Summit Materials' (SUM) CEO Tom Hill on Q4 2015 Results - Earnings Call Transcript

| About: Summit Materials (SUM)

Summit Materials (NYSE:SUM)

Q4 2015 Earnings Conference Call

February 11, 2016, 11:00 am ET

Executives

Rodny Nacier - IR

Tom Hill - CEO

Brian Harris - CFO

Analysts

PT Luther - Bank of America-Merrill Lynch

Jerry Revich - Goldman Sachs

Todd Vencil - Sterne Agee

Kathryn Thompson - Thompson Research Group

Trey Grooms - Stephens

Stephen Kim - Barclays

Brent Thielman - D.A. Davidson

Rob Hansen - Deutsche Bank

Adam Thalhimer - BB&T

Ted Grace - Susquehanna

Collin Verron - RBC

Stanley Elliott - Stifel

Operator

Greetings and welcome to the Summit Materials Fourth Quarter and Fiscal Year-End 2015 Earnings Conference Call. At this time, all participants are in listen-only-mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions].

As a reminder, this conference is being recorded. It is now my pleasure to introduce our host Rodny Nacier, Summit Materials' Investor Relations. Please go ahead.

Rodny Nacier

Good morning. And thank you for joining us today for Summit Materials fourth quarter and full year 2015 earnings conference call. Today's conference call is hosted by Tom Hill, Chief Executive Officer; and Brian Harris, Chief Financial Officer.

This morning we issued a press release detailing our fourth quarter and full year of '15 results, which can be found in the Investor Section of our website at summit-materials.com. We also published a supplemental worksheet highlighting key financial and operating historical data in the Investors section of our website.

During this call, we will review our fourth quarter presentation, which is available by assessing the live webcast in the Investors section of our website.

I would like to remind you that management's remarks and answers to your questions on today's call may include forward-looking statements which by their nature are uncertain and outside of Summit Materials' control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may differ in a material way. For a discussion of some other factors that could cause actual results to differ, please see the Risk Factors section of Summit's perspectives filed on August 7, 2015, filed with the SEC.

In addition, we will refer to certain non-GAAP measures on this call. You can find reconciliation of non-GAAP measures for historical period to most directly comparable GAAP measures in the press release.

With that, I will turn the call over to Tom.

Tom Hill

Thank you, Rodney. And welcome to our fourth quarter and full-year 2015 earnings conference call. On today's call I will review our operating highlights and market dynamics and then discuss Summit's unique strategic advantages. Brian will then give you some additional details on our operating and financial results. After our review, we will open the lines for questions.

Turning to Slide 4, 2015 was another exceptional year here at Summit. We delivered net revenue of $1.3 billion and adjusted EBITDA of $288 million, 60% of this adjusted EBITDA came from raw materials businesses, which includes cement and aggregates with the remaining 40% from products and services. Had we owned all of our acquisitions at the beginning of 2015 our pro forma net revenue would have been $1.4 billion and adjusted EBITDA would have been $308 million. This confidential performance was supported by improving underlying demand, positive industry fundamentals and with successful execution of our strategy of acquiring and improving these material-based businesses.

We ended 2015 with over 2 billion tons of well located reserves and doubled our cement capacity. Demand improved across most of our markets in 2015. Private residential and non-residential starts are well below peak level. And infrastructure end markets are post to benefit from expanding federal and state funding for highway projects. As a result, we believe there's significant upside as these markets continue to improve.

While we can't control the pace of this recovery, we continue to focus on improving price and reducing costs. In 2015, prices increased across all lines of business on a reported and organic basis, including organic aggregate prices up 7% for the fourth quarter and 6% for the year. This overall price momentum helped us achieve incremental gross margins of approximately 57% for the quarter and full year. Our unique acquisition strategy accounted for a significant portion of our growth in 2015. The strategy provides us with the benefits of a scalable national operation and benefits of local entrepreneurial leadership. This is truly the best of both worlds.

Our proven ability to integrate and improve these businesses greatly contributed to a full-year adjusted EBITDA margin increasing 460 basis points to 22%.

Turning to our results on Slide 5, as you can see, we delivered strong results in the fourth quarter and for 2015 as a whole. We meaningfully enhanced our materials exposure, improved our cap structure and exceeded full year targets. As I mentioned previously, we increased adjusted EBITDA 52% to $288 million with a 460 basis point improvement in margin. This was driven by organic price and volume improvement in each of our lines of business and the successful integration of our accretive acquisitions, especially in cement.

In the fourth quarter, our adjusted EBITDA increased by 45% to $90 million with improvement in all segments. Our fourth quarter gross margin improved by 480 basis points through a higher mix of materials and core profit improvement across aggregate cement, ready-mix and asphalt.

Turning to Slide 6, we continue to see positive demand comes in our end markets and key states. We are well-positioned in attractive markets to benefit from what we expect to be a steadily improving construction environment. Positive indicators across our end markets provide us with confidence that we are still in the early stages of the year out construction recovery.

In private construction the long-term fundamentals are all quite positive. In residential, having starts finish 2015 at 1.15 million, but are still way below normalized levels of around 1.5 million.

