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Summit Materials Inc
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Greetings, and welcome to Summit Materials First Quarter 2019 Earnings Conference Call. At this time, all participants are in a 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 your host, Brian Harris, Chief Financial Officer for Summit Materials. Thank you. You may begin.
Good morning. This is Brian Harris and I would like to welcome you to Summit Materials first quarter of 2019 results conference call. We issued a press release before the market opened this morning detailing our first quarter results.
This call will be accompanied by our first quarter 2019 investor presentation and an updated supplemental workbook highlighting key financial and operating data, both of which can be found in the Investor section of our website.
I would like to remind you that management's commentary and responses to 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 of the factors that could cause actual results to differ, please see the Risk Factors section of Summit Materials latest Annual Report on Form 10-K which is filed with the SEC.
Additionally, you can find reconciliations of the historical non-GAAP financial measures discussed in today's call in this morning's press release.
Today's call will begin with remarks from Tom Hill, who will provide an update on our business and market conditions, and then I will provide a financial review.
At the conclusion of these remarks, we will open the line for questions.
And with that, I'll turn the call over to Tom.
Good morning, everyone, and thank you for joining our call.
Turning to Slide 4 of the presentation. Net revenue grew at 5.5% supported by both organic and acquisition growth. Our aggregates based businesses in particular performed very well with mid single digit organic volume and price growth.
Adjusted EBITDA grew by 19.5% supported by topline growth and stabilizing costs. Excluding the impact of acquisitions, adjusted EBITDA decline by 9.4% primarily due to record flooding on the Mississippi River and it extended winter shutdown which negatively impacted our cement business. However, our vertically integrated businesses on an organic basis more than offset this demand under performance.
With respect to acquisitions, our pipeline has slowed a bit, but it remains active with several opportunistic transactions where we believe we can add meaningful value. Our aggregates greenfield opportunities are progressing and although these sites take time to develop. They are expected to generate superior long-term returns.
Turning to Slide 5. Our view on the U.S. construction cycle and anticipated demand across all end markets remains unchanged from our February update. We continue to be encouraged by local market dynamics and the fact that U.S. aggregates and cement consumption are still well below peak levels and long-term trend lines.
On the residential side, we continue to see stable growth in our markets supported by high employment, low interest rates and reasonable affordability. With respect to nonresidential demand, the positive momentum over the last few years is continuing into 2019 as expected. Looking further ahead, FMI forecast U.S. nonresidential construction spend to grow at a 2.9% CAGR through 2023. Importantly, we do not see overbuilding in the markets we serve.
On the public side, the funding outlook remains positive both at the federal and state level. At the federal level, highway funding will approach $50 billion in fiscal 2019, up notably from the past few years and there has been some recent positive by partisan dialogue in Washington DC around a potential new infrastructure package which is encouraging.
At the state level, a vast majority of states have implemented their own self funding mechanisms over the last few years. As a result, the lettings in several of our key states continued to hit record levels in 2019 and are up over 30% in the last five years. We are also seeing the impact of pent-up demand with weather-related maintenance demand following the harsh winter in several of our states which is reflected in our improved asphalt and paving backlog.
Looking further ahead, ARTBA forecasts U.S. highway bridge and tunnel construction spend to grow at a 2.4% CAGR through 2023 without any additional help from Washington.
Turning to Slide 6. The prolonged flooding in the northern Mississippi River region due to higher than normal snow packs and significant spring rains has created challenges to start the year. The river north of our Davenport, Iowa plant typically opens the barge traffic by mid March while the river south of our Hannibal, Missouri plant is typically open year round. Currently both north and southbound barge traffic remain shut based on the most recent U.S. Army Corps of Engineers forecast both are expected to open later this month.
We continue to service our customers by shipping by rail and truck, which are considerably more expensive than barge and these challenges have continued into Q2. Despite the poor start to the season, underlying demand remains strong in the river region.
Turning to Slide 7. Our strong aggregates performance helped offset the cement shortfall. The east region experienced strong double digit aggregates volume growth and high single digit aggregates pricing growth. East region ready-mix and asphalt were slightly behind prior year due to some wet weather in Kansas and Missouri.
