Martin Marietta Materials Inc (MLM) 2007 Q1 法說會逐字稿

Good day, and welcome to this Martin Marietta Materials Inc. conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to 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 Ward Nye, President and Chief Operating Officer, and Anne Lloyd, our CFO. We were very pleased with our results for the first quarter. We were able to produce record earnings of $0.73 per share against a back drop of severe winter weather which caused further contraction in aggregate shipments. Volume in our aggregates business has now declined four consecutive quarters with an expectation of further decline in the second quarter of this year. At the same time, we've been able to implement double-digit price increases which along with excellent cost management has enabled us to post a 14% increase in net earnings and an improvement of 200 basis points in our operating margin over the 12-month period ended March 31, 2007. This performance leads us to believe when the cycle turns up, and volume increases, we should post some very positive results.

In the first quarter aggregates pricing improvement of 15% was better than expected due to favorable product and geographic mix. On a relative basis, volume was weighted more heavily to our southeastern operations where pricing is higher than the lower demand northern tier states. The severe winter versus the mild weather of last year significantly impacted volume in the northern tier and in Texas with volume declines on an individual state basis ranging from 19% to 49%. In the southeast the volume decline ranged from 3% to 10% on a by-state basis. Other than weather which accounted for the significant majority of the volume decline, and returned volume to more normalized first quarter levels, the continued lower level of housing construction also contributed to the decline.

As we go forward in 2007, we expect increased demand from infrastructure and nonresidential construction with housing reaching a bottom in the second half. We also expect growth in special products such as railroad ballasts and flue gas desulfurization stone. In the desulfurization area we have recently negotiated three contracts which will add about 1.1 million tons of shipments in 2007 and 1.6 million tons in 2008. We expect additional opportunities for these types of materials. During the quarter we did a particularly good job of managing our quarry level labor costs especially in those areas hardest hit by the severe winter weather. Total paid man hours declined nearly 15% while production volume was reduced in excess of 11%. The result was a 3.5% productivity improvement in a low production quarter. Our operations management team deserves special recognition for their execution of a solid cost control plan over the quarter, as well as their consistent productivity improvements in recent years. Careful management of the price cost relationship in a demanding quarter yielded gross margin improvement of 310 basis points for the aggregates product line.

In our specialty products segment we had reduced revenue but improved profitability. Our magnesia chemicals business performed particularly well while in our dolomitic lime product line we experienced reduced volume based on lower operating rates by our steel mill customers. SG&A expenses increased $2.1 million in the quarter with $1.6 million of that related to increased management incentives based on performance. The increase in over head other than the incentives was 1.4%. We continue to manage this area very effectively. In addition to the business challenges, we also experienced a tax rate of 33.8% on continuing operations which was up 210 basis points from the prior year quarter. For the full year we expect a tax rate of approximately 32%.

As noted in our earnings release of February 8th we've been carefully evaluating our capital structure. Excellent first quarter results and a down market further validates the step function change in our business, and with that the ability and attractiveness of increased leverage on our balance sheet. Management and our Board of Directors have been discussing and reviewing capital structure since last May. The review has been extensive and has been supported by outside advisors. Accordingly the management team and our Board have established a leverage target of 2.0 to 2.5 times debt to EBITDA. We believe that this current leverage target is prudent and provides financial flexibility for value creation with strong operational performance, continued investment in internal growth opportunities, and support of value-added business development opportunities along with a return of cash to shareholders through sustainable dividends and share repurchase programs. While at the same time we expect to maintain our solid investment grade credit rating.

During the quarter we repurchased 2.335 million shares or over 5% of common shares outstanding in executing against our stated target. We followed that up with a very successful offering of $475 million of 30-year fixed rate and three-year floating rate debt. We currently expect to continue to add additional leverage during the year to move to the target range. For the full year 2007, we expect pricing to increase 10% to 11.5% in our aggregates business with volume flat to down 2%. The Specialty Products segment should contribute $33 million to $36 million in operating profit. Based on the positive first quarter results, we have raised our guidance for the year to a range of $6.10 to $6.65 per share from $5.95 to $6.50. For the second quarter we expect net earnings to fall in a range from $1.85 to $2.10 per diluted share. At this time, I would be pleased to take any questions that you may have.

Thank you. (OPERATOR INSTRUCTIONS) We'll go to Paul Betz with BB&T Capital Markets.

Thank you. Good results.

Thank you.

I was wondering about your full-year guidance, what shares outstanding are you assuming for the year?

The shares outstanding that we're assuming for the year are where we're at today with some movement towards our targeted capital range.

Modest movement I think is the way I would put it. We have not assumed major buybacks for the remainder of the year, more in line with what we've done in the past.

Okay. Are you able to say whether you purchased any shares in April?

No. We'll talk about that at the end of second quarter.

Okay. Thank you. Is there a way to quantify the price increase for the geographic mix, like I am assuming there will be some sequential decline through the year because of the shift to the more volume in the southeast. Is there a way to maybe quantify that?