In Texas, we have a stable residential outlook with the pace of activity increasing albeit at a slower pace. In Utah, the residential market has been a particular bright spot, with housing continuing to outpace the national average.

In non-residential, as a reminder, we participate in light commercial activity such as strip malls, hotels and retails centers. Generally speaking, this market follows residential development. We have limited exposure to heavy non-residential projects such as energy or industrial development.

Kansas & Missouri have positive non-residential outlook supported by expanding job markets. In Utah, non-residential construction starts increased over 40% in 2015. And in infrastructure, the recent passage of the five-year highway bill or FAST Act in December 2015 provides enhanced visibility for federal highway funding. In addition, many states have increased their highway funding. This increased funding will support growth in highway construction for the next several years as the actual highway spends tend to large funding by 18 to 24 months.

Turning to Slide 7, to add a little detail on state highway programs. Specifically, many state governments throughout the country have already passed legislation to allocate additional resources to increase their highway investment. During 2015, Iowa, Utah and Idaho implemented gas tax increases, and Texas took legislative measures to provide additional funding for highways in their respective states.

Texas expects to have almost $10 billion of highway letting this year, compared to $6 billion last year supported by funding from Proposition 1. We anticipate that other states will follow suit to meet pent-up demand for highway maintenance and capacity increases.

Turning to Slide 8, with the increased focus on oil prices recently we want to take a moment to update you on our business in Texas. We have a very diverse business in Texas with locations in Austin, San Antonio, Houston, Odessa-Midland and North Texas covering the area from Amarillo to Texarkana. We have limited indirect exposure to oil and gas and are seeing the benefits of a very healthy highway program.

On the residential side, there is still a lot of pent-up demand for housing driven by a shortage of inventory across the state. In addition, light commercial demand continues to grow. In Houston specifically, we are seeing continued strength year-to-date. The impact of -- the oil price decline is being offset by stable residential demand, particularly for entry level homes, increasing demand for light commercial activity and a multi-billion dollar highway program.

Turning to Slide 9, we have strong pricing momentum in our core aggregates and cement businesses during 2015. Favorable industry dynamics support pricing in both of these businesses. In cement, we have the two most northern plants on the Mississippi river. This region is geographically isolated and relatively insulated from either domestic or international cement imports. The positive materials pricing environment is supported by high barriers to entry, a depleting resource, and well-structured markets.

Turning to our growth story on Slide 10. A critical part of Summit strategy is our proven ability to acquire, integrate and improve both platform and bolt-on acquisitions. We have completed 38 acquisitions through 2015 for a combined investment of $2.2 billion. We focus our acquisition efforts on the materials-based businesses with strong market position and existing and attractive new markets. We also supplement this growth in the downstream where we can add value through the vertical.

We remain committed to grow our business through acquisitions in a disciplined manner and anticipate acquiring approximately $30 million of annualized EBITDA each year. We surpassed that target in 2015 with the acquisition of the Lafarge Davenport Assets. We have continued this materials-based acquisition strategy with the recent acquisition of American Materials Company which has operations in the fast growing North and South Carolina markets which was announced today. Our deal pipeline remains healthy and we are optimistic about our ability to grow and add value through acquisitions.

Turning to Slide 11, since we have increased our adjusted EBITDA margin by 790 basis points to 22%. This performance improvement is an integral part of our strategy and our management teams are passionate about increasing margins. This is facilitated by our decentralized business model which maximizes local relationships, a world class IT network, and tools and methodologies which allow our local management teams to drive performance. In 2015, our incremental gross margins were 57% across the company with 59% on materials and 50% on products which compares quite favorably to the sector.

Now I would like to turn the call over to Brian who will take us through our financial performance and balance sheet metrics beginning on Page 12.

Brian Harris

Thank you, Tom. We are pleased with our strong financial performance to conclude our first year as a public company and in particular with the pace at which our marginal expansion is accelerating. We reported an increase in sales of 20.5% to $1.3 billion and adjusted EBITDA improved 52% to $288 million. I'll now review some of the details and drivers behind these numbers.

Turning to Slide 13, pricing was favorable across lines of business during the fourth quarter and full year. You have the specific movements by business along with regional data in the appendix, so I focus on a few highlights. Aggregates prices increased 7% in the fourth quarter reflecting the benefit of successful price increases implemented over the past 18 months cycling into current project activity and favorable demand.

In our combined cement operations including our Davenport and Hannibal plants, average cement prices increased 25% in the fourth quarter mainly reflecting favorable mix in addition to core price improvement. Ready-mix price growth was steady and asphalt price, while still positive, was a little lower than the full year mainly reflecting lower liquid asphalt input cost and regional mix.

Turning to Slide 14, underlying demand was stronger overall and acquisitions contributed additional growth primarily in cement. The Davenport acquisition completed in July, 2015 drove the significant increase in cement volume particularly in the fourth quarter but also for the full year. Aggregates and ready-mix organic volumes grew in the mid-single digits were in line with expectations and enhanced by acquisitions for the fourth quarter and full year.

In Asphalt, lower volumes in the east on tough comps in the seasonally slower fourth quarter magnified the delta here. The full year organic decline in asphalt captures weather related challenges during the first half of the year along with the fourth quarter volatility.

