Martin Marietta Materials Inc (MLM) 2006 Q4 法說會逐字稿

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

Thanks for joining us today. I have with me Anne Lloyd our CFO, and Ward Nye, President and Chief Operating Officer.

We were very pleased with our results for the quarter and for the year. In the fourth quarter, earnings per diluted share of $1.36 increased 33% over the prior year period on an 8% increase in net sales. During the quarter, we took a charge of $0.05 per share related to exiting a significant part of our Composites product line. Adjusting for this item, earnings per share was up $1.41, a 38% increase.

Both our Aggregates and Magnesia Specialties businesses performed well. In Aggregates, a volume declined of 5% was more than offset of pricing improvement of 15%. Aggregates product line gross margin increased 470 basis points. Volume increased in the Carolinas and other parts of the southeast, along with a positive volume comparison in the midwest. Other areas were weak, primarily reflecting the significant decline in home building demand.

Our Magnesia Specialties business had its best quarter ever with earnings from operations of $10 million, up 74% from prior year, on a 4% increase in net sales. Reduced natural gas costs, coupled with operating efficiencies, were the primary drivers, augmented by favorable inventory changes during the quarter. Operating margin was a record 29.3%.

In structural composites we took a $3.8 million charge as we exited our composite truck trailer activity. We will continue with limited activity in Composites, but we will benchmark this business quarterly to determine its viability. For the full year, earnings per share of $5.29 increased 30% from $4.08 in 2005. This compares to an increase in net sales of 11%.

In our Aggregates business, we more than offset a 2% volume decline with a 13.5% improvement in pricing and continued good cost management. Our operating margin increased to a record 20%, after absorbing a 470 basis point decrement related to our long haul distribution network. As indicated previously, we believe we have the opportunity to expand our operating margin to the 30% level over the next five years, based on our excellent positioning relative to high growth markets, and our strong focus on automation and cost management.

For example, over the past five years, we have reduced head count 21%, or 1,460 people, our growing net sales 47%. These head count reductions have resulted in an increase of average net sales per employee of 71%, and an increase in average earnings per employee of 171%. Labor costs, which is our single largest category in producing aggregates, has increased 2.3% per ton produced, since 2002, versus a rate of compensation increase that is approximately 25%. The difference is productivity improvement.

In our Magnesia Specialties business, we continue to grow both the dolomitic lime and magnesia chemicals product lines. We had record lime production in 2006, with about 70% being shipped to the steel mills, and the remainder to our Manistee, Michigan plant, for use in making chemical products. In the magnesia chemicals area, we continued to see growth in our water treatment products, our cell guard product for the paper industry and our magnesium hydroxide powder products used in additives and as a flame retardant. To support growth in the additive and flame retardant areas we have a project under way to nearly double capacity by the third quarter of 2007.

Looking ahead, we expect to have a strong year in 2007. In our Aggregates business, we expect pricing improvement of 9 to 11%, with flat volume. Pricing should be up double digits in the first half of 2007, tapering to a single digit rate of increase in the second half of the year. Volume in the first half is expected to be down based on the reduction in home building activity, and a tough comparison with prior year. Our outlook also reflects our view that energy costs will moderate from the 2006 levels, which would create less cost pressure on our operations in 2007.

In our Specialty Products segment, we should benefit from a solid outlook for our dolomitic lime and magnesia chemicals product lines, coupled with the exit of the composite trailer effort. We currently expect operating earnings of 33 to $36 million for this segment, versus 22 million in 2006.

For the Company, we currently anticipate earnings per diluted share in the range of $5.95, to $6.50 for 2007. This is based on growth in infrastructure and commercial construction demand, for aggregates, coupled with an expected bottoming of the housing decline mid year. For the first quarter, we expect earnings per share of $0.36 to $0.52, versus $0.66 per share in the first quarter of 2006. Prior year first quarter benefited from exceptionally mild weather and very robust home building demand, neither of which is likely this year.

In our press release, we indicated we have been reviewing the leverage on our balance sheet, since the second quarter of 2006. We believe it is the appropriate time for such a review, given the performance metrics of our business, coupled with a positive outlook. Our Board of Directors and several outside advisors have been active in this review.

Accordingly, we're focused on establishing prudent leverage targets that provide for further opportunities to enhance shareholder value, by utilizing our strong balance sheet, and excellent operational performance, coupled with what we believe are very positive future prospects for our businesses. In setting these targets, we plan to provide for continuing investment in internal growth opportunities, financial flexibility to support opportunistic and strategic acquisitions, as well as returning cash to shareholders through sustainable dividends, and share repurchase programs, while maintaining our investment grade credit rating.

