Martin Marietta Materials Inc (MLM) 2003 Q3 法說會逐字稿

Good day, everyone and welcome to the Martin Marietta Materials, Incorporated conference call. Today's call is being recorded. At this time for openings remarks and introductions, I would like to turn the call over to the President and Chief Executive Officer, Mr. Stephen Zelnak. Please go ahead, sir.

Stephen Zelnak, Jr.: Thanks for joining us today, I have with me Janice Henry, our Chief Financial Officer, Anne Lloyd, our Chief Accounting Officer and Roselyn Bar, our Chief Counsel.

The third quarter was a very positive one with net sales up 8% and net earnings up 17%. Earnings per diluted share was 93 cents versus 80 cents in the prior year period. Aggregate shipments were very strong in the Southeast as improved weather enabled contractors to execute on deferred backlog. Shipments in our other geographic areas were essentially flat. Overall, Heritage volume was up 6% with pricing up 2%.

Improved operating efficiencies positively affected aggregates production cost resulting in a 1% decrease in cost per ton. This decrease was in spite of an 11% increase in diesel fuel cost per gallon and continued reduction of the inventory which negatively impacted unit production costs and earnings. We had a very positive quarter at our Bahamas limestone quarry, our Nova Scotia granite quarry and our other water-borne operations.

In its first full year of operation, our new Bahamas plant is expected to exceed our shipments target of 4 million tons . We continue to be on allocation for concrete stone at that location. We expect to continue to ramp up production and shipments at our Bahamas plant in 2004 with both expected to exceed 5 million tons. We were particularly pleased with our strong operating cash flow during the quarter, which was $26 million or 30% higher than the prior year period.

During the quarter, we paid off our remaining $34 million in commercial paper and overnight borrowings, invested $19 million in our pension funds and ended the quarter with $61 million in cash, inclusive of $7 million in escrow in a like kind exchange fund. SG&A as a percentage of net sales declined during the quarter to 6.6% from 6.9% in the prior year period. The management efficiency improvements from the recent restructuring of our aggregates business are being realized. We expect overhead savings of approximately $1.5 million in 2003 with full year 2004 savings anticipated to be about $4 million, which will help in offsetting the pressure of continuing increases in benefits and certain other costs.

During the third quarter, we improved the operating margin on our aggregates products line by 130 basis points over the prior year period, while our total aggregates division reported a 50 basis point improvement. Lower margins in our vertically integrated asphalt products, due to low volumes and high liquid asphalt cost, accounted for the difference.

During the quarter, we continued to be encouraged by the progress of our structural composites technology and products. Our new factory at Sparta, North Carolina is currently manufacturing specialty truck trailer sub assemblies with full production for both specialty composite trailers and composite sandwich flat panels expected in the fourth quarter. In October, we began to take orders from both government entities and private waste hauling contractors for our initial composite trailers which are targeted to the waste industry.

During the third quarter, we continued to bring on board the production, sales and management team needed to ramp up the new business as we move into 2004. The start-up costs related to our structural composites business were $1.7 million for the third quarter or about 2 cents per share and $3.3 million year to date, all of which has been expensed. We will provide more information on our structural composites business in our year-end earnings release.

The outlook for the remainder of 2003 hinges primarily on weather conditions in the fourth quarter. Assuming moderate conditions, we expect aggregates customers to continue to work against their deferred backlogs which should generate positive results for us. We currently expect fourth quarter net earnings in the range of 45 cents to 60 cents per diluted share. At this time, I'd be pleased to take any questions that you may have.

Thank you, the question and answer session will be conducted electronically. If you would like to ask a question today, please do so by pressing the star key followed by the digit 1 on your touch-tone telephone. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star 1 if you have a question. We'll take our first question from Arnold Ursaner with CJS Securities.

Hi, Steve, how are you?

Stephen Zelnak, Jr.: Hey, Arnie.

Can you remind us what percent of your business is tied to asphalt per se and what is your current outlook for that part of the business?

Stephen Zelnak, Jr.: Overall in the asphalt business and the contracting end, typically runs about 7, 8% of our total sales. That business has gone down this year, we're in the asphalt business in the Houston area, that market has not been particularly good. San Antonio is the other major place, not quite as good, also in north Texas and Shreveport, which has been fairly weak. We're not particularly optimistic about that business and think that it's going to continue to be a bit of a struggle. So, I'd just kind of leave it at that.

Okay and my second question, if you don't mind, is your magnesia specialties had a very nice jump in revenues but profitability was quite weak. Is there some specific item that has held that back?

Stephen Zelnak, Jr.: Yeah. It's called natural gas.

Right.

Stephen Zelnak, Jr.: Natural gas was where the impact was in mag specialties and also, actually the revenues were a bit more positive relative to the earnings than they would normally be and that's because in this agreement with Dow, we've been taking on some mag hydroxide business as sort of a merchant in the interim before their shutdown. At this point, Dow has shut down and we are now producing that product. So, as opposed to just being a merchant for it, we will be producing, and we will make a legitimate manufacturing margin on it. So, that should be a positive.