However, these Q1 volumes are a very small proportion of our annual volumes. In the west region, solid aggregates demand drove improve productivity and lower costs and supported mid single digit pricing growth. Although ready-mix volumes in the intermountain west were lower, we expect the balance of the year to benefit from pent-up demand. West region asphalt demand is accelerating with double digit volume growth in Q1 supported by increased third party sales.
Turning to Slide 8, for the year, it is unlikely that cement will be able to recover the expected $6 million to $10 million adjusted EBITDA shortfall resulting from the heavy flooding, extended winter shutdown and late start to the season. However, we expect continued strong aggregates pricing and some pent-up demand in our region to offset this expected shortfall. As a result, we are reaffirming our guidance of adjusted EBITDA in a range of $430 million to $470 million.
With that, I'll turn the call over to Brian for discussion of financial results.
Thank you, Tom. Turning to Slide 10. I would like to start with the revenue bridge from Q1 2018 to Q1 2019. In the west region a slower start to the season resulted in a small decline in organic revenue which was partially offset by growth from acquisitions. Revenue growth in the east region was the largest driver and as well balanced between organic growth and acquisition related growth. Revenue from cement was essentially flat year on year.
Turning to Slide 11. You can see our adjusted EBITDA bridge from Q1 2018 to Q1 2019. In the west region, we reported a year on year decline of about $2 million reflecting the slow start to the construction season, particularly in the intermountain west, which represents one of our largest ready-mix locations.
In the east region, we saw a positive start to the year with adjusted EBITDA increasing organically and through acquisitions by $4.9 million and $1.5 million respectively reflecting improved aggregates, volume and price. The largest negative to our Q1 performance was in our cement segment where production output was reduced to as an extended winter shutdown. The net effect was an overall increase in adjusted EBITDA of $1.1 million and while this is positive relative to the prior year, it just immaterial in the context of the full year.
Turning to Slide 12. Here we show the key GAAP financial metrics. We reported a basic loss per share of $0.62 compared with the prior year basic loss per share of $0.49. With the decline being attributable to the loss on debt financing of $14.6 million and this also contributed to the year on year increase in net loss.
Turning to Slide 13. You will see that our adjusted cash gross profit margin for the first quarter declined by 150 basis points to 21.5%. And our adjusted EBITDA margin increased by 30 basis points to 2.2%. It should be noted that due to seasonably low volumes in the first quarter, the margin percentages can be somewhat distorted. The LTM margin declines in both the cash gross profit and adjusted EBITDA are largely reflective of the decline in cement margin, partially offset by an improvement in aggregates margins.
Turning to Slide 14. You will notice that average selling prices in our aggregates line of business showed a significant improvement over the prior year, both organically at plus 6.3% and in total at plus 7.7%. The slight decline in average selling price in cement was due to a shift in the geographic and customer mix during Q1 which was related to the fact that shipments into the northern markets were delayed.
Volumes in aggregates were also significantly improved over the prior year with a 6.6% organic growth and inclusive of our predominantly aggregates based 2018 acquisitions, we reported a 15.8% year on year increase in total. Cement volumes were marginally better, although it should be noted that there were a distribution challenge on account of Mississippi River flooding, which significantly restricted barge traffic.
Ready-mix volumes were negatively impacted in Utah, one of our largest markets due to a severe winter. Ready-mix prices were slightly ahead of the prior year, but annual price increases do not come into effect until Q2 and we continue to have a positive outlook on price realization. Asphalt volumes were higher by 20%, albeit from a seasonally low base.
As we have discussed on prior calls, our 2019 annual cement price increases went into effect on April 1. With the Mississippi River close to barge traffic both northbound and southbound from our plants in Davenport, Iowa and Hannibal, Missouri, it is still too early to provide a good read on the realization of the announced price increases. But we remain optimistic that 2019 will show improvement over 2018.
Turning to Slide 15. As we discussed earlier, although consolidated gross margins were lower year on year, we did see signs of our recovery in aggregates. As volume trends and annual price increases gain traction throughout the year, we would expect to see margin expansion in the other lines of business as well.