Moving onto our gross margin on Slide 15, we are especially pleased to achieve aggregates incremental margins of 74% for the full year. Total gross profit increased approximately 40% for the fourth quarter and full year. As a percentage of net revenue, gross margin in the fourth quarter expanded to 36.3% compared to 31.6% in the prior year quarter.

Our expanded cement network along with our aggregates based acquisitions completed since 2014 were meaningful contributors to this improvement resulting in an 810 basis point increase in the mix of our gross profit from higher margin materials during the fourth quarter. In the fourth quarter, we also achieved 500 basis points of gross margin expansion in products and benefitted from lower energy costs. In cement, our fourth quarter gross profit increased 117% year-over-year although our cement gross margin was impacted by major annual repair and maintenance activity.

On Slide 16 we demonstrate the significant growth in adjusted EBITDA as margins for the fourth quarter and full year. Adjusted EBITDA margin improved 390 basis points for the fourth quarter and 460 basis points for the year largely as a result of our ability to increase prices organically, the accretive contribution from our acquisitions and our active cost management; a larger proportion of higher margin materials and product revenue helps to grow.

As we announced in our press release today we reclassified our segments and moved cement to its own segment. Due to the immediate integration of the Davenport assets it’s impractical to breakout the growth in cement between organic and acquisitions. Davenport accounted for the significant majority of our EBITDA growth in the fourth quarter along with some aggregates based deals. For the full year, the contribution from aggregates based acquisitions in the way accounted for 28% of adjusted EBITDA growth with Davenport helping as well in cement.

Overall our strategy is built around continued margin enhancements and we are pleased to capture additional margin at each phase of our vertically integrated business for the fourth quarter and full year.

Moving onto our balance sheet and liquidity on Slide 17, we ended the year with a prudently levered balance sheet and ample capital resources to continue executing our strategic growth initiatives in a disciplined manner. During 2015, we invested over $500 million on acquisitions while also successfully reducing our net debt-to-EBITDA leverage ratio to 3.9 times on a pro forma basis and ahead of our target of four times. We intend to remain disciplined with our capital allocation with the long-term objective of reducing our leverage multiple. During the fourth quarter, we issued $300 million of six and one eight senior notes due 2023 reflecting an upstart to meet strong investor interest. This capital providing us with an attractive source of funds to refinance our debt and lower our cost of capital.

We used a portion of the bond proceeds to redeem the remaining the $154 million of 10.5% notes for a total repayment of $625 million due in 2015 representing $27 million of annualized net interest expense ratings on the refinancing of 10.5% notes. For the full year 2015, we reduced our reported interest expense by $2 million to $84.6 million and we entered 2016 with an annualized run rate interest expense of approximately $72 million.

At the end of fiscal 2015 we had total outstanding net debt of $1.2 billion, our cash balance was $186 million and we had $210.6 million of availability on our revolving credit facility.

Looking ahead to the outlook for full year 2016 on Slide 18, we expect continued growth and in 2016 we are introducing our adjusted EBITDA outlook of $325 million to $345 million which compares to adjusted EBITDA of $288 million in full year 2015. Our outlook assumes organic improvement and American Materials Company which we closed last week.

As a notable shift from the prior year, our outlook moving forward will exclude the impact of any future acquisitions. We continue to target approximately $30 million of annualized adjusted EBITDA per year from acquisitions. The potential upside from any future acquisitions is excluded from our $325 million to $345 million range due to the unspecified closing dates of any future acquisitions. We will incorporate the impact of future acquisitions as appropriate on subsequent quarterly call as deals occur.

For growth capital expenditures, we expect to spend approximately $150 million to $170 million in 2016. This number includes, first, maintenance CapEx, which should approximate 6% to 7% of net revenue and is consistent with normal levels. The 2016 CapEx figure also include several projects mainly in aggregates facilities to improve efficiency and increase capacity. The high return projects will be completed in 2016 and deliver returns in 2017 and beyond.

And with that review, I'd like to turn the call back to Tom for some closing remarks.

Tom Hill

Thank you, Brian. We've executed on our strategic plan outlined at the time of our IPO. As we have mentioned on prior call, this is truly an exciting time here at Summit. We have the right people, the right strategy and the right capital structure to deliver future growth and profitability. Our strategy is based on first, a steadily improving underlying demand. Second, margin enhancement with a positive pricing environment and a commitment to reducing costs. And finally, a proven relationship driven acquisition strategy.

We are now happy to take some of your questions. Operator, can you please open the lines up for Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions].

Our first question comes from line of Paul Luther with Bank of America-Merrill Lynch. Please proceed with your question.

PT Luther

Thanks. Hi, Brian and Tom. It's PT Luther from BAML. How are you?

Brian Harris

Very well, thanks, good, PT.

PT Luther

Good. I was wondering, first off, if you could help give us a sense of the price and volume assumptions that underline the EBITDA guidance for 2016, specifically really looking at aggregates and cement. And if you give us an update on cement price increase plans for '16 and how they're being realized, if you've a sense so far?

Brian Harris

PT, we don't give specific guidance on volume and prices by line of business. However, we see a continuation into 2016 of the underlying market in 2015. So we see more of the same comment.

