Summit Materials Inc

NYSE:SUM

Earnings Call Transcript 2018-Q3

[Operator]

Greetings, and welcome to the Summit Materials third quarter 2018 earnings conference call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now turn the call over to Summit management. Thank you. You may begin.

[Brian Harris, executive]

Good morning. This is Brian Harris, and I would like to welcome you to Summit Materials' third quarter 2018 results conference call. We issued a press release before the market opened this morning detailing our third quarter results. We also published an updated supplemental workbook highlighting key financial and operating data, which can be found in the Investors section of our website. This call will be accompanied by our third quarter 2018 investor presentation, which is available on the Investors 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 and subsequently filed quarterly reports on Form 10-Q, each as filed with the SEC.

Additionally, you can find reconciliations of the historical non-GAAP financial measures discussed on 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 through the first 9 months of the year, and then I will provide a financial review and outlook. At the conclusion of these remarks, we will open the line for question.

And with that, I'll turn the call over to Tom.

[Thomas Hill, executive]

Good morning. Thank you for joining the call this morning. Turning to Slide 4 of the presentation, 2018 has been a challenging year. We are encouraged by year-to-date organic volume and price growth across aggregates, ready-mix and asphalt, resulting in overall net revenue growth of 11.6%. In addition, Summit completed 13 materials-based acquisitions, expanding our geographic reach and strengthening our local market positions.

Despite solid demand trends in our public and private end markets, EBITDA has fallen short of expectations. Year-to-date, adjusted EBITDA was down 2.7% relative to 2017.

The construction season started slowly, and we expected to recoup that shortfall with accelerated volume and pricing gains in the second half of the year. Continued severe weather, with record-breaking rainfall in most of our markets, hindered that volume and price acceleration. We believe our markets were disproportionately impacted by bad weather relative to the rest of the U.S. Higher variable costs continued to impact the third quarter, and our late 2017 and early 2018 price increases were not enough to fully recover these costs in ready-mix and asphalt.

This has resulted in decreased expectations of full-year adjusted EBITDA from a range of $460 million to $480 million, to a current estimated range of $400 million to $410 million. However, with improved pricing, greater cost control and increased asphalt and construction backlogs, we expect a meaningful EBITDA recovery in 2019.

Turning to Slide 5, we bridged from our initial adjusted EBITDA guidance midpoint of $505 million to $405 million, the midpoint of our new range. The revision is attributable to an estimated weather impact of $40 million, the impact of variable cost inflation, and several once-off operational issues. The resulting margin compression was most evident in the products line of business, where costs such as fuel and labor are more difficult to pass through in the short-term.

Our cement business has under-performed due to a combination of wet weather and competitive pressures. Looking back on the beginning of 2018, a very cold, wet spring delayed shipments in our northern markets, which in turn resulted in elevated demurrage costs for cement inventory held on river barges. Excess inventory in the region contributed to more price competition.

Furthermore, extensive and unusual late September rain in the Upper Midwest resulted in severe flooding on the northern Mississippi River in October that prevent both barge and rail transport for almost 2 weeks and severely impacted shipments in the month. This is only the second time on record, back to 1878, that the river has reached the major flood stage in Davenport, Iowa, in October. Typically, we would be much more worried about the river running too low in October.

Finally, we incurred several 1-time costs, most of which were mentioned on our second quarter conference call -- cement storage costs, certain acquisition-related costs, and execution issues in our construction services business. These nonrecurring losses offset the growth from the 4 acquisitions announced in Q2, as well as 2 bolt-on acquisitions that we completed since our last earnings announcement. Our further reduced guidance range for 2018 reflects the impact of weather, margin compression due to unrecovered inflationary cost increases, cement shortfalls, and 1-time expenses.

Turning to Slide 6, the sheer number of major weather events that impacted us this fall has been extraordinary and something that I have not witnessed in my 39 years in this business. Texas experienced their wettest September on record, which was also the third wettest month ever. It rained 43 of 44 weeks through October in Lexington, and in Houston, 28 of our 29 workable days in September had rain or rain the forecast.

