Mark Warren - Vulcan Materials Company J. Thomas Hill - Vulcan Materials Co.

John R. McPherson - Vulcan Materials Co.

Robert Wetenhall - RBC Capital Markets LLC Abdul Tambal - Goldman Sachs & Co. LLC Kathryn Ingram Thompson - Thompson Research Group LLC Trey H.

Grooms - Stephens, Inc. Rohit Seth - SunTrust Robinson Humphrey, Inc.

Garik S. Shmois - Longbow Research LLC Scott Schrier - Citigroup Global Markets, Inc.

Brent Edward Thielman - D. A.

Davidson & Co. Stanley Stoker Elliott - Stifel, Nicolaus & Co., Inc.

Good morning, everyone. Thank you for your interest in Vulcan Materials.

Joining me today for this call are Tom Hill, Chairman and CEO; and John McPherson, Executive Vice President, Chief Financial and Strategy Officer. Before we begin, let me call you attention to our quarterly supplemental materials posted at our website, vulcanmaterials.com.

You can access the presentation from the Investor Relations homepage of the website. Rather than review each slide specifically during our call today, we will provide the key highlights in our prepared remarks in order to allow more time for your questions.

Before we begin, let me remain you that comments regarding the company's results and projections may include forward-looking statements, which are subject to risks and uncertainties. These risks are described in detail in the company's SEC reports, including our earnings release and our most recent Annual Report on Form 10-K.

Additionally, management will refer to certain non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial 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. Tom?

Thank you, Mark, and we appreciate your joining us for the call today. So let's get right to the key points.

In spite of aggregate shipments in the quarter being hit hard by a rough weather across the Southeast and Mid-Atlantic, and by specific circumstances in Illinois and Coastal Texas, our unit margins in Aggregates reached a second-quarter record, and the pricing climate remains positive. In addition, our visibility to a turn in public construction activity continued to improve.

There are more highway project tons in backlog than we've seen in at least three years. Private non-residential starts in our markets are now growing.

They've gone from plus 1% a year ago to plus 8% today. In both highways and private non-res, our markets are outperforming non-Vulcan served markets in starts growth.

In addition, highway starts in Vulcan markets are up 7%. Although we have lowered our outlook for aggregate shipments in this calendar year, we see the second half of 2017 returning to growth.

The shortfall in aggregates volumes drove most of the gap between our reported results and expectations for the quarter. Shipment results are highly variable across geographies just like you'd expect given the dynamics I mentioned earlier.

For example, shipments for Georgia, Florida, Alabama, Mississippi and Louisiana were down 12% compared to the prior-year second quarter, well off trends and expectation. This was largely due to weather and its impact on project timing.

At the same time, Illinois and Coastal Texas shipments were down 19% and 12% respectively. This was driven by severe reductions in large project work.

Yet our backlogs in coastal Texas and Illinois, like most of our markets are very strong and growing. Our other markets combined saw shipment growth of over 6%.

This is much more in line with expectation and trend. This growth came despite very tough weather in the East, with the West showing very strong shipments, as expected.

It is important to note that the factors negatively impacting second quarter shipments are contradicted by strong underlying demand trends. In fact, looking behind the quarter's reported numbers, I'm very encouraged by what I see.

Leading indicators for shipments continue to strengthen, with public construction beginning to exit from the lull experienced over the last 12 months. Private demand continues to recover across most of our footprint, with key states such as California and Virginia showing renewed momentum.

Long-term project pipelines for both private and public transportation work continue to build. And now, we're seeing the rate of starts for transportation infrastructure projects returning to growth.

A year ago, these starts for Vulcan markets were down 16% on a trailing 12-month basis. This led to a drag on our shipments.

Today they're up 7%, and we're seeing meaningful improvements in our backlogs in markets ranging from California to Illinois to Georgia. Customer confidence remains very strong given this visibility, and the pricing climate remains positive.

Pricing for the quarter was up about 6%, taking into account product and geographic mix. On a normalized basis, our cash margin per ton in aggregates improved by 7%.

Now, this is despite wet material, which is hard to process; on-again, off-again production schedules; and expensive production splits. To give you a better feel for the quarter, I'll briefly compare and contrast two of our important states, California and Georgia.

They illustrate clearly the variability in the quarter, but also the quality of the profit improvement that we're seeing at the local level. In California, we saw volume improve by 10%.

This is the beginning of the recovery we saw coming in 2016. Pricing improved by 7%, and overall unit profitability improved by 49%.

This is consistent with the strong operating leverage that we enjoy. This California growth reflects a strong and strengthening private market, and this is before we feel the impact of additional state and local highway funding of approximately $6 billion per year.

This will drive dramatic improvement in the public market. In California, we are also a major supplier to massive projects like the new Rams stadium, which was delayed slightly in the first quarter and has now begun shipping.

Now to Georgia. For those of you close to the industry, you know Georgia is a strong market.

However, in the quarter things slowed down considerably due to DoT delayed projects and weather. For example.

Atlanta had 25 rain days in May and June. These factors contributed to a volume decline of 13%.

But I'm not worried about Georgia, Georgia is going to be fine. The fundamental demand outlook remains solid.

It is supported by both private construction activity and a defined slate of public transportation projects. Pricing for the quarter in Georgia rose a healthy 8%.

This is a strong sign of underlying demand strength. We lowered our volume expectations for the year, which lowered our guidance range.

This is due to compression of shipping days and the timing of large projects that we know are going to ship. In addition, I'm very pleased by our growing project backlogs, growing public and private starts, and the growing preconstruction pipeline.

We feel confident that we will return in the second half of the year to a sustained period of growth. To underscore the point, the backlog of large projects in Georgia where Vulcan will be the major supplier continues to swell.

Big highway projects like the I-75/16 work in Macon and the I-285/400 expansion in Atlanta have been delayed by the DOT as well as by weather. But they will start to ship soon.

Now I'll hand it off to John, who will walk you through the details of the quarter and discuss outlook and financing activities.

Thanks, Tom. I'd like to begin by underscoring that our business remains on track with our long-term goals for mid-cycle profitability.

