Good morning, ladies and gentlemen, and welcome to the Vulcan Materials Company’s First Quarter Earnings Conference Call. My name is Justin, and I will be your conference call coordinator today. As a reminder, today’s call is being recorded. [Operator Instructions] Now I’d like to turn the call over to your host, Mr. Mark Warren, Vice President of Investor Relations for Vulcan Materials. Mr. Warren, you may begin.

Good morning, and thank you for joining our first 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 would like to call your attention to our quarterly supplemental materials posted at our website vulcanmaterials.com. You can access this presentation from the Investor Relations homepage of the website. A recording of this call will be available for replay at our website later today. Additionally, you can sign-up to receive future news releases under e-mail alerts found in the quick links on the Investor Relations homepage. Please be reminded, the comments regarding the company’s results and projections may include forward-looking statements which are subject to risks and uncertainties. These risks, along with our other legal disclaimers, are described in detail in the company’s earnings release and in other filings with the Securities and Exchange Commission. Additionally, 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 the supplemental presentation. Now, I’ll turn the call over to Tom.

Thank you, Mark, and thanks to everyone for joining the call today. We appreciate your interest in Vulcan. We had a solid start to the year, a 15% improvement in adjusted EBITDA and a 11% improvement in Aggregates’ gross profit per ton. These results highlight the combined strength of our aggregates-focused business, our geographic footprint and our sharp focus on improving unit margins. As you know, the principal drivers of our Aggregates’ profitability are volume, price and operational efficiencies, so I’ll address each of these in turn. First, Aggregates’ shipments in the quarter increased by 13%, or 11% on a same-store basis. Importantly, the improvement was broad-based across our footprint. Of course, with record rainfall, California was the obvious exception, but with that said, reduced shipments in the West were more than offset by double-digit volume growth in our core markets in the East and Southeast and in Texas. As we expected, some of the year-over-year improvement in these markets was due to pent-up demand from last year. This was evidenced by significantly higher shipments in January. Shipments in February, March were more in line with our full-year guidance. Overall, the pace of shipments in the first quarter clearly shows that demand is healthy. The second profitability driver is price. And as predicted, our pricing continued to compound from the fourth quarter. On a freight-adjusted basis, pricing improved by 5.4% from last year. On a mix-adjusted basis, pricing increased by 5.8%. As with volume improvements, our pricing gains were widespread. The third driver, and one that is sometimes overlooked, relates to operational efficiencies and cost control. Much of our time and attention is focused here, because it represents an area, where we can strongly influence the outcome. One of our key financial metrics is same-store flow-through. On a trailing 12-month basis, it was 57% at the end of March, in line with our 60% long-term guidance. As we look forward to the rest of this year, our view of our markets remains on track with earlier expectations. We’re still seeing growth in private demand in Vulcan-served markets. In the public sector, demand continues to grow and the increases in state and local highway funding, which we’ve seen across our footprint are turning into shipments. As we pointed out previously, we’re in the very early stages of big growth in highway demand. 10 Vulcan states that generate approximately 80% of our revenue have passed infrastructure legislation over the last four years. These laws have raised funding by almost 50% over 2015 levels. The most recent state to join this stream was Alabama, which passed a gas tax in March. The pace of conversion of public funding and lettings in the shipments continues to accelerate. We see this strengthen our backlog and booking pace, and this also supports a healthy pricing environment, which we experienced in the quarter and can also see going forward. Now I’ll turn the call over to Suzanne for some additional color on the results. Suzanne?

Thanks, Tom, and good morning. I’ll cover a few additional items and then comment on our 2019 guidance. In first quarter, our same-store unit cost of sales increased year-over-year by 3%. The increase resulted in part from planned higher repair and maintenance costs. We are keenly focused on reducing downtime in our plants in order to improve our operational efficiencies and throughput in the upcoming seasonally stronger quarters. In addition, California experienced higher than expected production costs due to record rainfall. Our SAG costs were higher than last year as a result of the timing of certain expenses. For the full-year, we’ll be in line with our previously provided guidance. On a trailing 12-month basis, these costs continue to trend down as a percentage of revenue and will remain focused on leveraging this part of our cost base. With respect to the Asphalt segment, gross profit was lower than last year, but in line with our expectations. Shipments increased by 5% on a same-store basis and pricing also increased by 5%. Unfortunately, these gains weren’t enough to offset the 29%, or $9 million increase in liquid asphalt costs. Concrete gross profit declined slightly compared to last year. Lower than anticipated shipments due to weather in Virginia were partially offset by modest price increases. For the full-year, our outlook for the non-aggregates segment remains unchanged, as the first quarter is seldom indicative, particularly for asphalt. I’d like to move on now to the balance sheet and our cash flows. Our debt structure suits our business well. Our long-term debt reflects the weighted average debt maturity of 15 years and the weighted average interest rate of 4.6%. We intend to retain our investment-grade credit rating, and accordingly, the target range for our leverage ratio is 2 to 2.5 times. Currently, we are…

