Martin Marietta Materials Inc (MLM) 2006 Q3 法說會逐字稿

Good day, and welcome to the Martin Marietta Materials Incorporated conference call. [OPERATOR INSTRUCTIONS]

At this time for opening remarks and introductions I would like to turn the call over to President and Chief Executive Officer, Mr. Stephen Zelnak. Please go ahead, sir.

Thanks for joining us this afternoon. I have with me today Ward Nye, President and Chief Operating Officer, and Anne Lloyd, Our Chief Financial officer. The third quarter was more challenging than we expected, as our aggregates volume dropped 6%. Although we had expected a volume decline, it was exacerbated by sharper-than-expected pullback in housing construction, particularly in the Midwest and north central areas of the United States.

It was affected by timing lag in some highway work and also the impact of certain transportation issues, especially the Lock 52 disruption on the Ohio River. Timing on Lock 52 repairs was unfortunate, as we just brought on line our eight million plus ton a year plant at Three Rivers near Paduka, Kentucky, which feeds our barge network. This item, coupled with low water restrictions, reduced earnings by $0.06 a share, based on reduced volume and high shipping costs related to waiting time and lighter loading of barges.

Positive continue to be pricey. In the third quarter, pricing improved 13% against a tough prior-year comparable. As expected, pricing in the higher demand southern states led the way. The southeast volume was up about 2%. However, volumes in the newly aligned western United States Aggregates operation declined 9%, with notable weakness in the farm belt area.

In the mideast area which includes Indiana, Ohio, West Virginia, Maryland, Virginia and North Carolina, volume was down 8%. In spite of the down volume, we were able to post record results for the quarter. After adjusting for the unusual items from last year and this year, earnings per diluted share increased 11%. This result on significant down volume further validates the step function change in the business that we have previously discussed.

Our Magnesia Specialties business had another excellent quarter, with operating earnings of $7.5 million, up 13% from prior year on a 16% revenue increase. Both our dolomitic lime and magnesia chemicals product lines performed well. In our Composites business, the loss of $2.5 million was down $1.7 million from prior year, primarily due to a write-down taken last year.

During the quarter and through today, we picked up our first order for refrigerated railcars, along with additional orders for ballistic panels. The orders total about $6 million. As previously indicated, we will review the business at the end of the year to determine how to proceed in this business.

During the quarter, we continued to make significant capital investment in our business, with the most significant project being a new mine entrance and a new higher-capacity plant at our Weeping Water underground mine near Omaha, Nebraska. This project increases capacity from two million tons annually to about 3.5 million tons. Completion is expected in the third quarter of 2007.

Also during the quarter we raised our dividend 20% and repurchased 360,000 shares of common stock for $29 million. This use of cash is consistent with our stated objective of returning excess cash to our shareholders. It also demonstrates our confidence in our cash generating capability and our business prospects going forward. Based on our view of the current business environment and barring unusually negative weather events, we expect fourth quarter earnings to be in the range of $1.22 to $1.42 per diluted share versus $1.02 in the prior year.

Earnings for the year expected to be $5.15 to $5.35 versus $4.03 in the prior year. Aggregates pricing for the year should increase 12.5% to 13.5%, while volume is expected to be down 1% to 3%. Our current view of 2007 is positive, based on strong pricing and some cost relief on energy. Volume continues to be the primary risk factor.

At this time I'd be pleased to take any questions that you may have.

Thank you. [OPERATOR INSTRUCTIONS] First to Jack Kelly with Goldman Sachs.

Good afternoon, Steve.

Hey, Jack.

Can you give us some sense of what diesel costs head wind was in the third quarter and, you know, does it become a tail wind in the fourth quarter, and if you could wrap some maybe average prices or just changes year-over-year in the third quarter and what might happen in the fourth?

Yes, in the third quarter for us, average cost of diesel was up about 5% over the prior year. As we look ahead to the fourth quarter -- and obviously I'm calculating off of September numbers, which were much improved, and also what we've seen through the first half of October -- we expect we're going to have a nicely positive compare in the fourth quarter. By nicely positive, I think we could see $0.20 to $0.30 a gallon improvement in Q4.