Aggregate shipment shortfalls to date led us to reduce our outlook for the current calendar year. But at the same time, key leading indicators for shipments for the balance of this year and beyond have strengthened in important ways.

The pricing climate continues to reflect this confidence in the sustained recovery, and more tactically, the healthy backlogs we and our customers see. The operating leverage inherent in our aggregates-focused model remains intact.

And where we've seen good revenue growth, we've seen good flow-throughs. Our expectations for free cash flow growth also remain unchanged.

Now I'll dig a bit further into our outlook for the balance of the year. As you've seen, we are lowering our guidance for 2017 due to our reduced expectation for aggregates shipments.

We now anticipate full-year shipments of between 182 million tons and 187 million tons. A few comments regarding our outlook for the second half.

Starts data for public transportation infrastructure projects historically serve as a reliable leading indicator of our shipments to that end-use, with a lag depending upon the nature of the project. The turn we are now seeing is due to a higher proportion of larger, more complex projects, and as such can drive a longer lag between a project start and our shipment of aggregates to that project.

That said, we're pleased to see the turn in this indicator for our markets, as well as the solid growth in our internal backlogs. We take these as clear signals that we are exiting the lull in public transportation shipments experienced over the last 12 months and returning to a next wave of growth, one characterized by strength in public demand joining the continuing recovery in private demand.

The long-term pre-construction pipeline continues to build, and we're finally beginning to see that core demand flow through to growth and project starts and our own shipments. Now again, private starts momentum remains solid across Vulcan's footprint, and in fact, it's already showing up in our shipments.

For example, we are experiencing particular strength in shipments to private end-uses across the Southeast, and now in Virginia and California as well. So we feel very good about the fundamental demand drivers and about the leading indicators in near-term shipments.

But for the second half of 2017, we remain cautious regarding the ultimate timing of shipments to selected large projects, as well as the ability of our customers to fully catch up on work deferred from the first half. In addition, the turn in starts and shipments related to public transportation projects, although very encouraging, has come a bit late in some markets to fully impact 2017 as originally expected.

Of note, our aggregate shipments for July were up 2% over the prior year. Most Southeastern markets showed improved momentum as the month progressed and as weather improved.

However, we've yet to see a full return to growth in Illinois and Coastal Texas despite strong backlogs in those markets. Our lowered volume outlook primarily reflects the simple reality of the number of shipping days left in the calendar year.

We see a return to solid growth but don't know that we can fully catch up to our original guidance in the months remaining. Our current outlook for the remainder of the year, August through December, implies 5% to 10% growth in aggregate shipments over the prior-year period.

Our trajectory for unit profitability remains unchanged. And as noted, same-store average selling prices for aggregates advanced 5% in the quarter despite volume headwinds and certain mix headwinds.

On a normalized basis, unit cash margins improved by about 7%, again despite difficult operating conditions at many plants. Our cost disciplines remained sound, and in the markets where we've seen meaningful freight-adjusted revenue growth, we've experienced greater than 60% flow-through to segment gross profit.

In addition, certain transitory cost issues, such as our transition to new, more efficient ships, will be behind us by the end of the year. We remain on track with our long-term pricing and margin improvement expectations.

Now I'll close with a few comments regarding our recent financing activity and our current financial position. Through a series of financing and refinancing actions since the beginning of 2016, we have been able to fund high quality growth capital investments while at the same time, moving closer toward our target debt structure.

After paying down our 2018 maturities in July, our weighted average interest rate has dropped from 6.5% to 4.8%. The weighted average duration of our debt has extended from 7 years to 13 years.

Annualized after-tax interest expense has grown by approximately $5 million. The rating agencies were supportive of our announced agreement to purchase Aggregates USA and the financing actions associated with that transaction.

We remain committed to maintaining an investment-grade position throughout the cycle, and we should be in a position to pursue other smart growth opportunities as the recovery continues. Tom, back over to you.

Thanks, John. Now despite the volume shortfall, and our revised outlook for the full year, I'm very encouraged by the way many key indicators improved during the quarter, and by what that foreshadows for the second half of 2017 into 2018 and beyond.

This time last year, California and Virginia were relatively soft. Now they are demonstrating renewed momentum.

Coastal Texas, although weak so far this year, should begin to deliver on a solid backlog of work as delayed projects kick off later this year. And we remain very confident about the Southeast, given continued growth in both public and private demand.

Public transportation projects starts returned to positive territory. The pricing climate remains very positive.

Our customers are confident, and our recent acquisitions have performed well so far. Now, speaking of acquisitions, I want to comment briefly on our progress related to the Aggregates USA acquisition, and also in general about the M&A market.

Regarding Aggregates USA, we are on track with this important acquisition, and the more we learn the more excited we become. Their management team and workforce are outstanding, and the synergies are all there and work well for us.

This transaction is the one that checks all the boxes. Operational synergies will include plant efficiencies due to balancing product mix.

We will have cost synergies for managing our rail fleet more efficiently. We will serve new customers and serve our existing customers in different ways, with the right product at the right time and at the right place.

We are also obviously – we obviously also have back-office synergy. And lastly, we realize that in any acquisition, we have great opportunities to learn from the new business and its people.

We continue to evaluate a number of bolt-on M&A opportunities. The M&A environment is rich right now, but we will stay disciplined, and that means staying focused on the types of synergies that I just described.

And now, we'll be happy to take your questions.

Good morning.

Good morning, Bob.

Thanks for all the color, Tom and John. I'd like to discuss the pricing environment today and what you feel about execution.

So two questions. First, you provided a lot of color around your expectations for volumes in the second half of the year, and I was hoping you'd provide some color about the pricing environment in the second half of the year, and kind of how much confidence your customers have given what you were talking about as backlog and some increased activity in both public and private markets.

So just to make it a little cleaner, what are your expectations for pricing, and what gives you confidence in your ability to realize better pricing momentum going into 2H?

I'd describe the pricing environment right now kind of two words and that's vision and confidence. I think our customers see – they know the backlogs, the work they have, they see the work is coming.

There's going to be a lot of pent-up demand. And so, it's a very good environment for pricing because of that.