As we go through the year, what we said is that we expect that the rate of price increase will decline in the second half. If you recall last year we had very strong mid-year price increases, and we have said and I'll restate that we do expect some mid-year price increases this year. They will not be as extensive in terms of geography nor will they be at the overall level of last year. That will have some impact on the pricing metric as we go forward. In geographic terms what you should expect is that we will have lower rates of price increase in the northern tier where generally there is lesser demand. That would be the plain states, the north central area, and as you come to the higher demand areas in the southeast and southwest, particularly the southeast, you will see higher rates of price increase.

Okay. Thank you very much.

Sure.

We'll go next to Jack Kelly with Goldman Sachs.

Afternoon, Steve.

Hi, Jack.

With regard to your volume assumption for the year flat to down 2%, could you characterize that much like you did the price characterization which north, central in terms of price increases being less, etc, and maybe the pattern's the same, but in other words if volume is going to be down 2% or flat, how would the various regions stack up against that overall metric?

Very good question. I would expect to see volumes not particularly robust in the Midwest and the plains states. An exception, as you come across the northern tier, is that we think volume in Indiana's going to be very strong. Indiana, if you recall, has the enhanced road program that comes from having sold the Indiana toll way rights, and they in fact doubled up on their highway lettings, that work is coming out pretty quickly, and we think with the downtown construction coupled with that ramping up that '07 is going to be a strong year in Indiana for us, and as we go into '08 and beyond, Indiana looks awfully good. The very weak area up there is around Cincinnati and Dayton, and we expect that to be down substantially for the year.

As you come into North Carolina, which is important to us, we expect North Carolina volumes to be down for the year. We've said that before. We would expect that the rest of the southeast that the volumes will be pretty good. Those areas are holding up quite well. As you go to the southwest, we would expect that the volume in the southwest would be in the range that we've outlined, flat to minus 2%.

Okay.

So the lift would come out of the southeast plus Indiana, and the rest of it more likely to be flat to down.

Okay. Just focusing on North Carolina for a minute, Stephen, looks like some of the contractors down there, DOT spending in North Carolina this year could be down 20% or so. Maybe if you had a feel and you comment on that number. And, number two, what turns it around?

It is clearly going to be down sharply in terms of the letting schedule. What we do have, Jack, is quite a bit of carry over work. And that hasn't all played out yet. So the contractors are busier than the letting schedule might lead you to believe.

Okay.

Beyond that as you look at the state, what they really have to do is that they've got to cut loose with Garvey bonds. They have $900 million worth of authority. It is a question of when they think it is appropriate to do it. We thought they would do it fourth quarter of last year. They still haven't done it, but that's their -- given the history of North Carolina and other states that we're familiar with with respect to election cycles, it would not surprise me greatly that it coincides with the 2008 elections, and it is not unusual where you see a covey of work let to produce economic activity as you head into an election year, so that's just an aside and a personal opinion.

Okay. In your comment about leveraging up, you'd mentioned share repurchases, etc., but you also mentioned business development opportunities, and I don't know if that is just another phrase for acquisitions, Steve, or if you can give us any color on what you mean there?

Well, business development activities, obviously, include acquisitions, could include other types of things. We have a lot of activity under way with respect to potential megasites for the quarry business. It is possible that something along those lines might come together, might come together something that Martin does or Martin does with a partner. You just can't tell. We did in fact do two small acquisitions in the first quarter, Jack, which is a departure from where we've been for the last four years. We bought a small sand and gravel business in suburban Broken Bow, Oklahoma. I am sure you've been there. Southeastern Oklahoma. The beauty of that one is that we have been able to acquire property that will give us a connection to the Kansas City southern railroad. We will expand that operation rather dramatically over the next couple of years, and we think it is going to be a primary theater of material into Louisiana, so we're pretty excited about that.

Yes. You could also go to Texas, or not, Steve?

Yes, there will be some local market, but the big ramp up will in fact be rail material into Louisiana.

Okay.

The second acquisition was three ready-mix concrete plants in San Antonio. That's unusual for us. San Antonio is a market in which we're vertically integrated, both asphalt and ready-mix concrete. These three plants filled out our geographic footprint very nicely, makes us the number two concrete player in San Antonio, and in that particular area that's been a very good business for us. So we took those down, an expenditure of roughly $12 million on the two.

Just coming back to an earlier question just to clarify, in terms of shares outstanding and in your guidance, you're not assuming any further repurchases and so the only impact on the shares would be whatever you purchased in the first quarter kind of flowing through the average for the year? Is it?

Pretty much, Jack.

Good. Thank you.

We'll go next to John Fox with Fenimore Asset Management.

Hi. Good afternoon. I was going to ask you about the acquisitions, but I will skip that. Can you talk about housing, residential, and how it is versus your expectations when you came into the year and maybe comment on a couple of the home builders have cited March and April a little worse, because of the subprime contraction of credit, and just talk about housing versus your expectations? Thanks.

You obviously want to have a morose conversation.

I -- I do not. I want to have a realistic conversation.