That would be fourth over fourth or --?

Yes, fourth over fourth.

Okay. And the up 5% in the third equated to how many -- how much -- what was the price per gallon?

It's about $0.10.

About $0.10?

About $0.10.

Okay. And just on the Ohio River situation, is -- I think you had indicated a couple weeks ago that was going to be resolved by the end of the fourth quarter. Is that still best guess?

We're going to cross our fingers. Right now that lock is open. They have got high water and traffic is flowing. It's one of those unusual situations. We have to go through that lock to get our barges down river, which is where virtually all of our shipments are coming out of Three Rivers. We didn't -- we really didn't anticipate the magnitude of the disruption. At one point, mid-August, there were 66 tows backed up -- eight of which were ours -- and we wound up with wait times three or four days not being unusual.

By the time we got to the end of August our biggest carrier, which is Ingram, had declared a force ma jour and basically said, it's yours, boys, we're not going to take any risk or responsibility. At this point the smaller of the two locks has been repaired successfully. It's back in service. The repairs on the larger lock were actually slated to be finished around mid-November, but with high water now, those repairs have been put off. So we're going to cross our fingers and hope that they get through by the end of the year.

Particularly harmful to us, Jack, because we were coming off the consolidation of two plants into the new one at Three Rivers. We were inventory short. We had a shutdown at Three Rivers to bring the new plant up, and we were just scrambling, trying to find ways to get tonnage down into what is a very good marketplace in Louisiana.

Okay. Just finally on DOT work in North Carolina in '07, it appears, given, you know, what the contract awards have been here in recent months, that the volume of business, just on DOT, is probably going to be down in North Carolina. Do you have a -- do you agree with that view or do you still think it's up in the air in your mind?

No, directionally, I think it's probably going to be down. We don't know when the North Carolina DOT is going to begin to let projects under the $900 million of Garvey bond authorities that we have, and that's going to be key. That's the thing that, as they begin to do it, will give the future a boost in this state.

We do expect to see more money flow for road maintenance coming out of the budget surplus money that they've made available, but overall I would agree with you that I would expect that DOT business will be down next year. Hopefully what we see is the lettings coming out of the Garvey bonds that will sort of tee up '08.

Good. Thank you.

We'll go next to David MacGregor with Longbow Research.

Hi, Steve.

Hey, David.

Can you just talk a little bit about the residential exposure? I know you've talked in the past about it being 18% of the overall model, but can you talk a little bit about what you're seeing within that? And then, maybe, if it's possible to give us some sense of geographic breakdown, where it might be a little better and where it might be a little worse?

Yes, our last year percentage was about 20% residential, so the exposure in that sense is not great. I think I can probably speak with authority and say that I was the bear in our industry on housing, and I was not bearish enough, based on what's really happened. You know, the starts numbers actually are holding up okay, but what's really happened is that, if you track the major home builders, they're pulling back very sharply on their CapEx.

They're pulling their horns in on the development of new residential subdivisions, and that's where we sell half or more of the stone that goes into home building. So we see them continue to build out houses in existing developed subdivisions, but we see a very sharp contraction in opening of new ones. And how long that's going to go on is anybody's guess. Certainly we don't expect to see a turn in that probably until the middle of next year at best. We've said that before, and I don't see anything that would cause me to change that.

When you look at it geographically, it's a mixed bag. In our southern tier markets, those markets continue to go pretty well. They're certainly much better than the national average in terms of degree of pull back. We had indicated earlier we thought that our southern tier markets would probably pull back half or less of the national average, and I think that's likely to be the case. Where we're seeing some real downturn, much more than we anticipated, is in the northern tier markets, Midwest, north central. And you've got pull backs in those areas that are in the 20% to 30% range. I mean, really severe. Now, the good part of that is that pretty quickly you're getting inventories pulled back into line.

As you get to next year, in those areas you're probably going to be bit more in balance. And likewise, in the Mid-Atlantic area, where volume began to come down earlier, looks like that will be a little more in balance. So I would expect that maybe we begin to get some slight pickup there, in an area particularly, in the Midwest and north central where there's not much population growth. But I would expect that maybe that hits bottom a quarter or so earlier than the nation as a whole.