Now, I think that with some of the hard-to-produce products, asphalt sizes that are hard to produce and more expensive to produce, you may see prices go up faster and higher, particularly over the next year or two, particularly due to the rising highway demand and asphalt – demand on asphalt sizes. But people really understand the work that's out there, Bob, and they know it's coming.

So, they have a lot of ability to increase prices, all the way through the construction materials group.

Bob, just to clarify on guidance, our expectation for full-year pricing remains unchanged, our expectation for full-year unit margin improvement remains unchanged. Very much on track, despite second-quarter weather impacts.

Again, the work is there, everybody sees it, even have some places that are a little bit tight. And so our focus is really just on how much of our product we can get on the ground, how quickly, in the remainder of the year.

Got it. Got it.

That makes sense. And John, could you send a moment and talk about trends in unit profitability?

You obviously had some volume headwinds, but you've got really good price in the first half. It looks like you're getting pricing and volume in 2H.

What should be our expectations for unit profitability? And is there room for improvement?

Are you guys happy with current execution, given the environment? Thanks, and good luck.

We're happy with current execution. I'll let Tom comment given the environment, I mean, it can always be better, but we're happy.

If I step back from that, I'd say our unit profitability and that continuous compounding improvement in pricing and the unit profitability, from our perspective, is very much intact and continuing. If I step back from it, just to give you a few numbers or summarize a few numbers for the Aggregates segment for the quarter, the headwinds we've faced, profitability and total profits were almost all weather-related and volume-related, tied to weather.

The way we look at it, we probably lost 4.5 million tons of shipments in the quarter due to weather and related project delays, that's probably a $40 million impact to gross profit. In terms of price, and we call this out in our materials we had about $0.16 of headwind due to product mix and geographic mix.

That's probably another $8 million to $10 million of gross profit in the ag segment in the quarter. And then in terms of cost reduction and Tom may comment on this further, we called out a couple of transitory effects, diesel and the cost of transitioning to our new ships; that was about $7.5 million of impact in the quarter.

We probably had about a like impact, another $7.5 million roughly, from just operating in these wet, on-again, off-again operating conditions, and having a more difficult time leveraging fixed costs. So in total, the way we look at it, that's probably $60 million, $65 million of gross profit impact in the quarter largely due to volume and weather and selected project delays.

I say all that because we expect to return to more normal profitability and growth moving forward, and I think you'll see that reflected in our guidance if you kind of work that through. So profitability trajectory largely intact, execution good.

Really just a question of getting the product on the ground in the balance of the year.

Yeah, I'd add, John, I'd add to that, if you look step back and look at our operating people's performance in the quarter, they did a great job under tough circumstances – really tough circumstances. First of all, their safety performance was much improved.

Our accidents went down 20%, reportable accidents, and our lost time accidents went down 35%. So a great job on that, they're really taking care of each other, and that's taking care of business.

John said it best, when it comes to cost, the biggest impact was weather, and it was impact for the volume of weather and fixed-cost absorption. And then wet weather, as John said, you're starting and stopping plants, that's really inefficient, and it just slows you down.

It's just harder to run sloppy material. And so we did the best we could with that, under the circumstances.

And again, this is weather where it rains every other day, and that's just tough to work out of. And then we're also producing a higher percentage of asphalt sizes right now, and this is because of the visibility we have of all the highway work, and they're just smaller size, and they're just slower and harder to produce and more expensive to produce.

But I think our ops teams continue to work hard to really work on their operating efficiencies, and it's obvious they're protecting each other, which is incredibly important.

Sorry, just to recap that. So, your – you had great execution in the quarter, you have a positive outlook on both price and volume, and John, just to be specific on the record, you're expecting continued improvement in unit profitability in the second half of the year, correct?

Yes, the second half, and yes – and this is really what I'd underscore – yes, longer term, consistent with the longer-term goals we've laid out. So, yes.

Nice work in a tough environment. Good luck.

Thanks, Bob.

Hi, good morning, Jerry.

Good morning, this is Abdul Tambal on for Jerry.

Good morning, Abdul.

So, firstly can you just talk about what needs to happen for volumes to be up in that high single-digit range over the balance of the year? And would you need favorable weather to get there?

So which regions do you see at that high end of the volume range, and which regions do you expect to lag?

I think, if you look at where we stand from a demand perspective, and what's happened in the markets and I'd – it's all really good. The one place it may be a little soft is non-highway infrastructure and I'll come – Illinois – but I'll come back to those.

So I'll start in the Mid-Atlantic. If you look at Virginia, we saw – have seen non – our volumes actually went up in the second quarter, despite tough weather; non-res has come back, housing's been healthy, highway continues to be healthy, we have good backlogs there.

Looking at Tennessee, Tennessee is a very healthy state and a little bit of a drag on highways, but that will fix, rectify itself with new funding, and the Tennessee DOT is trying to accelerate that spending, but it always takes a little time. Carolinas continue to be healthy, both public side and the private side and that's before we see flow-through of funding in South Carolina.

Georgia, as we say, is a very, very healthy market on all ends, and we have massive highway work coming in Georgia, to the tune of – I could name six large jobs that we have secured that total 8 million tons of shipments. It's just a matter of when they ship.

Florida, continues to be good, both on the public side and on the private highway side. Alabama has been a little slow, it's actually growing on the private side, public's a little slow.

If you look at the coastal market, growing. Move to Texas, and we've called out coastal Texas and we'll see some big work flow through in coastal Texas, probably fourth quarter.

We expected those to ship, both energy projects and highway projects, second quarter; they just got pushed back because of permitting on land, a number of issues. North Texas and Central Texas continue to be very healthy.

We saw good growth in the second quarter in both of those. Arizona and New Mexico, while the private's been healthy, the highway work is really flowing through in those markets, and we'll get two pluses there because we're a big aggregates supplier and asphalt supplier, and our backlogs there are probably at records from highway work.

California has been a great story for us in the second quarter. We saw the price really driven by the private side.

Private non-res has really flowed through there. Housing continues to be healthy.

We see a little bit of pick-up in highway work, and remember now, in California, we are the largest supplier of aggregates and the largest supplier of asphalt, and we're in all the metropolitan markets, and this is before SB 1 flows through. Illinois is a challenge.