Turning to Slide 16. During the first quarter, we continued to focus on balance sheet management and maintaining adequate liquidity in the business. We expanded our revolving line of credit by $110 million to $345 million and extended the maturity to 2024. Seeing a significant improvement in the high yield market, we took the opportunity to refinance our 8.5% notes with a new tranche of $300 million, 6.5% notes extending the maturity to 2027 and lowering our annual interest costs by approximately $1.5 million.
As anticipated, our leverage ratio increased during Q1 reflecting the higher level of capital expenditure, which occurs during this time of year, which depleted our cash balance from $128.5 million to $64.8 million, thereby increasing our net debt and resulting in a leverage ratio of 4.8 times. At the midpoint of our adjusted EBITDA guidance, we expect our net leverage at the end of the year to be below four times.
For quarterly modeling purposes in the remainder of 2019, SG&A should be in a range of $65 million to $68 million, DDNA should be in a range of $48 million to $50 million and interest expense should be in the range of $28 million to $30 million. We anticipate paying minimal state and local cash taxes and no U.S. federal income taxes.
Finally with regards to total equity interest outstanding, as of March 30, we had a weighted average of $111.8 million Class A shares outstanding and $3.4 million LP Units held by investors, resulting in total equity interests outstanding of $115.2 million and this is the share count that should be used in calculating the adjusted diluted earnings per share.
And with that, I'll turn the call back to Tom for closing remarks.
Thanks Brian. Turning to slide 18. In summary, we see stable underlying U.S. economic growth continuing to support broad based demand across all our end markets. Our price increases are gaining traction especially in aggregates which were up 6.3% organically in the first quarter.
In addition, cost inflation is stabilizing particularly for diesel and liquid asphalt. As such, we are reaffirming our full year 2019 financial guidance with adjusted EBITDA of $430 million to $470 million. Capital expenditures of $160 million to $175 million and year end 2019 net leverage below four times.
With that, I'd like to turn it over to the operator for questions. Operator?
Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Nishu Sood with Deutsche Bank. Please proceed with your question.
Thank you. Wanted to start off on the aggregate side, obviously some nice strength showing there. And a couple things I just wanted to ask around what might have influenced to 1Q trend, some other folks in the business have spoken of a project from last year that were delayed until this year that might have benefited. Also, the weather in some of your important regions like Texas was much better than it has been in prior years. So might there have been some pull forward.
Just wanted to understand and then also weather probably would have weighed things down, so what kind of negative effect, just want to understand the puts and takes to try to get a sense of the kind of sustainable momentum that is indicated from 1Q.
Thanks Nishu. Yes, I think we've got a good start to the year in our aggs business, we're seeing good underlying demand, certainly some pent-up demand in the middle part of the country, which is a result of some projects being delayed. But probably more importantly for us is, it was a pretty rough winter and towns and counties have to start repairing roads in March. So we've seen that. We are continuing to see that in Q2.
So we're very optimistic about our underlying demand for aggs. I would say we're even more optimistic on pricing. We've had good success through Q1 and again seeing that continued into Q2. The weather – I would say the weather overall outside of the issues we've had on the northern Mississippi. The weather has been sort of normal. It rains a lot in the spring. So I don't think we've had – I think the weather is probably comparable to last year where we really ran into trouble with weather last year was more late summer and fall.
So I don't think weather had a lot of impact on what our business was in Q1, but overall I would say our aggs and actually our whole vertically integrated model going into the season this year, we'd be very optimistic about.
Got it. Great. And shifting over to cement, obviously a lot of focus on cement and the disruption to that business. You mentioned, I think a $6 million to $10 million EBITDA impact versus, I believe it was versus your expectations. We can see that in the EBITDA, waterfall chart last year to this year, but revenues were flat in cement year-over-year.
And obviously last year was a pretty depressed comp, so just wanted to understand the main components of that $6 million to $10 million shortfall versus your expectations. Was that mainly in the additional transport costs or just want to understand that since the revenues were flat on a year-over-year basis?