Thanks, Suzanne. I’m very proud of our people’s performance in the first quarter. And I want to take this opportunity to thank our operators and our salespeople for taking care of our customers, holding each other to a high standard of operational excellence and delivering on financial results as promised. A 25% improvement in Aggregates’ gross profit and a 11% improvement in Aggregates’ unit profitability, that’s not easy in a winter quarter. I’m also pleased that we continue to advance our safety culture in 2019 and improve on record-setting 2018 performance. So far this year, our injury rate was 0.85 accidents for 200,000 employee hours worked. Our number one job is to keep our people safe, and this is going to remain a central part of our operating disciplines. As we move forward, we’ll focus on the key elements that deliver value for our customers and our shareholders, and we will keep our people safe and allow our plants to operate at maximum efficiencies. We will execute at the local level and will drive unit margin expansion. We have the best geographic footprint in the industry, and our business model and our people are flexible enough to take care – to take advantage of market opportunities and resilient enough to overcome market challenges. Our first quarter was a good step in the right direction towards achieving our 2019 goals. Now we’d be happy to take your questions.

Thank you. [Operator Instructions] Our first question comes from Scott Schrier with Citi.

Good morning, Scott.

Hey, Tom, good morning and nice quarter.

Good morning.

So I want to start off with a bigger picture question. Obviously, due to the structure of the business, aggregates, particularly well-run aggregates businesses can come in higher multiples on peers. But with concerns about the cycle that really took hold towards the end of last year, one thing that supports a higher multiple is an elongated cycle, which comes from visibility and from the larger type projects, and I know you talked about it, Tom, in your prepared remarks. Can you speak to the visibility we have right now and the growth trajectory? How long does this last? I mean, assuming, of course, the $2 trillion a quarter century plan discussed the other day, I think, the one you’re aware. I know in the past you’ve laid out things like mid-cycle EBITDAs. What’s mid-cycle EBITDA? When does this happen? What – how much visibility do we have right now into the extension of the cycle?

All right. What we said was mid-cycle, we’d about 255 million tons. And if you look at the cycle right now, let’s take it in pieces. On the public side, we’re stronger than we would have predicted five years ago. You’ve got substantial funding from states. In fact, that funding in our states is up some 60% over 2015 level. So and – and not much of that is flowed through yet. So you’ve got four, five years of big growth in highway demand. Turning to the private side. On the residential, we see – we’ve continued to see growth in the residential in our markets. Our customers feel good about single-family growth. Looking out, we see exciting markets with housing growth and a few that we’re watching. What I’d put on the watch list would be San Francisco, Nashville and Chicago. Exciting markets would be Houston, Southern California, Tampa, Jacksonville, all of Florida, a lot of the Southeast. So the fundamentals of residential growth are still in place, population growth, employment growth in very low inventories of houses. So in our footprint, we still see growth in res. I would call out non-res very similar. Our backlogs, our booking pace are strong – we’re shipping strong, our customers outlook is positive on non-res. So, we still see strength both on the private side and the public side.

Thanks. And for my follow-up, I wanted to ask a couple of things on the cost front. Obviously, you’ve got some fixed cost absorption in California. You had the repair and maintenance. Looks like we also had some inventory build. So if I’m thinking about the cadence of the year, how can we think about some of those items? And I know that also in the past, sometimes you’ve given us a cash gross profit per ton bridge. I’m wondering if you could potentially walk us through that for the quarter?

Yes. So, it was – I would describe it as a typical cold, wet quarter. And our costs were up about 3%. About 1% of that was the impact of severe weather in California. I’d also add to that, that our California team did an excellent job managing their cost in really tough headwinds. The rest was – the majority of the rest was planned maintenance to get ready for the season, and that’s very typical for our first – for a cold, wet quarter. You’re just going to be inefficient in trying to crush rock when it’s cold and wet. So you fix it while the weather is bad and run it when the weather is good. So we did a lot of R&M, planned R&M in preparation for the season. We actually had a reduction in inventory, which was a little bit of a headwind for us. And again, that’s not unusual in a cold, wet quarter. You shutdown the planned R&M, because you’re not going to be efficient running. And I think our people have done a good job with inventories. If you look back, we’ve actually, over the last four, five years, we’ve actually lowered inventories of long sizes, which will be based in fines, and that’s really taken our inventory and that we’re all returning it to cash. Our inventory turns have continued to move up over the last four, five years.