You know, when we think about your local markets, there's an exceptionally high freight cost that represents a barrier to exit for material out of the market. So I'm wondering, to what extent will you see residential weakness in a certain isolated regional market, that stone ends up having negative repercussion on pricing and volume fundamentals for infrastructure or private non-res customers?

Well, there's always that possibility. When you look at the readi-mix business, there are different types of readi-mix companies. Some tend to specialize in residential, others tend to go for the more complicated work, higher specification work, higher quality work. We're well aligned with the bigger readi-mixers who do the high-spec work, which is good when non-res is going well, which it is.

But there's always the possibility that the smaller guy focused on residential, you know, may try to come into that sector and pick up some of the smaller non-res. And, in fact, I would expect that if they're feeling some pain on volume. On the stone side of the equation, could that shift the market a little bit? It's possible, but it's pretty difficult when you start looking at individual quarry locations and customer mix to see any dramatic shifts. It's much more of a micro game.

Great. Thanks very much.

Sure.

We'll go next to Jack Kasprzak with BB&T. No, we'll go on to Andrew Shaffer with Farley Capital.

Yes, hi. I was looking at your gross profit margin for aggregates, and I was just wondering with basically 13% year-to-date price increase and -- yes, I realize volumes are down, and also if you back out the Lock 52 situation, I guess I would expect kind of higher gross profit margins. What has also increased in that cost-of-goods line? Is it significant -- is it the diesel cost that's way up?

Well, certainly diesel cost has increased, but if you look at Q3 in particular, you've got two things that hurt us there. One is the lack of amortization of fixed costs because of the volume decline. Not only in sales, but we've tried to adjust pretty quickly on the production side. What we don't like to do is to build inventory and tie up working capital unnecessarily. So we made some adjustments pretty quickly in terms of production rates, and that gave us some under absorption of fixed costs, which was an issue.

The other thing that is continued to run at very high rates -- and it relates to Lock 52 -- it's really transportation. When you look at the mix of business we have and the high concentration of long-haul transport, that's been where the major cost escalation has been this year and through the third quarter. So we've got another healthy dose of that, and certainly that had its impact on margins. Those two things are the biggies.

Now, as we go forward, a lot of the transportation contracts we have -- in fact, virtually all of them, have fuel adjustment clauses in them. So we do have the potential to go in the other direction. We won't necessarily get that in the fourth quarter, because it lags. But as we go into next year, we've already commented that we expect some favorables coming from energy. Part of the favorable would be diesel fuel cost, where we burn 40 million gallons, or a little better a year, and just the per-gallon reduction there. The second favorable is that, on some of these fuel adjustment clauses, we'll likely get some favorable adjustments, i.e., down.

Okay.

That's what's driving it.

Okay. Thank you.

Sure.

We'll go next to Clyde Lewis with Citigroup.

Good afternoon, everybody. A couple questions, if I may, Steve. First in terms of Structural Composites. Obviously it's still a fairly tough year, but maybe a little better than you were hoping for. Are you sort of any more confident about getting the break even now in the foreseeable future and are you starting to pick up enough orders to justify that view? Or is it still a medium to long-term outlook for breaking even there?

Well, still too early to call. We've said that we're going to take a look at it at the end of the year, and I reiterated that. We are going to take a look at this business at the end of the year. The fact that we picked up some railcar orders for refrigerated cars was really a big plus. We've actually worked on that for about two years. And it's been difficult to generate the confidence in the market place for somebody to step forward and do it. But we've got a signed purchase order in hand.

In fact, we're manufacturing cars with a partner right now. We hope to get some follow-on orders there. If, in fact, we're successful, that could give us a nice boost to backlog, which is what we need. If we're not successful, then we'll look at that part of it very carefully. A place where we have had some success is with the flat panels, and particularly with ballistic panels.

We did pick up another ballistic panel order. All the feedback that we get from the military, from the standpoint of purchasing folks, as well as people who have utilized the material in the field is very, very positive. There are additional orders that are going to be let there, at least we're told that. So we're kind of waiting to see what it is we're going to get in the fourth quarter, and that will color our discussions that we have at the end of the year.