Specifically on cement, we did announce a $12 a ton cement price increase effective April 1 from our continental cement operations. The cement price increases in the market in that area have been anywhere from $8 to $15. We would hope to realize two-thirds of that $12 in 2016, which will reflect some discounts for larger customers will also reflective the fact that taper one. And we have many, many different markets with many different pricing dynamic. So is that helpful?

PT Luther

That's helpful. Thanks. And then another one on that CapEx guidance. So it looks like I think what's implied is growth related or project related CapEx of I think around $50 million or something to deliver in '17 I guess in terms of returns. Is there a way you can give us a sense of what kind of returns you're eyeing to that $50 million investment or so?

Tom Hill

Yes. Those investments that we're talking about are spread over a number of aggregates quarries primarily. They involve both capacity expansion and productivity and efficiency improvement. They're going to provide returns in the future for many, many years to come. And we typically target returns in the 20% range on those kinds of investments.

Brian Harris

Yes, the investments themselves are spread mostly in our -- on our aggregate facilities they're in Kentucky, they're the large project that's West of Houston, there is another one North of Austin and then there is also South of Charlotte in South Carolina. So they're pretty widely spread, but they are very focused on the aggregates business.

PT Luther

Great. And then if I could squeeze it one more. And then I'll jump back in queue. Can you -- we heard that weather was difficult in some pockets of the US in Q4. I was wondering if you saw much disruption in Texas I guess specifically where there was lot of rainfall, deferred tons that might be -- that might have been shifted more in '16?

Tom Hill

Yes, certainly the weather in Texas in Q4 was not very good. We didn't find it to be that disruptive. And I have never been smart enough to figure out the actual impact of weather. So yes, it had impacted us most certainly, but it's very hard to quantify that. And I've just never been able to do that.

PT Luther

Okay. Great. Brian and Tom, thanks very much.

Tom Hill

Sure.

Operator

Thank you. [Operator Instructions].

Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.

Jerry Revich

Good morning everyone.

Tom Hill

Hi, Jerry.

Jerry Revich

Tom, looks like your pricing in aggregates really accelerated in the fourth quarter. Can you talk about which regions had incremental price actions that were put through in the fourth quarter? Sounds like that was the case. And can you just talk about the range of price increase announcements you have made for January 1, 2016, and how those price increase announcements compare to January 1, 2015? And that's just an aggregates, please.

Tom Hill

Yes. I think we had very good success in Texas overall with pricing and that continues and will be similar I believe in '16 as in '15, also in Utah and then also in our recently acquired business in Vancouver. We've had probably more stable or lower single-digit price increases in the middle part of the country in Kansas, Missouri, and Kentucky. And that's sort of a poser for Brian. Do you have any further?

Brian Harris

Yes, we did quite well across the board actually on pricing in Q4. It was pretty evenly spread across most of our business units and regions.

Jerry Revich

Okay. And then in asphalt you've had excellent margin expansion with liquid asphalt cost coming down. Can you just talk about your expectations for asphalt margins over the next quarter or two? Should we be thinking about those margins compressing off of these very good levels on a delayed basis or how would you encourage us to think about it, Tom?

Tom Hill

Well, if the price of oil keeps going down I would suspect that we have very similar margins as we had last year. So it's where I'd be optimistic about asphalt margins in 2016. There is a lag. If the pricing tends to be sticky going down and going up, so we do get some added margins from the decline in hydrocarbons. Mostly, it's a pass-through [ph] in lot of states, but in Texas we -- there is no pass-through on liquid asphalt cost. So actually in December we acquired a liquid asphalt terminal called Pelican, which I think is going to add significant value to our asphalt operations in Texas, which are a big junk of our overall asphalt volumes.

Operator

Our next question comes from line of Todd Vencil with Sterne Agee. Please proceed with your question.

Todd Vencil

Thanks. Good morning, guys.

Tom Hill

Hey, Todd.

Todd Vencil

Can you talk some more about American Materials, just talk about what the volumes, the EBITDA looks like there? And then is that included in your guidance for the year?

Tom Hill

Yes, the EBITDA is included in our guidance. We're not disclosing what the EBITDA is. And I want to expect to the fact that it is in our guidance. Its five sand and gravel sites in the Piedmont Area of North and South Carolina, very fast growing space in Wilmington. It's got great business, local entrepreneurs but these sand and gravel sites together. It's a 100% AGS based business, and it adds to our goal of geographic diversification and it's a great fit with the Buckhorn quarry in Sand and Gravel sites that we acquired in June of 2014. And we see great add-on opportunities in this area and it's -- yes, we're very excited about it.

Todd Vencil

Good, good. And a follow-up which you kind of led me into you talked in the release about 460 bps that you added to EBITDA margin last year. Can you kind of parse out how much was due to a shift in the mix of the business more towards materials?

Brian Harris

Obviously it was definitely averse to the overall mix of the business. When you combine the cement and materials went up about 810 basis points a favorable contribution, in the year I think it's about 900, we were at about 52% of our business was materials based at the beginning of the year with the acquisition of Davenport and the other acquisitions were built on later in the year, we added to that mix. So it's definitely a positive shift. I can't give you an exact split but I can come back to you on that later.

Operator

Our next question comes from the line of Kathryn Thompson with Thompson Research Group. Please proceed with your question.