Yes, in Q1 about two thirds of the $6 million shortfall were from extended shutdowns. We had some issues at both plants, Hannibal was down a couple of extra days and Davenport was down, I think, 17 more days than we expected.
And then one third of it in Q1 was the additional freight cost servicing our customers even though the river was shut. So our rail and truck freight is significantly more expensive than barge. We see the river issues have continued into Q2 and could be up to an additional $4 million.
Interestingly though offsetting that, we've seen a real uptick in aggregate sales in Missouri, basically selling to repair the levees. So yes, bad news in cement, but on the aggregate side, we've picked up quite a number of orders that are helping to repair the damage that the floods have done.
Got it. Thank you.
Thanks Nishu.
Thank you. Our next question comes from the line of Trey Grooms with Stephens. Please proceed with your question.
Hey, good morning.
Good morning, Trey.
First question I guess is on ready-mix, it was pretty tough in the quarter. Can you talk about some of the drivers there around the outlook, excuse me, around the ready-mix business and your outlook there. I know Houston is an important market for you as well. And it sounded like one of the other players in that market was talking pretty good about the demand there as well as potential for pricing and things like that in that market, any color you can give around ready-mix and then specifically around Houston?
Yes. Our two main ready-mix markets are Houston and the front range in Utah. Utah had a very tough winter and a very late winter. So the shortfall on volumes is really due to the winter in the intermountain west. Houston I would be – we were okay in Q1, we see volumes picking up there. We see that economy very strong, price increases on the ready-mix side seem to stuck both in Utah and in Houston. So we should see improving volumes and margins in ready-mix as the year progresses.
Okay. Thanks for that. And then, I guess the second question would be just with all the weather that you talked about in the Midwest, and some of this kind of creeping into or some of the impacts kind of creeping into 2Q as well on the cement side. Is there any guidance you could give us on how to think about maybe the cadence that you guys have baked in understanding 1Q is seasonally fairly unimportant, but then once you start getting it into 2Q and the building season starts to really come in. Could you give us any kind of color on how that would be thinking about the cadence this year, given the backdrop of weather?
Is that of an EBITDA standpoint, Trey?
Sure. Yes, that'd be fine.
Do we have the percentages of those, Brian?
Yes, we don't really guide to the quarters. And Trey, it’s Brian here, but obviously the season picks up steadily from April. So Q2 is significantly stronger than in terms of the cadence in Q1, and then Q3 is our biggest quarter of the year. Q4 can be quite a big quarter, but obviously the weather begins to change as we get closer to the end of the year. And so we would expect – and obviously we have our price increases, many of them going to effect in April one as well. So the business just ramps up through Q2 and Q3.
Yes, there shouldn't be any major differences, versus history Trey, until we really get into the third and fourth quarter where weather really impacted us last year. And I think that's what you'll see. Q2 for instance, I think the additional aggregate volumes in Missouri may offset completely the cement shortfall. We've picked up some very nice riprap and other aggregate orders. So we're hoping to be on track in Q2.
All right. That's very helpful. Well, I'll pass it on. Thanks a lot and good luck.
Okay, Trey. Thanks.
Thank you. Our next question comes from the line of Kathryn Thompson with Thompson Research Group. Please proceed with your question.
Hi. Thank you for taking my questions today. On cement to clarify where the cement disruptions related to the accelerated maintenance CapEx or more non-routine cost and in light of flooding, could you give any color on cement inventories this year versus last year?
Yes, there were non-routine costs. We had a cooler fan fail at Devonport, which was completely unexpected. And also a feeder belt that went down at Hannibal, which was much shorter, but the cooler fan was a major disruption caused an extra 17 days at Davenport. Cement inventories, we have had to cut back production with the issues on the river, as we can't – if he can't ship you just run out of room. We are back up and running though at both plants now we expect the river to clear probably next week in Hannibal and a week after in Davenport. So we should be back in full swing over the next few couple of weeks.
Just to clarify your inventories aren't necessarily higher year-over-year?
They are about consistent, but we certainly had to cut back production in order to do that.