Okay. Thanks a lot. In terms of pricing, are you prepared to say at the moment as to what you're talking to your customers about, what the size of the price rises might be at the start of '07?

The only thing we've said and the only thing I would say right now is that we've said in North Carolina we put out price increases early to the major customers. Expectation is that we're going to raise prices about 15% in North Carolina. I think that will -- for any area of size, that will be our largest rate of increase for 2007. We will increase prices everywhere January 1, '07.

However, I think what you're going to see, based on some diminish of market conditions, is you're not likely to see any extensive level of mid-year price increases, like we've had the last two years. So I think you ought to count on that. We've said that the rate of price increase in '07 is going to be very good, but it will be a lesser rate than '06.

Okay.

And you ought to count on that also.

Okay. And one more question, if I may, on SG&A cost. They look as if they've sort of dipped a bit from where they were in the second quarter. Is that mainly down to the output, again? Is there a link there, or is it maybe a little bit of a driver on your behalf to cut some costs?

Certainly there is no lack of drive on our part to take some costs out, and all the folks sitting around the table here today would tell you that. We're very focused on squeezing some more costs out of the overhead structure. With that said, we did have some unusual overhead costs in the first part of the year, aside from the expensing of stock options, which you're already well aware of.

We had some things related to our succession efforts, some outside consulting, moved costs, a lot of things that we didn't really anticipate that were out of the ordinary. I think those are behind us, and I would hope to get back to a much more normal SG&A structure, with some things coming out. I'm giving everyone the opportunity to volunteer to take some things out, and if they don't volunteer, then they get some help.

Okay. Thanks a lot, Steve.

Sure.

We'll go next to John Kasprzak with BB&T Capital Markets.

Thanks. Good afternoon, Steve.

Good afternoon.

I don't know what happened the first time there. It was a quick hook, but -- [LAUGHTER]

Got to speak quickly, Jack.

Exactly. I wanted to ask about whether -- a question with a couple of parts related, though. Is it possible to pick out or parse out the weather impact in the quarter to try to get at what sort of organic volume environment we're in? If it was down six or so percent in Q3, is that even with the weather impact, the type of environment you think we're in? And do you think Q3 will be the low ebb for volume in terms of the comparison?

A very good question and a very difficult one to answer. We have certainly spent some time trying to analyze that with respect to Q3. Our best guess -- and it's an educated guess -- is that the economic decline probably accounts for roughly half of what we saw. The 6% I would put about 3%, perhaps a little bit more, on the back of the economic decline. So certainly nothing close to all of it.

Okay.

But we felt the down draft. It's predominantly home building, and we did -- and the other piece of it we also referred to some postponements on DOT work. It's stretching work out. If you're a contractor and you see liquid asphalt coming down, if you can hold off on that work, your profitability is going to be much better next year, and I think they're certainly inclined to do that.

Is it the low ebb in terms of volume decrease? I think it's too early to say. We're still in our planning process right now. We'll probably have a better view of the world certainly by the end of November, and we'll talk to you when we come out with the fourth quarter results. But I truly think it's too early to make that call, so I'm going to defer on that one.

Fair enough. And we talked already about the outlook on infrastructure and public works, particularly in North Carolina, but how about non-residential or commercial construction -- which I think you mentioned before is still good -- but how are you guys telling about the outlook there? Various indicators still seem to suggest that it should be positive in '07. Is that your view looking out into '07?

Yes, we don't see anything right now, from the statistics or from talking to customers, that would indicate that non-res would turn negative in '07. We see non-res being a positive, so we think we'll see some increased demand. It's not going to be as good as it was this year. This year has been a very -- very, very good non-res year, early on for sure. The infrastructure side, you know, we think is going to be positive, based on what we know today.

Part of that would be stimulated by the fact that DOT paving cost, if asphalt comes down to where it's forecast, which is roughly $100 a ton for liquid lower than the peak of this year, maybe even a little more, the DOT's are going to be able to get more for their dollars, and that would be a very, very positive thing in terms of demand for stone volume. Keep in mind, asphalt is 94% aggregate and 6% for liquid, but the liquid is a big cost element.