The other positive in the magnesia specialties business is that under our agreement with Dow, we have a long-term agreement to sell them our waste effluent, which is high in calcium chloride. We extract magnesium chloride and we've indicated before that we've got a take-or-pay agreement there that will generate a minimum of $1.5 million a year, the opportunity is for that to be higher. So, if you take those two things by themselves, it would indicate that the magnesia side of the business probably is going to be on an improvement track, as we go forward next year.

Okay. I'll go back in queue and come back later. Thanks.

Stephen Zelnak, Jr.: Okay.

Next we'll move to Jack Kasprzak with BB&T Capital Markets.

Thanks, good afternoon, Steve.

Stephen Zelnak, Jr.: Hi, Jack.

All else being equal, going forward after you have made some of the investments you have made in your aggregates properties over the last couple of years to lower costs, fine-tune the networks, what would you think your incremental margins would be on increases in your aggregate volume?

Stephen Zelnak, Jr.: Jack, you tell me where the volume's going to be, at which plant and I can probably tell you what the incremental margin's going to be but I think you know this business well enough to know that it is very much dependent upon where those incremental volumes are and I would hesitate to say anything to you other than what we've said before, we believe we're on a course certainly to improve margins, that's what we're dedicated to doing as we move ahead in the recovery. With the low-cost plant facilities that we have put into place, we're certainly beginning to taste that and as we see the volume come back, we think that we're going to get some significant volume improvements at those locations where we put capital investment, which have very low cost.

So, I'll just say, it bodes well in our view, we think we're set up very nicely and that was the objective of the very sizeable capital program that we undertook for about a three-year period.

Okay. Fair enough and can you quantify the year to date increase in pension and healthcare costs, the impact there and would you think that, obviously, I guess, assuming the plant is somewhat invested in equities, with the stock market being better this year perhaps the outlook for '04 on the cost side would be improved at least with regard to the pension plan?

Stephen Zelnak, Jr.: I'm going to let Janice field that one.

Jack, right now the pension costs versus pension and retiree medical, retiree benefits versus last year, it's about a $5 million increase over last year's costs. Healthcare has gone up but not as drastically because while healthcare has gone up, we've initiated a number of cost cutting programs to curtail that increase. As we go forward next year with the contribution that we just made, we'll give some guidance as to what next year's cost will be at our year-end teleconference.

Stephen Zelnak, Jr.: In the healthcare side, Jack, contrary to the significant double-digit increases that you're seeing in most places, with appropriate plan design and really good work on the part of our employees in choosing medical care in the way they use the benefit, our increase is more likely to be in the 5 to 7% range.

Okay. Great. Congratulation on a nice quarter.

Stephen Zelnak, Jr.: Okay. Thank you.

And Jack Kelly with Goldman Sachs has our next question.

Good afternoon, Steve.

Stephen Zelnak, Jr.: Hey, Jack.

A couple things: In terms of the Bahamas plant, can you give us a sense of pricing there? I mean, are you getting, you know, we talked about an overall 2% increase in pricing. Is that what you got down there and do we need more, number 1? Number 2, just in terms of the pension expense, could you just remind us, Janice, when the measurement date is because, you know, a number of companies are lowering the discount rate assumption given where bond rates are. So, just to give us, you know, for some companies it was September 30th, so they had to drop it to 6%. So, just give us a sense of that?

And I guess third, in terms of state funding activities, Steve, for road building, any, you know, sense of the states that you're in, kind of what's going on in terms of their spending pattern? If we could get the updates in terms of what's happening with the T-21, et cetera. Those would be the three questions.

Stephen Zelnak, Jr.: Let me ask Janice to comment first on the pension question.

The date that we determine the pension liability is as of December 31st and the current discount rate that we're using is 6.25%. We disclosed some sensitivity around that in the second quarter Q and we'll do so in the third quarter Q.

Stephen Zelnak, Jr.: On Bahamas, I'm not going to give you the pricing out of Bahamas other than to say it's meeting our targets, we're pleased with it. We think there is an opportunity to continue to improve pricing down there. The primary product coming out of the Bahamas is the concrete stone which is in high demand. We're going to ramp up, as I indicated in my earlier comments, ramp up another 25% or so next year on total production and sales out of the Bahamas. Coupled with that, we shall have some price increases and I'd be surprised if they did not exceed the 2% level.

The real key to the Bahamas is just moving through start-up, getting steady state there on the cost side of the equation, we've made tremendous improvement down there, as I indicated last quarter, we're in the black. What I think's going to happen next year is that Bahamas is really going to begin to show its real worth to us as a company and to our shareholders and I wouldn't be surprised if Bahamas will move into our top 10 quarries in terms of overall profit contribution to the company next year and from there, it ought to move up. You know, it wouldn't be surprising that it's going to move pretty quickly to the top five and compete to be the most profitable quarry we have over a three, four-year period. So, I like what's going on. The costs are coming down. We've got a very good team down there and certainly we're going to have plenty of volume potential to work with.