It's just going to be a challenge. The public side is tough.

Believe it or not, we do see growth on res in Illinois, and we will see some bigger work that we have backlogged in Illinois flow through over the next 12 to 18 months. So if you just step back and look at the picture and get past the weather in the second quarter, this is a really, really good market.

The starts have grown and the pre-construction pipeline is growing, both on the private side and now on the public side, and again, this is before we see flow-through of a lot of the new state highway funding. So as you step back and look at this, as I said in my opening remarks, we're very encouraged.

Got it. And just ...

If I could sum up, we'd just underscore the work is there, the uptick in starts that we would need to see has already happened. In many cases, we simply need to have a reasonable or as-expected pace of shipment to jobs that have already started.

That'll be what we keep an eye on, and we need to see our customers be able to catch up on some of the small deferred private work that was delayed out of the second quarter. But from a demand perspective, as Tom said, we don't need anything – I'm going to call it "new" to happen.

The work is there.

Got it. And then just on California, could you just talk a bit about what you're seeing there?

Have you started seeing any of the emergency funding flowing through into the projects, and what are your expectations on when SB 1 can start to move the needle for your business there?

There's you question. No, we've seen no flow-though.

Remember, those funds don't start getting collected until November. Now, the state has been talked about as it's trying to accelerate that, they'll let 13 jobs this year, and then they're scheduled to let another 50 jobs, pending permitting and design.

You'll see some work flow through, and a little bit flow through in 2018 maybe, and maybe some paving work or repair work, but the big work always takes 18 months to 24 months to really get going. So – and we just always, we want it to come through faster, there's a lot of promises to come through faster, but it's just tough to do.

So I would tell you the earliest that'll be 2018, but it's really going to flow into 2019 and 2020 and beyond. So it's like I said, we're always disappointed it takes longer, but the work's coming and it is absolutely needed in that state.

Got it. Thank you.

Thank you for taking my questions today. A follow-up on California ...

Good morning, Kathryn.

Good morning. For California last quarter, you talked about how California looks a lot like Texas did four years ago, and I've appreciated the color you've given in the call about that state, particularly with the 10% increase in volumes.

But taking it a step further, and knowing that you're the largest aggregate and asphalt producer, could you give us a sense, in terms of breaking out the state growth, just as you did for Texas, but focusing on the L.A. market versus Northern, and the San Diego market, in terms of what is driving real demand in the market, both on the res, non-res side?

And also, helping us understand the rough breakout in revenues between L.A. and your other markets, and how depressed demand is, particularly, in the L.A.

market? Thank you.

Yeah. First of all, the healthiest market in California right now is Southern California.

And we're seeing – we've seen, in California, residential growth be healthy for a long time now, and it continues to grow. One of the big differences is non-res, particularly in Southern California, and as we saw in the preconstruction pipelines a year ago, and we talked about it's going to flow through, and it continues to build.

So very exciting to Southern California on the private side. Northern California has been a little slower on the non-res.

Res continues to be healthy, but the pipeline is growing, and it will flow through. As you remember, we had a lull in, or a dip in state funding a little better than a year ago with some budget issues, they came back and put some funds back in.

And so we're starting to see that growth, and we know that they're trying to accelerate the funding. So I'd describe Southern California as a little ahead.

Northern California, it will come, and is following and the preconstruction, pipeline is filling on both. Just, like I said, Southern is little bit faster.

Now, as you saw in our numbers and you continue to see, with this visibility and the confidence and the jobs that are out there and what's coming, there is really good pricing momentum in California. We feel like, from a capacity standpoint, both in aggregates and in asphalt, we're physically in a great position, and ability to serve the market, we're in the best position.

And could you just remind us, or break out – oh, go ahead. Go ahead, John.

I was going to just give you a rough breakdown, and this is very rough, it really depends on where you are kind of in the demand cycle a little bit, but our larger position is in Southern California, combination of L.A. and San Diego.

You might think about that as roughly weighted two-thirds of our California presence. Northern California, Bay Area and up to Sacramento, the other third, including some of Central California.

Those are very rough numbers. I'd also just remind you that our reserve positions longer-term in California, in a state that has many depleting reserves, are really fantastic and unique.

So it's just a very attractive position now and longer term. Finally, we'd underscore that the recent improvement is really driven by private demand.

Kathryn, as – I know you know this, because you look at it so well, but the public demand is still working through a bit of a lull that was caused by the Caltrans funding uncertainty for a while. We think that'll turn around pretty quickly with the new funding in place, but what you're seeing right now is really driven by healthy private demand.

I would add one thing on, this is not the market, but our operating folks in California have done – made big improvements in the last year on operating efficiencies and synergies, and I've got to give them a real hand of – or applaud them for what they've done, and I think that will continue and only get better.

Great. And just one follow-up on coastal Texas.

As you know, we talk to a wide variety of different building contacts along the value chain, and we received a little bit better feedback than what you talked about in that coastal kind of Houston market, seen flattening and even some slight improvement in the Houston market. Could you help us understand the delta between what our industry relationships are telling us, versus what you're seeing?

And is this more a function of project mix, or is there something else fundamentally that we need to keep in mind?

No, I think, the fundamentals in Coastal Texas are all there. I know you've got employment growth, you've got population growth.

We've seen the residential side come back. Non-res has been kind of flat but starting to improve.

Our real issue has been timing of projects, and it's both highway projects and energy projects that we thought we had slated to start in the first half of 2017, and they're probably pushed to the fourth quarter of 2017. I'll give you some color on it, I'll give you some color.

There's the Golden Pass LNG project and Sabine Pass, we thought would ship in 2017; it's actually got pushed back, it will not let until early 2018. Port of Freeport expansion has been pushed back by design, Chevron Phillips refinery upgrade was delayed.

We saw State Highway 550, which is actually in the valley, we had environmental and permitting issues. And then the SH 288 Highway, which we thought would ship I guess second quarter, it got pushed back a little bit.

So from our perspective, it's really timing of large work. I think that as I said earlier, the fundamentals are there, and I think that that is a market that is returning and getting a lot better, to your point.

Okay. Final question, this is Texas.