So we're reasonably positive about infrastructure. We think non-res is positive. We think housing, as I said, continues to be ugly, and we're not ready to say how ugly. But I can't imagine that the fourth quarter is going to provide a lot of comfort when we see what the home builders turned in.

Very good. Thanks, Steve.

Okay.

We'll go next to Jonathan Goldberg with Highline Capital Management.

Good afternoon.

Hi there.

Steve, you've already talked about this a little bit, but as you look out at 2007, specifically your two biggest markets of North Carolina and Texas, could you kind of go through residential, non-residential, and infrastructure and just talk kind of qualitatively about the demand environment in those categories for those two states?

Sure, I'll take a crack at it. Texas looks awfully good to us. Texas residential has actually been stronger probably than any other area of the country. It's held up better. You are seeing some pull back now in Texas in the res end, and I think that will continue into next year. But given the flow of people into Texas, the demand remains high. I think Texas is going to outperform the country pretty substantially as far as res.

When you look at Texas non-res, I think it the's going to be like the country, except probably better. It'll be positive but probably at better rate than the country in general. And Texas infrastructure looks good to us. Part of that being driven by reduced asphalt costs to the DOT. The DOT will have another very good program next year, and on top of that, you've got a tremendous amount of toll work in Texas to augment it. So we feel extremely good about Texas.

When you get to North Carolina, it's a little bit more of a mixed bag. Res in North Carolina has held up fairly well. We expect that to continue, just like Texas. A good strong flow of people coming here. Charlotte and Raleigh, in particular, have held up well on the residential side, but it will be down modestly next year. Non-res in North Carolina looks good to us, probably outperforming the country in terms of rate of increase.

The big issue in North Carolina is what we talked about, and that's infrastructure, which, you know, we view as being down next year. And a big question mark in terms of the DOT's schedule for putting work out -- which they had the funding authority for -- it's just a question of them deciding where they're going to use that funding authority. They had far more work than they can get done, a lot of political pressures to do specific projects, and I think they're trying to figure out where they place the bets and which jobs they go ahead and commit to.

A lot of activity in North Carolina with respect to a tollway authority and projects that the tollway authority is looking at. Local option bond issues for infrastructure. So I think you're going to see more of it coming out of the local areas, in particular, as far as any positives than you will at the state level. So that's the best I can tell you right now.

Okay. Great. Thanks, Steve.

Sure.

We'll go next to Arnie Ursaner with CJS Securities.

Hi, good afternoon. The first question I have is in the quarter you were hit $0.06 for the Ohio Lock 52. What do you have embedded in your Q4 guidance, please, for that?

Not $0.06. A much lesser number. We just don't anticipate that we're going to have the same kinds of issues there that we had in Q3.

Okay. Second question, Anne's been pretty quiet there, so maybe we'll get her involved. On cash and cash investments you were way down in the quarter. Obviously you chose to invest the $12 million in pension expense. But I've heard you in the past, Steve, talk about trying to maintain around $100 million of cash.

Did you view the weakness in your stock in Q3 as an opportunity and got more aggressive in your share repurchase than you may have liked because the price was where you thought it would be?

Arnie, our cash objective has been around $40 to $50 million at the end of the fiscal year to be able to carry us through in slower periods for the first quarter, when cash is obviously very cyclical. We looked at, opportunistically, the free cash flow available during the quarter to look at, obviously, what we said the investment in pension. We had some increase in CapEx during the quarter, in accordance with plans, and the leftover free cash flow we went to the market with.

We obviously like our shares. We bought back almost four million of them in the last two years. We continue to think that that's a good use of excess cash. We think it's a very good investment, based on our view of our outlook for our Company, so we're going to stay focused on it. We clearly can fund our internal capital needs without any issue whatsoever, and have some very nice free cash flow left over to purchase stock, if that's appropriate.

Okay, a few more follow-ons, real quick. Capital spending for next year. Given the slow down, are you thinking or changing any of your capital spending plans for next year?

CapEx is going to come down next year. It was going to come down anyway. CapEx this year, 250, could ramp up as high as 260, depending on flow of projects in the last quarter. What happens when things slow a little bit is all of a sudden contractors get a whole lot more interested in moving on projects and material suppliers get a lot more interested in making materials available.