Kathryn Thompson

First in the cement segment how much of the roughly 25% increase in pricing the quarter was driven by adding the Davenport assets to the mix versus pricing appreciation in the market or there is something else we should take into consideration regarding pricing for cement. And then the second you've been helpful in the past in giving just the basic update on capacity utilization rates at your plant, if you could give an update on this? Thank you.

Tom Hill

Sure. It's pretty hard to split out exactly what the shift the mix about 25%. There is probably three elements, the price of Davenport was a bit was definitely higher. And there was also a general price increase in the marketplace which improved as the year went on just because of the realization improves as older jobs drop off. And then, third, in the prior year we had some out of market what we call wholesale partners which we then would have had less off in 2015. So I think all three of those things contributed plus or minus equally to that I can't -- we don't really have that data handy. We can probably get it for you, Kathryn.

Kathryn Thompson

And the capacity utilization rates at your plants right now?

Tom Hill

Yes, Davenport at capacity and we still have some additional capacity where we can probably another 150,000 tons at Hannibal that we hope to utilize in the next year or two.

Kathryn Thompson

And then -- go ahead.

Tom Hill

I said, and certainly the system of terminals that we have now from Minneapolis to New Orleans will certainly help us utilize that that excess capacity at Hannibal.

Kathryn Thompson

Great, thank you. And then on aggregates you're exposed to states, some states haven't been a big users of -- other than Texas the states outside have not been as relatively large users of just the alternative funding programs. And so as a result of lot of your balance for demand for aggregates in particular have been more for asphalt overlay or concrete projects. As we move forward with the New Highway Bill and the states are coming with alternative funding one of the things we focused on is the balance of days versus clean stone and you're not what. So could you give us a sense of how comfortable you are in terms of your balance of days versus clean and what this means for pricing as we look out not just for 2016 but the next couple of years?

Tom Hill

Yes, I mean our aggregate operations in general are very well balanced. The area that historical would have been in balance would have been in Texas on our Sand and Gravel operations that with the very large pilot program there are -- we're actually experiencing some sand shortages. And in the Houston market and we have a very strong backlog for the remainder of the year there. But in general our aggregate operations are in quite good balance, and trying to think of Vancouver is a very balanced operation and yes, I don't see an issue there Kathryn that -- that's -- that we've seen at all.

Kathryn Thompson

Okay, perfect. And I assume the shortage in sands would help contribute your pricing and that's in Texas?

Tom Hill

Correct. Matter of fact we have just picked up a very large sand job in Houston at a significantly higher price than we would have been year or so ago. So I would be very optimistic about our pricing environment in AGS and all of Texas.

Operator

Our next question comes from the line of Trey Grooms with Stephens. Please proceed with your question.

Trey Grooms

So on the non-res outlook it's for high-single-digits, can you talk about some of the things you're seeing out there whether it would be kind of what's in backlog or kind of some of the discussions you've had with your customers so forth that kind of gives you some confidence in that outlook for non-res specifically?

Tom Hill

Yes, our -- we are very specifically in light commercial and I just go market by market. In Houston, we are actually seeing a significant increase in our light commercial activity for both our Sand and Gravel and our ready-mix. And this is as the light commercial tends to lag and to follow residential development. And over the last three or four years in the West Houston market which we participated and this has been a large amount of large developments put in. That has they are now filling in the Strip Malls, the Home Depots, the Lowe's, the other retail establishments. And so we’re really seeing a good shift in our business towards that light commercial.

In Utah, Utah had a very strong 2015 in non-residential which was helped by a couple of large projects which we actually didn't participate in, but again it's light commercial, and we would be very optimistic for 2016 and 2017 for light commercial in Utah.

Looking at the other markets the Kansas, Missouri, Kentucky we are certainly seeing some growth in light commercial and would probably not be as strong as what we're seeing pretty much across Texas and Utah but still we're seeing some increase in activity there.

Trey Grooms

Okay. Thanks for that, Tom, appreciate it. And then, I guess as my follow-up and may be this is for Brian I don't know but as we kind of look at the guidance and we think about there might have been some weather in the 4Q that created some pent-up demand that type of thing. Is there anything that we should be making note of when we are thinking about kind of the quarterly cadence that's embedded in that guidance any large projects or anything at all that would help us out on how to kind of think about that quarterly allocation there?

Brian Harris

Yes, I would say that the biggest thing in the quarter-to-quarter guidance is always weather. And it's pretty hard to predict. So I would just say that we see more of the same in 2016. We see underlying demand really not changing a whole lot in 2016 versus 2015. We see Utah a little stronger especially on the single-family residential. We see highways in Texas, very, very strong, and they were strong in '15 and they will be probably even stronger in '16. But, really, we sort of see more of the same. So I wouldn't see the quarterly split changing a whole bunch from 2015 weather dependent.

Tom Hill

Yes, Trey if you go back into the supplementary data, you're going to see the quarter by quarter profile of the business, by line of business for revenue and margins. And I think that will give you a pretty good indication of the cadence, at least to the seasonality that's typically embedded in our business.

Operator

Our next question comes from the line of Stephen Kim with Barclays. Please proceed with your question.

