Martin Marietta Materials Inc (MLM) 2008 Q2 法說會逐字稿

Good day, everyone, and welcome to the Martin Marietta Materials second quarter 2008 financial results 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 Ward Nye, our Chief Operating Officer and Anne Lloyd, our Chief Financial Officer. The second quarter was dominated by energy shock which affected both cost and demand in our Aggregates business. The unexpected rapid escalation of the price of diesel fuel, natural gas and liquid asphalt increased these costs by about $18 million over the prior year period, which in turn reduced earnings $0.26 a share. Escalating construction costs particularly for liquid asphalt, which is up 135% in the past year at about 75% this year, through the second quarter, cut demand significantly. Infrastructure spending was impacted by cost escalation, reducing purchasing power, resulting in lower volume consumption. State departments of transportation were also affected by lower gas tax revenues as gasoline consumption declined due to high prices, a focus on higher-mileage vehicles and reduced driving behavior by the American public.

Volumes declined 9% during the quarter with the largest declines being in Indiana, North Carolina, South Carolina and North Georgia, all of which were down more than 20%. The areas we expected to experience the most positive demand did so, even though Iowa was notably impacted by rain and flooding, volume was up 9%. We also experienced positive volume in Texas, Oklahoma and Arkansas. In response to the weaker than expected demand, we reduced Aggregates production by 12%, which impacted earnings about $24 million or $0.35 per share. Beyond the impact of energy and the impact of reduced production volume, our operating management did an excellent job of controlling costs in a demanding environment. Also, our total SG&A costs was down $2.3 million or 5% with SG&A as percent of revenue declining from 8.4% in the prior-year quarter to 8%. We continue to aggressively work and find ways to manage our business in a more cost-effective manner. On a more positive note, we had record sales and earn also from our specialty products unit with revenue up 14%, $45 million for the quarter, and earnings from operations up 20% to $9.7 million.

Our sales of dolomitic lime to the steel industry are at a record volume level which is expected to continue through the year. In our magnesia chemicals business, we continued to see growth and demand for our water treatment products and flame retardants, along with specialized products used in the paper industry and for the manufacture of LCD and television screens. Also, our recent acquisition of the Elastomag product line is off to a very positive start. During the quarter, we completed a asset exchange with Vulcan Materials which added five quarry locations in the Atlanta area, and one in Chattanooga, Tennessee. The integration of these assets into our system was accomplished quickly and has been seamless.

During the quarter, the North Carolina legislature acted on the recommendations made by the 21st Century transportation committee. The most significant action was to provide sufficient GAAP funding to go forward with four previously approved toll road projects valued at about $3.2 billion, as a point of reference, peak annual road spending in North Carolina has been about $3 billion. The first of these projects, valued at almost $1 billion is in the Raleigh area, and is expected to begin late this year with completion in 2011. Estimated stone consumption is approximately 2 million tons. The two projects approved for the Charlotte area will start schedule in 2009 and 10. The fourth project is a bridge in Northeastern North Carolina, scheduled to begin in 2009. Of the total estimated 6.5 million tons of stone from these projects, Martin Marietta will be able to compete effectively on about 85%.

North Carolina's 21st Century transportation committee expects to present significant new revenue recommendations to the legislature by year-end, together with some likely additional toll road projects. This would obviously be a major positive step for North Carolina and our business in the state. Looking ahead, pricing has been remarkably resilient in the face of nine consecutive quarters of downed volume. We were successful in implementing some level of mid-year price increase in most of our markets. We believe that our 6 to 8% price increase for the year is achievable despite current market conditions. The key issues for the remainder of the year, Aggregates volume and energy cost with the two being closely linked. Given the significant impact of energy on second quarter Aggregates volume, we're lowering our volume forecast to minus 3% to minus 6% for the year. In our specialty products business, we affirm our prior expectation of operating earnings of 36 million to $38 million. And in this context, our range for net earnings per diluted share is $5 to $5.65 for 2008.

At this time, I would be pleased to take your questions that you may have.

Thank you.

We'll go first to Arnie Ursaner at CJS Securities.

Hi, Arnie.

First question, can you quantify the flooding that it had on you in Iowa?

I'll give you a rough estimate and it's really Iowa combined with the river system because that water has to go somewhere and where it went was in the river system in the middle of the country. If you take the two together, and obviously this is a rough estimate, the impact is probably in the 7 to $8 million range, which on a per-share basis would be $0.10 to $0.12. We will have overlap into Q3 with carryover damage and disruption. We have a quarry of Cedar Rapids Iowa which got a lot of publicity. Our quarry is under water. It is a small quarry but it filled up with 1.5 billion gallons of water and we'll be pumping that out from September into October. We had disruption there, we had disruption at the sand plants along the waterways and we had major disruption on the river, and some of that continues. So that is where it is.

Regarding the operations of your business it sounds like or feels like you dramatically almost hit the brakes somewhere in the middle of the quarter. Your production volume I guess was down 12%, which is much greater than the volume reductions you're seeing for the industry. Is it fair to say in fact you have very--very aggressively taken actions to reduce production, and are you also taking other actions like perhaps pulling down the number of hours you're working at some of your facilities? What other steps are you taking to better balance your inventory going into the slower part of the season?