With respect to state funding, gosh, I wish I knew. You know, we poll the states. We go through that exercise, as you know, as part of our budgeting process and it really depends on what day you call them because it changes rather significantly almost from week to week. They're wrestling with cash flow problems and we just don't know the answer, you know, to most of what is going to go on in these states.

The positive for us has been North Carolina which came out, had some bonding authority, and we indicated I think last time around that they've come out with a $700 million program, a minimum of which 630 is going to going to roads over a two-year period. So, we feel very good about our North Carolina program and the situation there. Texas looks very positive, those are our two biggest states and from there it is a real mix and I don't think I can give you much enlightenment, we're trying to figure it out.

I will say on the Federal side that I'm a bit more encouraged than I was, I said that, I think, the last time and I'm more encouraged at this point than I was three months ago or six months ago. I think reality has hit home with the Administration and with Congress and the reality is that they're not creating jobs. You know, you're down about 3 million jobs since Bush took over as President, there is an election in November 2004, last time I checked and I think everybody's really getting geared up to run and jobs are going to be a critical issue. So, I believe that that is a positive as we try to put together the six-year program.

I think Congress and the Administration are under intense pressure to create jobs in America as opposed to creating jobs in China which they seem to have done a pretty good job of. So, we'll see where that goes but certainly, we're getting better reception than we were even 90 days ago.

Okay. Just one quick follow-up, Steve. In terms of acquisitions, you know, broadly speaking and of course every market's different, there's been a pickup in activity in the last couple months. Do you kind of see that flowing through to, you know, the aggregates area?

Stephen Zelnak, Jr.: Well, I can only speak for ourselves. We look at just about everything that comes up, certainly if it's in our area, we look. We've recently competed on what I'd call a mid-sized opportunity. We were in the so-called "finals", being part of an investment bank you know what that means. That's the opportunity to raise the price one more time. We chose not to do that, so someone else got that one. It's numbers that were well north of what we were comfortable in paying. So, we're going to be there. There's just not as much to buy right now that is apparent to us. So, I really don't see the level of activity ramping back up to where we were over the last five years, I just don't think the opportunities are there.

Good deal. Thanks.

Stephen Zelnak, Jr.: Sure.

Our next question comes from David Weaver with Legg Mason.

Good afternoon.

Stephen Zelnak, Jr.: Hey David.

You mentioned your cost per ton was down about 1%. Could you give us a little more color on what went into that and maybe what you see in terms of potential?

Stephen Zelnak, Jr.: Yeah. I gave you one interesting piece of it. I mentioned in my comments that diesel fuel per gallon was up about 11%, that's about 9 cents a gallon for us during the quarter. Interestingly enough, when you translate that down to the quarry level, our diesel fuel cost per ton produced was down about a penny and a half and I think that is a very meaningful reflection of what we've been working very hard which is right sizing our fleet, just improving our operating efficiency, cutting down on haul distances, reducing the number of units we have in service. So, that was a nice piece of it right there.

Okay. When you say cutting down your haul distances, is there capital expenditures required to do that initially in terms of moving your plants?

Stephen Zelnak, Jr.: It can work in different ways. In some cases you may relocate a crusher to a different location in the plant and that's going to be a capital item. You may take it from the surface down into the pit somewhere, not uncommon, sort of bridge the gap, cut the distance in half. The other thing is changing your ramp locations in the pit and actually, where we've been focused largely has been changing the ramp configurations and that's an expense item, not a capital one, which we've already absorbed.

Okay. Is your cap ex budget for the year on track for your prior projection?

Stephen Zelnak, Jr.: We think that cap ex for the year is going to come in under $125 million. We started out in the 135, 140 range, that's coming down. Wouldn't be surprised if it's in the 120-ish range.

Okay. One last question. San Antonio, are they working on the new Toyota plant yet and is that a meaningful project for your business in that market?

Stephen Zelnak, Jr.: There's no real activity going on right now that impacts us. We expect that to get geared up probably right around the end of the year. As we go into next year, yes, we think that's going to become meaningful and for that whole market area, you know, an $800 million project like that is just going to lift the whole area.

Our experience with these auto plants is that they give you a 5 to 10-year economic shot in the arm and although San Antonio's been a good, solid market, it has not been a high growth market for quite a long time. So, I expect growth rates in San Antonio to ramp up sharply and our position in San Antonio is quite good, we're the leading aggregate producer, the leading asphalt producer, we have a significant concrete business there, it's our only fully integrated business that we have and, I think, we're going to be set up nicely to benefit.

Okay. Do you have a target for debt to cap? I know you've gotten it below 40 now are you kind of working more towards 30, or when do you start using your cash for other purposes?

Stephen Zelnak, Jr.: Well, if you net out the cash, we're at about 36 and if you had asked that question last quarter or any time before, I would have told you that we're going to take the cash and we're going to apply it, what we generate, we're going to apply it to debt. The fact is we've already done that, we're way ahead of schedule, we've paid off all the short-term debt and we don't have any prepayment capability on our term debt. Our first maturity is 2007 so, we have no debt due and so, it takes that off the table, obviously a use would be dividend, we've kicked the dividend up 20% this year, we'll come back next year, review the dividend, see if any other change would be appropriate. I don't see cap ex ramping up significantly.