Okay. As we look at housing, certainly the outlook is not improved. I would say it has deteriorated a little bit. We had a view that housing was going to be down sharply this year, particularly in the first half. It is down even a little bit more than I thought. As we go to the second half, you're going to get to a point where the statistical comparisons just aren't as difficult. And I still expect to see a bottoming in the second half, and what will guide you as to when the bottoming occurs really is going to be a function of how fast the home builders choose to reduce their excess inventory. And that's a function of pricing.

Right.

If you look at the home builders and what they're doing, they're trying to clear inventory off their balance sheets, all of them, virtually all of them are struggling with debt and balance sheet issues. They do that typically by running promotions. It has gotten to be pretty interesting phenomena from what was going on 1.5 years, 2 years ago, where you would have a house up for sale, you would have a list price, and people would come in and begin to bid above the list price. Well, today if you look at the flow of home-building sales, people aren't queuing up to buy unless there is a promotion similar to the retail business. And they wait until the home builders have this please come buy me promotion, and with that comes rather sharp price cuts. So, I think it is going to be very much dependent upon how much price pain -- additional price pain the home builders want to take as to whether or not you reach a bottom in the third or fourth quarter or it laps over. My sense is that they just want to go ahead and take the pain and clear the inventory.

Right.

That's a personal view.

Okay. Thank you. And maybe for Anne, can I have the budget for DD&A and CapEx, and what is the run rate and interest expense after your borrowings in the quarter?

We'll be looking at DD&A of around $145 million to $146 million level, CapEx still is planned at about $235 million, obviously down pretty substantially from last year. The run rate on interest expense will get us to about 60 -- about $65 million for the year.

$65 million for the year.

Yes.

That -- that assumes no more borrowing for future buybacks?

Correct.

Okay. Thank you.

We'll go next to Mike Betts with JPMorgan.

Yes. Good afternoon. I had three areas of questioning, if I could, Steve. The first one was what seems to be a big improvement in productivity in the first half, and I guess particularly the 15% reduction in paid man hours. Could you quantify what approximately cost saving that is, and maybe a little bit more detail? Is that something we can expect to continue through the year, or is it something you specifically did in the first quarter, and then I have two more questions after that?

Well, let's talk about productivity improvement in general. If you go back and look at us over the last five years, we basically have been offsetting increased wages with improved productivity. And productivity during that period in order to offset the wage pressures, productivity improvement has been running plus 4%, 4.5% I think is a good number. We thought that the first quarter was particularly notable because when you go through a 15% sales volume decline and an 11% reduction volume decline in a quarter in this business, it is very tough to respond to. With our great wisdom and foresight, which I say tongue in cheek, we predicted there would be a winter this year. We actually spent a lot of time preparing for it and getting our people ready for the fact we weren't going to repeat last year and that we needed to be very cognizant of coming in, producing a couple of days or a limited number of hours. And that was important because if you go back to last year and the prior three years, we were hand to mouth on inventory all the way, and we basically were running every open hour that we could run to put inventory on the ground for our customers. With some slack hitting in the economy, particularly in those northern tier states, we just didn't feel we had the need to do it.

So we made a conscious decision to manage it in a different way, and at the end of all of that I think the results are truly outstanding to get a 3.5% productivity improvement when you got that kind of down volume. If you look overall, I am not going to break out the labor cost per se, but if you look at cost reduction for us, both production costs and the transport costs, I think it was roughly $19 million, and that was I think pretty impressive. I think we did a very good job of controlling it. As we go forward, we would expect to get our typical productivity improvement rate course that we've been on which is going to be in the 4% range. I certainly hope we're not going to see any more quarters with 15% down volume, certainly not the expectation.

That's good. Thanks. My second question is on the pricing data which you now produce by region, and I (inaudible) trying to find it, but the west region was quite a lot lower than the other regions, I think about 6%. Was there any particular thing that dragged that back? Obviously in Q1 with low volumes it could be due to product mix or anything, but was there anything in particular that caused that?

Yes. Two things. You get into a product mix and actually a geographic mix within that region, the southern part of that region was very weak, and that is where we transfer a lot of material into distribution yards, and when we move to those distribution yards, as in Houston, or the NAFTA corridor, you're dealing in material that may sell for $16 to $20 a ton would be a respectable range.

Right.

We had a lot of that that just wasn't present this year as opposed to being heavily weighted toward that last year. If you look at the more northern tier states and go up in the Midwest plains area, last year we had the most remarkably mild winter that I have experienced in my career with respect to places like Iowa and Nebraska. And what that meant was we were selling a lot of clean stone products that we normally would not be selling until later in the year, so we had some artificial high-priced sales above the norm, and we just don't have those this year, so that's really what impacted that, Mike.

Okay. And my final question was just on tax because I remember on the last conference call you were talking I think, Anne, about the tax rate potentially dropping to 28% in 2010. I understand the reasons why it has gone up in Q1, and you've given the guidance for the year, but would your view on the outlook for future years now be different, or will it now decline from the 32% to 28% in 2010 or --

It might go down to 29%. When we picked up about 100 basis points as a result of adopting FIN 48, and that's not going to go away, Mike. And so, I would say now that number probably goes down to 29% to pick up that additional impact of the production deduction here in the states.