There you have a big letting with the state, $1.1 billion in August. What is your real capacity for the state itself to adequately meet the demand for that big of funding, particularly if you're going from $3.2 billion to $5.5 billion to $6 billion this year, and growing even more the following year, should we expect additional delays, just because of capacity constraints?

Or is the state, and our contractors and yourself able to adequately even meet that demand in future years? Thank you very much.

I think that's one we'll have to wait and see. There will be some pressures on them, and tension there.

We're hoping that they can get that all out and permitted and designed and in place, but as always with larger projects, it becomes – the time constraints could become more difficult. They are just more complex to design, you've got bigger permitting issues, you've got bigger right-of-way and land issues.

So – and we're seeing that across all DOTs, particularly Texas, but you're starting to see a big increase of large projects. And the good news for us is, whether it's Texas or anyplace else, that's right in our wheelhouse.

We've got a lot of those backlogged, but there's a high percentage of those that we're just seeing take longer from when they start. And we've got a number of them started in 2016 and we're still not shipping rock, and it's a variety of complex designs, it's right-of-ways, it's permitting; some of it's obviously weather in the second quarter.

But I'm not – I guess, I'm not worried about this, because the work's there, it's funded and it is coming. Just large projects are more complex and take longer, but once they go, we ship a better mix of product, and they go fast.

Great. Thank you very much.

Thank you.

Hey, good morning.

Good morning, Trey.

I just want to follow up on that last comment. Tom, you mentioned with the increase of large projects, they are taking longer, and John, you also mentioned that the lag has extended some on the highway side.

Just to get an idea, what – historically, what has been the lag there, and what is it now? So, we can kind of get an idea of, with starts picking obviously in the – on the highway side of things.

I think you said Vulcan market is up 7%. Just to try to give us a sense for when those can flow through and how that lag has extended?

I'd take a shot at it, Trey, just with the qualification that it's of course project-specific. These are often project-specific or state DOT specific circumstances.

But historically at 12 months, 9 months to 12 months, and I think we've probably seen that on an average extend by 3-ish months. And again, it really varies by project, and again Tom gave you a sense, sometimes it's larger complex projects; sometimes it's design build efforts that get behind in the design phase, so they've started, but don't start taking aggregate shipments on the sort of previously agreed schedule.

So we've probably seen, to bring it down to this year. we've seen kind of the turn in starts and turn in large public transportation demand happen about as expected, but we've seen the actual shipment of those projects be six weeks, eight weeks later than expected.

And frankly, that's reflected in our revised outlook for the year. So – but again, it's highly – the only thing I would just sway is, this is also for the very large complex projects, it's also just a little bit less predictable.

So, it's not just that we're getting it wrong, or it's not happening as quickly as we thought it was going to happen. It's not happening like the DOT thought it was going to happen, or the general contractor thought it was going to happen.

It's just – I think a thing to keep in mind is, it's just that from a project-to-project basis, these large complex transportation projects, which are very good for us, the week-to-week, month-to-month shipping timing is just a little bit less predictable, and that's one of the things we tried to reflect in our revised guidance.

Got it. All right.

That all makes sense. And then also to kind of follow up on another question before, Tom, you named a lot of these projects, named off several that have been kind of pushed out a little bit that I think you guys had initially thought might come on a little earlier.

Looking at that, what's your – what kind of visibility do you have, or I guess what's your sense for, as we sit here today, these projects that have been pushed a little bit, when those might come on? And I don't necessarily need project by project, but just a sense for your visibility there, and what's kind of embedded in the back half guidance for some of these delayed large projects?

Yeah. Embedded in guidance, we've got a number of them that are starting to ship.

We saw some ship a little bit in July, and they'll come on in August and September. And as I talked about Texas, we'll see some starting in the fourth quarter, I hope.

But it is leveling out. I think we – and do not underestimate the impact of raining more than 50% of the time in May and June.

It's not just DOT designs and right-of-way. When you have rain 15 days out of a month or 14 days out of a month, and it's spread out, the contractors just can't get on the job.

And any day that we can cobble together four or five dry days, we see our shipments jump up all over the place. So the work's there, and it's going to come, but it – so I think that we feel good, and our outlook for the second quarter of the work that's going to start, we have good visibility to that and have good contact with the contractors.

And the good news is, the work's there.

Yeah. Right.

Got it. All right.

And then ...

And Trey, despite all this, we'd also say by the way, we like seeing more large complex projects.

Oh, yeah.

So the timing is a little bit more complicated, but we're one of the very best positioned suppliers to meet the kind of needs of those projects, and – so we actually like that trend. It does make the very near-term predictability of shipments a little more difficult.

But these aren't things that are going anywhere, they're not getting – this is weeks of delay in putting aggregate on the ground. It's not changing whether or not they do the project.

Right. And then once they start, the visibility is there?

And once ...

So on ...

Yeah, once they actually get going and past grading and that kind of stuff to taking our product, they go quickly. The other thing I would say is, we talked a lot about capacity constraints in the sector.

This really isn't where the capacity constraint is, Trey. When you get going on these big jobs, if you will, you can get a lot of aggregate down per unit of labor.

Got it. All right, that makes sense.

Well, just speaking of labor, I will ask you this on the downstream, with looking at ready-mix drivers or pavers or that sort of thing, as we kind of look through any kind of spikes in volume and projects and things like that coming on, do your customers or do you have any concern about that end of things creating a bottleneck and maybe delaying things, maybe things wouldn't be quite as good as they would have been otherwise as a result of just not being able to find the labor? Just any opinion you have on that?

I think from Vulcan's perspective, we're okay, and we continue to add, and we – both quality of employees and quantity of the employees. From our customers' perspective, and John said it very well a minute ago, on the large highway work, that's not going to be a big constraint.

And those folks are really putting in on and prepared, because they have visibility to what's coming and they have time to do that, and that's going to continue to flow through. Now, there will be, on concrete work, probably more pressures, and I think those, our customers are working hard to address drivers and finishers and framers.

But it will be a natural tension, probably a little more short-term than long-term, and it will come and go. But I think long term it won't be a bottleneck, it will be just be some tension.

Okay.