It is a good question and certainly highly relevant and very much on our minds. As a starting point, we're not real interested in buying up working capital sitting on the ground just to admire it. And as it became clear that volumes were not going to be what we had expected, we did put the brakes on hard. And if you look at that difference, it's 12% reduction in production volume, as you noted, and that compared to a 9% pull-back in sales. If you take year-to-date, naturally, we've been working this year-to-date just more aggressively in Q2. We've got 11 million tons less production as compared to about 7.4 million tons lower sales. So we've just decided we're not going to get ourselves out of balance, we're not going to see how we can make the stockpiles, and what it does, it does conserve working capital but it also puts you in a better mode to run when you get some pickup. So that you're not working off inventory overhang.

So we took a pretty good hit and that was intentional. We thought it was the right and prudent thing to do. With respect to cutbacks, a couple of metrics that might be interesting. First of all, with respect to number of employees, that are employed in our Aggregates business, and obviously specialty products is doing great. We've added a few folks there. But in our total Aggregates business, if you compare in the second quarter this year to in the second quarter last year, so you've got the seasonal impact in it, the number of people is down about 6%. If you adjust for the acquisition that we made from Vulcan, the asset exchange, what we also put a quarry in their hands, we picked up about 75 additional people there. If you do the same on same, that number is closer to 7.5%.

If you look at reduction of hours worked, year-to-date, that number is about 9% in the second quarter. It was 10% and then in the second quarter we reduced overtime hours by about 23%. And just to give you a flavor for what this is all about, first of all, since I'm the noted rock historian, been around the longest, this is the toughest time since the early 1980s and we're having to react accordingly. The big things you focus on, you go after them. I mean, we're at a point now where we're scrubbing very hard at what time do shipments take place in each quarry, can we adjust the working time by about 15 or 30 minutes or even an hour to get more labor cost out without disruption of sales, if you go around to our quarries all of our guys know what CFL lightbulbs now, and we're replacing conventional light bulbs with CFLs in high-use applications. It is not huge money, but we're nibbling anywhere there is an opportunity. Because in doing that, you get yourself set up, the first time when you take volume it will be incredibly attractive. So that is where we are.

Final question if I may. In your guidance for the upcoming year. Two questions, one is, in the quarter you had $0.13 from the discontinued operation, is that included in your guidance? And also what fuel costs is embedded in your guidance?

The guidance does include the $0.13. And fuel cost assumptions actually the assumptions are basically flat to slightly up, and as you know, we're getting the downward trend and the way we get to the upper end of the range is to have that downward trend continue. That would be important.

Thank you very much.

Sure.

We'll go next to Jack Kasprzak at BB&T Capital Markets.

Hello, actually this is Paul Betz for Jack.

Okay.

Two questions on guidance was answered, but the interest expense kind of went up this quarter and I know you've done some activity there. Do you have a run rate that possibly for the year or a quarter that we could use in your modelling assumptions?

Yes, Paul, this is Anne Lloyd. Interest expense expect to be about 74 million this year. Obviously it's up in the second quarter because of the advanced funding we did, $300 million and the rate we issued in April. The run rate includes the amortization related to that offering.

Thank you. The $72 million gain that is in your--from the asset exchange that is in your continuing operations, you said it was split between the west and the mid-east, do you know the number, how much went into each region?

First off, 7.2, not 72. We would have loved to have 72, but we didn't get it.

I'll get that number for you, Paul.

Okay. Lastly, you said the Augusta, Georgia, quarry is opening sooner than you expected in this year. Does that do anything with your CapEx outlook for 2008?

For 2008 it's going to make it a little bit heavier than we would have expected. When we get to 2009, we'll get the benefits of that.

Okay.

And, you know, early expectation for 2009 is that CapEx is going to be down significantly. We have other large projects but any starts would be later in the year. So I think we're going to see a major CapEx reduction in 2009. We will see a reduction in 2008, estimate for 2008 is 240, could be as much as $250 million, and then when we get to 2009 we'll quantify later but you should expect to see significant reduction.

Okay. Thank you very much.

Okay.

We'll move next to Timna Tanners at UBS.

Hi. Two questions, as well. One was to ask just to make sure I understand and to think about your pricing, to assume the low end of your 6 to 8% pricing we will have to probably see continued pricing from what you saw in the second quarter and actually an uptick. So are you continuing to pass on price increases and are you seeing what TXI talked about with a surcharge, are you planning to follow that initiative?

We won't follow TXI on their pricing philosophy and the implementation. We'll do our own thing. We have a much more successful round of bid year increases than we earlier anticipated and not that they're big, but they were much more widespread, and in fact in virtually all of the areas of the company we got some type of mid-year increase, not necessarily on all sizes, not necessarily at every quarry, but we did get far more than we expected. So that is where the optimism comes for the 6 to 8%. And we feel quite comfortable with that based on what we're looking at, that has already been implemented, it's put in place.