Okay. And then, therefore for 2008, we've just got about a 1 percentage point extra in 2006 -- or sorry, in 2007 it's a one-off nature. Would that be right?

Yes, absolutely, incremental piece there, yes, and build off of that.

Okay. Thanks very much.

We'll go next to [Andy Shafer] with Farley Capital.

Hi, everyone. Anne, I just wanted to make sure I understand when you're talking about your leverage ratio, how you're defining your debt and how you're defining your EBITDA? When you're talking about EBITDA, is this a trailing 12 months EBITDA, or is this more along the lines of how a rating agency looks at it with a three years trailing, two years forward?

This is straight out of the definition of our credit agreements, Andy, and we provided for you on the page 11 of the press release a calculation of consolidated debt to consolidated EBITDA in accordance at that time, and it is on a 12-month trailing, so this is not how a rating agency would look at it, but exactly how we have to look at it from our credit agreement perspective.

Okay. And I guess in that light it looks like for you guys to hit that range based on your guidance for earnings this year, it might be somewhere around year-end debt of say $1.2 billion to maybe $1.5 billion, so it seems like you have a significant ways to go. So, I am just wondering when you're talking about maybe not repurchasing too much more in the way of shares, what would be some other uses of your capital?

Well, we didn't say we weren't going to repurchase shares. What we said is that in our calculation we had not put any significant additional repurchase in the calculation of earnings.

Okay.

It's open as to whether or not we repurchase additional shares, and we're going to look at the best use of the capital. I did mention that we did a couple of small acquisitions, more activity, and in looking, because we've seen some things pop up that are of interest. Is there anything very large out there that would soak that up, you never know. I mean, those things are truly opportunistic, so we just kind of leave it open.

Alright. Thank you.

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

Hi. Good afternoon. This is Garik Shmois in for David. You mentioned before the expected prices to go up in the Carolinas about 15%. Is that view still holding and with volumes coming off in the region, can you talk a little bit about why the Carolinas are so strong with respect to pricing?

Yes. The 15% number we think is -- continues to be a good number. With respect to -- this is the economic question that we get all the time. Why are you able to increase prices at double-digit rates when the volume is going down? The reality is that you're dealing with a product where the replacement cost in many cases, there is no replacement. The replacement cost is just incredibly high any way that you calculate it. We've got irreplaceable reserves, and as we have looked at that, we've concluded that it is not in our best interests to deplete irreplaceable reserves without getting what we think is an appropriate price point.

And that's the way we're approaching the business. Over time what's happened is demand has gone up. The number of additional locations is not very many. The reserve base, you're constantly chipping away at, so it puts you in a position where you have that opportunity, particularly given the locations that we have. That's the fundamental approach to it. I think you should expect to see us continue to take that approach.

Okay. Very good. And just also on the Specialty Products, revenues were down again for the second quarter in a row. Can you talk a little bit about as to why?

I had mentioned that the dolomitic lime business was off a little bit with the steel industry contraction. The steel industry is obviously playing their game in a different way with the consolidation that has taken place there. And actually I think it's a much better way. It used to be that the steel industry would produce and produce and produce until they had filled up all the distribution channels, and then you would have to go through this protracted period of outage in order for them to rebalance with actual sales. Today they watch those sales very quickly, particularly the distributors, and if they see weakness in the distribution chain they're pretty quick to pull furnaces down. We see that and it is reflected in our business very quickly where as they might have in the past continued to produce and just hoped it would get soaked up until they hit a point where they would take significant outage.

Today they're adjusting to the business demand by the week. So that's what's going on, and as you look at automotive and as you look at construction, steel demand there, you would expect to be off and that impacts the production rates. We think we're going to have a good year with dolomitic lime, but certainly some of the excess demand we've seen in the last couple of years is not likely to be there.

Okay. Very good. Thanks a lot. Very good quarter.

We'll go next to Alan Mitrani with Sylvan Lake Asset Management.

Hi. Thank you. Can you talk about whether you looked at the master limited partnership structure at all for any of your assets in terms -- in doing your capital structure review and why you chose at least now not to pursue that?

We have. And in fact, we've spent a lot of time looking at MLPs. We had several of our shareholders suggest that it is something we should take a look at, and we certainly tried to do that in detail. If you look at the type of business we run, the characteristics of the business, and you look at where we're trading today, it really doesn't work very well. We've had the suggestion that perhaps you take lower growth segments of your business, break it up where you're getting price increases that are in the 2% to 3% range, and look at perhaps MLP in that part. The only difficulty we had is we couldn't identify any places where prices were only growing 2% to 3% and had that likelihood as we went forward. So at this point I won't say it is a dead topic because we remain open to ways to create value, but we have certainly not found a way to make it something constructive for our shareholders.

It's funny, Alan, in addition to the fact that you can't really get any arbitrage on the multiples here and as they exist today, there is also some pretty significant tax leakage that happens with the structure for us.