Yes. And I would just add to that, Scott. I can see where you’ve got the question about inventory being higher. If you look at it on a year-over-year basis on the balance sheet, it does appear to be higher, but that’s as a result of the acquisitions that we’ve done year-over-year one – reasonably sized one in the paving and asphalt side of the business. I think from the production cost standpoint in the quarter, the – probably the better way to look at it is to look at what your inventory actually did in the quarter. So if you look at the balance sheet, you can actually see a decline in finished product there.

Great. Thanks a lot. I appreciate it and good luck.

Thank you.

And next will be Nishu Sood with Deutsche Bank.

Good morning.

Good morning.

Thank you. Yes, good morning. I wanted to start off kind of digging into the commentary you mentioned about the backlogs – I’m sorry, the deferred projects that benefited 1Q. February and March are more in line with your long – your year guidance for low to mid single-digit volume growth, whereas January was much stronger. I just wanted to dig into that a little bit. January, I would anticipate would be much smaller volume-wise and February and particularly March. So it just implies some really strong volume growth in January. Am I understanding that correctly? So how strong was January? And then what does that speak to in terms of momentum carrying out of the quarter?

Yes. So, the shipments overall in the quarter is a robust first quarter. And that volume growth, which is very encouraging was very widespread with the obvious exception of California, which was just a washout. As we said, the big jump came in January. It was high double-digit. And if you remember, when we made comments on the third quarter, we said we had a lot of pent-up demand and some of that may flow-through into 2019. That’s actually what happened in January. It was as predicted, again, February and March were more in line with our guidance. What we’re seeing out there is a real sense of urgency from our customers to get work completed, so they can get on to their growing backlogs. And this was really evidenced in the first quarter as the weekend shipments were up 25% year-over-year. And what that signals is, those customers got to get the work done and they’re willing to spend over time to get on to the next project. The private continues to move up, as we said, where the big increase we’re seeing in is in highway shipments and the flow-through of that funding. And I – as we said, that increase in funding flow-through will continue for the next four, five years. I think that as far as the rest of the year, as predicted, I would expect shipments to be more like February, March, but remember, it’s still just the first quarter.

Got it, got it. I appreciate the details there. And then second question, one of the impressive thing about the numbers is the low double-digit aggregates volume growth, despite your largest market California being down double digits. You mentioned it was broad-based. How much did the Aggregates USA footprint, which would have been less weather affected, perhaps impact that? So just how were you – if you could dig into how you’re able to offset the double-digit declines in your largest market with the rest of your footprint? What were the particular drivers of strength or regions?

Well, I think that everywhere except for California saw strength, particularly in our very important Southeast market. We’re the largest producer in the Southeast, and we really, really benefited from big demand in those Southeastern states. It was just widespread. And again, you had some big projects scattered out across that flowed from fourth quarter last year into first quarter this year and that was really what you saw in January.

Got it. Thank you.

Sure. Thank you.

And our next question will come from Kathryn Thompson with Thompson Research Group.

Good morning, Kathryn.

Hi, Thank you. Good morning. Thank you for taking…

Good morning.

…thank you for taking my questions today. Just – so first on the follow-up on CapEx. Could you give us a little bit more color on the $55 million spend for internal growth projects and expected returns? So there’s looking – building out new sites. But just wanted to get some more color on what type of growth projects you’re targeting for this?

Sure. I’ll address that one, Kathryn. In terms of the growth projects and what we spent on in the quarter, they are largely – the spend was largely on what we’ve outlined before we are opening some additional sales and distribution networks in certain parts of the country, along the Gulf Coast into Charleston as well to sort of help expand the network there. We are also expending money on the opening of two or three greenfield sites, one of which is in California. And we would expect and that one to hopefully begin having a few shipments from that late this year. In terms of returns, we don’t go into the specifics of the returns on those individual projects other than to say that they are definitely accretive to the returns of the company and have a higher return than what we – what the company generates overall. And that’s the main reason for doing those projects. As you look at an internal growth project versus M&A, this is a way to get exactly what you want, where you want it without potentially having to pay a lot of blue sky. And when you are able to do it internally, it causes the return on investment to rise.