We're looking at some individual projects that, you know, a couple of them that might be of interest that would be of a larger size for our business, 20 to $40 million range but that's not anything that is going to happen in the near term . We may choose to put some more money into our pension funds and that might prove to be beneficial to us in terms of cutting pension expense and also making sure that we're very well-funded in the pension fund so, that's on the table. Share buyback is on the table, we could let it sit and we can earn money market rates, I have to tell you that doesn't excite me a whole lot. So, we're going to be looking hard at the other logical alternatives.

You know, acquisitions are always out there and we'll be prepared to look at and to do acquisitions that are attractive but as I indicated earlier, we just don't see much that is out there that appeals to us right now.

Okay.

Stephen Zelnak, Jr.: And other than that, I don't know what you do with cash. I think we covered it.

Okay. Thanks a lot.

Stephen Zelnak, Jr.: Sure.

And as a reminder to our audience, please press star 1 if you do have a question. We'll go next to Trip Rodgers with UBS.

Hi. Good afternoon.

Stephen Zelnak, Jr.: Hi.

When you look at your backlog that was deferred from the first half, assuming that the weather continues to be good in the fourth quarter, does that backlog, those deferreds, continue to roll into early next year?

Stephen Zelnak, Jr.: I think that's's a good question, Trip and that's the key question right now in terms of judging the economy. You know, the published backlog that's out there is APACs backlog that we all can see and APAC worked on their backlog in the third quarter. If I recall, I think it came down just slightly but their backlog is very strong, near record levels. The real question for the contractors is that if they have a good work period during the fourth quarter, how much new backlog do they pick up to fill what they're able to perform and I don't know the answer to that. What we see when we get to the first quarter will tell us a lot about whether or not we truly have an economic recovery underway. So, I think the jury's out on that one.

Right. When you look at the highway award numbers that are published, anything that you're seeing that differs from the trends in those awards that have been fairly negative in a few states?

Stephen Zelnak, Jr.: I don't know that there's anything that greatly differs from the trends overall in the state. I think the question you have to ask is, you know, for each individual company where are they located and where is that money going? In most cases we've been probably, we've had the good fortune to be in the place where the money has been headed so, the highway work that we are performing or expect to perform in the near term is probably better than the overall state numbers would indicate and we'll just have to see where they let the next jobs.

And I guess finally, on the commercial side, any kind of light of hope that you're seeing in that area in general?

Stephen Zelnak, Jr.: For the first time we're actually, you know, seeing a little bit of new activity. I think that's a product of some increasing confidence, you know, on the part of developers and retailers, so, I would say that there is at least an indication that we may have hit the trough and are starting to trend up but I would caution, as I've said before, we don't expect to see any major move in that area until sometime after the middle of next year, maybe 2005.

Okay.

Stephen Zelnak, Jr.: But at least a positive trend or a positive sign for the first time in quite a while.

Great. Thanks a lot.

Stephen Zelnak, Jr.: Sure.

Next, we'll move to Bob Bridges with Sterling Capital.

Good afternoon. What's behind the spike in accounts receivable in the quarter?

Accounts receivable, I think what you're comparing to is the December year-end balance sheet as far as accounts receivable are concerned and December usually is a slow month for us and accounts receivable obviously go down in December. It's normal from a seasonal perspective for our accounts receivable to increase in the third quarter.

Stephen Zelnak, Jr.: Yeah, more sales is the answer and if you look at the year-end, you know, we finished up last year on a very low note. Accounts receivable, you know, sales were quite low, depressed and what we saw in the third quarter was some increase in our sales, a more robust sales equation. So, receivables are going to move with that.

And on the inventory, moving lower on your working capital management, just on an absolute level is it going to be trending lower for the next several quarters, or how do you view your inventory management kind of going forward into 2004?

Stephen Zelnak, Jr.: I would expect that, again I'm back to the weather as a qualifier but if we have moderate weather and reasonable shipments in the fourth quarter, I would expect that inventory would be about the same, perhaps slightly down in fourth quarter and then based on the levels that we're at as we go into next year we would expect to build inventory, certainly in the first quarter. You know, we have budgeted some inventory build next year. We think we're a little bit light in some places but overall, we have had an objective of trying to make sure that we get our inventories totally aligned with the sales opportunity and I think we've done a pretty good job of that.

Certainly our folks are very cognizant of it and we're measuring it very carefully and I'll, if I could, I'll also comment on the receivables because, you know, working capital in general is something that is an issue with us. We have become more stringent with respect to our credit terms. we have tied incentives for general managers and sales managers and sales reps in much larger proportion to receivables collection and I believe that that's going to lead to some positive trends in receivables, either measured in DSO or as a percentage of sales on a 12-month moving basis, we do it both ways.

So, working capital continues to be a big focus. You probably will see, in relative terms, inventories trends up a little bit next year and I would expect, in relative terms, receivables to trend down a little bit.