We expect to provide definitive information on our capital structure and leverage targets, and we report first quarter earnings in May. The earnings per share guidance provided earlier is based on our current capital structure and the existing share repurchase program. We currently have existing Board authorization to repurchase up to 4.2 million shares. We will review the repurchase authorization and with our Board as appropriate.

At this time, I will take any questions that you may have.

Thank you. [OPERATOR INSTRUCTIONS] We will go first to Jack Kelly with Goldman Sachs.

Good afternoon, Steve.

Hey, Jack.

On the pricing increase of 9 to 11, to the extent you can, and I don't know if geographically, maybe by group, give us some sense of what areas are going up more strongly than 9 to 11 over the course of the year, and what might be lagging a bit?

Sure. We already publicly stated that North Carolina pricing will be up 15% for the year. So obviously, that is a very strong area for us. Other parts of the southeast, you're going to see some increases that are in the mid teens. Southeastern market continues to be very strong. And certainly, those areas where we're in the distribution business are the strongest. When you really follow, it's a logical economic pattern, when you get out to the midwest, you go up to the north central area, you are going to see lesser rates of price increase. Texas will be somewhere in between.

So will Texas be double digit, Steve or?

Texas will probably be somewhere right around the average number that we've given you.

Okay.

So hopefully that is helpful, Jack.

Yes. And then also just kind of looking beyond maybe this year, what seems to have happened the last couple of years is that various cities, regions, have gotten more consolidated, and that has triggered better pricing for you. As you kind of think about it, what areas appear ripe in that regard? It sounds like the midwest or central is more functioned, and the low pricing isn't functioned so much of maybe a lot of competition, is just that activity levels are low. So I don't know if that would be an area, but just in general looking out next year or two.

Well, if you look at those areas that you just cited, lesser pricing opportunity is a function of available capacity. And with that, a higher level of competition. We get asked the question sometimes, how much available capacity do you have, and my answer is, it's irrelevant, because it's all in the wrong places. The fact of the matter is, that capacity utilization appears to be remaining tight. We expect it to remain tight in the high growth southern tier markets. So that's where the opportunity is. And there's no real mystery in this, it's supply/demand.

Just a question about your capital structure comments. It appears, given the fact that you said you were going to -- you wanted to retain your investment grade rating, that, really, the options we're talking about is-- would be-- the two options would be just a bigger stock buyback, and/or a special dividend. I mean am I -- I'm not asking you to comment which one of those it is, but is there anything beyond that that we could be under consideration here?

The answer is no. And I will go ahead and comment. Special dividend is not in our -- on our consideration list. We really focused on share buyback. And our view of that is that we think our business model is very strong for now, and for the foreseeable future. So, as we look at where we can use our balance sheet in the best interest of our shareholders, and particularly our long-term shareholders, we see share repurchase as a very attractive place to go. And if you look at what's happened over the last three years with the share repurchase program, it has been an incredible return.

Okay. So share repurchase consistent with an investment grade rating, so that kind of rules out any kind of leverage recap?

I think we've defined what it is we're focused on, very clearly.

Thank you.

Sure.

We will go next to Arnie Ursaner with CJS Securities.

Hi, good afternoon.

Hey, Arnie.

To follow up on the point you just made, in terms of attempting to keep an investment grade rating, would you define that as something approaching, let's say, a three times leverage ratio which would imply comfortably another billion dollars of incremental debt?

First of all, we will not be attempting to keep an investment grade rating. We will be investment grade. That is one of the book ends. Secondly, it is premature to comment on where we're going to wind up. We will do that with the May release, first quarter release. What I would tell you is, that we sit today at 1.3 times debt to EBITDA. If you take-- and that is on 2006 EBITDA. If you take, midpoint range of estimate that we've given out, and to it DD&A of 148 million, you are going to drop that ratio more. So, that is much, much too low. Pretty clearly, we're going to change that metric. We wouldn't be talking about it if we weren't going to move the meter. So, there should be an expectation that we are going to do something of consequence, but we are not going to come close to taking ourselves out of the investment grade category, because we don't think that is in the interest of anyone.

And as a follow-up to that, I know there is an investor you and I've kidded about quite a bit about who has been after you aggressively for two or three years to be more aggressive on share buyback and using more leverage. Why now?