I would add to that. There’s a ramp-up time for these just because when you buy something it’s already going to this when you have to ramp-up. But they’re adjacent or in our footprint, so they’re additive to the franchise and protect the franchise and there are some of our highest returns that – you’re not painting the blue sky, but you also the flip side as it takes a little time to ramp-up.

Okay, perfect. And then a follow-up on ASPs. Nice job in the quarter. Thank you also for confirming that. You didn’t build inventory and it does look that from an industry standpoint, at least, from the folks we’ve – with whom we’ve spoken. In general there has not been an inventory build in Q1 this year to the same degree as last year. Just a confirmation that this certainly should be positive for pricing going forward? And then second, on a follow-up to that, could you just give more quantification or color on the commentary of project type mix in the quarter and how this impacted pricing for the quarter? And really more importantly, how you think it will – how it impacts it as we look further out 12 to 18 months from now? Thank you very much.

Yes, thank you. The quarter – the pricing momentum in our markets continues to improve. This was, as we predicted, third quarter, fourth quarter last year. The mix was about 40 basis points. All of that was base, which a higher base refines in a cold wet weather is not unusual. It’s also indicative of new highway construction. But overall, we’re seeing widespread pricing momentum across our vast majority of our markets. In fact, all the one market – every market we reinstall price increases, they’re for one and that one was flat. The – I think the foundation of this is the visibility to that highway growth and the continued demand growth and shipping growth on the private side. Our January and April price increases to fixed plants were all in place. And we’ll see bid work push up throughout the year. And as you know, bid work is a campaign over time, it’s not a one-time price increase. So the 2019 price increases came out of the gate strong. But I think what’s really important here is, it provides a good start to our improve unit margins. As we said, those unit margins were up a 11% in the quarter. And this is the second quarter in a row that we’ve grown unit margins in the face of some pretty tough conditions. And that’s simply sound execution and disciplines under difficult circumstances by our people. And if you remember, if you kind of look back over time, this is usual for us. If you look back six years, we’ve gone from $3 – roughly $3 to just under $3 to almost $5 from the trailing 12-month basis on unit margins, that’s 12% compounded annual growth rate and we saw 11% in the first quarter. So my hats off to our sales and ops folks and we thank them for that. And this is our job and we’ll keep looking at it.

Yes. I just add one thing there, Kathryn, going back to the commentary around base sales and the fact that our – that produced a bit of unfavorable product mix of about 40 basis points. Our base sales did increase pretty substantially in the first quarter year-over-year. Last year, they constituted about 22%, this year, about 27%. So that’s about 500 bps up. So to – given that significant increase to only have a product mix effect of about 40 basis points, I think is pretty good.

Yes, perfect. Thank you so much.

Thank you.

Sure.

And our next question comes from Jerry Revich with Goldman Sachs.

Hi, good morning, everyone. This is Ben Burud on for Jerry.

Good morning, Ben.

Hi, Ben.

Good morning. Just wanted to touch on pricing. So if we look back to last year, pricing improved over the course of 2018. So as a result, you’ll probably be facing tougher comps in the second-half. As a result, obviously you had very strong pricing 5.8% year-over-year, excluding mix. Should we think about pricing kind of steady over the course of the year, or does that comp – the second-half comp present a meaningful headwind?

I think you nailed it. I think, we would expect our price increases to be steady throughout the year in line with our guidance. And you have to remember, so we – the fixed plants, as I said, went into effect in January and April. You’ll see some – some of those you’ll see mid-year price increases. But the bid work, which is the majority of our work, as I said, is a campaign over time, and we’ll continue to push that up throughout the year. And you got to remember, we were looking at our backlogs and our booking pace and our pricing, our book pace, and it will support that 5% to 7% guidance that we’ve given, and I would see that smoother in 2019, whereas it was kind of a ramp-up in 2018.

Got it. And this kind of feeds into the mid-cycle question you addressed earlier, but I appreciate that it’s a few quarters away. But can you kind of give us an idea how you’re thinking about pricing in 2020? It’s obviously very strong this year. Can we keep that momentum into 2020 and continue that path to a strong mid-cycle level of performance?