That's helpful. I've got another question on the cap ex, just kind of continuing your remarks of a couple minutes ago in terms of thinking about cap ex over the next several years you indicated you don't see a coming ramp and you're coming down off of 150 to $200 million levels the last several years. What's the right way to think about the business going forward, you have made a lot of productivity enhancements over the last several years, whether it's in absolute dollars or as a percent of sales, how do you think about that, maybe looking out two, three years?

Stephen Zelnak, Jr.: In terms of what it yields?

In terms of, yeah, in terms of where it's going, you know, additional productivity projects you might want to be doing in the next, out further than a year.

Stephen Zelnak, Jr.: Are you asking about the capital side of it, or are you asking about the productivity side, I'm not quite clear?

The productivity side of it.

Stephen Zelnak, Jr.: Okay. Well, let me just take it in terms of trend and what it is that we've tried to do. As you know, we're a big acquirer, we rounded up what we think are pretty awesome set of assets and we had a game plan particularly to work the coastal markets which I think we've done very well, you know, from North Carolina to Texas, we can serve it all, either from land or by sea. So, we've accomplished that, we staked out the position. Coming behind that was the thrust to increase capacity at key locations and to modernize some large-scale plants where we had real productivity, cost reduction opportunity. I would say to you that we're well into that program, you know, we are not 80 or 90% complete, I'd say we're more like two-thirds, 70% complete with what we've got on the screen right now but even with that, most of what we need to do, intend to do is going to be readily done with capital that is at the depreciation level or perhaps, a little less.

So, I would expect that, you know, you're going to hear us talking about and giving you data on productivity improvement going forward for the next several years, you know, it's going to be a continuing theme and I think the best way to look at us is that we placed our bets,, we're going to play our cards. We told you we're going to generate a lot of cash, we have great positions, we think we are set up very well and we're not going to have to replicate the kind of investment we made over the last five years. I expect sales to grow at a lesser rate and I expect earnings and cash flow to grow to a higher rate themselves. So, that's the game plan.

So, if I hear you, you're somewhere between half and maybe three quarters on the kinds of longer term productivity things you'd like to do but to get there over time, you're not going to have to spend dramatically above what your depreciation run rate is?

Stephen Zelnak, Jr.: Right. Absolutely correct.

Okay and maybe one more question. In terms of thinking about acquisitions, is there anything out there that suggests that the next round of consolidation by the industry and by Martin Marietta in particular, the metrics that we saw being paid for acquisitions, say, a few years ago, any reason to think that they're going to be markedly different, positive or negative, from where they were back during the last wave?

Stephen Zelnak, Jr.: I don't think so. You know, acquisition prices are always in the eye of the beholder and really, at the end of the day relate to what it is that you can do with what you bought, what kind of plan you have to put it together sometimes with something else to create enhanced value but if you just look at the core fundamental values of mineral reserves, zoned and permitted mineral reserves, which is what really drives acquisition value in this business at the end of the day, you know, I think those metrics are going to stay pretty similar to what you've seen.

Great. Thanks a lot.

Stephen Zelnak, Jr.: Sure.

Moving on, we'll take our next question from Leo Larkin with Standard & Poor's.

Good afternoon. Could you give us the DD&A for '03 and for '04 and did you actually give a number for cap ex for '04?

Stephen Zelnak, Jr.: Did not give a cap ex '04 number. We'll talk about '04 in the next conference call but just going back to the general comment which we've stated before, we expect to be in the range of depreciation. Deappreciation this year, DD&A, 130 to $140 million, next year probably very similar.

Thank you.

Stephen Zelnak, Jr.: Sure.

And next, we'll go to Mike Betts with JP Morgan.

Yes, good morning, I have three questions actually, please. The first one was to ask a little bit more detail on the regional developments in the third quarter and specifically, I mean, listening to Vulcan's conference call earlier in the week, they highlighted that they'd had good volume growth in North Carolina and Texas, two of your big markets. You seemed to indicate it was mostly in the Southeast. I wonder if you had some idea of why there might be those differences and also, sometimes you do give volumes by the individual regions, were you prepared to do that?

Stephen Zelnak, Jr.: Sure. We can give you the volumes for the mid-Atlantic area for us, which is Virginia, Maryland, West Virginia, that was up about 4%, North Carolina was up about 9%, a very positive increase in North Carolina, we're pleased with that. Mid-America region, which is Indiana, Ohio, was up about 5%. The Southeast division, which for us runs from South Carolina down through Florida all the way over to Mississippi, includes Tennessee, it was up 16% and then you go out to the Northwest, which is primarily farm belt area and that was up only modestly, about 2% and the Southwest was down for us about 3% and I'll elaborate on a couple of items there that may be helpful to you.

Our business in San Antonio and Houston was down a little bit. The business in North Texas and Oklahoma was very positive, very strong, Arkansas business was down, so, it was a mix of locations. If you take, you know, I can't do the comparisons with Vulcan, I don't know what's behind their numbers and wouldn't attempt to do that. We do operate in some different areas and certainly in the Midwest, they are not an active player there and that's an area for us that just didn't grow, there wasn't much going on in the Midwest, farm belt area. So, I think those are some of the differences. Is that helpful?

