south end of it.
We also think what we're going to see in North Texas this year is going to be a very exciting, very full, very dynamic market.
So as we're looking at that marketplace with more volumes and we're looking for some price increases there that are probably going to be around that $6 a ton range, probably a little bit better in the North than it is in the South.
And you take those and put them together, we think it's going to be a pretty attractive place.
The other thing that I'll bring your attention to is if you look at our share by quarter in 2017, we had 21.4% in Q1, 20.9% in Q2, 19.1% in Q3 at the nadir, that's when we spoke last, and 20.2% by year-end, you started seeing us capture some of the share back that we had lost in many respects because we had been resilient on pricing.
We think our strategy is working in that marketplace, and we will continue to be very thoughtful about how we capture a bit more share in the overall Texas marketplace.
But, <UNK>, hopefully, that gives you a good drive-by on what we see in Texas cement.
Ward, can you talk to us about what you're seeing for your shale-related shipments.
How did the year end up.
What's your anticipation of the ramp in '18 for that part of the business as you speak to your customers.
And can you just calibrate us on a run rate basis how diversified is this business by shale play.
No.
Happy to do that, <UNK>.
And what I\
And, Ward, just the cadence.
You mentioned you're exiting the year up 43% year-over-year in this business.
The comps should be equally easy through the first half of the year, so I know we're talking about the law of small numbers here.
But is that the kind of ramp that you expect based on what you're hearing from your customers similar ---+ through the first half of the year in that mid-40s exit rate.
Yes.
And again, I think you could certainly see that type of build again.
I would expect more of that to start in Q2, simply because of the weather issues that are inherent in Q1.
And keep in mind, if you're selling into a Marcellus or a Niobrara, that's a very different Q1 than is an Eagle Ford, for example.
So I think a lot of it's going depend on the where.
I will say this from a percentage perspective, the 3 areas that did get the most better in Q4 would have been Barnett at 38% up, Eagle Ford at 130% up and Haynesville at 51% up.
So that gives you a snapshot of at least where the action is and hopefully what the time will look and feel like.
I appreciate the color.
And then separately, from a pricing standpoint, I know we've got moving pieces in terms of which regions are driving growth for you folks in '18 versus '17.
As you look across your markets, how do you expect the magnitude of price increases on January 1 and April 1 of this year to compare to what we saw last year and any differences in terms of parts of the footprint where you're going earlier or later in the construction season with your planned price increases this year.
You know what, it varies a lot, <UNK>.
I'd rather not go into very specific markets and talk about dollars and cents in any given market, but here's what I'll say.
Clearly, there are some markets that will see increases and have seen increases on January 1.
There are others that will go as late as April 1, so you're not ---+ we're not seeing things past April 1.
The one thing that's worth reflecting on and I mentioned early in the conversation some of the diesel costs.
Diesel in a rising cost circumstance has clearly been something that has continued to at least prop up in the past what had been some mid-year price increases.
We'll have to see how the year shapes out on that and have to see what happens with diesel.
But again, from a pricing perspective, many in January, some in March, a few in April is the way that I would encourage you to think about that, <UNK>.
Yes.
And thank you for the question, Phil.
I think the big issue there is going to be on the where.
So if we go back to the guidance and really think about what is in the guidance itself and how it rolls up, I mean, if we're looking at the low end of that guidance, what the low end of that guidance would assume is that you've got flat Mid-Atlantic volumes and Southeast just up mid-single digits versus our forecast of high mid-single digits.
The short answer is if you've got Virginia and North Carolina and South Carolina going at greater rates than that, it's clearly going to be a friend to the incremental margins.
So it's really going to be more of a story on the where.
And one of the nice ---+ actually, the Secretary of Transportation here in North Carolina who I was referring to a little while ago who's got the high-class problem of having several billion dollars worth of work that he needs to get out the door.
So we're certainly hoping we see that.
We haven't necessarily built a budget around that.
But to give you a sense of it, that's really more your driver than anything else because those are obviously our highest-priced, highest-margin areas that we think have very bright futures, we're just ---+ we're a little bit cautious right now on exactly when that future shows up, but we like what we see.
I don't see a big risk on the construction season this year.