I think I would turn that to – obviously, we’re not going to give you guidance for 2020, it’s too early. We’re still in first stages of 2019. But I think what I would look at there is what drives price and its visibility and work that’s coming, so people secure that they can take price in and give prices out there in the marketplace. And that is what so important about the growing highway demand. It is – everybody knows it’s there. It’s very visible. They know way out in advance what’s coming. And so whereas private work in is helpful there, but it’s a little less visibility and a little less sure than a state saying they’re going to do XYZ jobs. So I would predict pricing to continue – the momentum to continue to increase over time underpins again by the visibility to highway demand.

Got it. And if I could just squeeze in one quick follow-up on that note. Obviously, the infrastructure demand is very, very positive. There’s nothing that you guys see looking out that would represent a downside risk to the current infrastructure demand, kind of like what we saw in 2017 where there were project delays or engineering constraints. Is that not the case this time around?

There’s enough flowing through, I would expect it to be a little smoother. You got to remember, we were back to 2017, that was just a couple of states that had new highway bills. Now we’ve got 10 of our states that have all passed increased funding, that funding increases $20 billion a year versus over 10 states, where the federal bill is $45 billion a year over 50 states. So this is substantial. It’s big. It’s widespread. And I think will there be air pockets of how fast it grows by or it will be, I wouldn’t expect it to be a smooth go up. I would expect it to always be going up over the next four or five years, though.

Awesome. I appreciate the color.

You bet. Thank you.

Next will be Phil Ng with Jefferies.

Hey, guys, great quarter.

Hi, Phil.

Thank you.

It seemed like some of the bottlenecks that may have held you back, had started to ease a bit. Curious, your ability to kind of play catch-up, given some of this pent-up demand. And if you continue to see double-digit growth like you did in the quarter, we’re not saying that’s the case for the rest of the year. But if you had that type of growth trajectory, do you have enough bandwidth in inventory to kind of meet that demand?

Oh, sure. I mean, we had the bandwidth in production capacity. I mean, the capacity is built in these plants to do 300 million tons, it’s just a matter of hours. But we’ll handle whatever comes at us, and we have the power to do that. I’m not at all worried about that, in fact, I’ve loved to have that problem.

Okay, sounds great. And then shifting gears to like California, what are you expecting in terms of how much that market grows this year? There’s certainly some puts and takes. We have already showing some signs of a slowdown and the softer 1Q start, the public sounds quite robust with SB1. And can you remind us what are the splits between private and public for California?

Yes. The – obviously, the first quarter in California was a washout, but the fundamentals in California are very strong. You’ve got SB1 coming on with a steadily increasing implementation. Remember, we’re only a year-and-a-half into the funding of SB1. We always tell you, it takes two years. But Caltrans is actually doing a pretty good job in getting work out there. We’ve already backlogged probably 1.5 million tons of aggregates and a 1 million tons of asphalt. And you got to remember, much of that is going to ship this year. Remember, we’re the largest aggregate and asphalt producer in California. So this is right in our wheelhouse. The backlogs and booking pace would support our plan for the year. We will have a good performance in California this year. Time will tell, if we can catch-up on projected volumes in California for 2019 with the works there. Management team actually performed extremely well in a tough quarter with our cost I said earlier. It boils down to, I’m not concerned about California, if anything actually very excited about California, both the demand level on the private side and big demand coming on the public side, our team’s performance. So we’ll have a good year in California. As far as the split, I would tell you, in Southern California, we are more about 50-50, like we are across the country with – of private versus public. In Northern California, we are – in Central Northern California, we’re probably heavier on the public side than we are on the private side.

Got it. And just one last one for me. Can you talk about how trends are tracking in April and May? And how extended are your backlogs? I know, one of your competitors mentioned some of their customers and contractors have started to reach out for work in 2020, right? Just curious if you’re seeing some of that as well? Thanks a lot.

I’m sorry, I couldn’t hear the first of your question.

Can you talk about how your trends are tracking in April and May – early May?

Yes. Well Ms. Wood just kick me under the table about what I’ll be trying to talk about April and May. But I would call out the full-year. I would expect our price and volume to track pretty smoothly as what we have in our guidance.

Got it. And then the backlogs, are you having conversations with customers into 2020 already, or how’s that kind of shaking out?

Well, some of the big work that we’re bidding today will flow into 2020. But most of it’s going to be shipped in 2019. But we – when we bid work that goes out years to come, we’ll put escalators in it.

Got it. All right, thanks a lot.

Thank you.

And next will be Adam Thalhimer with Thompson Davis.

Good morning, Adam.

Good morning.

Good morning. Great quarter.

Thank you.

Thank you.