Turning to Slide 7, our full year EBITDA impact from weather is estimated to be $35 million to $45 million, primarily driven by reduced volumes in Texas, the Midwest and the Mid-Atlantic. Further, the extreme weather resulted in challenges achieving price expectations for an impact of approximately $5 million.

Our costs increased $10 million to $15 million due to reduced efficiency and increased energy expenses. For example, it is much more expensive drying wet aggregate in our asphalt business. Heading into 2019, some of the lost activity due to weather has been pushed into next year. Our third quarter asphalt and construction backlogs are up 10% and 8%, respectively, compared to third quarter 2017.

Turning to Slide 8, in addition to weather-related productivity losses, inflationary cost pressures continued into the third quarter. Our expectation is that cost of goods sold will be approximately 7% to 8% higher than 2017 after adjusting for volume. This compares to almost no overall cost increases in 2017 and a cost decrease in 2016. Costs in 2018 accelerated much faster than expected, and though we were able to recover these costs in the aggregates line of business, price increases set in the spring and last fall, in many cases, were not sufficient to cover costs in ready-mix and asphalt.

We saw margin compression in products in 2018 and are actively managing both price and costs in order to recover these margins in 2019. While we expect labor, fuel and material inputs to continue to rise in 2019, these costs should grow at a slower rate than we saw in 2018. The majority of our 2019 price increases have been announced, and we expect to realize mid-single digits, which will contribute to margin recovery.

We are also very focused on productivity gains and cost reductions across the business, and expect to capture cost improvements from capital investments made in 2018. Lastly, we are staying ahead of fuel price escalation by hedging our 2019 fuel needs appropriately and implementing fuel surcharges to recover rising energy costs.

Turning to Slide 9, our cement business significantly under-performed due to a late start in the spring shipping season, which negatively affected our volumes, increased floating storage costs, and impacted pricing. Despite the headwinds in 2018, underlying growth in our markets remains in the 2% to 3% range, and with pent-up demand, our customers are reporting elevated backlogs compared to 2017.

We have announced a $10 price increase for 2019, which is at the midpoint of the market announced range. And we believe cement plants on the river are operating at high utilization rates, which makes for a positive pricing environment entering 2019. Our plants are running at world-class efficiency levels, and with a return to a more normal weather pattern, we are optimistic about our cement business.

Turning to Slides 10-12, we remain positive on the construction cycle and anticipated demand, supported by local market dynamics and U.S. aggregate shipments being well below peak levels.

On the private side, we continue to see stable to strong growth in our top markets. Although certain U.S. markets are starting to show signs of overheating, we believe that Summit's markets are still short of midcycle. In some of our top metro markets, single-family permits and months' supply of housing inventory remain well below their peaks and long-term averages, respectively. We believe our housing markets will continue to benefit from what remains a slow, steady recovery, given the positive underlying demographic trends and the supply/demand imbalance in housing inventory, particularly in the entry-level price range.

On the public side, the funding outlook remains positive heading into next year. At the federal level, the Senate and the House Appropriations Committee have both approved proposals that increase funding for the Highway Trust Fund in fiscal 2019. Total federal highway funding is expected to approach $50 billion in fiscal 2019, up approximately 14% from fiscal 2017.

At the state level, Texas continues to increase funding for public infrastructure. In October, TxDOT increased its fiscal year 2019 lettings estimate by 12% to $6.4 billion, and longer-term, has indicated a target of $8 billion per year.

In September, the Texas state comptroller's office announced that fiscal 2018 sales and use tax collections were $31.9 billion, up 10.5%. As a result, the comptroller allocated $2.5 billion to the state highway fund per Proposition 7, which requires that the first $2.5 billion in sales and use tax collections exceeding $28 billion in any fiscal year must be given to the state highway fund.