That's very helpful. No, thank you for that.

Stephen Zelnak, Jr.: Sure.

My second question was, and you've partly touched on this already but the highway awards that I've seen have been running about minus 10% year to date. You indicated problems with state end spending. I wonder if part of that in your view might be federal, given all the uncertainties, or do you think that most of that down turn is in reality concentrated at the state level?

Stephen Zelnak, Jr.: I really believe it's at the state level at this point. Most of the states have been somewhat slow to ramp up revenue to match the federal program in the last round, you know, T21 and what has gone on and I think there's been some good, study work to show it, is that the states have tended to take money away from their own state-only maintenance programs and put that toward federal matching. So, across the board with the exception of Virginia last year, to my knowledge, the states have been picking up their federal money and have been moving on with it. The real issue at the state level is how much money they have been dedicating to state and local roads and I'll use South Carolina as probably the most extreme example I can think of.

South Carolina has had some very large projects, federal aid projects and right now the big project in South Carolina is the Cooper River Bridge in Charleston, that is a $600 million dollar projects that basically soaks up South Carolina in terms of funding. So, what's going on there is that in the last three years with that and other big projects, South Carolina has essentially not had a statewide resurfacing program on state-only roads. So, I really believe the root of the problem is at the state level.

As we see what comes forth with the next federal program which is clearly going to be an increase, it's just a question of how much. it's going to be absolutely incumbent upon the states to increase revenue. I don't think they're going to be able to take it from maintenance and flip it to the federal match side, they're going to have to go forth and they're going to have to increase taxes, fees, in order to generate a lot more revenue. So, I think they're going to reach the tilt point here as the new federal program comes forth.

The other thing you're seeing that's kind of interesting in terms of what I think may become a trend is, an interest in toll roads on federal interstates and those have been untouchable. In the Republican Administration version of the new Federal Highway Bill, Federal Transportation Bill, there is a demonstration project, which is Interstate 81 in Virginia, which would be eight-laned all the way and would become a toll road and that would be the mechanism for paying for that. I can tell you that there's been recent discussion in North Carolina and North Carolina is going to apply for a waiver to the federal government to do the same thing on Interstate 95 in Eastern North Carolina to take it to eight lanes and pay for it with tolls over about a 30-year period.

I think once that happens a couple of places, you're going to see it as something that is going to pop up across the country and that would create an acceleration of much-needed roadwork, increasing capacity and taking care of some major roadway deterioration on some of these high-traffic corridors. From our perspective, that's a real positive.

Okay, thank you for that. My final question was when you were talking about the asphalting and contracting business, I think you said you weren't optimistic for the future. A question with two parts to it; one, why are you not optimistic, is it because of the bitumen activity, which you don't control and is very volatile and the second part, with that view, is there any way you could exit that business or is it totally integrated into your stone business?

Stephen Zelnak, Jr.: My lack of optimism is probably colored by the current reality with those businesses. We've been whipsawed like everyone else who has a taste of those businesses by the liquid asphalt prices and, you know, the volatility is tough to manage, particularly in an asphalt business that's as small as ours. Some of the larger players have more opportunity to manage that and to do some hedging on liquid and to do some true volume purchasing. So, I think a little bit of it is colored by our limited participation in that business. If you look at the markets we're in Northern Louisiana, Southern Arkansas, Northeast Texas, those are slow-growth markets and I just look at them from what I think is a realistic standpoint. I don't see anything that's going to cause them to be other than slow-growth markets.

If you look at Houston, Houston is a place that does have significant growth opportunity and certainly, I would be more optimistic about Houston ramping up. San Antonio, I've already indicated we have a very good position there and I'm quite optimistic about our asphalt business in San Antonio going forward and we also have a little asphalt construction business in the central part of Arkansas and it's very solid and I'm reasonably optimistic about it.

Can we or would we exit some or all of that business? I would indicate to you that I don't, you know, some of it is highly integrated, we like it for the long-term. I would not see us exiting other parts of it and may be candidates for that but I put it in the category of fine tuning, we're not talking about anything major here.

Okay. That's great. Thank you very much.

Stephen Zelnak, Jr.: Sure.

Next we'll go to Alan Metroni with Copper Beach Capital.

Hi, thanks, I was actually going to ask the regional breakouts but it looks like you guys answered it. Could you talk a little bit just about the competitive environment, what you're seeing from some competitors? Does anybody, I guess short of volumes, are you seeing much competition in certain markets, which ones are more competitive and also, if you could just give us a little more color on the Southeast volumes, they were up 16%, was there an easy comp last year, or specifically which states besides South Carolina, as you said, maybe talk about Florida a bit?

Stephen Zelnak, Jr.: Okay. Competitive environment, my assessment of it is that given that we are in a generally weak economy, that the competitive environment is about what you would expect. There are some players out there who are hungry for some volume. I would say to you, and we've mentioned before, that we've been pretty successful with our positioning in picking up some volume opportunities in recent years based on positioning, based on transportation advantage.