Tom, sorry to harp on this again, but I’m just curious on the guidance – the volume guidance with such a strong start to the year. 5% volume guidance would be kind of, I don’t know 3% each quarter for the rest of the year. Is there any some conservatism baked in on your part there?

Well, I’ll tell you what. I’d rather have the first – I’d be rather be ahead on this on the batting than behind. But you got to remember, it’s still the first quarter. And if history repeats itself, we’re going to see some headwinds this year. And you saw February and March ship more like guidance, so it’s a solid start. I think we were thoughtful in our guidance and I still think we’re thoughtful in our guidance. I don’t – again, it’s a great start. But it’s – we – most years, we see some storms and fires and hurricanes in there, and who knows what’s going to happen this year, hopefully not, but we’ll see.

Yes. I would just add to that. I mean, I think it’s a little bit early, yes, it was a great start to the year. As Tom said, we did have some pent-up demand coming through in January that propelled the numbers beyond the guidance. We feel comfortable with where we are from a backlogs and booking pace perspective for the rest of the year. But I think only 45 days or so, 60 days or so after we gave the initial guidance that we spent a lot of time thinking about taking all of these factors into effect, it’s probably a bit premature to to go down the path of revising that at this point on the basis of the seasonally slowest quarter of the year.

Okay, understood. And then can you give a little more color on non-res, Tom, particularly the bidding?

Sure. As we look out, our non-res shipments have been strong. Our customers’ outlook is very positive in non-res. The backlogs and booking pace or good. In non-res, you rarely see all of your markets line up at the same time as strong. So I’d call out markets that we watch out – we’re watching from a non-res and some excited about the watch list would be – this doesn’t mean they’re going to go down. They are just – we’re not quite as excited about them as we are others the watch list would be places like Baltimore, Nashville, Dallas markets where we feel very good about our non-res side about, would include Southern California, Atlanta, Phoenix and North Virginia. But I think we’ll continue to see strength in shipments in non-res throughout 2019.

Great. Thank you.

Thank you.

And next will be Mike Dahl with RBC Capital Markets.

Good morning.

Good morning. Thanks for taking my questions. I wanted to – first question circle back on one of the earlier questions and comments around cost quantification just on the 3% unit cost. It sounded like 1% was kind of weather impact. So then, if we look at the bulk of the remaining, I think, that would translate to roughly 10-ish million in terms of headwinds from some of the maintenance and repair costs. So first, is that on track? And then second, how should we be thinking about unit cost through the balance of the year as you get back into seasonally stronger periods?

So that’s a good question. On the call California – so cost went up 3%, I will look at this way. California was about a percent of that. And even – now with that said, I think, our folks did a good job, they just had a tough go of it and that happened we had that much rain. The other 2% – about 1.5% that would be R&M. I said R&M, repair and maintenance and this is we took plants down, because it was not a good time to run. And that’s what we should have been doing and then when the sun comes out, the season will – we can run at maximum efficiencies. And then inventories was about a 0.5%, and again that was by design and that you don’t need to be trying to build inventories when you have operating efficiency. So that’s how I look at it. As I look through the quarter, I would expect – I wouldn’t see big shifts in inventories. I wouldn’t expect California to – the sunshine back sign in the California back running. I think that operating team is very talented and they will do a very good job with that. And our R&M will level as the year goes along and we start running.

Okay. So flattish in terms of unit costs for the balance of the year, and that’s kind of how you get back to the 60% incrementals, is that fair?

That’s probably a little better, up a little bit than flat, but in all said, yes, you’re correct.

Generally flat, yes.

Okay. And then my last question, just on the mix commentary, understand the impact of the base from a product standpoint. So if you think about the potential for a rebound in California and the mix of base potentially move a bit lower through the year. How should we be thinking about the overall mix impact within your full-year guide as it relates to the pricing?

I would expect not a big impact from mix geographically, if anything maybe a little positive of the mix on product mix, I would expect base to continue to be pretty strong, maybe not as strong as it was in Q1. But the reason I say that is, you’ve got a lot of new construction out there with this – with the highway funding. So and then, by the way, this is a good thing. This is not – but we’d go back to – and I’d point you right back to guidance, which is 5 to 7 mix adjusted.

Great. Okay, thank you.

And next will be Trey Grooms with Stephens.

Good morning, Trey.

Good morning.