Stephen Kim

Yes, thanks very much guys. I guess first question you talks about your capital or speaks to your capital allocation priorities. I -- we obviously know that you're still planning on -- you're still targeting growth through acquisition even you're not taking your forward guidance; we fully expect that to continue. But I would also think that perhaps there is some sentiment on the marketplace that given some of the macroeconomic concerns that have intensified and some of the disruption in the credit markets that perhaps may be your thresholds for evaluating acquisitions may have changed or perhaps you may possibly considered increasing the prioritization of perhaps even debt pay down or applying your cash in a slightly different way. So if you could speak to whether any of the changes we've seen in the macroeconomic front or in the equity markets and credit markets have altered in any meaningful way, the way you look at evaluating or applying your capital?

Tom Hill

Certainly we have taken note of the, both the equity and the debt markets. However we do see the continuation of our existing strategy, our high yield bonds have actually traded fairly well in the last several months. And, we see not only do we have existing liquidity, which I'll let Brian touch on. But I do think, as far we're concerned the -- that we still have the ability to look at the high yield market. That said we are very careful in our evaluation of targets. Our deal flow is exceptionally strong now and we are certainly redoubling our efforts to make sure that the acquisitions that we do are value added and we are just making sure that we're continuing to with our -- sort of our proven acquisition strategy.

We don't really see a reason to change that. If the cost of debt goes back, surely you have to look at higher returns, acquisition still reflects that. So we obviously bake that in. But we do see a continuation of our existing strategy. Brian, do you want to touch on where our existing liquidity is?

Brian Harris

Yes, so, as we mentioned in the conversation at the start, we have a -- we did upsize the bond that we had in November $300 million that put a decent amount of cash on the balance sheet, we had $186 million at the end of the year, we were undrawn on our revolver, and we used cash on hand to close the AMC deal that we just announced. So we feel that we have ample liquidity to continue with the strategy and to fund the internal CapEx and the organic growth that we're pursuing as well.

Tom Hill

Yes, one other thing, Stephen I would mention there is, we do pay a lot of attention to where we are in the cycle. And at 1.1 million housing starts, the non-res recovery is only in my mind is only 18 to 24 months old. We still believe that we are in the early stages of this construction market recovery. If we -- if that shifts -- if our belief changes that we're later on in the cycle certainly that would impact our acquisition strategy.

But sitting here today with really no slack in any of our construction markets with the new Highway Bill, with states raising extra money, I still see us in the early innings. And that said I think it's a great time to grow by acquisition.

Stephen Kim

Yes, no, I appreciate those comments very much, and certainly the Highway Bill provides a lot of tailwinds for many years. But I want to touch on as a follow-up your comment about the pipeline being particularly strong and your comment about the cycle because one of the concerns that obviously exists out there is that on the resi side at least Texas perhaps as a state and just be nothing moving beyond Houston. But just sort of Texas as a state it's been so strong that it actually isn't looking as early cycle in the state again taking the infrastructure side of it out. And so as you look at your pipeline and you look at the robustness of it, can you share with us perhaps what kind of geographic distribution or dispersion are you seeing in your pipeline, are you seeing about an equivalent kind of waiting towards opportunities in Texas or are you primarily going to be focused on other areas of the country?

Tom Hill

Our deal flow in Texas right now is probably limited. And I think when we look at Texas though and you look at where you are in the cycle, you can you may be past mid-cycle in res, in the middle part of the state, and so on, but you can't ignore the Highway market which is just on fire, they just had a letting the last two days, very large lettings, it's an important part of what you would look at in Texas is Highways.

We certainly would be interested in expanding our footprint in North and South Carolina, Virginia that area. We like the Northwest. But we always -- our first priority is really always to add on to our existing regions. They tend to be the safest and low at risk. But we look at new businesses and new platforms at a time but we have to really find a way to add value to make those work.

Operator

Our next question comes from the line of Brent Thielman with D.A. Davidson. Please proceed with your question.

Brent Thielman

Tom or Brian, a question on the aggregates margin specifically is there a way to frame how much of that huge improvement comes from volume growth and pricing versus some of the deals you've done which might contribute higher margins, is it kind of a 50:50 split; is that fair?

Tom Hill

I think we have that split out on the charts in the deck there. If you look at the -- I'm going to give one dip to the Slides that we have there. On the volume trends in aggregates about half of it in the quarter was from organic and the other half was from acquisitions, so roughly 50:50 there. On the price side, we're now kind of go past the anniversary of Mainland which is reported on previous calls was a lower price market. So you see that the organic and the total pricing beginning to merge together there and we don't have that shortfall in total that we had in the past. So both contributing but on a volume basis it's split roughly 50:50.

Brent Thielman

Okay, great. And then, Tom, when you look at the business today, the portion of profits to materials versus your kind of products area to services is this a late mix going forward, do you feel the business is still kind of underlevered in the materials?

Tom Hill

No I like the mix we have now. And we like the downstream where we have really strong materials position in well-structured markets. I think it could go up and down slightly over the next couple of years depending on the deals that we close. But I like where we are and I like the vertical as I've said many times I think it is with the right materials position that vertical adds really adds value.

Operator

Our next question comes from the line of Rob Hansen with Deutsche Bank. Please proceed with your question.