Additionally, in September, TxDOT announced that it anticipated that funding from Proposition 1 for fiscal 2019 would be $1.4 billion, up 87%, supported by increased oil and gas severance taxes.

In Utah, the public funding outlook is stable, with possible upside, as Advisory Question 1 is on the ballot today asking voters if they support increasing the gas tax by $0.10 per gallon to fund transportation projects and education. Although the question is non-binding, a resolution to put the question on the ballot was approved by a significant majority in the state legislature.

In Colorado, the outlook is positive, as CDOT is seeking to significantly increase infrastructure finding in this election cycle through 2 multi-billion-dollar voter propositions on the ballot today.

In Kansas, the public funding outlook is stable as the state continues to get its financial house in order. In July, Kansas's Department of Revenue indicated that fiscal year-end tax receipts were $1.2 billion higher than the previous fiscal year. In May, the Joint Legislative Transportation Vision Task Force was convened to evaluate the current transportation systems condition and funding. The task force will make recommendations on the current and future transportation system needs and the structure of highway funding, with a final report due by January 2019.

In Missouri, the public outlook remains positive, as the state continues to increase funding. In July, MoDOT released its 2019 Statewide Transportation Improvement Program, or STIP, which increased annual funding to $900 million, up nearly 6% over the 2018 STIP. Proposition D is on the ballot today, seeking to increase the gas tax by $0.10 per gallon over 4 years. If passed, Proposition D is expected to generate an incremental $400 million annually to fund and maintain the state's transportation infrastructure.

Turning to Slide 13, we've completed 13 acquisitions on a year-to-date basis, including 2 transactions that have closed since our last quarterly update. Total investment spend across the 13 acquisitions was $300 million, including $72 million for the 2 bolt-on acquisitions completed since August. Walker Sand & Gravel is the premier aggregates business serving the attractive Sun Valley, Idaho market.

We also acquired the land and related mineral rights of an active quarry in the greater Atlanta area. The existing quarry operation lease is scheduled to expire in 2021. Summit will receive royalty payments through that time and then will take over the quarry operations.

Of the 13 acquisitions we've completed this year, we've added more than 400 million tons of aggregates reserves to our portfolio, further expanding our presence in the upstream while leveraging our presence in the downstream through our vertically integrated business model.

With that, I'll turn the call over to Brian for a discussion of financial results.

[Brian Harris, executive]

Thank you, Tom. I would like to start by comparing our year-to-date adjusted EBITDA with the prior year. Slide 15 shows the positive underlying organic volume and price growth was insufficient to offset the increase in our variable input costs, which has resulted in margin compression. Embedded within these numbers is approximately $11 million of nonrecurring costs and a significant weather impact, which we estimate to be $35 million to $45 million, more than offsetting the EBITDA generated from our acquisitions.

Turning to Slides 16 to 18. In the West segment, net revenue increased 12.1%, while in our East segment, net revenue was up 12.5%. Growth in both West and East segment net revenue was supported by a combination of organic and acquisition-related growth.

Net revenue in the cement segment declined 7.2%, mainly due to high precipitation levels and competitive dynamics along the river system during the third quarter. Consolidated net revenue increased by 8.8% in the third quarter, and is up 12.1% on an LTM basis, given a combination of price and volume growth in our markets. However, third quarter adjusted EBITDA was essentially flat versus the prior year period, and LTM EBITDA is up slightly from the prior year.

Turning to Slide 19, organic aggregate sales volumes increased 3.9% year-on-year in the third quarter due to higher volumes in the West region, which were ahead by 10%, with most of our markets performing well. This was somewhat offset by a decline in organic sales volumes in the East region, where our large aggregate space businesses on the East Coast were impacted by the hurricane.

If we were to exclude our project-driven sand business in Vancouver, organic aggregates volumes would have increased by 4.6% in the third quarter. Organic aggregates average selling prices increased 1.5% year-on-year, with the West region average selling prices up 2% in the period and the East region up 1.7%.