Okay. Great. And the other question was about buy-backs, you did a small amount during the quarter. I just want to get your philosophy on stock buy-back.

We haven't done any stock buy-backs during the quarter. Only thing we've done this year is we had $24 million of cash that got paid out the first of the year to settle fourth quarter '07 buy-backs, but we haven't acquired any additional squares.

The question is how do you think of it then?

The way we think about it is first of all we did the very large deal for us with Vulcan. And we took on additional debt to take care of that, plus we did prefunding of the debt maturity that comes up at the end of the year. We actually quite pleased we did that prefunding. We think that is advantageous. The objective between now and the end of the year to pay down debt. We have a defined target range and it was--it was done thoughtfully, being between two times and two and a half times debt to EBITDA. Expectation by the end of the year is it will be somewhere in the middle of that, and get debt down $100 million or so, 125. So the focus will be on debt repayment, we always got to keep ourselves in balance. Not that we don't like share price. We do. We love it. In terms of being a purchaser. But it would be foolish in our view not to take care of our balance sheet and also we need to take care of our debtholders and try to balance that out.

The focus of use of cash is to pay 100 and 125 million year-end in debt?

Yes.

Great.

Next we'll go to David MacGregor at Longbow Research

Hi, Steve, Ann. Couple questions, first of all, on the infrastructure, one of your competitors was talking on a recent call about the highway trust fund shortfall and that there is a bill before congress right to you now to address that. The question is, if the bill passes in the next month or two, when do we actually see the benefit in your P&L in terms of these infrastructure projects?

It will be 2009 before you will get anything notable that will happen there. Based on what has been proposed, it's not huge money but it could be very interesting. The typical flow on that money is that roughly 27% of it flows in the first year, mid-40s in the second year and then it stretches out beyond that. The state D.O.T.s would be the ones that would decide which projects they're going to apply it to. I don't think there's any shortage of projects that already been engineered and ready to go, so I think they can get out of the gate reasonably quickly. But even if they do, cranking up projects of any size takes a while to mobilize and again to actually put stone on the ground, put asphalt down, concrete.

So it's a 2009 item. I believe pretty strongly that given the ramp-up in unemployment, which I think is going to continue for a while, the fact that we've got a national election coming up in November, that it's likely that the democrats are going to make infrastructure a priority. They seem to be doing it. And historically they have been very good for our industry. So it would not surprise me that they come forward, what is kicking around right now is a fairly modest program under the characterized as stimulus with infrastructure being a component of stimulus. Would not surprise me that they come back with something that is broader, they've talked about bond guarantee program. I think it's a function of unemployment, people are feeling, and as that unemployment rate picks up towards 6%, the pressure is going to grow given that I think the politics are leaning very heavily democratic electionwise, that they're really going to carry the ball on this. So actually I'm fairly optimistic about that part of it.

Just two follow up questions, number one, you said '09 before you see impact of '09, are you talking first half or second half. On the stimulus package, what kind of numbers are being discussed with respect to the magnitude of that.

With respect to how things hit, highway work doesn't really get going typically until the second quarter, unless you're in Florida, very warm climates. So any impact that you would see in '09 would begin in the second quarter. That's the earliest I think you would see it.

Right.

The infrastructure component, Senator Byrd is the one who is carrying the water on this one right now. The infrastructure component of his stimulus package is roughly $7 billion, and it is a variety of infrastructure components. But most of it would be aimed at roads. And that's about a third of his total stimulus package. Anything that we're talking about with respect to bond guarantees and other programs would be beyond that. If you contrast his program, as a long-time senate reader with Barbara Boxer in the House, her program is a $50 billion program. And she's pretty adamant about what she thinks needs to be done. So it will be interesting, take two, average them together, but they would tell you that the democrats believe that there is additional stimulus needed and they actually think that stimulating the US economy as opposed to the Chinese economy, would be a good thing.

Agreed. Now, last question. Just with respect to gauging your confidence on pricing beyond 2008, what is the chance that you'll see year-over-year pricing falling back to the low single-digit levels that we saw in '82 and 2004.

It is always possible but we just don't see it right now. My pricing levels being less next year than they are this year. I think they could be. But if they are, they will be likely at or above the prior peaks that we saw for the last 20 years. We're just in a completely different environment. I'll give you--I'll give you something to think about that I think is pretty interesting and in measuring where we are, and how this industry is reacting. If you look at volume decline and you annualize volume, which is the way you need to do it, you go back to the first quarter of 2006, which was the peak of the cycle, as a company we were clipping along at about a 206 million ton annualized rate. If you come forward to the second quarter, just completed, we're at an annualized rate that is about 175 million tons. And that is a 15% decline in tonnage over that 9-quarter period on an annualized basis.