Well, I think what has happened, in our business, given the cyclical nature of the business, and obviously, having been around for a while, I've been through more of these cycles than I care to remember, you always have the concern about what is going to happen on the down side. And at the same time, we're looking at what we have said is just a fundamental change in this business. So, what has happened in 2006 is that we have had an opportunity to truly validate what happens to you with a down volume, recession scenario, because volume has been down the last three quarters. By a definition, that is a recession. At least in our sector.

So, we have been through that now. We have turned in what I think is a pretty impressive earnings performance. We look ahead and we think we likewise are going to turn in another very good year in 2007. And that just says convincingly that we're at a point where we are comfortable taking on more leverage. That's the bottom line on it.

Great. Thank you. I have a real quick final question if I may, on Magnesia Specialties, your Q4 revenue growth was a lot slower than we've seen for quite a while. Is there any specific thing that occurred there?

It is the general slowing of the economy, and some slowing of the steel mills in particular in the dolomitic lime side.

Okay. Thank you.

Sure.

We will go next to John Fox with Fenimore Asset Management.

Hi, Steve. Hi, Anne.

Hi, John.

Hi, John.

A question for each of you. Steve, could you talk about housing? I picked up from your comments you kind of feel that that is going to be bottoming in the be second half. Is that just based on easy comparisons? Or are you seeing signs? What do you see on residential at this point?

Our view is that that is more statistical than anything that you or I are going to get excited about. If you look at when the home building began to go down last year, the second half, it began to be reflected in the numbers.

Right.

So my view is that the first opportunity for a favorable comparison is the third quarter. My view is that from an inventory standpoint, the major home builders are all faced with challenges on their balance sheets. They are out there trying to push the inventory, which means that they're not building at any pace that would excite us, not developing subdivisions. So I think the first opportunity for them to really get back into the building business is mid year-ish, third quarter. Is there going to be some significant rise? I don't think so. I think it will be gradual. But at least there is an opportunity to start the [tray] line back up.

Okay. And then this year, with pricing, of course, there is price carry-over from 2006. And then did you raise prices on January 1st in some markets?

We raised prices January 1st everywhere.

Okay.

To to varying degrees.

All right. Great. And then for Anne, I guess Steve, you gave us the DD&A earlier, do you have an estimate for CapEx for this year?

Yes, we're at the 235 level.

Okay. And on the other segment, which you gave guidance of 33 to 36, what is the breakout for Composites in that guidance?

Well, we're not going to break it from here on out because Composites is basically going to be just a very minor piece of our activity. Unless there is something to talk about. And if it is minor, and not getting there real quick, it is not going-- it's not going to be a part of the Company. So we've got some short-term benchmarks. But we think we're going to have a reasonable year in Magnesia, but we also believe that the lime component, which has been a good business for us, is probably going to be down a little bit. So that will be the driver on the negative side that will hold that business back. We think the magnesia chemicals side of it will be a plus. And if you look at the rest of the change, it is really the losses and Composites going away.

Okay. Thank you.

Sure.

We will go next to Mike Betts with JPMorgan.

Yes, good afternoon, Steve. I've got a number of questions, if I could. The first one, maybe just on pricing, I think you referred to double digit price increases in H1, referring to single digits in H2. Is that just the assumption that you're assuming no July price increase in 2007, and what do you think the prospects are for July price increases? Is my first question.

The assumption is we will have some, but they are certainly not going to be of the magnitude nor the geographic coverage of mid-year price increases that we had in '05 and '06. That is just a function of the markets. But yes, we will have some.

And in your pricing guidance, is there any assumption for that?

Very modest. So to the extent that we get something that is more than modest, then there is some possible upside there. The real driver is that prices really ramped up sharply in the last half of '06, so when you begin to do just the statistical comparison, those are going to be tough compares. They will tend to drive the numbers down.

Okay. Thanks for that. And then also, thank you, you've given some regional information, a split between the three regions I think for the first time, or the first time I've seen it, so thank you for that. It does raise the question though, obviously, the mideast region margins are basically double what they are in any other regions. In terms of getting to this 30% margin target in five years time, would you expect those other regions to play catch-up here, or it's-- obviously a lot of it's your historic cheaper assets there in the mideast region?

I think they are all going to move, Mike. You have to understand that there is a disparity in margins between the three, but that is driven by some specific things. If you look at that decrement that we have in our distribution component, virtually all of that decrement is concentrated outside of mideast, and the other two regions. And also, if you look at the western or group, if you look at the western group, the western group also contains our vertical integration. So it has some construction in it, which is very low margin, it has asphalt, it has ready mix concrete, which are lower margins than our Aggregate business. So once you adjust out for all of that stuff, the margins are actually a lot closer than they would appear. If you go to the southeast group, it contains all of our waterborne. You say southeast, you wouldn't think of Canada but most of that material goes to the southeast, so they control that source as well as Bahamas and as well as the river operations we have up on the Ohio river system.