Hey, good morning, Tom and Suzanne. So I guess, first off, the – you mentioned you’re seeing kind of an accelerated or accelerating transition from lettings to actually seeing aggregate shipments. Tom, what in your opinion, what’s driving this? And is it sustainable as we kind of start moving into the busier time here as we look at the backlog that you have, as we look at the states that you’re in and the increase in funding? Is this, I guess, shorter lag between a lettings? And when you guys see work, is that sustainable, or do you see that kind of stretching out again?

I think, what I see is, this is sustainable. In fact, I think it is going to compound that growth rate over time, as funding within a state matures and then as funding between each state comes online. So I would expect it to be stronger over time. You’re seeing it in our backlogs, you’re seeing it in the highway lettings, you’re seeing it in the highway – in the state’s highways budgets. It is – the bottom line of it is, it is the maturing of the DOTs into their funding. And as we said, it takes two years and then it ramps up over time.

Yes. I think Tom is exactly right on that. I mean this is just a natural progression. It takes about two years. And so you’re beginning to see come through now some of which we had hoped would have come through last year, but it just takes longer when the projects are initially beginning to ramp up.

Got it. All right. And then you mentioned January benefiting from some pent-up demand. Is – was that more kind of the catch-up you’re talking about here, or it was that just weather-related things that didn’t happen last year that kind of pushed into January that was a catch-up period and now we’re back to normal?

I think, well, the overall growth is what we’re talking about. The bubble, so to speak, in January was work that flowed through from 2018.

Okay. And so California weather likely created some level of pent-up demand. How should we think about that flow-through? And then also you mentioned Virginia weather impacting ready-mix. Did that impact aggregate shipments as well? And is there any pent-up, I guess, shipments there?

I’ll tell you Virginia first. The cold wet weather is going to impact ready-mix concrete worse than it is rocks, so we shipped – we actually shipped a lot of base. Aggregate shipments in Virginia were actually up in spite of the weather. And – but it was more based in clean stone and that again is very typical for a cold wet quarter. We also did more vertical work last year in ready-mix than we have more flat work this year. It is also – the flat work is more weather-sensitive. So not worried about Virginia, but Virginia will have a very good year and had a great start with aggregates, but the ready-mix backlogs are there and it will perform. On California, I think it’s this. Again, the booking pace and backlogs in California, both from a volume and a price perspective is excellent. Same thing with our asphalt, with going prices in asphalt will have a very good year in California. The timing of this was such a quarter, I can’t predict yet. Hopefully, we’ll get it all done. Our customers want that to happen with sunshine in there. They’re shipping and they’re busy. But it’s really a matter of do you have enough days and the timing of those projects. But again, that’s a matter of timing. California’s going to have a good years, it’s a matter of whether it’s a good year or great year, but it will be solid. And if we don’t do it in 2019, we’ll do in 2020.

Got it. Thanks for taking my questions and congrats to you and the team on a good quarter.

Thank you.

Thank you.

And next will be Garik Shmois with Longbow Research.

Good morning, Garik.

Hey, this is Jeff Stevenson on Garik.

Oh, hi, Jeff.

Hi, Jeff.

Hey, how are you?

Good.

My first question was just a follow-up on California. I was just wondering if you could provide any more color on contractor labor and other capacity issues that might impact demand from getting work through this year?

Yes. Well, labor is an issue, not just in California, everywhere, and not so much for us. But we have pressures on labor, but we can get it done. It’s really our customers. I think that highway demand growing faster is more labor-efficient, so that will actually help us. But everybody has pressures on labor, but it really affects. And I think – backing up to the highway, our contracted customers of the highway piece of this have done a good job, building labor forces with the visibility to the work coming. But it will be a constrained and that’s just a piece of the question mark of can we get all work done in 2019, again, it’s a timing issue. But – so labor is an issue, but we’ll shift past, I think.

Okay, great. And then you’d expect that asphalt to make up most of the gross profit improvement in the downstream business. And just wondering if this is tracking in line with your expectations, given liquid asphalt cost of product more than expected.

Yes. The quarter was actually right in line with our expectations. Prices and hot mix were up 5%, but liquid costs were up $100 a ton for liquid. So liquid cost us in the quarter about $9 million. Now that’s first quarter. If you look back to the fourth quarter, liquid is, as predicted, is pretty much level out and our backlog and our booking pricing on future work for hot mix, it continues to escalate. So we’ll catch this up. It’ll be a ramp up throughout the year. But I think we’re good with our plan, accomplishing our plan. And the big ramp-up in highway demand is very, very important for that asphalt product line, because that’s what most of the painting is.