If you go back to 1991, which was the last deep recession in our industry, volumes were down 10%. And we gave up a third of our profit. This is prepublic company days but we've stated this before, volume down 10% and we gave up a third of our profit. Volume is down 15%. If you take the range that we just put out and take the middle of the range, and compare that with what we earned in 2006, which was 529, your profit is flat but slightly up on a 15% volume decline. I think it's pretty incredible we are where we are, and frankly you ought to make that comparison with some of the other companies in the industry and I think we separated ourselves in that regard. But it is an interesting way to look at it, in my view, what it says is, that we're positioned incredibly well from a cost structure standpoint, and when we get a little volume which will go with some better than historic pricing, your incrementals are phenomenal.

Thanks, Steve.

Sure.

(OPERATOR INSTRUCTIONS). We'll go next to Ajay Kejriwal at Goldman Sachs.

Hi. Just wanted to clarify on the EPS question asked previously. So your guidance include the entire $16.4 million, or just the $0.13 of that 16--

No, it includes everything. It's a total roll-up. The number that we reported at the end of the year.

Okay. And maybe some color on what's that 7.2, why would that be part of the operating income? Is it sustainable? Or how should we think about it?

Those were properties that were operating properties that had not been classified as discontinued. It is just like selling any other land or equipment that we have in the course of the year.

Which we do regularly and generate fairly significant income off of.

Okay. All right. Moving to your volume guidance, and if you back out what you did in the first half implies second half volume of what minus one to minus two, if my math is correct, but does that sound right?

We think the second half is going to be much better. The Midwest should be very strong, barring some other disruption like the flood. We think the midwest is going to be extremely strong. We are looking for a very robust agricultural lime season out there. We have some very good project work in most of the parts of the company. We think we'll see positive volume in Indiana and Ohio the second half. Now I have to ask the question breaking out weather impact. I just concentrated on Iowa and the river, but the reality is that Indiana and Ohio get impacted pretty heavily, too. And when we get to the comparison the second half there, that came down very sharply very early, so the comparison getting easier, we think that will be a positive.

We think Texas will continue to be pretty strong, Oklahoma should be positive, Arkansas should be positive, the big worry is the southeast. Carolinas, North Georgia in particular. Atlanta area. And if you look at the volumes in the second quarter, in the Carolinas, you're talking about all 25% which is far beyond anything we would have anticipated. Some loss of confidence people preferring to pulling back. And in Atlanta you plus 35% reduction. And when you subtract out the quarries, the same on same and take away the Vulcan, and so that market is being brutalized, and in fact the decline in t Atlanta probably is the worst sin the mid-1970s.

Good color there. Do you have data on shipment by end markets in the second quarter, how did your markets do in terms of res, non-res and infrastructure?

We don't calculate that until year-end. We obviously keep track of it more anecdotally. Reality is that RES continues to come down obviously from a lower base. I will tell you that for the first time in probably two and a half years, I actually see a glimmer of hope in the residential sector. In looking down into the abyss, I think I can see a bottom. And I haven't been able to say that in a long time.

It would not surprise me that you begin to see some statistics, and in fact you're seeing a few, that indicate that we're getting down toward the bottom. It would not surprise me that you begin to see some positive statistics as we get into the middle of '09. I think inventory has probably peaked in terms of months of inventory, which is about 10. It would not surprise me that that number would be closer to eight by the middle of next year. The major home builders have really pulled back sharply in terms of what they're doing. And from the standpoint of our business, the interesting thing is that they're running out of subdivisions, even at low levels of sales, they pulled back so sharply that sometime next year, probably by the middle of the year, they're going to have to begin to develop property again, which is where a lot of our stone gets consumed. So clearly down more in the second quarter, infrastructure was the big pull-back and it was--that was surprising but it was really driven by the price of liquid asphalt and the total construction costs.

I think the D.O.T.s around the country got spooked when they saw asphalt anywhere from 650 to $850 a ton and their view would be I can't buy much of that based on those prices. I need to pull back because I have to, but also expectation that that price level will come down. And I think they're correct in that regard. So I would expect as pricing comes down for asphalt that we will see more activity there. Plus there's a lot of activity at the state level in addition to what we talked about at the federal level. The states are very active in trying to increase the revenue. They have to do it. The demand is overwhelming.

The question is how do we raise the funds? It is not going to be through the gas tax. It will be through other fixed fees and toll roads which we talked about before and some today. Commercial work continues to be reasonably strong, although we're seeing the pull-back on retail and we're seeing the pull-back on office, which we've noted before. But capacity-driven projects continue to go very strongly. So it's the least impacted sector right now, although in the leading indicators certainly those don't get you excited. But I think that switch can flip back on pretty quickly because there are a lot of projects on the sidelines right now that people have ready to go as soon as their confidence is up. So that is an anecdotal description of where I think we are.

Very good color, there, Steve. Maybe just lastly on transportation. Are you seeing state DOTs as they plan for next year, are they planning for similar amount of dollar funding or given what is happening with property taxes and foreclosures, are you seeing lower spending for next year?

We really don't know, yet. The DOTs hold that pretty close. They're obviously assessing their inflows from gas tax, which is the primary component of revenue structure. As you know, that is being impacted. You're seeing declining consumption of gasoline, and that is pushing them to go to other revenue sources. Not that a particular state is going to come back two years in a row, but what you're getting is sort of a rotation right now where states are coming out. They're raising funds, and the other state does the same thing.