So it is a little bit deceiving in just looking at it without understanding the adjustments that would need to be made. But bottom line is we would expect to see improvement in all three segments as we go forward.

And Mike, as we file our annual report, you will see some good discussion on just what Steve has indicated there as to what is in each region and what comprises it. That should help add some color to your modeling process.

Yes. That will be useful. Thanks for that. And you also mentioned, Steve, the Ohio river. We had the issue with the barge-- the barge problem in Q3, is that issue solved now? Did it have any impact on Q4?

It did not have an impact on Q4. The issue is not solved. The current time frame is third quarter of next year. They will go back, they have repaired one of the locks, they have a second lock to repair. We are being a lot better shape for that, because, if you recall in the third quarter, we were transitioning to our brand new plant. We had a shortage of inventory down river. So we really were forced into a position where we had to try to move as much as we could, even though it was very costly and we had backups and delays. So by the time we get to the next round, I would expect that we would be able to back off a bit, and have yard inventory down river as part of our planning process.

Okay. And the final question, if I could, please, just, in your risk piece that you have to put there, your forward-looking statements, you refer particularly to spending in North Carolina and South Carolina. Could you just update me on what the budgetary situation is now in North Carolina? And I have to admit, I didn't really realize-- and maybe there isn't an issue in South Carolina, but is there also an issue with the State budget there?

I'll start with South Carolina. South Carolina has some real organizational issues as well as budgetary issues. And they're in the throes of trying to figure out how they're going to organize their DOT. And how they're going to run it going forward. That's probably going to cause them to not let projects, to any great degree in the short term, as they figure that out.

And in North Carolina, we have talked about the fact that the State had an accounting error, a modest $600 million, and in order to make up for that short fall in cash flow, they slowed down the lending pace pretty sharply. The other side of that equation is, they do have $900 million in Garvey Bond Authority, which we thought they would begin to use in Q4. They have not yet begun to use that. So the expectation is that at some time in '07, that North Carolina's program will begin to move back up somewhat. There is also toll road initiatives in North Carolina that are currently being reviewed. I think you are going to see that become a component of the mix in this State. And the reality in all high growth States is that the local initiatives are rapidly gaining ground in terms of how much value is at the local level in terms of funding, versus the State and Federal money. That's where the real growth is going to be.

Understood. And just back on South Carolina briefly, you don't expect to be let any projects in the short term, I mean, is this going to run all the way through '07? Or, when-- what sort of time scale could we expect to get themselves organized again?

Having lived in South Carolina, graduated from high school there, which was a great event, I will tell you I don't have a clue. And they have a long way to go to figure this out. So we're just going to have to wait. They're in disarray.

And it is not new.

No.

It is not a new issue this year. It has been around for a couple of years.

But it has come to a head. They need revenue. But given the organizational and political issues that they have, they're going to have to get themselves reorganized before they can go forward with anything that will enhance revenue.

Okay.

I'm not even going to guess on that one.

Okay. That's great. Well, thanks for your answers, anyway.

Sure.

We will go next to Tom Brinkman with Davenport.

Good afternoon. Just wanted to know, the last several years, I know you've had the position that acquisition prospects are not so great because of the valuation multiples out there. I'm wondering what has changed? And, one of your major competitors is obviously doing some acquisitions in the small side, in the United States, and just seeing a better environment due to the-- they're saying the home building downturn and the fact they can get some reasonable valuations now.

Acquisitions are all in the eyes of of the beholder. And I don't think that will ever be different. We certainly have things that we continue to look at. And don't be surprised if we don't do a few small acquisitions this year. We may pop out with a couple of modest size. We are seeing some things that-- where the value correlates better to what we think is acceptable value. At the same time, we still see a lot of things that even with what we think is good forward-looking business opportunity, are just too rich. So we have to compare that, or do compare it in our world, versus taking the same amount of money, and buying back Martin Marietta stock, which is a lot less risky and has turned out to be great value. So we just continue to wave that off, where we have opportunities to grow the business, in a way that we think is prudent, and adds value, we will do it. But we're not going to charge out there just to grow for growth's sake. We think we ought to have a lot of growth baked in, organic growth into the system that we've crated.