Organic sales volumes of cement declined 6.4% in the third quarter, due to high levels of precipitation that continued to disrupt project work during the period as well as increased competition. Organic cement average selling prices decreased 1% in the third quarter due to competitive price pressure.

Organic sales volumes of ready-mix concrete increased 3.2% in the third quarter, with the weather impact of 7.1% decline in the East region being offset by higher volumes in the Salt Lake and Houston markets, where Hurricane Harvey in the prior year period provided an easier comparative, notwithstanding the heavy Texas rainfall in the third quarter of this year. Average selling prices were positive in both the East and West regions by 1.2% and 2.8%, respectively, albeit pricing traction in our large Houston market proved difficult to achieve, and a prospect of a full increase did not materialize.

Organic sales volumes of asphalt increased 3.2% in the third quarter, driven mainly by increased paving work in the West region, particularly in North Texas and Utah. However, this was offset by lower volumes in Kentucky, where adverse weather negatively impacted what would otherwise be the busiest time of year.

Turning to Slide 20. Adjusted cash gross profit margin declined year-on-year in the third quarter across all lines of business, with the exception of cement. While volumes and prices on aggregates, ready-mix and asphalt were positive in the third quarter, higher variable costs and some one-off performance issues were a headwind, particularly in the products lines of business, which tend to be disproportionately impacted by adverse weather.

The adjusted cash gross profit margin in our aggregates business was lower by 380 basis points compared to the prior year, but encouragingly, the LTM trend declined by just 60 basis points to 63%. In the cement product line, excellent manufacturing productivity offset the volume price headwinds, resulting in a slight improvement in the margin year-on-year.

Turning to Slide 21, as of September 29, 2018, we had cash on-hand of $64.9 million and borrowing capacity availability under our revolving credit facility of $219.6 million, providing ample liquidity to support the ongoing cash needs of the business. We anticipate net leverage to approximate current levels by year-end 2018, assuming the midpoint of our revised adjusted EBITDA guidance. We remain in full compliance with all debt covenants, and our senior secured leverage ratio was 1.4x, compared to a covenant requirement of 4.75x, which leaves an adjusted EBITDA cushion of $305 million.

For modeling purposes, including the impact of all 13 completed acquisitions on a year-to-date basis, SG&A is running in a quarterly range of $63 million to $65 million, DD&A is running in a quarterly range of $53 million to $55 million, and interest expense is running in a quarterly range of $29 million to $30 million.

All analysts should also model for approximately $2 million per quarter of transaction-related expenses, an amount which can vary depending on the volume of potential acquisitions under review. We anticipate paying $3 million to $5 million in state and local cash taxes and no U.S. federal income taxes in the current year.

Finally, with regard to total equity interest outstanding, as of September 29, we had a weighted average of 111.6 million Class A shares outstanding and 3.5 million LP units held by investors, resulting in total equity interest outstanding of $115.1 million. In calculating the adjusted diluted earning per share, this is the share count that should be used.

And with that, I'll turn the call over to Tom for his closing remarks.

[Thomas Hill, executive]

Thanks, Brian. Turning to Slide 23. In summary, to date, 2018 has been both difficult and disappointing. Through the year, we experienced a few significant operational issues, which resulted in nonrecurring expenses, incurred cost increases in excess of pricing gains, and faced competitive cement segment pressures. All of these were compounded by extreme weather in most of our markets. On a positive note, Summit realized continued organic volume growth and completed several high value acquisitions and organic investments.

Looking ahead to 2019, we expect to see margin expansion as improved price realization more than offsets cost increases, improved execution on a reduced fixed-cost base, and a reduction in leverage as we reduce capital expenditures and acquisition spend. We remain optimistic on the construction cycle and demand outlook, and we are confident that Summit's investment thesis is intact. Finally, our outlook for 2019 is for meaningful organic EBITDA growth.

With that, I'd like to open the call for questions. Operator?

[Operator]

[Operator Instructions] Our first question comes from the line of Phil Ng with Jefferies.