So things tend to move a little faster. We could be a little higher this year. I certainly would expect that next year we're going to see CapEx come down, could be ten, probably on the high side of 15%, while funding every project that we see that's got the kinds of rates of return that we've talked about in the past. i.e., rebuilding of plants that have 25%, 30% IRRs after tax. We will be on everything like that that we can conceivably do. Returns are too good to ignore.

My final question, if I could, regards segment margin in Aggregates, and it's really a two-part question. What would it have been this quarter ex the Ohio River issue, in your opinion? And the second question relates to '07.

You give us some preliminary views about your thinking on price for next year and you've also given us some pretty good indications of some of the key costs involved, they're also coming down. When you equate the two, some price relief, some volume decrease, and some cost decreases, what sort of view do you think we're looking at for operating margin improvement next year in Aggregate?

Yes, too early to give you a specific number, Arnie, but I'll talk about it broadly. I've said previously that we expect margins to expand in 2007, and I don't have any reason to change my view of that. We think margin expansion is certainly in the cards and in the works for us.

If you take the broader view, I have also said that, as you look out over the next five years and maybe even a little quicker, you've got an opportunity to make this a 30% margin business as opposed to a 20 and some change kind of business. I firmly believe that that's there, and, you know, could you potentially get a dip in some year in that period? It's possible.

But I think it would take a pretty healthy margin decline or, you know, some type of runaway inflation that you couldn't offset fast enough to do it. I think we're in an awful good position as we go forward and come out of this lull, downturn in volume and start coming back up. What I can say with conviction is that Aggregate is going to be short in the key markets where it makes a difference. And some of the other construction materials will be short also, which, you ration that by price.

With respect to segment margin for the quarter, you've got the Lock 52 number. You can take and translate that. But let me just take it a little more broadly. With a host of the issues that we had, most of which spoke volume, and it was a bit more cost in there -- we had some other things that were a bit more costly than we anticipated -- I would have expected to have margin improvement that was more along the lines of, you know, 200 basis-points, 175, 200 basis-points on the gross margin level, if everything had gone the way we wanted it to and expected it to.

is that a fair thought for Q4? Something like that?

Well, I'm not going to give you an expectation for Q4, but clearly, if you take a look at the numbers we've put out with respect to EPS, I don't think you get there. We've already said down volume in Q4. So if you take down volume and very good pricing, the only way you get to the numbers we've put out is you've got to have margin expansion.

Thank you very much.

Sure.

We'll go next to Wayne Cooperman with Cobalt Capital.

Hey, guys. How are you?

Fine.

I guess first I just wondered if we could have your view on Cemex and Rinker. Seems like you guys might be a good fit, too. And I guess on the share repurchase, I was just wondering would've thought you might be even more aggressive, if you could touch upon that? And maybe you have a target set to EBITDA or debt-to-cap that you're looking for?

Okay. With respect to Cemex and Rinker, I think everyone in the world has commented on that, so it's really their's to comment on, not our's. And I'm not smart enough --

Just curious what your views was, anyway, given your expertise in the industry?

Well, I really don't have a view, because those are two totally different companies than we are. They are very broad product lines. They're both international. They're in a different game than we're in. So I'm not smart enough to have any kind of view that's going to be helpful to you. I'll pass on that one.

With respect to share repurchase, what we've said is that we plan to take a hard look at employing our free cash flow in the best interest of the shareholder. And we start out by investing in everything that will create long-term value, and we're doing that. Then beyond that, we've got excess cash. We actually got more aggressive in the second quarter, when the share price went down much more sharply, dipped down into the 70s. And we actually did some short-term borrowing, which would not we our norm to repurchase shares, and we did that based on the fact that we had incredibly heavy CapEx in the first half.

So we looked at it, and we normalized the CapEx and said, if we had had a normalized CapEx, what would we have had available? And we ended up the quarter, if I recall, about $13 million of short-term borrowing, which we employed to buy back shares.

Well you guys just don't have a view that your stock is still sort of misunderstood and you'd be willing to add on incremental leverage to create value by buying back stock because it's cheap?