What we are seeing in the marketplace is that there is often times in many of the markets a shortage of asphalt, stone materials, that's the high-demand item and then the market would tend to be long on base stone because of the lack of new highway construction and the lack of commercial construction. Concrete stone's sort of in the middle, good residential characteristics there for demand, but negatively impacted by the commercial side. So, when you get to the asphalt stone side, it is much more a question of supply and quality in most markets and pricing opportunities have been good there.

When you get to the base stone side, and you have to understand that asphalt, or excuse me, aggregate plants aren't particularly flexible. You know, they turn out a ratio of product mix, some of which is going to be base or streams or a combination of the two. I would say most of the producers are long on base right now. So, they would look for an opportunity to move that and that makes the base market, you know, more competitive than certainly we'd like to see. You know, pricing increases are tough to come by and, in some cases, on big jobs you're seeing price erosion on base and then concrete stone, in the middle, the last year it's been very tough to get a price increase on concrete stone but not really going down, either and as we go forward next year with concrete, I think the environment there is going to improve a little bit and I would expect to see a little bit of pricing improvement for aggregate with respect to concrete producers. So, that's my quick cut at that, if that's helpful.

No, that's excellent color. Thanks. I appreciate it. Can you just give us the last on the regional and specifically the Southeast, how the comps were last year, and more specifically, Florida and other states, how those were?

Stephen Zelnak, Jr.: Okay. The Southeast as we now have it organized includes our offshore elements, includes the Nova Scotia quarry and the Bahamas quarry because the majority of the markets for those two stone products and quarries are in the Southeast and a significant part of the ramp up came out of those operations and that material went into Florida, which you mentioned, Florida market for us has been very strong. The demand for asphalt stone and particularly the high-quality granite we have in Nova Scotia is strong. I hate to say the word "sold out," but we're basically on allocation in Nova Scotia and our winter project is to see if we can't, without spending a whole lot of capital, ramp up production capacity there, hopefully around 15% or so, maybe 20%.

I'm sorry. What was 15, 20%?

Stephen Zelnak, Jr.: We're looking to increase capacity at Nova Scotia.

Oh, okay. Thank you.

Stephen Zelnak, Jr.: Because we believe. we're comfortable that we can sell it if we can cost effectively ramp up the capacity. So, Florida and the offshore part would be a big piece of it, that also includes, we referenced in our press release other water-borne. Our business on the river system was excellent coming down the Mississippi River, going into Louisiana, there have been some specification changes there is that are favorable to our stone supply locations and we in fact have been able to take advantage of that. That business was very strong.

So, those are the two primary drivers. You asked the other question; easy compares and the answer is, you know, quite honestly the compares in Georgia would have been pretty easy because the weather was pretty rotten in Georgia last year and we had some very favorable results there.

So, Georgia and Florida and off in Bermuda very strong?

Stephen Zelnak, Jr.: Bahamas.

Bahamas. Excuse me. Excellent. Thank you very much.

We'll move next to Steven Kim with Smith Barney.

Hi. This is actually Mitch Resub for Steven. My first question is about the other income line. Now, I'm assuming that the composite business, start-up costs of $1.7 million are probably in that line and you had income this quarter of about $1.5 million. So, absent the composite start-up costs, you would have had income of about $3 million. Could you just give us a little more detail on what happens behind that?

You're right. The composite business expenses are included in that line. However, it was offset, we had a small fuel additives business out of our magnesia specialties division, which we sold in the quarter and the profit from that ran through that line. We also had two claims that we settled from previous issues and the profits there also ran through that line.

Stephen Zelnak, Jr.: Insurance recovery.

Yeah.

Okay, I see. And second question, a much broader question. If I look back at the construction business margins in the mid to late nineties, it was averaging about 24% or so, which is about 6 or 700 basis points above and I'm talking about the third quarter in particular of all of those years, so that's about 6 or 700 basis points above what it was in this third quarter. Can you perhaps discuss in quantitative terms what has driven the margins down that much and I mean, I imagine part of that is items such as fuel, a shift to perhaps more long haul, more upstream businesses but can you help us understand quantitatively what has driven that down and what potentially could take it back up?

Stephen Zelnak, Jr.: Sure. We've actually covered in some detail that question previously and I don't know that you were around to hear that, so I'll elaborate on it. The business model was changed, pure and simple. You know, we have oriented ourselves to where we think future growth is, which is in the coastal markets where there is no aggregate in general and that aggregate has to be shipped in by rail, has to be shipped in by water, requires a distribution network, requires distribution yards and with that, you wind up with an imbedded freight component and you wind up with a yard distribution segment.

The impact of that on margins, given that you don't make a profit on the freight, it's just a pass-through, is about 400 basis points which is a change of business model component and, you know, is that going to change, improve over time? Well, the freight isn't going to have the margin on it. We think it's going to become increasingly profitable because we think we're going to run higher and higher volumes through those distribution yards as we go forward based on the demand characteristics and we've already made the investment, put it in place and we'll just lever up on it.