Okay. Also, I noticed that in 2006, you spent a little bit less cash repurchasing shares than 2005, in spite of the downturn in the stock price in the late summer. I'm wondering about, are there any existing debt covenants that are holding you back? Or what was it that gave you some pause there?

Well, actually we spent only $3 million less, it was 176 million in '05, and 173 million in '06, so it was very consistent. What we have done in the past, and we altered that a little bit in '06, is we basically have used available cash to repurchase shares. We have not generally incurred additional debt. We did incur some additional short-term debt in the second quarter of '06 because the price went down. We were a buyer when the price was 113. We certainly were a buyer at 76 or 78. So we actually stretched out a little bit. And that was because we had heavy CapEx in the first half, and just looking at cash flow for the year, we felt totally justified in that.

The other part of it was we had a very big record CapEx program in '06, $266million. So we wanted to make sure that we funded that adequately. Where we sit today is that we've indicated that our estimates assume that we are going to continue along with a repurchase program that is similar to where we've been the last couple of years, and then to the extent that we add leverage, we would be in a position to step up repurchase. We liked our shares at 113. We like them at 120-ish, whatever it is trading at today. I suspect we're going to like them for a good while.

Okay. Last question. Would you consider any acquisitions in nonaggregate type construction materials or would you expect to remain solely in the aggregate side?

We're not solely on the aggregate side. We're modestly in the ready-mix business in a couple of markets. We are likewise modestly in the asphalt business. And just a little bit of construction activity. It is not what we seek, necessarily. But where we can do an acquisition that we think really adds some value, gets some cost type cost synergy opportunities by buying-- adding to something else we already have in the ancillary product lines, we're willing to do that. Bus first and foremost we're an aggregates producer, and that's what we would seek.

Now, we likewise look in the magnesia specialties realm, too. Because that business has done exceedingly well. And we've had a number of things we've looked at, nothing that we have moved on, but we continue to look there. So there is always a possibility we might find something attractive that we ought to do in that segment.

Okay. Congratulations on a great quarter.

Thank you.

We will go next to Clyde Lewis with Citigroup.

Good afternoon, everybody. A couple of questions, if I may. One on volumes and one on costs. I mean, given that you obviously got some new quarries that are going to be up and running this year, hopefully you don't have the problem with the Ohio river again, and hopefully the transportation issues in Texas don't repeat, but, were it not for South Carolina and North Carolina, would you have expected volumes to be up this year? And it is really just those two States that are holding things back? Or is the weakness of housing really being sort of the major drag on volumes this year?

The weakness of housing is a pretty significant drag. Would it be up a little bit if we had highway programs that were normal in the two Carolinas? Yes, I think it would be, in fairness. So those are definitely a drag on us.

Okay. And then in terms of cost, one sort of specific item, there was a large jump in your corporate costs that you showed in your results, I think it was sort of 16.7 up to 34.8 for the full year, and within the fourth quarter, there was obviously a meaningful move as well. And I'm just wondering if you can explain what was going on there? Is that sort of stock costs or is it sort of a central charge for getting rid of the composite part or the trailer part of the composite business? And then on sort of a generic question on costs in terms of what you would expect to see for nondiesel, nonfuel costs in 2007? And what are you doing to sort of like minimize the impact there?

Okay. Several questions together. Let me start with SG&A. If you take the SG&A increase for the year, and you strip out the expensing of stock options, and strip out the increased incentives that we fade out, which are performance-based, the rise in overhead was less than 3%. Which I think was awfully good performance. So we're actually pretty pleased with the way we've managed that. There is no composites embedded in that. We've broken that out for you. It is what it is. And we have elaborated on it. If you look at production costs, the assumption that we have with respect to diesel is that diesel environment is going to be basically flat. Hopefully, it is going to be down a little bit. But we've started with an assumption that it is flat. And if you buy that assumption, and you carry that forward to production cost at the quarry, then the target would be to keep production cost at the quarry to less than 3% increase, in 2007.

The more difficult piece to manage, which is now 27% of our business, is the loss component that relates to long haul transportation. If you look at long haul transportation, just like we're getting some nice price increases in areas where there is a shortage of supply, that also happens to be where the long haul network is, where there is shortage of supply on transportation. So that gets priced accordingly. So, a bit of a wild card there in terms of what the rate of increase is going to be on that component. It certainly is not going to be down near 3%. It is going to be much higher.

Okay. Can you maybe give some sort of indication as to how much that went up last year, as a percentage increase for the long haul freight?

Yes. It was up about 24%.