It's a good point of debate. It's obviously something that we think about a lot. We get a lot of commentary from shareholders who, in some cases suggest we ought to, in other cases suggest that we find more ways to employ some of this high-return money within the business. So, you know, we look at it and we try to weigh it out. I'll tell you where we are right now. We're clearly a buyer of our stock.

Would we like to tee it up and buy more? Certainly I would -- you know, I have no problem with valuation of the stock. We'll buy all day. We were a buyer at 110, so that's not an issue. The real issue here is capital structure.

Right.

And part of the issue is we've got $700 million worth of bonds out there. And, you know, people loaned us money with a certain view of how we were going to run the business, and I'm not particularly inclined to stiff the bond holder. That's not my view of life.

So what I want to do is make sure that we're keeping the faith with people on both sides of the equation. We paid down a lot of short-term debt to, in fact, bring debt to cap back into the 35% to 40% range --

Right.

-- which is where we're keeping it now. And once we did that, you know, the debt side of the equation said,you guys ought to de-lever and bring it down to 25, 20, 15, and we said, no, we're not going to do that. It's the shareholders' time, and we're going to deploy that to the shareholder.

Because if you believe that you'll get to 30% operating margins and you run out of scenario, and then you assume that you had incremental leverage and bought back more shares, the delta in five years is unbelievable how accretive that would be. I'm happy to share our numbers with you if you'd like.

Better your numbers than some we conjure up. We'll be happy to take a look at them.

Sure, okay. Thanks a lot.

We'll go next to Mike Betts with JPMorgan.

Yes, good afternoon.

Hey, Mike.

Hi. I had two areas of questioning, if I could. One, you know, [inaudible] the Cemex, Rinker situation he mentioned. But I wanted to ask in terms of your business in Florida, which I think is about 5% of sales. Firstly, just where are your strong points? Where are you concentrated in Florida?

In Florida we only have two production locations and they're up in the panhandle of Florida near Tallahassee. They service the Tallahassee market, and they service the area going over to the coast, Panama City, Destin area. So those are the two producing locations. The majority of our business into Florida is, in fact, material that we ship in by rail and by water.

Okay.

We have a lot of strength in Jacksonville. We rail material, and it's granite that we're railing in to Jacksonville. In fact, all the material we're railing is granite, which we do into Jacksonville, all the way down through the central part of the state, even down to Orlando and Tampa.

We really have a niche in Florida, and our niche is the infrastructure component that is related to asphalt paving and the use of granite, because that's a superior material for that application, compared to the porous Florida limestone. So that's what we focus on. That's been a good niche opportunity for us. It continues to grow.

As I'm sure you know, Florida DOT has a very, very strong infrastructure program. Looks like that will continue for several more years. And with population flow, it may continue for a lot longer than that. So that's where our strengths are. We bring material into Jacksonville. We come by water, both Bahamas and Nova Scotia into Jacksonville. We come by water into Port Canaveral, Port Manatee on the gulf, Tampa on the gulf, Panama City and Pensacola on the gulf. So those are our key points of entry.

Okay. Thank you for that. And then just on North Carolina -- and I probably missed it in the past, Steve -- but you described the market outlook, which kind of looks a bit mixed, and yet you're putting your biggest price increase through in North Carolina. Has something structural happened in that market that I'ave missed or is it just that you feel that the price increases have lagged over the years? Is it something you can talk about on the call?

Yes, I don't think that -- when you step back and do an economic analysis of the value -- true underlying value of aggregate in North Carolina, we don't think current pricing reflects that, is the bottom line. So when you begin to look at that it way -- what you don't want to do is to put it all on the customer at one time. And, you know, we have taken -- taken some time to roll out what we think is much more economically-driven pricing.

The customer has had some time to absorb that. The marketplace gets to absorb it. I think it's a better way to do it. So the bottom line is the reason that the price increases will be fairly substantial next year in North Carolina is that there's a makeup component there. And we think we need to get the pricing of stone in North Carolina to something closer to its -- what we would call economic value, based on our analysis.

So if I was doing it from here, I should assume that probably in future years there would also be increases in excess of the average then?

I wouldn't assume anything right now. I think we'll just wait and see on that.