Excellent. I appreciate that. Thank you. Also, since you went the last few months you have been spending and there have been several large deals in the sector between Rinker, Florida Rock and the rumors on Hanson, it seems as if the assets as you're talking, the pricing is not just reflected in the market and making the product worth more. It seems as if the overall assets and the scarcity of companies is making your assets worth more. I was just wondering whether you've been involved with talks in terms of looking at other companies obviously not the $30 billion types, but some of the smaller ones or any of these -- has any of the consolidation pushed any of the families that you've talked to over time to maybe consider being public given the multiples?

With the family businesses, I am not aware. Certainly the size of those businesses really doesn't -- they don't lend themselves to going public in a significant way. The larger family businesses for the most part have been taken out over the last 10 years, and if you just look at what we've done in the last since we went public in '94, we took out 4 of the top 15 during that period, so there has been considerable consolidation. We certainly expect that that is going to continue. As we've said, we're interested in value-adding acquisitions, and I put that qualifier there, and I will put a further qualifier. Value adding in relatively short order, the so-called strategic acquisition that is going to add value three, five or eight years out, doesn't really excite us. We think it needs to add value quicker if it is going to be something that we're going to line up to do, so that's our approach to it.

Excellent. Thank you.

Mr. Ursaner your line is open.

Hi. Good morning. Good day. Sorry. Last year, Steve, you spent a great deal of CapEx targeted on major facilities, and I know in the back of your mind you've had a lot of upgrade work you could do on more of your existing facilities. Given the paybacks you're seeing in the current environment, can you update us on your thinking of the some of the capital spending you might put in your older facilities?

We continue to be on a course, Arnie, to modernize and significantly upgrade the capacity of our operations in the southeast. We have done it in the southwest. We put a lot of CapEx to major locations in the southwest, as well as the Bahamas, Nova Scotia and the project that we had on the river at Three Rivers near Paducah. As we look at where the biggest opportunity is, it is in the Carolinas and Georgia and over the next five years we have a plan to systematically take those quarries which are rail connected, they serve local markets across the fall line in those states, but they also serve by rail markets toward the coastal areas. You're going to see us double and triple the capacity of those plants. We have assured that we have the reserve base to do that. And the beauty of it is you're working in a developed location. You will build a brand new highly automated plant which is going to double your output per man hour. You're going to have internal rates of return that are going to be 25% to 35% or better. We've reviewed with our Board last November a series of projects we've done, and we had some that were above 35%, and that relates to the pricing metric. So it is awfully attractive, and we're going to stay on that course.

Okay. And a follow up to that, you've 15 years or so ago put together some permitted properties some of which you have not attempted to develop yet. Given the current pricing, given your current views of the scarcity, have you thought more about accelerating some Greenfields on your permitted property that is have yet to be developed?

We look at it all the time. Pricing is a delicate thing. What we've done is permit some sites that you couldn't get zoned and permitted today and we've put them in our inventory -- land bank inventory. When the demand gets to a point where that site location, and remember you're dealing in very specific site locations, is attractive based on the development, then we pull those off the shelf, and we develop them. And typically when you do one of these things you're going to spend a good three years or so when you begin to physically develop it all permits in hand actually getting the quarry up to a point where it is running and you're getting some reasonable productivity. We do have some green sites that we expect to open, particularly in North Carolina. I have mentioned before that we have one down near Fort Bragg, a beautiful situation in an area where a lot people didn't think there was any economically minable rock, we found a needle in a hay stack, and it just happened to be adjacent to Fort Bragg and we kind of like that because we blast rock and they shoot 155mm howitzers. We're compatible neighbors. That one we will begin to open up this year and get it open in '08, and we've got potentially four others coming behind that over the next three or four years. We roll them out as we -- Pardon?

I am sorry. Go ahead.

We'll roll them as out as we think they will be effective and make money.

Final question for me, I think, if I know I could never have analytically come up with a number like you had in Q1 in the margins you've had. As you look out over the next two or three years with some likely improvement in housing, you've frequently talked about a 30% margin goal in aggregates, and it certainly appears like you're going to get there a lot faster, and, again, given any housing recovery it seems like you ought to be able to exceed it. What are the things you see holding back a dramatically faster realization of margin in aggregates?

My 34 years of experience in this industry and just some conservatism based on that, because there is always something that happens that you do not expect. If you just sit down and start running numbers with some reasonable volume improvement as you go up cycle, you can run them and we can run them, and they look awfully interesting.

I think it's very important though for your shareholders who are saying to the extent you're going to lever up, if you actually think 2009 and 2010 could show the types of numbers you're probably looking at, as aggressive as you have been and I applaud you for that, there are probably some that would think you should be even more aggressive.