[Philip Ng, analyst]

Cement pricing has been weaker than many expected. Part of that was competitive dynamics, which, at the very least, was driven by weather, which impacted demand to start the year. Weather continues to be an issue in the Midwest heading into next year, so what's the rescue? Do you see a repeat of that happening again? And can you give any color in terms of inventory levels in the channel?

[Thomas Hill, executive]

I mean, I think what won't be repeated is just the extraordinary weather that we experienced in 2018. We have seen a continuation of the instability in the cement market in the Midwest, but inventory levels are probably improved over last year, and we don't see any issues going into next year. The key will be that we get off to a good start weather-wise, and as the spring season starts, that people have more reasonable levels of inventory.

[Philip Ng, analyst]

And I guess a question for Brian. Your EBITDA was flat year-over-year in 3Q, and you're guiding to roughly a 20% year-over-year decline in the fourth quarter. It'd be helpful to -- and you have a few tuck-ins. It'd be helpful to kind of parse out what's incrementally a bigger drag in the fourth quarter and if you could parse out 4Q's impact in that bridge you have highlighted in Page 5.

[Brian Harris, executive]

Yes, Phil, it's really weather, again, and October is going to be the biggest part of that. We've baked in an assumption that we'll continue to see no improvement in the weather in the balance of the year, so that's a big factor. And obviously, October is now behind us, so we know what those numbers are. As far as the contribution from the acquisitions, the 2 that we've announced have happened late in the year, so we're not seeing a significant contribution from those in the balance of this year, but we'll obviously see a full year from them next year.

[Operator]

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

[Brian Biros, analyst]

This is Brian Biros on for Kathryn. You highlighted inflationary cost pressures in the quarter. I was wondering if you could pass along the major buckets of cost and how quickly you might be able to pass those on to the end markets.

[Thomas Hill, executive]

Well, typically it takes anywhere from a quarter to 3 quarters to pass it along. The big buckets in general are wages, energy, materials, from fly ash to coal. Electricity in our cement business was up. In general, we saw an acceleration in the first half of those -- of all those costs, and we see going into next year that we'll be able to recover those and more.

[Brian Biros, analyst]

Got it. And just one more. You saw that aggregate sales volumes in the East region were down a little bit. I was wondering if you could expand on that, kind of the states and end markets that might have had the weakness, and if you think that's more of a temporary blip or something more structurally going on in that area.

[Thomas Hill, executive]

I believe the biggest impact in the East was weather when you look at some of the major weather events that impacted our business there. Brian, any specifics?

[Brian Harris, executive]

No. I said in my remarks the East was obviously affected, our big aggregates business on the East Coast. That's Boxley, AMC and Hinkle on the aggregates side. They were the ones that had the biggest weather impact from the hurricane. They're also our biggest or some of our biggest aggregates facilities, are on that -- were in the path of the storm this year.

[Operator]

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

[Stanley Elliott, analyst]

Tom, you mentioned significant organic EBITDA growth in the coming year. Typically, you guys have talked about this business being, let's call it, kind of a low double-digit sort of a number, maybe high single-digit sort of an organic business. Is it going to change materially from that in '19?

[Thomas Hill, executive]

We believe going into '19 that we will not experience the same degree of weather impact. We also believe that we will be much more effective at recovering the cost increases. So we really do believe that going into '19, there will be a reset on weather and costs, and then we'll have the normal increases above that.

[Stanley Elliott, analyst]

Okay. Perfect. And then in the release, you talked a bit about being a little more selective in terms of the M&A. Do we think about that piece of the business slowing down? With Karl as the COO, is that -- is it going to be more of an operating story, or has anything changed, or what should we take from that?

[Thomas Hill, executive]

Well, certainly, with our increase in leverage and the decline in our share price, that we are going to be much more selective on acquisitions. We still have a busy deal flow, but we are being much more selective. As far as an operating story, I think we've been an operating story. Certainly, Karl brings a lot of capabilities and has had a big impact going into next year.