Okay. Thank you. And then on aggregates, for much of the industry we've seen in some others public companies have confirmed that there just wasn’t as much inventory build this year versus last year, which is respective for future pricing. Wanted to see – did you see a similar trend with your business? And also could you give more color on the mix of Baystone in Q1 versus [indiscernible]? Thank you.
We haven’t seen much change in inventory at all Kathryn. It’s been pretty consistent. However, a little bit different than the industry, we actually had a pickup in Q1 in Clean Stone and not a very large increase, we had an increase, but less of an increase in Baystone than we did Clean. Q1 for us is pretty insignificant so that's really not particularly meaningful. As the year progresses, we'll see how that mix works out. But really Q1 is so small that that's not that meaningful data point.
Excellent. All right, thank you very much.
Thanks Kathryn.
Thank you. Our next question comes from the line of Stanley Elliott with Stifel. Please proceed with your question.
Hey guys. Good morning. Thank you for taking my question. Everything that's going on in the cement business, how do we think about incremental this year given kind of the higher cost, some of the delayed shipping costs, just trying to kind of parse out what to think about that, especially with the lower input cost, it feels like?
Well, the underlying demand is quite strong price so we should see some volume growth, assuming the river opens over the next couple of weeks. As far as margins go we're going to – our price is going to be better than last year, for sure. And costs are pretty stable. I mean, that's one of the real encouraging things about Summit overall when we look, versus what was a very disappointing 2018. We certainly see cost stabilizing and outside the cement industry – outside the cement business especially, we see prices accelerating. So we should see some significant – real prices increasing in our vertically integrated businesses this year.
As far as exact incrementals, Brian, any thoughts on incrementals in cement for the year?
Yes Stanley if you look at the LTM trend on our gross margin, you can see that at the end of Q1, primarily as a result of a very low Q1 only 3.1%, we trended to 42 last year we were 48. We would expect start to steadily see the margins improve as we get beyond this flood disruption and into the full swing of the season. So I would expect the margins to expand over the balance of the year back into similar level to last year.
Perfect. And then kind of thinking about the CapEx spend, I mean, can you parse out kind of the growth CapEx versus the maintenance piece if you wanted to or care to. And should we think about kind of next year I know you don’t want to give CapEx guidance necessarily for next year. But maybe kind of give the puts and takes between acquisitions versus some of the more kind of greenfield operations you've been working on it since those have been so successful?
Yes on the CapEx for this year it's got less growth or development proportion in it than it had in the prior year. Obviously we had a number of big projects in 2018 including the big one up in Mainland Vancouver, [indiscernible] expansion. So we see a return to the more normal split, if you will, about 70% maintenance, 30% growth or cost reduction type projects in 2019. The start of the year is typically when we do a lot of the maintenance replacement of worn out equipment in readiness for the start of the season, so the first four to five months of the year when we do the bulk of that spend. And that's really the pattern that we have this year.
Perfect. I appreciate it.
Yes, on deals, our deal flow it's a little slower than it was a year ago. Obviously given our leverage, we're being very cautious in our acquisition spend, still think that we would hope to do some over the next, 12 months to 18 months. We do have a few greenfields in the hopper that we've been working on for a number of years, pretty unpredictable when they will come through. And also what the capital will be required for them. We would hope to get one greenfield in a year over the next few years. Most of them are in the southeast U.S. and Georgia, north and South Carolina, which are obviously very good aggregate markets.
So pretty unpredictable, Stanley so we're hoping that some of those come through – or at least one of them comes through each year for the next two or three years.
Great guys I appreciate it.
Okay, thanks.
Thank you. Our next question comes from the line of Adam Thalhimer with Thompson, Davis. Please proceed with your question.
Hey, good morning guys. I wanted to ask about asphalt that growth was pretty exceptional there. What's your thought on the sustainability of volume growth in asphalt this year?