Rob Hansen

Thanks. I just wanted to revisit the guidance a little bit, if you kind of put in the volume assumptions that you have thrown out there call it 6-percent-ish and then you assume some of the pricing trends kind of continue as well. It would seem like your margins you're not including any at really any margin expansion kind of embedded in your guidance is that the right way to think about that. And then kind of related to that, what you consider kind of normalized incremental margins in the cement versus the aggregates now that you kind of broken that out?

Tom Hill

Well the aggregates incremental margins were 74% for 2015. They are a bit lower for cement. But in total the overall was 50%, I think it's 57%. So would expect those kinds of incremental margins to be maintained going forward.

In terms of the guidance number, yes, we've maintained our assumptions on volume and price into that guidance; say we don't give specific numbers for those. But the trends that we've seen in the 2015 year are expected to broadly continue albeit there could be variances from one location to another.

Rob Hansen

Got it, okay. And just on the leverage part I think you talked a little about this before, you met your goal, you're below four times, you've got a good cash balance here, if you kind of -- if you hit your guidance let’s say you add another $30 million on EBITDA you wind down somewhere kind of may be 3.5 or below at the end of '16. Is this kind of what you’re targeting for the kind of future leverage ratios here?

Tom Hill

We don't have a specific target for leverage. We are obviously comfortable at where we are now but with larger deals could pop up, like it did last year with Davenport but we would have to be comfortable that it would get at least down to where it is now by the end of the year. So that's sort of we're very comfortable where we are now and I'd say again that just adds to the whole idea of where we are in the cycle. If we were later in the cycle, I believe we were later in the cycle we would want to be at a lower leverage. But where we are now that moderate level of activity both in the res and non-res and with that the Highway program, we believe that the leverage we have is appropriate for our growth story.

Brian Harris

And it will come down, Rob naturally to the organic growth and the EBITDA. So if we did nothing, we would be down into the 3 to 3.5 range by the end of 2016. So it's just as Tom said, we would allow to increase temporarily if we saw the right opportunity providing we could see long-term pathway to continue to reduce it overtime.

Operator

Our next question comes from the line of Adam Thalhimer with BB&T. Please proceed with your question.

Adam Thalhimer

Hey, Tom you have been in this long-time, have you ever in terms of where you are in the cycle, have you felt likely early and then six months later realized it we're actually late?

Tom Hill

You don’t know I mean I think the biggest mistake what I look historically is in '06 and '07 we knew we were past mid-cycle and there we’re heading into a decline. We just had no idea of the extent of the decline. I’m not sure many people did. But you can say I mean 1.1 and 1.15 million housing starts in the U.S. is very low from a many decade, view. We may never ever see $2 million again and I do think we’re going to see $1.5 million, $1.6 million over the next few years.

And then for non-res, on the non-res the aggregate intensive non-res that we participate in has really only started to see additional shipments really from late '14 to second half of '14. So I can’t believe that we’re not going to have a four to six year non-residential cycle that’s where I feel we are and it still feels early cycle to me. And I’ve seen a number of cycles, I can say that.

Adam Thalhimer

Good, appreciate that. And then on the finance side there was some talk of in the Southern River markets may be rising prices in January, I’m just curious if that happened and if so how that played out the marketplace?

Tom Hill

Limited success in the summer, in the southern river market. We have not seen any -- we are a consumer in Houston, we have not seen price increase in Houston as of now. So I think a lot of those price increases have been deferred till April 1.

Operator

Our next question comes from the line of Ted Grace with Susquehanna. Please proceed with your question.

Ted Grace

Brian, is there any chance you could just give us a bridge on the 74% incrementals for the aggregates business, just to the degree you can dissect, kind of what pricing contribution was volumes and then cost dynamics, specifically calling out the benefit of diesel in the year?

Brian Harris

While there's a lot of factors diesel goes across obviously more than one line of business, but maybe if I go to deal with diesel first of all, I might be the -- to simply say, that this just doesn't impact aggs, that it affects that whole business. And on our core volume we -- over the total year, we had a saving on diesel about $13.4 million. Obviously, we had some increased volume usage and then we had some acquired business. So our total spend was actually up by a $2 million, because of the acquisitions that we made. But actual savings from price reductions was about $13.4 million.

In terms of the split of the business, again, I'd refer you back to the price and volume schedules that we've got there for the aggregates. We've got into all the lines of business there. And Slide 14 shows the volume. The aggregates was organic 4% and total 8% on volume in the quarter in year-to-date 5% and 27%. And the bulk of that 27% came from the acquisitions in the west. So we added obviously LeGrand and Johnson and Johnson halfway through the year, so that was a driver within there.

What's the third part of your question, Ted? Can you just remind me again?

Q - Ted Grace

Yes. Just the other cost factors that we should think about in that EBITDA bridge?

Brian Harris

Well, there is a lot of -- I mean the main drivers on the margin are the volume and the price. Obviously, we had a -- on the aggregates we had about another $12 million to $13 million of variable cost and that's predominantly going to be energy related. The other driver, business labor is relatively benign on inflation, runs at about 2% for most of our businesses in 2015. And then no other real big factors outside of that.

Ted Grace

And could you quantify kind of the carryover benefit, like where did you exit on a per gallon basis on diesel just so we can think about what that carryover benefit is in '16?