Yes. Reasonable people can have differences of opinion about that. What we're trying to do is thread the needle between what we think is an appropriate balance sheet, at the same time we have said, and I will state again we think we have a share price that does not reflect true value of the company, and I will say it today at $140 some odd or wherever it is. We're a buyer. And we expect to continue be to be a buyer for the foreseeable future unless there is something that changes in our assumptions, and the basic assumptions that we laid out were that the pricing metric as we go forward over the next 10 years, maybe 15 or so is likely to be perhaps double the metric of the last 20, which was a little over 3%, so maybe we're talking about something between 5% and 7%, call it 6% with an inflation rate in a similar place, you roll in transportation, which rises faster on top of that, and that would give you roughly a 4% rate of cost increase. That's 200 basis points a year on average. Is it possible to do it quicker? If the volume comes back certainly that potential is there.

Congratulations on (inaudible) quarter. Thank you.

Thank you.

We'll go next to Clyde Lewis with Citi.

Good afternoon, Steve, and I will have three or four questions if I may. Firstly, in terms of the productivity improvements that you posted in the first quarter, was any of that gain down to the kick-in from the Three Rivers Quarry at all or was it sort of spread across the group across all the different regions rather than just in that one area?

Actually, Three Rivers did not make a significant contribution to that. It was spread across the Company, but particularly notable in the northern tier states and the southeast.

Can you just sort of remind me what you sell into Florida right now and in case the Lake Belt case does lead to some closures down there, what would you be able to do in terms of increasing your shipments into the markets down there?

Well, roughly 5% of our revenue comes out of Florida, and the majority of that comes from the sale of granite both by rail and out of Nova Scotia. We're the big granite provider into Florida for infrastructure. That's our niche. If you were to see Lake Belt shut down or let's say Lake Belt diminution which is much more of a possibility, if we did the Marshal plan of aggregates and really mobilized, we think we could get another 10 million to 12 million tons down there in 18 to 24 months, some of it very quickly. Some of it we would have to gear up for in terms of adding crushing capacity and some additional load-out equipment. We certainly could not bridge the full gap.

You're talking about an area that produces something in best of times maybe 60 million tons of aggregate. You got a couple of cement plants to feed that would have to be fed with high calcium material from other sources, most logical scenario there it would be probably to feed that out of north central Florida, and you would have to truck or rail it down. We could help, but we certainly couldn't cover it all, and what I would tell you that anybody that helps with that scenario if it were to develop is not going to give the material away and I can tell you the transporters are certainly not going to give away the transportation. Because you would have to bump material off of rail in order to get it down there, and that says that the rail rates would be quite high relative to today's rail rates.

That really brings it down to one of my other questions about transportation, not flagged up many problems either on the river system or on the rail system in terms of sort of shipment problems in the third quarter. Would that be fair?

That's fair. What's happened particularly with the rail transporters is that in line with the economy some of the pressure on them has eased off, and what we're seeing, they're obviously working hard to make improvements, and those are coming forward at the same time that they have a little less pressure. So the fluidity of their systems has improved, the velocity in their systems has improved, car availability, power availability, so we have seen some improvement on all the railroads. Now what will happen is that as the economy goes up cycle, the railroads are going to be back to the same place they were at and we're going to be back at same place we were at, which is you're going to be hand to mouth on inventory, rock inventory for us and cars and power and trackage for them.

And on the river.

The river will be the same and is the same today. It has backed off a little more availability of power and barges, but as soon as you go up cycle, you're going to take all of that away very quickly. Keep in mind we've got 50 barges on order in anticipation of increased business opportunity, particularly out of our Three Rivers Quarry with the big investment there, and we'll begin to take delivery of those mid year.

Then the last one I had was I think in the back of your statement on the risk section, you refer to believing that sort of 2007 is going to be a nasty year in terms of hurricanes, and it is a bit of an odd question, but can you give us some idea as to what you actually factored in for guidance in terms of your hurricane expectations for 2007?

Well, we read the various forecasts that are put out, and the forecasts that we have read indicate that there is a likelihood that you're going to see an above average hurricane season. We actually had the same forecast for last year, and it didn't materialize, so as we look at the business, we just want to remind everyone that we do operate in coastal areas. We certainly have seen the impact of hurricanes, particularly in the southeast where they hurt us badly, dumped a lot of water in our quarries, we've had extensive flooding problems, in some cases loss of equipment. But we're just trying to make sure that everyone understands that we do not have a mammoth umbrella that that goes over the areas on the coast and that that is a risk factor, and it is what it is. We manage it well, but 140 mile-an-hour winds are pretty tough to control, and even more so we've found that the heavy rainfalls that come with those hurricanes are much more devastating to us than the winds. The winds pass pretty quickly.

But Clyde, from a forecast perspective, we obviously haven't forecasted a catastrophic storm in our results.

But would you -- you've sort of factored just a normal level of rainfall or actually --

We would have factored in a normal third quarter which is usually third and early fourth quarter is when you have the most exposure so we've factored in what we would consider to be normal.

Thank you very much.

Sure. (OPERATOR INSTRUCTIONS)

We'll go next to Tom Brinkmann with Davenport.

Good afternoon, everybody.

Hi, Tom.

Just wanted to know about just briefly you talked about CapEx being down year-over-year, and you talked about future projects for CapEx. I was just wondering what you're up to these days and why the CapEx is down this year?