You know, the other part of it, quite simply, is that, you know, we're in a recession and when you look at the kinds of volumes that we're doing in a recessionary environment, given the capacity that we have and the number of new locations that we've picked up, we're well off of what we can do effectively. So, I would tell you that as we go forward, we've said very pointedly and I'll say it again, we're in the mode of margin improvement, our expectation is that if we add volume to these key locations, as we go forward in recovery, that we're going to get some pretty handsome incremental returns on it.

So, that's the game plan for us. It's really not all that complicated once you look at our system and if you're not familiar with it, I'd encourage you to to our website, there's a pretty fancy map in there that shows you where all the aggregate is in the eastern half of the U.S., where it's not and how we're positioned from a transportation distribution standpoint.

Yeah, I'm sorry. I got disconnected earlier, so I must have missed that part. Did you also --

Stephen Zelnak, Jr.: I didn't say it in this call, actually it was in an earlier call. Go ahead.

Okay. Now, in terms of the volume element of the deterioration in operating margin, what specific line items, you know, cost line items do you see mitigating as volume picks back up again?

Stephen Zelnak, Jr.: Well, let me give it to you in a little bit different way. If you take cost in our business and you look at fixed and semi fixed, in the short-term and intermediate term probably about 70% of your cost is in those two categories as opposed to a true variable. So, that's what you work it against as a starting points, your depreciation goes up per unit, you're running lesser volumes through, your personnel costs per unit goes up and I'll just give you a piece of flavor on how that works.

If you're below volume levels, you'll have your people come in that work an eight-hour shift five days a week, and they've got start-up time and shut downtime, they've got normal equipment preventive maintenance time with whatever they're running, be it plant or mobile, you know, to get set up for the day. If you're running eight hours, that's a fixed piece of time. If you're running 10 hours or 12 hours, it's the same amount of time. So, the amount of productive output you're going to get by expanding hours is very, very effective in terms of reducing overall personnel costs and the reality for our business and, I think for most in our industry is, that when times are good, you know, we ramp up the hours and we get some tremendous incremental yields. So, you'd see it in the personnel costs very vividly.

Right and what percentage of, and maybe in a percentage of sales, is personnel costs and maybe maintenance in particular?

Stephen Zelnak, Jr.: I'll give you overall personnel costs just as a percentage. It's typically for us going to run somewhere in the 30% range and that's inclusive of all benefits, fully loaded, vacations, everything and when you get to repair and maintenance, that's done in different ways, in some cases we contract it out, in some cases we perform if with our own people, so, I don't have a good way to just totally break that out but where we can isolate it and put it against the repair and maintenance line, it's typically going to be somewhere in the neighborhood of 15% of our costs.

Okay and I'm sorry, just one final question. Have you quantified previously over the next 10 years or so what percentage long haul you're aiming for, where you would expect that to go?

Stephen Zelnak, Jr.: We have indicated that we think that the long haul component of our business is likely to move up from the current 23% up to 30% or so. You know, five years out, I wouldn't be surprised to be around 30% because we're already having inordinate growth in those areas that we've staked out and I think that's going to continue. If you go back to 1994, with the different business model which only had rail in it and truck, we were 7% rail, 93% truck as opposed to 23% rail and water, 77% truck last year.

Okay. I guess what I'm having, so, then, of that 400 basis points that we were talking about margin deterioration, moving from, let's say, 23 to 30%, how much of that 400 would be reduced or would kind of increase as you move, as you kind of increase the throughput in your long haul?

Stephen Zelnak, Jr.: Well, that's the question to be determined, you know, I would hope that, maybe we get back 100, 150 basis points of the 400, you know, over a five-year or so period as volumes ramp up but we're not going to get it all back, the business model has changed and we just, we've got all that freight that's just going to pass through, it's just a mathematical function, if it's on the top line and you don't get any margin on it, then that's where the math is going to work.

Right. Okay. Thanks a lot.

Stephen Zelnak, Jr.: Sure.

And our final question is a follow-up from Jack Kasprzak with BB&T Capital Markets.

I just wants to ask about the tax rate, which was 30.3% in the quarter. Do you think it will stay in the low 30s, should it go back up, what you said about magnesia specialties properties improves, will that have an impact on it, where do you think it might go?

When we develop our effective tax rate for the quarter, we do it based on what we think the estimate is going to be or actually year-end numbers for the year. So, today the 30.8% that we have in the tax rate is what we would expect to see at the end of the year. Obviously, as we get to the end of the year and if our earnings are different than we estimated, there might be a change in that tax rate but it is based on our estimate for year-end earnings.

So, for modeling purposes would it be reasonable to keep it in that, between, around 31% range?

Yes.

Okay. Great. Thanks.

And that does conclude the Q&A session. Mr. Stephen Zelnak, I'll turn it back over to you for any additional or closing remarks.

Stephen Zelnak, Jr.: Okay. Thanks for joining us. We'll try to give you a detailed report the fourth quarter including some additional information on the composites opportunity. Talk to you later.

And that does conclude today's conference. Thank you for your participation.