Okay. Thank you. Thank you, much.

Sure.

We will go next to Thomas Russo of Gardner, Russo, Gardner.

Hi, Steve and Anne.

Hey, Tom.

Hi, Tom.

Hi. A question about the potential for share buyback, and I guess to the question asked earlier about acquisitions. Implicit in the stepped-up buyback is the belief that the market just misses what has transformed in your business, and I wondered to what extent you have equally applied that transformed valuation multiple to the acquisitions that you do look at? If in fact we're the whole new world, are you willing to step up that purchase price of existing capacity to reflect that same view?

Well, if we were looking at something that had the same kinds of positions that we had, then it's very easy to step it up. And we have talked about what our view of the future is. We think it is quite good. We've talked about the fact that we've got a margin target that is in the 30% range, five years out, which we believe is achievable. So that is based on positions that have been built over a long period of time that, frankly, most people don't have. So when you are looking at each acquisition opportunity, you have to look at the particulars of that opportunity, and then you are going to model it accordingly. And as you look at these things on what you can do with them, they're going to come out with different EBITDA multiples based on that positioning.

What I would suggest to you is that we're undergoing a transition, and when I say we, I'm looking at the Aggregates business in total, the companies that participate in it, there clearly is a step function change. Ourselves and all of the other companies have amassed reserves, in some cases very significant metal reserves that just aren't readily replaceable. And it becomes more difficult by the hour to come up with something that would be a replacement. Therefore, the value of those reserves has gone up and the earning power of those reserves has gone up. And our view is that the market does not reflect that yet. Certainly in our share price, I will let other companies comment on their own, but I will comment on ours, if you make some modest assumptions about the next five years, with respect to pricing, and the difference between price costs, and getting to a 30% margin, you're going to come up with a present day stock price that is significantly above where we are now.

So I would expect that the marketplace will watch us put up numbers as we go, draw their own conclusions, and as we put up numbers, particularly as we get into the next upturn, I would expect that they will value accordingly. I think you are going to ultimately see a business that is valued differently on an EBITDA book basis, from historic norms, because there is more built in long term profitability and cash flow in this business than there has ever been before.

Thank you. Thank you, Steve. The comments you made about the shift towards local funding in lieu of State and regional-- or Federal, what is the vehicle through which those local projects are funded? And what do they tend to be?

Different vehicles. In some cases, the local areas are issuing bonds. They can issue bonds and do issue bonds for schools. An example is that the county that we live here in Raleigh, North Carolina, Wake County, which has a population approaching 700,000 people, just approved a $970 million school bond issue, and that will probably keep the schools in a position where they're building and chasing the needs for another three years or so. They're going to be back for another issue that is probably $1 billion or so, three or four years out.

They're even talking about accelerating it to this year. [inaudible]

So all of these areas in the south where you have these influx of people, particularly young people with children, tremendous pressure on the school system, and that's the only way you meet it. We're seeing bond issues for road improvements at the local level. Quite a few bond issues related to parks. That's a big one.

If you look at the other thing that is going on, local option sales taxes to fund transportation and other needs, Charleston South Carolina would be an example, where they implemented a local option sales tax with that money dedicated to roads. You had Charlotte, which is funding part of their transit system, with local option money. So you've got just an array of things that are going on. We think that is where the action is. That, and toll roads, you're going to see a tremendous ramp-up. The money is not there otherwise.

Yes. And then last, Steve, you mentioned the doubling of capacity for the mag hydroxide flow retardant business, and other ways that you will expand here, [servically], especially chemical area, are there any changes going on in your competitor set, or that has made this business evolve or has it really been your own share of the market, plus your cost structures improving with sale?

We have really worked hard to improve our cost structure. And that has worked extremely well. What we do in that business, a lot of what we're doing, where we're getting growth, is the work that we do internally to customize products to meet specific needs of customers. And by producing a synthetic mag hydroxide as opposed to processing natural magnesite, say from China or Australia, we have the ability to customize the product. So therefore, we can carve out market niches that other people can't necessarily compete in, because they can't make the product. So that's a lot of what we're doing that is adding value. The flame retardant business, which has grown significantly for us, the biggest consumer of that is synthetic roofing shingles. And we just happen to be able to make a product that suits the needs of that marketplace very, very well. Another piece of this business will go toward additives for motor oils. About 1/3 of the shipments for the maga hydroxide powder are for motor oil additives. And that's another highly customized product.

Okay. Thank you, Steve. Congratulations on a great year.

Thank you.

We will go next to Stuart Powers with TCI.