I do think if we step back a little bit, Trey – and Tom, you might, I know you're talking to customers about this all the time, but if we looked at a year ago, our customers were pretty reluctant to make investments ahead of the election and things we talked about back then. It feels very different now, because our customers are talking about and actively trying to make those investments in their own capacity.

Well, they see what's coming and they've got bigger backlogs.

Okay. Yeah.

That – got it on that, it makes sense. Last one's a housekeeping, so it will be quick, is just the $7.5 million you called out from the transition to ships, and I think it was the first couple of quarters here we've seen that.

And you think it's going to maybe be a little bit going forward. How much do we need to be kind of modeling in or baking in to – for that?

Which I'm sure is in your guidance, whatever it's going to be, but just to try to get a sense for pure aggregates? And then also, just what does the product mix in the backlog look like for the back half, as far as you can tell?

Are you expecting any kind of impact at all from mix as we look into the back half of this year? Just so we're clear on how to model all these things?

Yeah. And obviously happy to follow up afterwards also, Trey, with you or anyone else.

To answer your question on transition to ships, we expect that cost – and it was a little over $5 million in the quarter – I'd expect that to repeat again in the third quarter, and then ramp down in the fourth quarter as we get new ships delivered and get those online. But yes, incorporated in guidance.

Diesel will be a little bit of headwind in the second half of the year, but not – it was about a $2 million headwind in the quarter, and should be about the same moving forward. And again, over time that should get reflected in pricing, and as we talked about before, higher diesel prices over time are in some ways a good thing for our business.

So I think that's the answer on those tactical items; I'll let Tom comment on product mix.

Yeah, I would summarize product mix in the second half as probably normal. But you'll have two offsetting pressures.

The new projects will take a higher percentage of fines and base, and that's really good for us. The flip side of that is you've got a lot asphalt backlog out there, with big highway work, and also non-res and the res will take lot of concrete work.

So rising waters in both of the different sizes there, so I would tell you normalized.

Great.

And Trey, one of the things I know we talked about it in the past, just to revise, we talked – way back about a year ago, we talked a lot about rising repair and maintenance costs. And we feel pretty good about where we are in that now, they're basically flat or slightly down even in the quarter despite the other headwinds.

So we do feel good that that period of rising R&M costs should largely be behind us, which is a good signal.

Thanks a lot for answering the questions, guys, and good luck on the balance of the year. Thank you.

Thank you.

Hey, thanks for taking my questions. My first question is on that leading indicator you mentioned, the construction starts, you'd said that public highway was up 7%.

Is that a year-to-date figure or is that for June?

Trailing 12 months as of June.

Okay.

I think that trailing 12 months figure's really the way you want to look at it on a – it can be noisy month-to-month, but I think the trailing 12-month figure is really the good leading indicator.

Okay.

And it's not just that it's up, but that we've worked through a previous lull. And so it's returned to growth and is continuing to strengthen across our markets.

I would also add to that that, in a lot of places that's before the big funding flows through.

Oh, yeah.

If you look at South Carolina or Tennessee or California, that – we haven't touch that, and so, more to come.

Got you. Okay.

And then as I'm listening to this call here, you sound incrementally positive, your commentary has been pretty bullish. As you think about your 2018 plan, I mean are you guys more incrementally positive on achieving those objectives, and how do you feel about timing, and – any thoughts there would be helpful?

I think as John said, it really boils down in 2017 to the number of shipping days we have left that works there. And so whatever doesn't happen in 2017 is obviously not going to go away.

We see growing how we starts, we see growing private starts, and the pipeline of preconstruction continues to fill. So while we feel good about the end of 2017, or the second half of 2017, I think we feel very good about 2018, 2019 and 2020, because like I said, the private side continues to be healthy and you've got very much a growing public side.

And I'd say, we're obviously not giving 2018 guidance right now, but as we sit here now, given the backlogs we see and the discussions we have with customers, and the public funding developments and all of the things we've talked about, I think we would be really surprised if we weren't entering 2018, we and our customers, with very strong backlogs and with a very positive outlook. And when you look at the start data, which is part of why we emphasized it in our materials, it would suggest we're returning to another wave of growth in this long recovery.

It would suggest we're entering a period in many of our markets that have public and private clicking together in growth. A little bit analogous to where we stood in the second half of 2013, except that as we sit here right now, we've got substantially higher prices, substantially higher margin per ton, and a stronger balance sheet, and some key acquisitions coming online.

So we're pretty excited about the outlook, as you can tell. And that's 2018 and beyond.

But again, without trying to give guidance, we'd be really surprised if we weren't – we and our customers entering next year with strong and healthy backlogs and strong and healthy outlook.

Okay, thanks. And then for long-term thinking here, I tend to think in upcycle, volumes will grow anywhere from 3% to 4%, perhaps 5% in the upcycle.

And when you think about public and private clicking at the same time, is 5% a good long-term run rate, or you think, given where things are, where do you see them today, perhaps even better than that?

I'll take a shot, based on – I'll comment on things we've said publicly elsewhere, just to be clear. But the demand is there to grow at faster rates.

Just the pent-up demand is there to grow at a much faster rates. You could look at any of the end-use segments and you'd see it.

And increasingly, the funding is there to grow at faster rates. That said, I think when you have a portfolio as broad as ours, across as many markets as we're in, and when eventually do have some realistic constraints, but how quickly DOTs get jobs out and how quickly the construction factor can meet that demand, 5% to 7% is probably a better assumption than 10% to 12%, just to give you a feel.

Yeah.

The demand is there to grow at faster rates. There will be periods when we grow at faster rates, there are individual markets that you've seen that grow at faster rates.

But across the whole portfolio and over a longer period of time, we still see a – a more gradual, steady, sustained extended recovery. But at the same time, I'd say you look at the demand picture and it's hard to argue why it couldn't grow more quickly.

Got you.

All of that still supports a good climate for pricing and a good climate for compounding profit improvement. And we still find very encouraging, particularly once we see the construction start activity on the public side continue to pick up.

Is it fair to say that your pricing is – has been moving above inflation for a while now, and is it fair to say, the cycle matures, you can continue to get that? Is that a realistic assumption?