Okay. Then a final question if I could, Steve, and I think I know the answer, but just to clarify it it from my point of view, transport surcharges. Generally you've been recovering the higher cost through price increases. Are there me sort of energy-related surcharges that automatically disappear of any significance with decline in energy cost?

There are fuel adjustment clauses, which that's just exactly what they are, adjustment clauses. They go up, and they can come back down, based on the price of energy, you know, that the railroad is consuming, The price of fuel/energy that is being consumed in barging, and likewise deep water ships. So there is an opportunity to get some pull back there. We'll just wait and see how that develops.

Okay. But are there any that you've passed on your customers in that form who could then be claiming back that there should be a reduction because of that?

We have done some very limited surcharges -- fuel surcharges, where, in fact, those would come off the customer if things backed up in terms of fuel pricing, but quite limited. We've just -- we've essential taken the tact that we're just going to price the product, then we take the risk from there.

Okay. That's great.

[OPERATOR INSTRUCTIONS] We'll go next to David MacGregor with Longbow Research.

Yes, Steve, just as a follow-up. One of the things I've always liked about the way you've managed this business is your commitment to capital to internal, sort of, debottlenecking projects that pay very high internal rates of return. But what I'm hearing is your CapEx is going to be down 15% next year, and, obviously, I think anybody who thinks about this realizes it's not an infinite list of projects.

Is it possible we're approaching the end of the set of which you'd call projects with attractive marginal efficiency of investments or are we -- is there still a lot of mileage left? Can you give us a sense sort of what inning of the game we might be in on those projects?

Sure, I think that's a very good question. First of all, if you look at 2006, you need to keep in mind that we're coming off of two of the largest projects in our history. And that's the project at Three Rivers, which actually, when you eliminate -- when you look at the plant crushing side of it, that's probably the largest crushing plant piece, exclusive of transportation, that we've ever done. And you're looking at approximately $47, $48 million there. Then we go to North Troy in southern Oklahoma feeding Dallas on down to Houston, and that's another project that's going to wind up in the $40 million plus range.

So we've had two huge projects, which are very unusual for us in terms of their magnitude. So when you step back and put those away, I mentioned a big project, multi-year project out in Omaha, which is going to be a very good one, what you should expect out of us over the course of the next five years is that we are on a program to systematically come across the southern tier, particularly the southeast, to increase capacity -- in most cases we're looking at doublings -- and to do that with a high degree of automation, which means that the head count's going to remain essentially the same. And you're going to see that in North Carolina, South Carolina, Georgia, in particular.

We actually, as we have capitalized a lot of the acquired facilities -- and particularly done a lot of buildout in Texas and Oklahoma, and then this Three Rivers project -- we haven't put as much capital proportionately into what is really the guts of our business in the Carolinas and Georgia. We're going to dedicate probably the next five years to doing that. You're going to see a very high level of automation implementation, and that is a key focal point internally.

So, yes, I think we are in early middle innings of this game. Out of the 250 or so plants that we operate, only about 25% of them -- to be accurate, let me say less than 30% are automated. So we have tremendous automation opportunity, even without doing major rebuilds, doing the entire plant. So we're hard at work on that. It's a very good question.

So as you automate a location, what typically happens to the location margins?

The history of automating locations is that the margins improve, and in most cases pretty substantially.

I guess I was going to try and get you to quantify pretty substantially. [LAUGHTER]

Well, I'd just take you back to the fact that, when we do one of these big rebuilds, we've said that those are typically 25 to, you know, on up to 35% after tax IRR projects. And you know that you've got to have some significant margin improvement when you're investing big slugs of capital. So it's very attractive.

Good, thanks very much.

Sure.

And that does conclude today's question and answer session. I'd like to turn the call back over to our speakers for any additional or closing remarks.

We appreciate you tuning in. Obviously, our outlook for the fourth quarter, as we view it today, is much more positive than what we saw in the third quarter.

Again, barring unforeseen weather, we would hope to come back and talk to you in the end of January or early February with some much better looking results. And at that point in time we will also talk to you about our view of '07 much more precisely. Thanks. Appreciate it.

That does conclude today's conference call. Thank you for your participation, and you may disconnect at this time.