[Operator]

Our next question comes from the line of Mike Dahl with RBC.

[Michael Dahl, analyst]

Tom, I was hoping to push a little bit more on the '19 commentary, and maybe Brian can chime in as well. When we're thinking about weather, it sounds like in the updated 4Q guide, there's no expectation for improvement in weather, and while, at first glance, it certainly is clear that a lot of what's happened this year is somewhat unprecedented, but in the context of the last couple years, extreme weather has become more common, arguably, and so as you approach the time to give us guidance for 2019, is this something that you'll be assuming a meaningful improvement in weather in 2019, a normal weather environment, or will you start taking into account kind of potentially a bit more of a cushion for things that may occur over the course of the year?

[Thomas Hill, executive]

Mike, when I look at my 39 years, we've -- certainly, this is the worst weather year that I've ever experienced. I don't see that repeating itself. But I think what you'll probably see in our guidance come February is probably a wider range that will take into -- that will take in the potential for worse weather -- not worse than this year, but worse than normal. So I think that's what you'll probably see, is a wider range, Mike, and I think that's how we'll handle these difficult weather patterns.

[Michael Dahl, analyst]

Okay. That's helpful. And then the second question, I guess in a similar vein, when we're looking out to '19, there are some capacity constraints in the market around labor and transportation and such, and so when we're thinking about potential for recouping deferred business plus what you would have normally anticipated in terms of the organic growth, do you have the capacity to deliver on both, or is this effectively just going to kind of push out the whole project backlog and make it a bit more extended?

[Thomas Hill, executive]

I think the constraint that we see would be both in labor, in a couple of markets for our own labor, but certainly our customers have a constraint as the number of houses they can build or so forth. That's really the one constraint I'd see. We haven't really had much capacity constraint on the freight side. We don't ship a lot by rail or barge. We ship some certainly in our cement business and a little bit in our aggregates, but we've been okay on the freight side. It's really whether you can find enough people to fill all your ready-mix trucks, and we've had some difficulty in that in Salt Lake and in Houston, but relatively minor. I would be more worried about our customers' capacity to increase their volume, and that's hard to judge, but I certainly think we've seen some of that when the sun is shining this year.

[Operator]

Our next question comes from the line of Adam Thalhimer with Thompson, Davis.

[Adam Thalhimer, analyst]

I guess first I wanted to start with cash flow. I mean, that's the biggest question I get from clients, is just why hasn't cash flow been a little bit better this year.

[Brian Harris, executive]

Good morning, Adam. Thanks for your question. Well, the real reason, obviously, is 2-fold. Obviously, we've seen a much lower EBITDA, to start with, so operating income has been lower, but we've also seen an elevated level of capital expenditure. We've talked about that before. This is quite a bit higher than our normal average run rate. We've been for the last couple of years in kind of a 10% to 11% of net revenue range. We expect to bring that down significantly as we get past some of the bigger projects that we've done this year, like the Cox Quarry, the upgrade to the Memphis cement terminal, and 1 or 2 other larger projects, which will start to deliver returns and improve margin for us next year. So that's really been the primary driver of the cash flow, but we could expect to see that improve substantially in 2019.

[Adam Thalhimer, analyst]

Yes, and I guess that's the million-dollar question. I mean, how much cash, Brian, can you generate in Q4 and in 2019? How much debt can you pay down?

[Brian Harris, executive]

Well, baked into those numbers, we're expecting the leverage to stay at about the same as it is at the end of Q3. We'll have -- we've got almost $65 million of cash on-hand at the end of Q3, and Q4 is typically a quarter where we do generate some more cash, so we should have a decent amount, probably around about $100 million or so by the end of the fourth quarter, as we head into Q1, which is obviously our lowest quarter, traditionally and seasonally, and the first 3, 4, 5 months of the year are when we typically incur capital expenditure. The majority of our CapEx for the year happens in the first half, so we like to have some cash on-hand for that. And then we'll generate significant cash next year from a combination of lower CapEx and, as Tom mentioned, a significant uptick in our EBITDA.