Well again, Q1 is so small that I'm not sure that the growth is that meaningful. We've had good growth in the West and picking up a few third party customers which, we do – we lay most of our own asphalt, but we have picked up a couple of good customers, especially in Texas on the third party side. Our big asphalt businesses are in Texas where the DOT is just letting, I think, yesterday and today there's $1 billion letting or $1 billion plus letting in Texas. So that's very strong, our backlogs are very good there. I think our backlogs year-on-year are up getting close to about 20%.
So yes we will – I'd be very optimistic that we will have some volume growth in asphalt. I think with cost stabilizing and especially hydrocarbon cost stabilizing, we should also more importantly see some margin expansion there.
Okay. And then in the east, Tom, the aggregates business, really strong, high single digit volume growth and pricing organic, is that an easy comp or is the market just that much better in the kind of east and southeast U.S.?
Well, we certainly saw in March some of that levy work start and that certainly helped. We have seen surprising strength in Kansas and in Kentucky. The Carolinas and Virginia have been okay and they're great markets, but they're off to what I would consider to be a normal start. And Kentucky, Kansas and Missouri were really off to a very fast start and that's continued into Q2.
Great. Thank you.
Thank you. Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.
Yes hi good morning everyone.
Good morning, Jerry.
I'm wondering, Tom, if you can just spend a minute stepping through the pricing cadence in cement. Sounds like you had wholesale versus retail mix this quarter. I'm wondering if you could share what the like-for-like pricing performance would have been.
And Brian, in your prepared remarks you mentioned it's too early to talk about pricing actions taking effect. Can you just say more? I thought the price increases were effective April. So can you just expand on that part of your comment too please?
Yes, I think it's more of a geographic mix in Q1 not wholesale, retail. We sold more in the southern part of the river system, which traditionally has a lower price. That's really the impact on the price to in Q1. The river still remains competitive. We were out with eight, or we were out with 10, everybody else came out with eight that certainly has deteriorated from there. We're going to have an improvement on last year's price increase, but it's just too early to tell as far as what the final number will be.
And Tom, in terms of the improvement on last year's pricing point, is it going to be enough to drive margin expansion for cement in coming quarters? Is it enough to offset inflation in some of these other costs that are moving around?
Our plants are incredibly productive. We have just a first class team there and with world-class figures from a productivity standpoint. Unfortunately the river being shut for a couple of – for really two months extra this year is going to add some costs. So I would hope that margins stay stable, but I doubt there's much upside because of that, not because of inflation.
Okay, and then angry it's really nice to see pricing re-accelerating this year across the industry. And I guess typically when we've seen pricing reaccelerate like this it's not just a one-year phenomenon. Can you just talk about how you see the pricing cycle playing up medium term and what are you seeing in your markets? I would account for the really strong acceleration this year and what that could mean for pricing carryover effect as we think about bags at rate for 2019?
Yes, I think, what you're seeing is typical of the number of cycles that I've been through. You see inflation one year and then the industry recognizes it and you get better price increases for a few years after that. We're certainly going to see that this year. We would hope – typically we see price acceleration through Q2. And then it's stable for the rest of the year. That can vary with individual jobs, and geographic mix, and so on. But that's typically the cadence. I'd be optimistic that that this continues for a couple of years. It has historically when the industry has been hit with inflation.
So again, I thought that’d be – I think I be pretty positive on aggregate pricing over the next few years as is typical for the industry.
Okay, thank you.
Thank you.
Thank you. Our next question comes from the line of Mike Dahl with RBC Capital Markets.
Good morning. Thanks for taking my questions. Wanted to start and stick with cement. You've mentioned that between the downtime at the plants and something is being less economic to ship by rail and truck versus barge. You've kind of lost some volume there, but the underlying volume remains strong. Can you give us a sense of just quantification, like what do you think that you’ve lost in terms of volume that you could potentially make up over these next couple of quarters?
Yes, we've actually lost very little volume Mike. Unfortunately, it’s just cost us a lot more to service our customers. And our cement team has done a great job of arranging both rail and truck to service the customers. We probably lost a little bit of volume, not in Q1, but we've probably lost a little bit, but not material in Q2. But when the sun shines we are really busy. The markets all the way from Minneapolis down in New Orleans – they're probably a little improved over last year. So we just – and I think there is quite a bit of pent up demand because of the poor weather in the second half of last year and really tough weather, especially on the northern Mississippi this year. So, we're optimistic on the volume side.