Iowa just came out with $140 million of new revenue. In Iowa, that is big money. Oklahoma recently came out with something in the 150s. Early in the year you had Louisiana and Minnesota, you're getting a lot of positives there. The big one for us is to see what North Carolina does which is what I highlighted in my remarks. Very successful in this recent session in the constraint was there could be no new money. It had to be a reallocation of funds, and we were successful in getting that done. The legislature funded these toll road projects because the need is just overwhelming. So they will be able put in front of them a very large basket that will be a 10-year program. I am going to guess that the numbers can be 8 to $10 million of new money over 10 years, at least that's what is being talked about now. And in addition potential toll road projects that might add another 6 to $8 billion, or even more. So we're not talking small change in North Carolina, because the needs are driving it.

Great. Thank you.

Sure.

We'll go next to Mike Betts at JPMorgan.

Yes, hi, Steve. I had three questions, if I could. The first one, Steve, if you could just talk a little bit about Florida and what is happening to pricing now, these 3 quarries are open again.

Okay. We don't compete down in the southern tier in Miami. We've got a little bit of business down there, but nothing notable. We do compete with those quarries by rail as they try to ship up to Orlando and up to Jacksonville. They were visions of another $5 increase. You can cross that one off. I don't think that's going to happen. They're trying to do some rebuilding of volume with the quarries that were shut down. Florida continues to have a pretty robust infrastructure program. The hurt has come on the concrete side, as you can see, with some acquisitions, rock. Interesting thing with the piece that we're involved in, we look at it in terms of our south Georgia business and Florida because they're tied very closely together. If you take the piece of south Georgia that feeds Florida, our volumes were up in the second quarter and we picked up some pricing. Where the competition is for concrete business, I will tell you that has become very aggressive, and we're seeing more aggressiveness down there between the players who play in that game. Fortunately we don't--we're not involved in a significant piece of that. So we're not surprise me on the concrete side that, that's going to be a shoot-out for a while.

The first $5, the one that was in October of '07, is that as far as you're aware is still--I guess you got some knock on benefit from that.

Yes.

You haven't seen any sign of that diminishing?

Not really. I mean, it is there in terms of a starting point. List prices, and what volume discounts would be to the big customers. But there's some nibbling around the edges. People get to a point where they really would like to steal a little volume from their competitor.

Okay. My second question, if I could, was just on cost cutting. Hopefully we are reaching a trough in volumes if we did have further declines in volume next year, is the further scope for taking additional costs out of the business or have you done so much now you would be starting to damage the business for when things recovered? I wonder if you could just talk around that issue and give me some idea of also how much of what you do is preemptive versus reactive on the cost-cutting side?

We obviously been very aggressive in managing our costs, a lot of that comes back to the information systems we have which allow us to do things that we don't believe other producers can effectively do and react real-time. If we were to have further significant volume decline in 2009, I think what you will see is us shuttering some plants, rotating crews between two plants where we run one crushing crew between two plants and then we will have scale and load-out people at the plants to keep them operating on a sales basis. So there are things that we can do. I've already talked about capital coming down. We're well capitalized. We've done a nice job of getting ourselves set up with mobile equipment.

This Augusta plant coming on is a huge plus for us in terms of being able to move more product where the market continues to be pretty robust. And also by giving customers some longer-term guarantees on supply to lock in some volume and some agreements there. So we don't see what, you know, that volume decline significant volume decline coming right now, but you know we got a long way to go to the end of the year so we'll reserve judgment until we get there. But, no, we haven't done anything we can do. We're going to continue to adjust. The thing you can't adjust for is the hard, fixed costs that go with the plant. The depreciation part of it. You're not going to be able to adjust for.

Understood. And earlier, Steve, you mentioned the 15% reduction in annualized volume over two years. How much of your employees or your--employees is a good guide. How much of your employees actually dropped over the two years? I mean, you gave the 12-month number which I think you said was 7.5%. Could we double that for the two years where you talk about 15% drop in production?

It's not 15%, but it is in the low teens.

Okay. Thank you for that. And then the final question, Steve, was just on Texas given the importance of it, one of your biggest states. I mean, obviously part of the the growth we're seeing this year is because of the bad weather a year ago, but I guess my real question here, is there any sign of any slow-down yet, there, either in the housing market or in the other markets?

The answer is yes. I don't--other than the farm belt, I'm not sure that there's anyplace that is really immune to some slow-down. That economy is driven in a different way. If you look at housing statistics, you're seeing San Antonio, Houston and even Dallas/Ft. Worth back off. They're backing off from very high levels and there is still a very solid housing market there compared to other parts of the country. But you are seeing diminishment. And with that you begin to potentially see some pull-back on commercial and retail construction. Texas non-residential continues to be strong. That is part of what's driving the volume out there. And it's not part of it that has been a major component that's driving it.