Again, I think it's important to go back to the answer I'd given a little while ago relative to the cadence because I do think, historically, people have tended to put more weight on a Q1 than a Q1 really deserves as I said, really it's those last couple of weeks in March that at least in the 20-plus years that I've been around this industry tend to either make the quarter work or not, and I would just hate to make a year bet based on the last 2 weeks in March.
I don't see anything relative to the state budget, so the federal budget, that gives us any notable concern as we're looking at what we believe the construction season is going to look like when the season arrives in earnest.
Yes.
I guess a couple of things.
I\
I think it probably picks up with the normal construction season in March.
I mean, if we just go through and look broadly at those big 8 or those elite 8 states that we spoke of before, I mean, TxDOT has a letting plan of $7.9 billion this year versus $6.2 billion last year.
I think we feel positive in Georgia as we feel like the House Bill 170 dollars will start to begin to have a much more notable effect.
And we talked about the fact that North Carolina, we believe, has the positive outlook, and we're seeing an accelerating letting schedule here.
I think if we look at South Carolina and we say they've done something that really is not typical for South Carolina, they raised their gas tax over a 6-year period, I think we'll clearly start to see more work there.
And Indiana has done the same thing.
Florida is at a near-record budget at $10 billion.
And part of what we're liking in Colorado right now, which has been just a really strong robust state for us is we continue to see big jobs let in that state.
And here's part of the difference that we're seeing there.
These are big, complicated jobs that are going.
So if we're looking at 2 large TIFIA projects and C-470 is one of them, that's underway.
And I-70 will start in 2018, and that's about $1.7 billion worth of total investment.
And part of the trick on those jobs is we think aggregates will well be tight in that marketplace, and we think contractors are appropriately going to be focused on making sure they have aggregate suppliers and partners going into those jobs who can actually meet their needs.
So again, I think we're going to see a normal rhythm and cadence to it.
I do think we need to get past March 15 because in many states under DOT specifications, you can't even really go full-bore on those projects until then, which goes back, <UNK>, to the earlier comment that I had that oftentimes those last 2 weeks in the first quarter oddly enough make it or break it.
So I think we see a fairly normal, consistent rhythm and cadence to public work as we go into 2018.
Sorry for the long answer.
I'll tell you, we don't see many in our footprint that feel that way.
And as we look at a lot of the nonresidential forecasting that comes out, I think most of them would continue to concur on that.
If we look at the South and the Southeast, those areas continued to have expectations of pretty heavy growth.
About the only places that we see any degree of contraction, at least from third-party forecasters, are really in markets where we're not.
So we're seeing at least people forecast something that's going to feel a little bit more like a pullback in portions of the Northeastern United States.
But again, if we're looking at those states that matter disproportionately to us, what I would suggest to you is I don't see anybody who feels like they're peaky and they're about to go to over that peak.
And we continue to see a lot of cities and among them places like Atlanta and Raleigh and Charlotte and others that we think are still pretty early in the cycle.
And as you know from following us for years, those are cities that tend to be disproportionately important to us.
Quick question.
We're talking about the elongated cycle.
And certainly, you guys got some benefit from the tax plan.
Does it change how you think about leverage over the near term.
And I ask that kind of post-Bluegrass and the dead deal you're looking at kind of mid- to high 2s sorts of level, which is very reasonable, I think, kind of where we are.
But I would love to hear your thoughts whether additional M&A, buybacks kind of where your head's at in terms of all of that.
<UNK>, it's Jim.
I'll take the question.
There's no change to our capital priorities.
So the right deal, we'll move on that if it makes sense as has been the case for years.
But as it relates to your question around debt and its relative attractiveness, well, with the new tax law, it's obviously less attractive than it used to be, but it's still obviously more attractive than equity issuances.
So we really don't change too much from that perspective, either.
The tax law change does obviously give us more cash flow going forward and a greater ability to, a, either delever; or b, pursue more acquisitions or share buyback at the right point.
So it just gives us more free cash flow to work with, but I would say foundationally there's no difference in our approach to capital allocation.
Perfect.
Then one housekeeping.
On the cement pricing, the $6.
Is that ---+ are you assuming kind of a mid-year price increase in that.
Or is the market not requiring that at this point.
No.
We have ---+ we started talking last year about cement price increases, so we think we're pretty much set with that.
Right.