Okay, thanks. And then shifting gears to aggregates and forgive me if I missed this, but could you talk about the monthly cadence of organic growth as you went through the quarter and also how April shaped up?
Mike we don't really give a monthly data. Obviously as the weather improves, our volumes improve. Our aggregate shipments we tend not to comment on the existing quarter, but when the sun shines, we're very busy and very optimistic that we're going to see both solid volume growth and mid-single-digit price increases in the aggregate business for this year.
Okay. And I guess just to clarify, and I think, Nishu alluded to it earlier, but some others have noted kind of a strong start to the year from a year-on-year basis and then things have kind of normalized, so the exit rate was still healthy but lower for 2Q. Can you give anything on kind of directional? Has it been more consistent for you? That's kind of what it sounds like. [Indiscernible].
Yes they have been more consistent. There’s been nothing unusual in the volume cadence in our aggregate business, except for the extra levy work that we've picked up in Missouri.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Scott Schrier with Citi. Please proceed with your question.
Hi, good morning.
Hi.
Good morning.
As we look across your top five states outside of Kansas, which is split roughly fifty or fifty-fifty, you're public exposure is closer to 20% or 30%. I'm curious on two fronts. First, can you speak to your ability to participate more in the public market with the public market strength in some of these states? And then to a quick update on the public environment in Kansas and Missouri and I know you talked a little bit about Missouri, about some of the extra work there, but just some of the normal highway type letting there.
Yes I mean overall we're about a third into the highway market. In Kansas the business is about fifty-fifty. There will be an increase in highway spending, I think, it's $150 million less that they're stealing from the Highway Trust Fund there. So you're going to see an uptick. There has been a lot of discussion about additional funding sources in Kansas. It hasn't been – we haven't gotten anywhere yet, but I'd be optimistic that you'll see it at a minimum slowly growing highway in Kansas at a maximum the governor there has expressed the desire to redo the highway spending and to come up with a funding source, but it's still just discussion.
In Missouri we don't really have much highway exposure there. And that highway business is just stable. And they had a referendum get defeated last year. And again, there's a lot of discussion but no action on increasing funding. Kentucky, the same way because there’s Governor's race this year and the Governor has expressed the desire to get an increased funding bill. We'll see you on that one.
But actually we're seeing surprising strengths in our Kentucky business pretty much across the Board so far this year. But those three states really have not addressed the funding source, the funding for highways as opposed to our eastern businesses, the Carolinas and Virginia, Texas, Utah, Colorado, all of those states have additional funding sources. The industry is working away at increasing funding in those three states. And I'd be most optimistic in Kansas; secondly, Kentucky and Missouri seems to be a tough one. But we have very little exposure to highways in Missouri.
Thanks for that. And I wanted to ask you another one on your comments about the pipeline and understanding you're cognizant of your leverage and definitely being more selective on the opportunities that you pursue. Looking back you've talked about the hundreds of relationships you have over a long time. So are you sending [ph] that there's a reluctance to sell from some of these smaller type of relationships do you have, or is it more the pipeline slowing on your willingness to move forward with some of these deals?
It's a mix. There's certainly a number of people out there that – we have a good enough relationship to say, hey, could you wait six, twelve months. And certainly there's a number of them out there that I would say we're in that position. But I think that there was a surge in valuations or the level of valuations here over the last 24 months. And I think that the valuation expectation got ahead of where buyers were willing to go to and that slowed the pipeline pretty significantly.
Great, thanks Tom.
Okay, cheers.
Thank you. Our next question comes from the line of Garik Shmois with Longbow. Please proceed with your questions.
Hi, thanks. Coming out of the last earnings, I think you mentioned that you expected aggregates to return back to 2017 gross margin levels and you've made good progress in the first quarter with the extra volume that you're seeing coming through with the levy work on some other items that you mentioned, can you just speak to your confidence in returning margins for the whole year back to where they were in 2017 and if there's any mixed impacts that we should be aware of as you move towards that goal?