Infrastructure has been a mixed bag in Texas. Toll side of the equation has gone very well. The Texas DOT is funding-challenged, shall we say? And they're pulling back accordingly to match expenditures to incoming cash. So, yes, you're seeing something but certainly relatively strong compared to most of the parts of the country. Stronger--lot stronger than the southeast right now.

Okay. Now, this is my final question and I should know the answer but I apologize, I don't. The state and local funding, how much of that is reliance on the gasoline tax as against other sources of funding roughly?

I can't give you a precise number, because we've never racked it up by the states. But you're probably talking about a number at the federal level that it is all gas tax. When you get to the states, it is not unusual that that number is 75% or better gasoline tax, and I'll tell you what I think is going to happen. And this is the thrust of the changes that have recently been made. You're seeing the increases come with respect to vehicle transfer taxes, i.e., a sales tax. You're seeing it with respect to registration fees, title fees. In other words, fixed fees. One of the things we're talking about in North Carolina is a vehicle miles traveled assessment. And there's talk about that around the country. We've got a construct we're looking at, that's fairly simple and straight forward. We think it is easily collectible. Whether or not it will be the political will to implement it, I don't know, but we're going to talk about it a lot. It would not surprise me that we come forward with this recommendation. Although next five years you are going to have to see a significant movement to fix fees and vehicle miles traveled assessments. The gas tax simply won't do.

Okay. That's great. Thanks for those answers, Steve, cheers.

Sure.

We'll go next to Todd Vencil at Davenport & Company.

Thanks, hi, guys.

Hey, Todd.

Steve, I think your guidance on the volumes, the down 6, that was carried into volumes net of acquisitions and divestiture or net of acquisitions? How much of the acquisitions you have done so far will add to that?

The acquisitions are really minor. You're talking about partial year. You're talking about 1% or so change. Remember, we divested, too. Just happened to be most of it is in the Atlanta market and I already told you what has happened to the Atlanta market.

Right. Okay. Thanks for that. And then I don't want to beat this sales thing to death. I just want to make sure I understand it. Of the 16.4, 7.2 was continuing, is that right? It was split between those two groups?

That's correct.

It was--

Land sale component which is part of our normal business.

Income statement 7.2 is above the line and 9.2 is below.

Correct.

And then turning to price increases, you said you're getting price virtually everywhere and then you came back and said roughly the same thing. Is there anyplace that you're not getting it that is surprising you or you're just not getting anything at all?

No, I'm actually quite surprised that we're as successful as we've been, that we're able to get some price relief pretty much across the board, because when we started out the beginning of the year, we didn't think we would be able to do that. In fact, your call coming out first quarter we bumped our price range 50 basis points.

Good work and congratulations on that. You talked about a couple quarters about the fact that you were shifting mix away from your long haul markets and maybe losing some price due to mix shift in terms of what the average was coming out to be?

Yes.

Do you see that for this quarter?

Not nearly to the same degree. Geographic mix was a big piece of first quarter as was the transportation mix, transportation mix is more normalized.

Yes.

And geographic mix still is a negative for us and, in fact, we go through a little calculation. If we had the same geographic mix in the second quarter that we had last year, we would earn $0.09 a share more.

Okay. And a couple of housekeeping items. You talk about CapEx expense, can you tell us what you think the tax rate and full year DD&A are going to look like?

Full year DD&A right around $165 million. The tax rate should be 31 to 31.5.

And the--you threw out a couple of times the cost savings you guys are doing are really going to pay off--first time you start to take up some volume. You kind of teased me with that and the way the housing market are going to do. What do you think the time frame is going to be when you are going to start to see some up volume?

Certainly too early to be too definitive. But if we begin to see a break in the housing market in the second half of next year, obviously that's a lead. My view of the non-res side is that it is going to respond much quicker to what is going on in housing and in fact it may respond independently based on investor confidence. Because if you still look at--if you go back and look at the non-res construction, it continues to be behind the home building footprint. So those two things could move pretty simultaneously. Even the, non-RES could move in a positive manner a quarter before res. A res-positive move becomes apparent. But I think the key thing is going to be--is going to be the infrastructure piece. I really believe that with the state of the country that with the politics are calling for significant change much more focussed on the domestic economy, and the democrats are articulating that very well and it seems to be resonating with the American public. And would not surprise me that before November they're going to make some promises that people are going to hold them accountable for that would be positive for our industry.

The big uplift that really will really take this industry forward has to come from infrastructure. Even with housing coming back, let us be realistic. I went back to monthly rate of 2.4 million starts, probably the next two or 3 cycles, you're not going back to the annualized rate of 2.1 million, you might get back to something that is in 1.7 or 1.8, sort of peak rate, 1.5, 1.6, more likely. So it is certainly well up from where it is right now. But it is not going back to where it was--I don't think for at least two cycles out. So it puts more emphasis on infrastructure and more emphasis on what I refer to as the capacity-driven non-residential projects. America has to rebuild its capacity. Be it transportation or other types of things that we produce.

All right. Thanks for that.

Sure.