Some in third ---+ I mean, some in four, yes.
Well, I guess what I ---+ let's go back to the why first, then we can go back to what the margin looked like.
I guess what I would tell you if we look at it from a practical matter, <UNK>, there are parts in the Midwest, in particular, where we wanted to make sure we had adequate inventories on the ground because cranking up in that corner of the world is a bit of a challenge.
So that's why you would go ahead and do that.
Now back to your point, incrementals based on some of the inventory build were 100-plus percent, they probably would have been more in line, maybe slightly ahead of our targets had we not done that.
So you would have seen a very attractive incremental margin in Q4.
The inventory just made it look phenomenally attractive, so just in the spirit of transparency.
Well, I guess what I would say is this: I want to say unemployment in parts of Indianapolis are about 1.8%.
Typically, people would say 2% is full employment, so that's pretty constrained right now.
But here is the issue that we're running into.
We're not constrained from our perspective.
In some instances, contractors have been constrained in some markets.
But the observation that I would make to you is this, <UNK>.
When contractors need to move on jobs, either because they're concerned about liquidated damages or they want to get an incentive bonus for finishing early, my observation is they are able to meet those deadlines when they need to.
I think contractors, the more we see talk and the more we see action on an enhanced infrastructure project, I think they can hire in these markets.
I think in many respects, they have chosen not to hire in these markets.
And I think as we come into 2018, they're going to be able to meet what the demand is and probably start positioning themselves for what we've indicated we believe is going to be an extended cycle.
CSX is working their way through what has been an extraordinary period of time.
I mean, so they clearly had a change in CEOs twice, one with Michael Ward's retirement and then, sadly, with the death of Hunter Harrison.
They clearly have had a change in their strategy.
They went from really largely unit trains to more precision railroading, which means in their terminology manifest service.
I mean what that meant for portions of last year, again in the spirit of transparency, they did have some longer cycle times.
They did struggle at times with rail congestion.
And I think, on occasion, they were resource limited.
What I would tell you is we have had very constructive conversations with CSX.
They have been good partners to us and continue to be good partners to us.
And we're seeing their performance improve over the last several months in terms of cycle times and fulfillment.
So am I going to tell you that it's perfect exactly the way that we would like to see it.
No.
I don't think I can say that.
Can I tell you that it's considerably better.
I can.
And can I affirm to you that we expect it to continue to get better through the year.
Yes.
And have we, in many respects, built those notions into what we put out as our guidance.
Yes, we have as well.
I think we are seeing an improved circumstance in North Carolina, and my expectation is based on some of the dialogue that it will continue to get better.
We're going to bring a little bit of show-me to North Carolina ---+ we're going to ---+ or Missouri to North Carolina.
We're going to wait for a little bit more show on that.
But right now, the outlook is good.
North Carolina has a very good secretary of transportation, and he's a visionary, thoughtful leader.
And I think he will do great things with DOT in this state.
<UNK>, we\
That ---+ <UNK>, that's certainly the right way to think about that.
I mean, I would never expect under normal circumstance with the normal January and February and early March to have the types of incrementals that we talked about through a cycle across the enterprise.
So the short answer is yes.
I think you will ---+ you should typically expect to see a build on those through the year.
In a normal time, what I would tell you is you should typically expect to probably see them peak in late 3, Q3 or early Q4.
And part of what happened this year, <UNK>, is candidly October showed up in November.
The short answer is I think a lot of people were looking at a wet October, which is usually the busiest month of the year in the aggregates industry, and it wasn't because of weather.
And then November ended up being a very strong November.
So yes, the way you're thinking about incrementals is the right way.
We're not seeing anything notable that happened, that's happening in that respect, certainly not in North Texas.
Obviously, you've got some activity at the port in Houston and in South Texas.
But again, the competitive issues that are underway in that state have all been taken into account in the forecast that we put out, <UNK>.
Thank you again for joining our fourth quarter and full year 2017 earnings conference call.
Our team's disciplined execution of our strategic plan and demonstrated record performance continue to provide a firm foundation to enhancing long-term shareholder value and underscores our confidence in <UNK> Marietta's long-term outlook.
We very much look forward to discussing our first quarter 2018 results in April.
Until then, thank you for your time and your continued support of <UNK> Marietta.