And I would just add to that. In terms of asphalt, when you think about the guidance that we gave for the year back in February, we said that a majority of the improvement in gross profit would come from increased volume. And based on our backlogs and booking paces, as Tom said, we feel pretty comfortable with that right now. And the other point I would make is that, particularly with respect to the first quarter, remember, in California, that is an extremely big asphalt business for us And so, no doubt. While we were pretty much on track with what we expected in first quarter from an asphalt perspective, California, if it hadn’t been raining out there virtually every single day, that would have certainly been helpful as well. So we can look forward to that as the sun begins to shine a bit more.

Okay, great. Thank you.

You’re welcome.

And next will be Adrian with JPMorgan.

Good morning.

Hi, good morning, Adrian.

Hi, good morning, Tom and Suzanne. Thank you for taking my question. Just two questions. One is, what percentage of your territories you had the price increases in January and what percentage was in April? And the second question is, you did not have much M&A activity in the quarter. Should we expect lower M&A activity this year, probably on higher valuations than what we had last year? Thanks.

As far as pricing is concerned, it was pretty consistent through the quarter as how the poor turned out and that was as we predicted in the fourth quarter – for the fourth quarter call. So it was – and I would expect that throughout the year. As far as M&A, we’re always working on a few of these that’s happening today. It’s always hard – it’s to predict what’s going to happen M&A as the seller side, when they want to sell and we don’t have a lot of control over that. I think, what I was – what I look forward for us in M&A is, I’ve said there’s a lot, it’s discipline – be disciplined about what you’re going to buy and be disciplined about those synergies that are unique to us, try not to pay for those, make sure you don’t overpay pressure test the project. And then once you get it, make sure you integrate it quickly and accurately.

Okay.

That’s right. And I would also add to that from the M&A perspective. If you look back to the amount of spend we’ve had in M&A over the past 12 to 18 months, it has been pretty sizable for us. And so I think whether there is a deal out there to be done or not, I think, having a relatively quiet quarter to make sure, as Tom said, those are embedded in and we stay very focused on making sure we get off to a really good start in the aggregates business is probably the most important thing for us to have done in the first quarter.

Understood, Tom and Suzanne. And you mentioned at the opening three, I think, you said three quarries and one in California. And what are the chances that we could see even more quarries being opened this year?

I think that quarry took about 10 or 15 years in development. It is – and it took a lot of work for our local folks. It is extremely hard to open a quarry anywhere much less California.

And how big is going to be this quarry in California?

It’s a mid-range quarry, but I don’t think we want to be public about that at this point.

Thank you, Tom.

Thank you.

Next will be Lee Nalley with SunTrust.

Hi, thanks for taking my question.

Good morning.

Good morning.

Sure.

Good morning, good morning. So just a real quick. In the past you guys have discussed leverage target 2 to 2.5 times, I think, you confirmed that last quarter. But prior to that, there are also – there’s also this target of 1.5 times at the cycle peak. I’m just wondering can you give your kind of updated thoughts on how you manage – plan to manage leverage through the cycle? And is that 1.5 times target still out there?

Yes. Our target range is 2 to 2.5 times through the cycle, and we are comfortable with that. We think that’s an appropriate leverage range. It gives us the the flexibility and stability we need to manage through the cycle, because remember, in the downturn, we will be – even though EBITDA may fall a bit from fewer shipments, we’ll be very cash-generative, because we’ll basically be spending virtually nothing on growth CapEx. And if we go into the cycle as we plan to with our fleet pretty young, then we will not have to spend very much at all on – from an operating and maintenance side as well. So that cash profile that’s a little countercyclical to profit gives you some cushion as well. We like to be flexible in what we do. We’re comfortable with the 2 to 2.5 times. But certainly, if we were in the middle of the cycle and felt it was appropriate to reduce the leverage range further, that is certainly within our remit to do. But when you think about our business model, we’re pretty comfortable with the 2 to 2.5 times. We’d certainly like to be toward the lower-end or at the lower-end of that range, as you’re entering the downturn.

Thanks. All that makes a lot of sense. Thanks for the clarification.

Sure.

And that does conclude the question-and-answer session. I’ll now turn the conference back over to Mr. Tom Hill for any additional or closing remarks.

Again, thank you for your time today and thank you for your interest in Vulcan Materials. We look forward to talking to you throughout the quarter. Have a good day.

Thank you.

Thank you. That does conclude today’s conference. We do thank you for your participation. Have a wonderful day.