[Operator]

Our next question comes from the line of Jerry Revich, Goldman Sachs.

[Jerry Revich, analyst]

Can you folks talk about what level of organic volume declines you have baked into the fourth quarter, I guess, to get to the 20% or so year-over-year EBITDA decline in the quarter? It seems like you would need organic volumes to be down in the high single-digit range. Is that what you folks are modeling? And how much of that guidance is you folks wanting to get right side up on guidance after a challenging weather year? In other words, how much room to have to execute on that new guidance?

[Thomas Hill, executive]

Jerry, we don't give quarterly volume guidance, but certainly with the start of October being -- the first 2 weeks were almost a complete washout, virtually across all our businesses, so I would expect to see some volume declines for the quarter.

[Jerry Revich, analyst]

And so, Tom, as you would think about the cadence over the next 12 months -- obviously, you don't have '19 guidance yet, but when do you expect to get right side up? From a volume standpoint, when do the comps get easier? And when do you folks expect to get right side up on price costs in asphalt and concrete? Is that 6 months out? Any comfort you can help us build around those 2 items?

[Thomas Hill, executive]

Well, Q1 was not very good this year, and I guess the only good part of having a really disappointing year like we have this year is that the comps are going to be pretty easy throughout the year next year.

[Jerry Revich, analyst]

Is that a comment on both price costs and volumes? Can you just be more specific?

[Thomas Hill, executive]

We should see a slower rate of growth on costs. We should see an improving price trend, certainly when our volumes start picking up in spring. April, May, June are obviously the times where we get enough volume to really make a difference. And we see certainly price being -- we've certainly seen -- or we certainly are predicting that we are going to be able to recover the entire cost increase, plus some, next year. And we should see some volume pickup from the weather this year, plus good, solid underlying growth in most of our markets.

[Operator]

Our next question comes from the line of Nishu Sood with Deutsche Bank.

[Nishu Sood, analyst]

Thank you. I wanted to ask a question just on the housing outlook. There's obviously been some slow-down in the reported housing statistics. How much of that, if at all, are you taking that into account? And if it does continue, what -- how would that affect the outlook? How will that affect your business plan currently?

[Thomas Hill, executive]

In most of our markets, we haven't really seen a housing slow-down. I mean, most of our markets are pretty early cycle. I'd say Austin is one that we're -- is probably a little later cycle than some of our others, but we really don't participate much in the residential sector there. We've seen stable markets in the center, in Kansas, Missouri, Kentucky, maybe a little bit of weakness in Missouri on the residential side. Not much, however. But, really, residential in the rest of our markets is staying really pretty good. I think we're probably more early cycle than the typical -- or than the overall U.S. market. And places like Salt Lake, for instance, we've seen slow growth there, and I think that's an area where our customers are constrained by labor, so it's made for more of a slow grinding recovery than a rapid one. So, overall, we just -- so far, we have not seen it.

[Nishu Sood, analyst]

And in the slides, there were some backlog stats of 3Q '18 over 3Q '17 -- asphalt I believe up 10% and the construction business up 8%. How should we think about that as a kind of window into what volumes in those businesses might be like in 4Q?

[Thomas Hill, executive]

Well, Q4 is limited as far as the amount of asphalt and paving you can do, because it gets cold. So it really -- most of that is 2019 work. We're -- most of our asphalt business is starting to shut down now. In most states, you've got to be 45 and rising in order to pave. In a lot of our states, we're below that already, and that's typical. That's not unusual. So it's really mostly pointing towards 2019.

[Operator]

Our next question comes from the line of Scott Schrier with Citi.

[Scott Schrier, analyst]

On the cash flow and capital allocation, several weeks back you announced a divestment. As you look at your portfolio, how do you think about whether it's divest certain hand-picked non-core assets across the portfolio or does a larger type of platform type of divestment make sense in order to generate cash flow? And is there anything in the capital structure that you could do, whether it's refi the 8.5% senior notes? I just want to get some color there.