We'll go next to Trey Grooms at Stephens, Inc.

Good afternoon, quickly, you mentioned in the press release large commercial industrial jobs, are these projects that you already started or are they projects in the pipe coming up. Could you give us some color on that?

With respect to large commercial and industrial jobs we've got an array of those types of opportunities that are out there across the country. A lot of it is energy-driven, and if you were to go--I mentioned Iowa is awfully robust with the farm economy. But Iowa has become an energy state and we continue to have very robust business out there with farm projects. Iowa is the number three producer of wind generated electricity and is ramping up further. So I think that's going to be a positive. We talked previously about expansion of LNG terminals and refineries, we talked about steel mill expansion. We talked about foreign automotive expansion, which you've got recently announced plant that is going into Chattanooga, BW and you have the Toyota plant in Mississippi. Those are nice opportunities you get Mobile. And all of these are very, very big projects that are going to take a while to build out. They really give a stimulus to our business, because whether we or a competitor gets that work, and typically it winds up getting split up, it soaks up capacity in the market. And keeps people busy, which is always a plus. Tends to take pressure off of people getting extremely price aggressive trying to seek volume for plants that just don't have any. So those things are key. Absolutely key.

One other little positive note I'll give you since I talked about toll roads which are important to us in North Carolina, the letting took place this week on the work I mentioned in Raleigh, and there were two projects let. The first of those projects was the small one. It had--it has about a half million tons of aggregate on it. We've been told that we will furnish that aggregate. The second project has about a million and a half tons. It is a much larger project. We may not know for months there but in expectation it will furnish some portion of it, too. So those kinds of opportunities don't come along all that often. Half a million ton project is a very big project.

Great, thanks for that. And then also with the $24 million incurred to control inventory levels, I assume that this is kind of an ongoing initiative. Can you take a stab at what that impact might be, in the third quarter or fourth quarter?

I think we're much better balanced as we go forward through the year. I believe that we took our big hit in the second quarter where we really jammed on the brakes hard. Expectation is that we will be fairly well in balance as we go the rest of the year. It is not to say that we might not have some fixed cost inventory type hit. I'm sure we will. I don't think it will be of a similar magnitude.

Okay. That's all I've got. Thank you.

Sure.

Next we'll go to Clyde Lewis at Citi.

If I may, I probably should know this, but the west rich gin was the lowest price increase. Can you just sort of run through the reasons behind that, mixed changes but I want to check on that.

Mix changes are a piece of it, you know, where the material is being shifting within that region, you have transportation mix, which is improved, but if you look at, the pricing there, Texas was very strong. Particularly the NAFTA corridor, that where we shipped some low price material. We referenced that in the first quarter. So the expectation out there has not been that we were going to get--first of all, starting point was we were not going to get the level of price increases we've seen in the southeast, in particular, and that it is just what the economists would predict. You've got more competitors, various entry or not as high, and the pricing reflects that. Plus you got some very low-cost material and low-price material in the NAFTA corridor. [Colliche], which we've referred to before, $2 and $2.50 material and the market is quite good for that right now, that's really what is impacting it.

The other operating income in Q2 is another good number. I suspect (inaudible) and what expectation you have for the full year.

That is our land sales, the 7.2 million in there is land sales we did in the Vulcan asset exchange. You will have some used equipment that gets sold in there, the run rate, runs anywhere from 12 to $15 million a year if you look over the last three to five and we don't see any difference that that this year.

That 7.2 is in that 7.6, rather than tucked up in the gross profit.

Correct.

Okay. The other two were slightly bigger picture ones. One was sort of on concrete roads versus the asphalt roads. Given this other spike in asphalt prices or liquid bitumen prices, has the DOT turned around and said let us build concrete roads instead and taking advantage of weaker cement market.

The problem with concrete roads is ride ability. People, as they take their trips don't enjoy the noise that typically has gone with concrete road. They don't enjoy the seams, the joints. So you get into rideability issues which the consumer just has a bias because the asphalt roads are much quieter and a smoother ride. Now the concrete industry is obviously working very hard to convince DOTs otherwise, but the DOTs are, at the end of the day, they're political animals. They have to survive in that environment, and if they're not pleasing the driving consumer, then they have a problem, and you can go around the country and it's not hard to find anecdotal situations where the DOTs went to concrete on major roadways and regretted it very soon thereafter with the flurry of consumer complaints. So economically it makes all the sense in the world, Clyde. It is cheaper initial build right now to build with concrete, and certainly life cycle concrete construction cost is far better. That line crossed over in 2007, and it's heavily weighted toward concrete. I think where you may see it, where it really has an advantage, if you take parking lots, if you're a Wal-Mart and you're accustomed to putting down an asphalt parking lot, you pretty quickly going to ask the question why am I doing that versus putting in concrete which is initially cheaper and will last me a lot longer. So if the economics stay anywhere in close proximity, I think you're going to see a lot of non-res projects move away from asphalt parking lots to concrete parking lots and that can happen very quickly.