Actually my questions have been answered. Thank you.

Sure.

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

Good afternoon. This is Garik Shmois filling in for David. Just first off a quick housekeeping question. What tax rate should we be using for '07?

It will vary throughout the quarters, but we're planning a 30% effective tax rate for 2007.

Okay. And just lastly, what are you seeing in Texas right now? Is residential construction slowed down more than you had anticipated? Has infrastructure continued to remain strong? And also, has there been any delays in the fourth quarter with regards to rail tie-ups, sending material down there and any expectation for that going forward here in '07?

With respect to home building in Texas, clearly you're getting a pull-back there, just as you are in other parts of the country late to come to Texas. But definitely happening. A little bit difficult to read right now because weather in Texas starting out the year, has been pretty ugly, particularly for Houston, which is normally an open weather type market at this time of year. So we're going to reserve judgment on that. But there is no question that it is pulling back. I don't know of any markets in the U.S. right now of any consequence that haven't pulled back.

With respect to rail, actually in the fourth quarter, the rail movements that we're tied to, in our markets, perform reasonably well. The major railroads had a little less pressure on them. Their business is backed up, as the economy is pulled back a little bit. So we saw better movements, more availability of cars, probably the best we saw all year. In fact, I would say probably it was the best that we saw all year. As we go into '07, the availability of rail always depends upon things that are outside the aggregate domain, because the aggregate business does not drive the railroads. They've got a lot of other businesses that are much, much larger for them. So we don't know the answer to that. It'll depend upon other types of shipments. But I certainly would anticipate overall that it will be a bit better than it was in '06 in terms of supply. But probably still constrained at different times throughout the year.

Okay. Thank you. And just also, with regards to the weather, does it look like the bulk of the work that was scheduled for the first quarter here and in Texas is going to get pushed out into the spring or might you be able to recover some of that here in the back half of the quarter?

Well, it is-- it is only early in February and I'm not very good at forecasting the weather, so I just-- I don't know.

Okay.

There is work there. Certainly Texas has a very, very large infrastructure program. So we will just have to see how the weather treats everyone.

Okay. Thanks a lot.

Sure.

We will go next to Jack Kasprzak with BB&T Capital Markets.

Thanks. Good afternoon, everyone.

Hi, Jack.

You guys have touched on a lot of issues. But I wanted to ask you, reference the next cycle, and obviously we've had three down quarters for volume, and of course the issues in North Carolina and South Carolina, so if it does pan out late '07 into '08, that housing stabilizes maybe begins on an upward trend again however modest, some of these states get their acts together, maybe North Carolina, for example, important to you guys, and you start to see more average GDP type volume growth in your business, does that-- what implications does that have for pricing, if pricing can remain around double digits, in a quote downturn? In that scenario and upturn scenario, would you expect to see a much better pricing situation, or is that, I guess, too much to ask?

Well, keep in mind that the pricing that you are seeing right now does not just relate to what we're doing right now. It also relates to price increases put in when the demand was more robust. Because you've got lag factor in our business. Typical highway project that is being done right now, on average, we quoted that job 18 to 24 months ago and did not necessarily have escalators in it. So as you get that work out of there, you just begin to roll in the existing prices, you get a nice lift. So we will have that. That is a piece of the driver. You just have to keep that in mind. There is a lag factor here. If you think about what I've already said about mid year price increasing, and the fact that there will be a much lesser environment for implementing those this year than the last two years, that's an indicator that the economy is slow. So as you go forward, you probably have a period where you will have a lesser rate of price increase, given that we're not going to have the big mid year pops that we had the last two years, and then as the economy begins to pick up, if you follow the scenario you outlined in 2008, then you're going to be back to very tight supply in the markets that matter, and we're going to gauge that accordingly, and if product is short, then we have more opportunity than we have today.

Perfect. That's great. Thanks, Steve. And congratulations on another great year. I've been following you guys for a long time, and just another superb job. So well done.

Thank you.

[OPERATOR INSTRUCTIONS] We will take our next question from John Fox with Fenimore Asset Management.

Hi, I had another question. Later in '06 there was an issue with liquid asphalt prices very elevated and some highway work being deferred as a result. Can you talk about where asphalt prices are today and do you see any of that work coming back online in '07?

We had an expectation that there would be more physical work done, because if you look at what happens to States and even individual developers, school systems whatever, they're trying to stretch their budget dollars. And at one point, in '06, you had liquid asphalt up to $400 plus a ton. And it had gone from something in the mid 250s up to that 400-plus, very, very quick. If you look at the trend line now, I think the expectation is that liquid asphalt's likely to be in more in the $300 range, 300, 325 for the year.