Brian Harris

Yes. As you know, what we do is we buy about a month at a time a year in advance. So we've already purchased about 15% of our 2017 requirements and locked in it at $1.64. For 2016, we've got about 60% of our requirements a little over $2. So there will be a carryover. And the balance that we buy obviously will be at spot prices and that can cause some variability there overall. But for order of magnitude we'll consume about 20 million gallons of diesel in 2016.

Ted Grace

Okay. And then the only I got to squeeze it in, the EBITDA range $325 million to $345 million, could you maybe just give us kind of some handholding on what would be the biggest influences of where you fall in that range, whether it's mix, is it more volume dependent or pricing realization dependent, is it cost that you have that time seeing, just any kind of framework there will be helpful? And I'll jump back in queue.

Tom Hill

I mean the risks out there would be in ready-mix pricing, would be -- we haven't seen any weakness in that at all. And we're quite optimistic, but that's certainly a risk. I think weather stroke demand would be another risk. We -- I think there is probably upside in Utah demand, we're seeing that market really start to pick up some speed. Brian, what?

Brian Harris

And cost is not really going to be one of the factors that would drive a movement within the range. I think we -- cost passing is relativity well-established to this point.

Ted Grace

Okay.

Tom Hill

Yes. We're well along on our integration of Davenport, that's going quite well. We think we have a world class cement business now in the upper Mississippi. And so we're very optimistic for that producing a good return this year.

Ted Grace

Okay. Well, that's really helpful. Thanks a lot. And best of luck this quarter guys.

Tom Hill

Okay, Ted.

Operator

Our next question comes from line of Robert Wetenhall with RBC. Please proceed with your questions.

Collin Verron

Hi, this is actually a Collin filling in for Bob. Just a quick questions touching on the capacity utilization in cement industry again. You previously indicated that you have full capacity in Davenport. You've 150,000 tons in Hannibal remaining. Do you guys have the ability to add any capacity at the Hannibal plant? I know you said you may have extra line. And what would give you confidence in to increase that capacity again, how much would that cost?

Tom Hill

Yes, we do have the capacity to -- or we do have the ability to double all capacity at Hannibal. To do that is about a $400 million expenditure. We are doing the engineering and fermenting it at the moment. We would have to obviously see a pickup in demand. It's a very large expenditure for a company our size, so we would probably want a partner, primarily someone who can guarantee some off take because every time I do a large capital project it tends to get commissioned an hour and a half before the downturn. So we want to protect ourselves on that. I think it's something that we are looking at very seriously. But we're very cautious about taking on a project of that size.

Collin Verron

Great. And then just a follow-up on a cement business. You noted in press release and in your commentary that you had some large maintenance and repair expenses given the timing. Can you quantify that? And then also, would you expect that to be a normal pattern going forward or would you expect it to be spread out throughout 2016? Just any clarity on that would be great. Thank you.

Brian Harris

Yes, so it -- the difference, Collin, was that that it's how in the fourth quarter and not in the third quarter it did in the prior year. So it was just the timing issue. We typically take a cement plants down twice a year. It's for major repair maintenance. The amount that we end up spending is generally depends on what you find sometimes when you take a plant down. Obviously when it shutdown we take advantage of that opportunity to do any major overhauls and repairs that are need. So the fourth quarter really just a timing difference from the third quarter, but nothing extraordinary unusual in terms of the amount of the spend.

Collin Verron

Great. Thank you.

Operator

Our next question comes from the line of Stanley Elliott with Stifel. Please proceed with your question.

Stanley Elliott

Hey, good morning guys. And congratulations on the nice year. Quick question on the guidance. Just for clarification purposes, the $308 million of further adjusted EBITDA that does not include the American Materials; is that correct?

Tom Hill

Correct.

Brian Harris

Correct.

Stanley Elliott

And then could you give us a pro forma liquidity you're both following American Materials? And also maybe a little flavor on what the dollar amount of a cement maintenance activity might be in the coming year? Thanks.

Brian Harris

Yes. On the liquidity. After AMC, we still have undrawn on the revolver, which is still $210.6 million, that's a $235 million revolver with about $24 million used for LCs.

And then on the cash, we had $186 million at the end of the year. As of today, would be right around at about $115. Obviously, we've consumed some cash for working capital and CapEx as well along the way.

Stanley Elliott

And then the estimated maintenance spend on the cement?

Brian Harris

I can't give you a number off the top of my head. I'll have to come back to you, Stanley, you're looking for annual -- the total annual spend?

Stanley Elliott

Well, just trying to get flavor for kind of the cadence and then also the dollar amount since it's kind of twice a year two large outage?

Tom Hill

Yes. And the big ones tend to be in the early part of the year, those are the major shutdowns. The fall, early winter shutdowns tend to be very short. So again, that can vary. But we'll get you, Stanley, some more information on that.

Stanley Elliott

Okay. That's fine. Thanks guys. And best of luck.

Tom Hill

Okay. Thank you.

Operator

Thank you. Mr. Hill, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Tom Hill

Thank you, operator. And thanks everybody for joining us today. We look forward to speaking with you again in the near future.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for participation. And have a wonderful day.

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