I think it's a function of what's happening out there in the market from a demand, and as I always say the visibility and confidence. And if you look at what goes on, particularly in the private sector, which is very healthy, continuing to grow and well below kind of normalized levels, and then as, again, you put on top of that what's happening from a highway perspective, yeah, prices – the pricing climb will be healthy for years to come.

Got you, okay. And my last question, just on resi.

I know resi has been good, everybody is talking about resi's good, Single Family is leading. How much of the Single Family is coming from new communities as opposed to in-fill, and if you could just maybe highlight some strengths and weaknesses by geography and what you're seeing in community development, if at all?

And ...

Yeah. I think, if you step back and look at res in our markets, demand's up high single-digits.

But Single Family is up much higher, it's up double-digit, and really the driver right now. And that growth is supported by subdivision development and construction, really with smaller homes and it's affecting a lot of first-time buyers and younger buyers.

And if you look at demographics that's really good, because there's a lot of them out there. So – and the good news about that is, that kind of construction is very aggregate-intensive, both with new subdivisions and a lot of houses.

So we're pleased with the res, and it is broad based across our footprint. It's hard to find a market that doesn't have good healthy residential growth.

Great. Thank you very much.

Thank you.

Hi, thank you.

Hey, Garik.

Hi. First is a housekeeping question, just around your volume guidance for the second half of the year, the 5% to 10% increase.

To be clear, does that include the acquisitions that you made in the first quarter?

Yes. They don't have a big impact on volume, but yes.

On aggregates volume, by the way they – a couple of our acquisitions are in our concrete and asphalt segment primarily. So the answer to that question is yes, but Garik I want to be clear the 5% to 10% is really August through December.

The squeeze we're doing is really looking at our hand after July, seeing where we are. So I think if you did second half, it's probably equivalent of something like 4% to 8%.

Just keeping in mind that July was up 2%. Stronger in the second half of July, but that's really what, as much as anything, is causing us to think about the squeeze for the balance of the year, is August through December.

Okay, that's helpful. And I don't want to harp too much on July, was most of the, I guess, the relative softness compared to the rest of the back-half guidance.

Weather-driven again?

Yeah. I think July is easy to explain, the first two weeks it rained, the second two weeks we put a lot of work together.

And the second two weeks were very healthy. So – and again, as we said, in lot of these cities we had 10 days of rain in July and still went up 2%.

Okay.

And also (58:10) some continued weakness in Houston and Illinois were up 3%, and the trend is pretty good, but Garik, you know this very well, I think you looked at some of the squeeze in some of your work I thought it was well done, but it's just that number of fewer construction days we have left in the season. So anyway, that was – did I answer your question?

Thanks. And thanks for the kind words.

My second question is on the highway outlook. You talked about an improving outlook here, but I'm just wondering, is there any risk or any chatter around the uncertainty on the federal side with respect to the debt ceiling and these continuing resolutions that we're under?

Is that an impact, or I guess has that been an impact in the first half of the year? Is that a potential impact as you look as far as continued project timing delays in the second half of the year?

I think the answer to that question is no, it's not an impact. The FAST Act's secure and we're seeing those funds flow through.

It's been very good for us. I don't think a lot of it's hit yet.

And remember, that passed in November of 2015, takes – again, it takes 18 to 24 months to flow through. But I think we're secure about that.

I think what everybody's working on right now is what we do three or four years from now. And I think there's a lot of momentum in D.C.

to address the Highway Trust Fund. Both parties want this to happen.

It's not a matter, again you hear us say this a lot, it's not a matter of if, but when and how. We saw back in the summer 200 members of congress sign a letter to fix the trust fund.

So I think it's going to be addressed, but I don't see any threats to federal funding at this point.

Garik, I do think – and I'll apologize for this being a little bit anecdotal, just as it relates to 2017. So, I think Tom summarized the forward outlook very well.

But I think earlier this year, when there was a lot of talk about a $1 trillion infrastructure program very early in the year, we probably had some DOTs and some local governments, particularly some local governments, just kind of waiting and holding back on some starts, wondering if the rules were going to change. I think they're past that now, and in some ways this will be better for everybody if it was just quiet until we had an agreement on something.

In the meantime, it's a distraction for everybody. But I think most of the DOTs, the people we're working with, are past that.

And frankly, now that they've got new funding passed – and you know this in many states, they have a little bit of political pressure to show progress. And so that's part of why you see Tennessee and South Carolina and California doing what they can do to put forward some spending, just to show some progress.

So in any event, I think it was maybe a little bit of a distraction for some DOTs early in the year. I think we felt that, a little bit right now, but I think we're past it.

Great, that's helpful. Thanks.

Thanks again.

Hi. Thanks for taking my question.

Just wanted to ask a quick one on the downstream. Looks like you continue to have strong growth there, especially in concrete.

Just wanted to see what you're seeing there in Texas and Virginia? On the concrete you had nice pricing, both sequentially and on a year-on-year basis.

So I just wanted to see what some of the drivers there were, and how to think about it going forward?

Yeah. Our volumes were up in all of our concrete markets.

The big margin improvement came in Northern Virginia and Texas, California is – which is new to us – performed very well. We're very pleased with that.

I think overall we're very pleased with our concrete performance, and I think that the teams out there have done a really good job of executing, both on servicing our customers and on being efficient from an operating cost perspective.

Because our biggest concrete market's still in Virginia, when you see that improvement, it's a little bit of an indicator of the strong private demand in Virginia, we talked about before, because that really drives more of the concrete usage for us there.

Got it. And then on the comments regarding the strong shipment growth of 6% in Virginia-Carolinas-Tennessee, and I know that you had parsed out the overall volumes that you lost in the quarter due to mostly weather and some delays, is there any way to get a sense of what that 6% would have been ex the weather in those particular markets?

I'll take a short at it. First, I would say it would have been higher.

So you had – you did have weather impacts in South Carolina, North Carolina, Tennessee, Virginia. So absolutely it would have been higher.

I think, when we gave the estimate earlier of about 4.5 million tons lost to weather, in selected project laid in the quarter, that amount would have incorporated in what we would have seen as a hit in Georgia, Florida, Alabama, Mississippi, Louisiana, and Carolinas-Virginia-Tennessee. What I'd say is those markets would have been a bit better.