The CapEx is down this year because we had two very large projects last year. We had the Three Rivers Kentucky project which was on the order of $50 million, and we also had our North Troy, Oklahoma project which was about $45 million, so those are huge projects for the aggregates business, and we had two of them at once. If you come to this year we do not have any projects of that magnitude in the plan. The biggest project we have going on right now is out in Weeping Water, Nebraska, which is south of Omaha, a major underground mine for us that. That project all up will probably cost us somewhere in the neighborhood of $32 million to $35 million, but we've been at it over the course of three plus years. We should be online in the third quarter there.

Beyond that, the other project that we'll gear up later in the year is we're going to begin to build a new plant at Augusta, Georgia. Augusta is a very good local market. That area continues to grow very nicely as far as the truck component. We also serve the railroad with ballast out of Augusta, and that is a shipping point to south Georgia, it can go on down into Florida. We're going to take that plant from roughly 2 million tons up to a potential capacity of probably close to 5 million tons if we run it flat out. So that project will -- that project will lap over this year and probably won't be online until early 2009, take a good full 2008 to build it.

Okay. And you talked about the benefits from a geographic mix, and with all of the different percentages being thrown around, it is tough to keep up, but I was wondering if you can tell us roughly about what kind of dollar amount prices you're realizing in each geographic division?

No. I'd prefer not to do that. That's information that I would consider to be competitive information. What we have said is the pricing levels are typically higher in the high demand areas which is southeast and parts of the southwest, and you have to remember where you're going to distribution yards you have a big freight component in that piece of it, and we've said before that out of the distribution yards that you're looking at pricing there that can be $15 up into the $20s -- mid $20s, just based on the freight component.

Okay. And you mentioned some ideas about long-term average price increases. What about -- what has been the compounded average growth rate of volumes? Obviously with all of these fluctuations in volumes just kind of get a feel for what the big picture is long term?

Our assumption and the fundamental assumption we make is that at this point we think the aggregates business is a GDP growth business, so pick it at 3% or 3.5% in terms of what average volume growth ought to be over the next decade or so.

Okay.

Part of what drives that is -- a key part, is the relocation of people from the north to the south, and I always like to use the per capita example, because I think it really says a lot about what's driving the aggregates business. If you live in Chicago, you're worth 5 tons per capita to me. I will buy you a ticket to Myrtle Beach, because you're worth 20 tons per capita in Myrtle Beach. You build up in Chicago, you build -- you build out in Myrtle Beach, golf course communities, all the infrastructure that goes with that, and that's where the flow is out of these high density areas into lower density, more retirement oriented, higher quality of life services some would say, and that's driving the aggregates business, certainly driving ours.

Okay. And the last question I had was there a pull back in contract lettings -- highway contract lettings in February. It was the first one I had seen in a long time really in the 1.5 years since the Federal Highway Bill was passed, and I was wondering if you had any comment as to why that might be and did it relate to the federal appropriations or what was going on there?

Certainly I know nothing that says that appropriations would drive that. States are notorious for fluctuations in their letting schedules, and frankly I don't put a lot of stock in individual monthly lettings or even a couple of months. I think you have to look at it on a longer term trend line basis looking at quarters and particularly looking at rolling 12 months is a good way to look at that because it tends to take the seasonalization out and the erratic nature of the states.

Okay. Thanks for your -- answering my questions, and good quarter.

Sure. Thank you.

Next to Michael Lucas with Appaloosa Management.

Yes. I just wanted to confirm some things. Did you say your CapEx was 2.35% for the year?

Yes.

-- and the interest was 65?

Yes.

And taxes -- what was your tax rate?

We expect it to be about 32% for the year.

Okay. The one thing I am trying it figure out and I recognize you got in some nice pricing and some decent growth and volumes are down a little. It doesn't seem like you do any free cash flow. On those numbers, it seems you had 2% to 3% free cash flow relative to markdowns? Do you think I'm lost somewhere? You've got some estimates here of 700 of EBITDA minus $2.30 of CapEx and your interest and you basically get 2% or 3% free cash flow. Is that what you guys are looking at?

You're running the numbers.

Okay. No. I'm just trying to get it in light of you're saying the way the monetize better returns and carve it up, but I don't actually understand how you do a capital structure arbitrage when these are the returns that are being garnered. I am just trying it figure out as an equity holder.

I am confused about what we're carving up here.

If you were to MLP a portion of the assets like you --

Yes. I talked about 2% to 3% rate of price growth. We had that question posed by a particular investor, looking at whether or not there was a possibility of taking part of our business and MLP'ing it as opposed to the majority which he clearly did not view as an MLP candidate.

Great.

And the way he posed the question he said, if you had an area, and he specifically identified the Midwest or the north/central area, which are slower growth, and the prices were only growing 2% to 3%, would not that be a good candidate for an MLP? And we said theoretically that might be interesting provided that you didn't get killed on the taxes with the book value issue, relative to what you took it out at, but we could not identify any areas where the prices were only growing 2% to 3%.