[Thomas Hill, executive]

We look at our portfolio all the time. We don't have many -- and we don't have any significant non-core businesses. We have some miscellaneous, but they're pretty immaterial. We are always evaluating our overall portfolio, and if we ever believe it's time to divest something, we won't hesitate, but right now we don't have any plans for that. As far as...

[Brian Harris, executive]

Yes, Scott, as far as the 8.5% notes, yes, we're always looking for an opportunity to refinance those at an attractive rate. The high-yield markets have not been particularly favorable so far this year, and the first call date on those is in April of 2019, so we will certainly be looking to improve the cost on those at the appropriate time.

[Scott Schrier, analyst]

Got it. And for my second question, if I look back to last quarter, you had that $16 million of incremental price and volumes into your guidance, and understanding, of course, weather played a big role in the volumes, but I'm curious if on the pricing side, were there any kind of incremental competitive pressures with respect to pricing, outside of cement, I mean, that have sort of hindered the pace of pricing growth that you were able to get? It seems like the tone regarding pricing was a lot more optimistic last quarter.

[Thomas Hill, executive]

Yes, and it's certainly the weather impact on pricing. We had it around $5 million. That's pretty much, obviously, an estimate. When it's raining all the time -- in Houston, when it rains for a couple of weeks, some of the smaller players come out, they need to make payroll, so there's hits on pricing there. So overall, pricing was a disappointment in the second half so far.

[Operator]

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

[Brent Thielman, analyst]

Tom, the price announcements in cement, the $8 to $12 a ton, I just wanted to be clear, does that reflect all participants or all the usual participants in the market, or are there sold holdouts still to come?

[Thomas Hill, executive]

I believe that's everyone that impacts our market. Yes, it is.

[Brent Thielman, analyst]

And second, I understand the inflation you've seen year-to-date is unique, and the impact or ability to overcome that has certainly been amplified by weather, but do you think you need to change, I guess, any strategies internally, particularly with all the deals you've done, in order to be able to react a little bit faster to these situations? Is there more you can do to block and tackle in the future, or is this truly just an extraordinary year?

[Thomas Hill, executive]

No, I think we -- I'm very disappointed in our performance and pricing, and we were late to recognize the costs, and we're going to do a much better job of that in the future. I think having Karl onboard, that's -- he's certainly one of the pricing gurus in the industry, and he's going to have a real impact on our operations. But, no, we didn't execute well on the pricing side this year. We were late, and we were short.

[Operator]

Our next question comes from the line of Garik Shmois with Longbow Research.

[Jeff Stevenson, analyst]

This is Jeff Stevenson in for Garik. And with prices, especially in cement, getting more competitive in the third quarter due to weather and other things, given the timing of the price increases in April, should we assume that it'll remain challenged for several more quarters, for modeling purposes?

[Thomas Hill, executive]

I hope not. I wouldn't assume that. I mean, hopefully we get off to a good start in the year and we have more typical price escalations through the first couple of quarters of next year.

[Jeff Stevenson, analyst]

And I believe, Brian, you mentioned a lower CapEx for next year, and I know it's early, but how should we think about that as far as growth versus maintenance?

[Brian Harris, executive]

Yes, growth versus maintenance -- maintenance, in a normal year, is typically around about 70%, and growth is about 30% of the total. We'd expect probably to be bringing the total spend down to something more in the 8% range. It's kind of early days for that, but that's maybe how to think about it, 8% of net revenue, which is where we've always said we thought the long-term spend rate should be. And obviously, this year we've had -- the mix between maintenance and growth has been different. It's been more like 55/45, because we've had those big growth projects that we've talked about up in maintenance. So a switch next year to more like the normal run rate.

[Operator]

[Operator Instructions] Mr. Hill, it appears we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

[Thomas Hill, executive]

Thank you, operator, and thank you, everyone, for joining us today. That concludes our call. Have a good day.

[Operator]

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