They did have tough weather, if you look at the rain days across key markets in those states, but a little bit better working it through. And they also had – their weather impact was a little bit earlier in the quarter.

What really hit Georgia and Florida in particular for us was tough weather in late May and June, when by definition you don't have time to catch up in the quarter.

Thank you.

Great. Thank you.

I don't believe you touched on this, apologize if you did, but the SAG outlook for – still $320 million for the year, implies something around $9 million less in the second half than the first half. I guess I was a little surprised by that, just given maybe some coming costs to get Aggregates USA completed.

Any more color there?

Our outlook for SAG is unchanged. You have some timing differences due to accruals and incentives and other things, quarter-to-quarter.

Fundamental outlook for SAG unchanged. What I would say is that we remain intensively focused on G&A productivity, on the one hand, and we remained equally focused on making smart investments in our sales and customer service capabilities.

So on the Yes component, if you will. But overall outlook for that for the year, unchanged.

Okay. And then maybe just from a bigger picture perspective, Illinois, not a new issue in terms of being a tough market, headlines are clearly out there.

But I know you guys kind of think about the business for the long term, kind of just refresh your stance on the market, need for Vulcan to be there, maybe any green shoots you think you could develop over the next few years in that market?

Yeah. I think the – right now, IDOT is just in tough shape.

The public sector's been hit hard, you've had no state budget for two years; the DOT stopped work temporarily in the second quarter, we've seen them crank it back up. From our perspective, we've got better backlogs than we've had.

Our backlogs are growing in Illinois. We've got some big jobs that were delayed, particularly O'Hare runway.

If you step back and look at Illinois and remember demand is driven by population, and Chicago is not going away and they'll have to fix their problems. And again, this is one of those that's not if they're going to fix it, but when they're going to fix it and how.

So – and our position in Illinois is very good. I think under very difficult circumstances, our teams in Illinois have done a very good job maximizing profitability and being efficient and servicing customers.

So while it's tough right now, we do think it's – in the long term, and remember this is a long-term business, that long term, it will be a solid market and we have the premier position in Chicago. So while it's tough, again it's a long-term business, and we're in for the long haul.

Yeah. And Tom, with that position, are you guys – and in this environment – are you guys still able to get a little price in that market?

Yes. We've had actually decent price increases in Illinois, and we've upped our game on servicing our customers, and position is important and we're getting paid for it.

Okay. Thank you.

Best of luck.

Just in terms of the year tasked in Illinois, we had obviously, we kind of would have expected it to have bottomed out by now. We didn't expect Illinois to be strong this year in terms of volume growth, but we didn't expect it to continue to drop like it has.

So we foresaw some of the weakness, but we didn't see the kind of crisis around the budget, again, that Tom mentioned – and you may know this because it was publicized – frankly caused bills to stop being paid and caused work to stop. So we're still working through some of that in 2017.

But again, it's a very healthy and profitable position long-term beyond 2017.

Okay. Thank you.

Good morning. Thank you, guys to fit me in.

Most everything has been answered. Quick question though, on the Ag USA deal.

In the release it mentioned the prospects of having to do some divestitures. Where are you all in that process?

After looking at that portfolio, what percentage do you think you'll end up having to divest? Any thoughts around that would be great.

Yeah. To answer your question, we're still in the process with the DOJ, and that's a normal process and it's going along.

But it's way too early to try to speculate on what we have to divest or where, what and when. But I would say this much, as we get into that project and into that acquisition and look at the quality of it, and as I said in my opening comments, we're really excited about it.

This is a very good business, it has very strong assets, great positions, great reserves, and their people are very professional and very good. So we're – while we're going through the process, and as – which is normal – I think the more we spend time with this, the more excited we are about welcoming this into the Vulcan family.

Great. And then you kind of, throughout the call, you've mentioned permitting problems being a culprit for a lot of the delays for some of these large projects.

Certainly the administration had – was trying to push more streamlined regulatory reform. Is that impacting your business at all?

What are the prospects for any changes on the regulatory front to kind of open up some of these bottlenecks, if you will?

Well, I think, as you know, we rescinded the Waters of the U.S., which was a big win. I'm sure there will be legal action with that, but, it was just the right thing to do.

And right now the administration knows these issues with us – I mean, as I mentioned earlier, we had a big issue with our big Macon job which got held up with land and had some permitting issues, and we're now having a number of them in Texas. So it is a real issue.

I mean, it's out there. Right now, the administration is gathering suggestions on what needs to be done to speed this up.

So they know it's a problem, I think they're fact-finding right now, and I think we feel good that they're going to take some action on this, because it just needs to happen for – to rebuild our infrastructure, and to give people the ability to speed up these projects and get work done that needs to be done.

Do you think that has to be a part of like an executive action, or is this part of a larger infrastructure build?

I think it may be both. I think you see some of both with that.

Great, guys. Thanks very much.

And best of luck.

We've seen streamlining already in the FAST Act, I mean there is a lot of momentum behind this, it's just – and also, we'd also just say, keep in mind with these very large, complex projects, the larger more complex they are, the more opportunities there are for hold-up. You could have one right-of-way hold up a larger job.

So again, it just makes a little bit less predictable, week-to-week, month-to-month, in terms of exactly when we're going to be shipping to the job. But ultimately, it's very good for us, because there are very few people who have the capabilities to service these kind of jobs, particularly in these markets.

So good development for us long-term to see this higher proportion of large jobs in the mix. Frankly, you see it in non-res also.

But short term can lead to some longer lags between start and actual shipment of aggregates.

I understand. Thanks, guys.

Appreciate it.

Thank you.

Thank you for your time that you spent with us this morning. As you can tell, John and I, and I'd say the rest of our Vulcan family, are very excited about our business, our growing pipeline of work, our growing project starts, our backlogs are up, both on the private and the public side.

And I think our people are working really hard every day to improve our business. So these are exciting times.

We look forward to sharing more information with you over the quarter, and talking to you again at the end of third quarter. Again, thank you for your interest in Vulcan Materials.