Yes, as I said earlier, we're quite optimistic about our aggregates business for the year and getting back to the higher gross profits is certainly a goal. I think the big thing – the two things for us is that our cost have stabilized and our prices have accelerated. And that should mean real price increases and margin expansion. Exactly where that turns out it’s still early in the year, but I do think we'll certainly see some margin expansion as the year progresses.
Okay. And then just from a high level, $6 million to $10 million of underperformance is cement being offset by the strength in aggregates. Just wondering if you could frame what the net impact is relative to your full year guidance. Should we assume that the midpoint assumptions net out and are broadly unchanged, or have you seen any shift in how we should be calibrating, I guess, the probability is hitting the low, mid or higher end of the full year guidance?
I still think that we're the same way we were three months ago. We think that the midpoint is still the midpoint. When you look at the offsetting were $6 million $10 million down in cement. The levy work in Missouri will be at least $5 million. And we certainly think we can make up the balance in the rest of the aggregates business. But it's early. I mean it's Q1, it's all to play for. But those would be why we reaffirmed our guidance and obviously reaffirmed our midpoint of 450.
Great. Thank you.
Thank you. Our next question comes from the line of Brent Thielman with D.A. Davidson. Please proceed with your question.
Hey, great. Thanks. Tom on cement I know you only usually get one price increase per year in the northern market, but just given all the noise you're in this spring, it sounds like a pretty good demand environment any shot we could see another attempt on price later in the year?
No, I'm sorry. I'm sorry to say. The northern markets just don't take a second price increase in my memory because the season is so short. In Minneapolis, the season shuts down in October, so you're really just don't have time. You need to give your customers a three-month or four-month lead time so that they can pass it on. And it's just really difficult to up north.
Okay. And then there's been some [indiscernible] related infrastructure projects and moving to bid stages in the Gulf. I guess are you seeing that, how significant could that be for you directly or indirectly, any thoughts there around particularly around your Gulf Coast business?
And you broke up there a little bit Brent, what type of projects were they?
Hurricane related [indiscernible] projects I guess in and around Houston.
Yes, I mean, we're seeing good demand. We've actually picked up more infrastructure work in our aggregate business in Houston than we've had historically. We have not seen the dollars flow into the hurricane mitigation, repair or whatever you want to call it, yet. They keep saying it's coming, but we haven't seen it yet. I think that that would just be upside for the second half of the year if that money does start flowing. But we haven't seen it, we haven't seen the work bid. The highway businesses, what we're participating in and it is very strong all across Texas.
Okay. Thanks guys.
Thank you. [Operator Instructions] Our next question comes from the line of Phil Ng with Jefferies. Please proceed with your question.
Hey guys. Your downstream margins were down a bit. It sounds like part of that was weather related volume weakness. And with asphalt costs a lot more contained. And it sounds like you're generally constructive on pricing for ready-mix. How should we think about margins for the segment for the remainder of the year?
In products we should – we will see better pricing than we did last year in ready mix and with cost stabilizing on the asphalt side, both of those should see margin expansion through, through the year.
Okay. That's great. And then, sorry, one last question on cement, the six million to ten million shortfall you called out on EBITDA, that was for the full year, not just one queue, right. Is that correct I guess?
Correct.
And given that headwind in some of the commentaries you said maybe less upside. Should we now expect EBITDA in that segment to be kind of relatively flat on a full year basis?
No, we would still hope to see some reasonable progress on EBITDA in cement.
Is there ability to kind of play catch up in the back half from a growth standpoint? It doesn't sound like you've lost much, but there's decent pent-up demand and obviously there's some transportation logistic bottlenecks on the river side of things.
Yes, we would hope to be able to make some of that back. Volume is – like I said demand seems to be quite good, our customers are optimistic and if we can get some – we can get the river open and get the sun shining, I think we can make some of that back.
Okay. Thanks a lot.
Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Hill for any closing remark.
Well, thanks everybody. And thanks everybody for joining. And that concludes our call. Everybody have a good day.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.