Okay.

If that's the fact, then, yes, there have been deferrals, and you would expect that the people who have deferred, both States and private developers, are going to move ahead on that work, unless they've got some view that prices are going to come down even more. But my guess is they will take advantage of this respite and go ahead and do some work that they didn't do. We have no way of cataloguing how much that is. It is just a general expectation that we are going to see some-- we know some work was deferred. We are going to see the benefits of that in '07.

Okay. Thank you.

Sure.

We will take a follow-up from Arnie Ursaner, CJS Securities.

Hi. Two quick follow-ups. On the rail cars, have you gotten those delivered at this point? And are they part of your fleet and are you using them at this stage?

All the deliveries of rail cars were made last year. 780 new cars. They are in use. And at this point, they're meeting the performance characteristics and the cost savings characteristics that we laid out in our pro forma.

And you had thought when you did get these [inaudible] by having the ability to do full carload trains, you might be able to get a pretty good cost savings from the railroads. Are you seeing that?

Well, the fact is, we were doing that before, in terms of using unit trains. But we had difficulty securing as many cars as we wanted at certain points. And also keep in mind that we just brought on this new rail capacity up in southern Oklahoma, at North Troy, and we needed to make sure that we had car supply to adequately take care of that new 5 million tons of capacity because virtually everything out of there is by rail. The local market is probably less than a quarter of a million tons. So we had to plan for that. So we're getting very good use out of them. I'm just quite pleased with that right mow.

Two more quick questions if I can. Your billing, you obviously have had a major capital expenditures, Paducah one of your largest plants to come on stream, when you think about your '07 margin views, can you give us a sense of what sort of start-up expenses you are incurring, or likely to incur? And if you don't get the volume pickup that-- again, with volumes declining and increasing capacity, wouldn't this have some margin impact on you in the upcoming year?

Are you talking specifically about that plant or just the array of capital projects that we did last year?

More the overall array and start-up expenses related to those.

Well, the start-up, there were some start-up expenses related to the two big projects. Any time you bring on a large capital project in the aggregates business, the fine-tuning is going to take you at least a quarter, more typically two quarters to really get it running the way-- up to design capability. So we did go through that. There was some start-up costs incurred. The reality was a reduced capital budget in 2007, is that we won't have as much start-up costs in our capital projects, but, Arnie, it is not going to move the meter enough when you're plus $6 a share, whatever the number may be, in that range, there is not going to be enough difference in start-up costs to make any significant changes in our earnings, in my view.

Okay. And my final question, I thought you had locked in very attractive long-term contracts on the boats or ships from Nova Scotia and added to last year. Can you comment again or remind us of how these contracts are structured, and I'm a little surprised when you mentioned you had a 24% increase all of last year. Can you give us a sense of how these contracts work, and how it might impact the upcoming year?

When you're dealing with big ships, we do have long-term contracts that stretch out as much as 15 years. If you think about the shippers' economics, what they want to do is assure capacity utilization, because with the ship, it is all about fixed costs. So we will have a basic rate, and then we will have fuel adjustment clauses related to that, which take care of the fuel changes. The place where we really got the big pops were not on the big ships. We got it on the barging side of the equation, and that related to short supply, and you don't have contracts that stretch out for long-term with the barging side. And also, the fuel adjustment clauses there. You are running 65 to 100-horsepower diesel engines on those tow boats and it is just a giant sucking sound as they consume fuel. So we saw a very significant-- a very significant ramp-up in barging costs, in fact, the number was 40% or so, as opposed to the 24% average for the long haul. Just to give you a feel for that.

And then we saw a significant increase in quite a few of our rail movements where we do have some contracts which are longer term in nature. But they also have fuel adjustment clauses, and beyond that, with rail supply tight, we also have some new contracts, and those were priced at much higher levels. Railroad is in a good position. They're long on demand and short on supply, and they price accordingly.

Okay. Thank you.

Sure.

And at this time, we have no further questions. I would like to turn the call back over to Stephen Zelnak for any additional or closing remarks.

Well, we had a great year. We were really, really pleased with what we were able to accomplish, expectations are high for '07, the risk is in the volume, and I think you ought to be aware of that. That is really where we think the risk is. We think we will perform well on our pricing metric, and we think we are doing a very good job of managing our costs. We look forward to talking to you at the end of the first quarter to see where we are, and take this business forward. Thank you.

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