Okay. Got you. And then just on the volumes, just trying to understand a little bit better, do you think that you could have decreasing volumes and still keep pricing, you never get a push back from customers here at some point?

Don't think there is not plenty of customer pushback, you always have that. But reality is we made some conscious decisions in areas where there is reserve scarcity that we're simply not going to give the product away. We're going to try to get better value out of what's a diminishing resource. It is diminishing relative to that particular location, and we just think it is extremely valuable and that value is built over time. So, yes, we get push back and in fact the push back right now as you might imagine given the diminution of housing is very heavily from our concrete customers who are seeing significantly decreased volume. So if you look at what we've said, we've said that prices this year are going to be 10% to 11.5% for the year. That's versus 13.5% last year. So if you call it -- pick basically the mid point, call it 11%, we'd be down 250 basis points in pricing from last year which is directionally the same as your volume decline. It is just from a higher level.

And very comparable too if you look at the past 20 years of pricing and volume that we've put on our website, very comparable to the direction and rate of increase in declines recycled.

Yes. It is 250 basis points against 13.5% as opposed to 5%.

Got you. Got you.

Which is helpful.

One other thing and I am trying to understand and maybe you can help me understand as an investor. Look at coal companies and a bunch of commodities, and maybe this is a better reflection if I look at your K, it says you basically have in your mid east group 69 years of production rev, southeast 74, when with gas, coal, and oil companies have 7 years of production, why is this a scarcity? I am trying to understand why is this a scarcity of reserves, you have 70 some odd years left, or 55 on average?

There is a scarcity based on the fact that there will in our view never be any additional zoning and permitting for quarries in proximity to the ones that we possess in most of the areas where we operate, and it really becomes a scarcity that frankly has been created by the environmental movement, by extensive regulation over time, and you may have a very long-term number, but that's a number based on today's demand that demand is going to grow, and let me give you an example. I just outlined the fact that we're going to double and triple capacity at some of these key locations across the southeast in the Carolinas and Georgia. If you have 60 years and you triple the capacity, you then have 20, so you have to measure all of that out. That's what we're looking at.

Great. Thank you.

Sure. We'll go next to Paul Betz with BB&T Capital Markets.

Hi. Regarding Ohio River and Lock 52, in your 10K you said there is a scheduled two-week outage that may occur in August 2007. Is that -- do you know if that's still on schedule, and would the impact kind of be what you encountered in 2006?

To our knowledge it is still on that schedule, and, no, we don't expect to see anything like the impact that we had in '06. What caused the impact on us that was real extensive is that we were building the new plant and transitioning to it at Three Rivers, and we had to shut down the old facility, and that meant that we basically had run out of inventory. So we were hand to mouth trying to get material down to customers as opposed to having yards stocked and inventory that we could live off of until the lock problems were solved, so we just had to get in the queue, eat a lot of holding cost on the river. That demurrage is very expensive, and we don't anticipate anything like that this time. So, I don't think it is going to going to be a significant issue for you.

Okay. Thank you.

Sure.

We'll go next to Mike Betts with JPMorgan.

Yes, two follow-up questions if I could. Firstly, obviously you're going to be taking a lot of additional debt on the balance sheet with the releveraging. The question, I guess, to Anne, just for working assumptions, Anne, what sort of interest rate should I assume particularly as you get up to those higher rates of leverage. Is 6% a reasonable number on the total debt, or could we get higher just because of the extent of leverage?

Well, our new debt, Mike, we got 6.25% on $250 million of it and then LIBOR plus 15% on $225 million of it, so actually our overall effective rate on the portfolio will go down from what it is today.

Okay. But you'll be taking presumably -- the rest of it will be short-term debt, will it, Anne, that you take on board from here?

Not certain. Could be short or long, but there is not a whole lot of difference between those rates right now.

Okay. And the second thing for you, Steve, I guess you've talked with acquisitions maybe there being more opportunities, and I guess my direct question is two major corporate transactions at the moment. We kind of have a pretty good idea at least in one of them what's got to be sold and I guess you guys have a pretty good idea of what's going to be required in the other one. Are there -- are there meaningful assets that you would you be interested in acquiring assets out of those forced divestments?

I assume you're talking about [Sumex] and Rinker where the FTC has defined what must be sold at this point?

Yes. And the Florida Rock.

And Vulcan and Florida Rock where that has yet to be defined. The answer is that there may possibly be some quarries that are required to be divested. We think there probably will be. We would certainly be a very interested buyer in anything that Vulcan had to divest.

Could that involve significant sums of money? I guess not in Vulcan's case -- they have put a limit on the EBITDA, haven't they? Okay. Thanks.

Sure.

And that does conclude our question and answer session. I will turn the call back over to our speakers for additional or closing remarks.

Okay. Thanks for joining us. We -- as I said, we were very pleased with the first quarter. We'll be back to talk to you about Q2 probably in the month of July or maybe the first of August. Look forward to it then. Thanks.

And that does conclude today's conference call. Thank you for your part -- your participation. You may disconnect at any time.