Thanks on that. The last I had was on margins. Where are you now in terms of your sort of, you know, sort of margin improvement over for the five-year period. Are you still hoping to get there by 2010 with a sort of hopefully a more stable market in '09, and in 2010, or do you think that's actually going to be pushed out into 2011 or 2012.

I think it's going to be pushed out. I think we have to be realistic about that. This thing is deeper and more pronounced than certainly we expected. I'm going to frame it for you in a little different way, we'll talk more about this as we go, but if you go back to the period of 2002, to 2007, we increased margins 1134 basis points. I think you will agree we did a pretty good job. If you take a period going from 2007 to 2012, the next five-year period, the expectation is even though we're moving backwards right now, that we're going to do that again. We're going to be 1,000-plus basis points during that period. From 2005, the different point we've been looking at, to 2010, we're not going to get there simply because of this year. By 2011 measured on that basis I think we've got a good shot at getting there. And being a statistical junkie, I like to look at these things and try to break them apart. If you look at 2002 to 2007, we essentially got that done and the bulk of it in a three-year period, and most of it at two years. So it's not going to surprise me that the same thing plays out over the course of the next five years. You're going to get a lot when volume turns, margins are going to ramp very significantly.

Yes. Okay. Thanks very much.

Sure.

Our next question comes from Jason Brown at KeyBanc Capital markets.

Good afternoon.

Hi.

Just wondering how much your liquid asphalt costs have come down so far in this quarter?

Well, first of all, we're not big asphalt guys, and we're into the third quarter and not appropriate to speak in the third quarter, and in the second quarter--in the first half of the year, liquid asphalt cost started the year in most places a good average would be about $400 a ton. And by the end of the second quarter, those numbers were $650, $700, with larger increases promised as people came into the third quarter, it will be interesting to see whether or not those stick, how long they stick.

Okay.

We haven't seen--we haven't gotten any letters from anyone or any one of our customers saying that liquid asphalt is backed up.

Okay. And then the second question is just in Iowa and the whole midwest I assume there has to be a lot of maintenance and rebuilding has to be done after the flooding. Do you expect to recover any of that volume in the second half, or even the first half of '09, and are you seeing any increased demand from that?

Yes, I don't think there's going to be hugely impactful rebuilding tonnage. Cedar Rapids was the most impacted metro area, and Cedar Rapids is not a large place. The downtown area was pretty much destroyed, and the question as to whether or not to even rebuild it there or just relocate. I think the economy out there is so strong that it was more the disruption of what would have been an exceptional volume upper that was the issue and as we go into Q3 and Q4, we think volumes are going to be very strong there, regardless of what goes on with any reconstruction work. I don't think reconstruction is going to be the driver. Just going to be the strong economy there.

Okay. Thank you.

Sure.

Next we'll go to Dave MacGregor for Longbow Research.

Couple of quick ones, you talked about CapEx being down next year. What is the CapEx number we should think about for Martin Marietta.

Maintenance CapEx hovers around DD&A and we've given that number, about 165, which is--it's up, it is inclusive of the acquisitions that we did predominantly the Vulcan, the pickup with the Vulcan quarries.

Can you quantify the mid-year price increases?

Actually if I wanted to, I could take you through area by area and tell you exactly what they are, but I'm not going to do that for you.

No.

They were modest single-digit overall. There were some spots where we got some double-digit, very selectively. But that was unusual.

Okay. And final--

And in some places you just nibbled and you got a very small single-digit increase.

Okay. You talked about Atlanta volume being down 35%, which I guess is pretty extreme. Can you talk about what happened in pricing in the face of 35% volume decline?

The Atlanta market has become much more competitive. This is a good way to put it. At the same time I would go back in time and look at this industry. And if you had that account volume decline in another era where everything in the industry was production-oriented, I think you would see significant pricing decline in that market. The fact is you're not seeing that. You're seeing a lot of competitive pricing, job by job, particularly where there is some volume. But frankly, you're not seeing what I would call financially irrational behavior, because you sit back and you do the analysis, and given that the tons are not there, you're not going to create any more tons in Atlanta by whacking your price a dollar or two dollars a ton. So where you can be clever and pick off a little work for your competitor, I'm sure everybody would like to do that, but at the same time you don't want to destroy the pricing you already have. So it is a fine line, because you destroy the pricing structure a buck or two dollars and all of a sudden Atlanta becomes a place that people are not making much money, if any at all.

Good. Thanks very much.

Sure.

And that does conclude today's question-and-answer session. At this time we'll turn the conference back over to Mr. Zelnak for any closing remarks.

Okay. Thanks for joining us, a lot of questions and hopefully we've done a good job of answering them. We tried to give you a lot of specifics and some anecdotals that would help you understand what's going on in the industry. It is a difficult time. We're working our way through it, I think, very effectively, and we relish the first opportunity to taste a volume increase overall, and at that point things--life will get much more enjoyable. If you have any individual questions, feel free to call us, and and we'll look forward to reporting back to you at the end of the next quarter. Thanks a lot.

And that does conclude today's conference. Again, thank you for your participation.