Martin Marietta Materials Inc (MLM) 2008 Q3 法說會逐字稿

Good day, and welcome to the Martin Marietta Materials Incorporated third quarter 2008 financial results 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 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 third quarter results given the conditions in which we operated. The third quarter was on tenth consecutive quarter of down volume in our aggregates business as compared to the prior year period. Shipments volume for the quarter was down 13% which was a product of a sharp pullback in construction activity based on credit market issues and a deteriorating economy. In addition, we experienced four major storms in our areas of interest, which compounded the problem. Aggregates pricing continued to meet our target expectations with an increase of 8% for the quarter and 6% year-to-date. The midwest continued to be the bright spot as heritage volume in Iowa and Nebraska was up 15% over the prior year period and year-to-date. The strong farm economy and alternative energy products are the main drivers. We also experienced positive volume in our operations that cover Arkansas, east Texas and northwest Louisiana. This is the result of increased oil and gas drilling activity. The most negative volume comparisons were in the Carolinas and the Atlanta area, with shipments down 20% to 34% for the various market areas. On the cost side, we're running most plants on reduced schedules with many of our plants scheduling recurring shutdowns of one to two weeks as needed to control inventory. During the third quarter, we did an exceptional job of managing our controllable costs.

Even with the reduced production, tons per man hour was equal to the prior year period. We view this as exceptional performance in the very volume-sensitive industry. Our specialty products business continues to perform well with record third quarter sales of $46 million, up 18% from the prior year period. Operating earnings decreased slightly as we experienced high energy costs and high maintenance costs related to both planned and unplanned repairs. Both the dolomitic lime business and the magnesia chemicals businesses are performing well with record sales and earnings expected for both businesses for the year. For the quarter, we earned $1.58 per diluted share versus $2.13 in the prior year period. In addition to the sharp decline and aggregates volume, energy cost was up $16 million for a negative impact of $0.23 per diluted share. We also had a surcharge of $2.6 million and $3 million of expense related to strategic initiatives that reduced earnings by $0.08 per share. The impact of weather cost us another $0.08. On a positive note, the state of Florida recently launched its accelerate Florida initiative aimed at advancing start dates on $1.4 billion in road construction to stimulate the state's weakening construction economy.

Martin Marietta is well positioned to service much of this work through granite quarry in Nova Scotia and fall line granite quarries in South Carolina and Georgia. We will also have our new plant at Augusta, Georgia online in the current quarter with 6 million tons of cost effective capacity versus the old plant which produced 2 million tons. We believe it is increasingly likely that Congress will come back into session after the November elections with the objective of passing an economic stimulus package. We would expect that any such package would contain meaningful funding for infrastructure. Our business continues to generate solid cash flow even in a weak economy. In the nine months ending September 30, net cash provided by operating activities was $271 million or $2 million less than the prior year in spite of a $55 million decline in net earnings. Aggressive control of working capital coupled with lower cash taxes from lower pretax earnings and the benefit of bonus depreciation deductions has been a positive for cash flow.

Looking at the rest of 2008, the lack of available credit, which has stalled construction activity, is likely to continue and will keep downward pressure on aggregate's volume. We expect the volume decline to range between 11% to 12%. However, we expect pricing growth to be in our target range of 6% to 8%. We also expect record earnings from our specialty products segment of $36 million to $38 million. Based on these factors, we expect net earnings for 2008 to be in the range of $4.25 to $4.65 per diluted share. We're developing our preliminary views on 2009 as we complete our regional operating plans. We characterize the upcoming year as a period of stabilization in our aggregates business with the first half subject to continued volume pressure. If Congress passes a package with infrastructure stimulus funding, we could see positive impact in the second quarter of 2009. Currently, we expect moderate price increases, stabilizing aggregates demand and a deflationary cost environment as it relates to energy costs. In our specialty products segment, we expect another year of record sales and earnings. Also, we anticipate that capital spending will be no more than $185 million in 2008(Sic-see press release) based on early completion of our Augusta, Georgia plant and no large projects planned for 2009. At this time, I'd be pleased to take any questions you may have.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment. We'll go first to Arnie Ursaner with CJS Securities.

Good afternoon.

Hey, Arnie.

My question relates to -- I know Steve, you've probably taken the most aggressive actions of any of the aggregate companies to reduce your costs and have really done a great job of it. Given the current environment, can you give us a sense of the types of actions you might be able to take from here, and is there some more room you have to lower your cost structure?

Certainly we are very focused on trying to bring the cost structure down even more. If you look at the SG&A area where they typically are viewed as the best operator and have the numbers to back that up with respect to SG&A as percentage of sales, but clearly, we're going to do more. We'll talk to you at the end of the year about what actions we'll take there, but we've got to bring the cost structure down more in that regard with respect to the environment that we're in. We're looking at all aspects of controllable costs and by that, I mean that the senior management sitting here in this room is going over this company line item by line item from the ledger looking at everything we do and simply asking the question, is it necessary in these times? And I think you're going to see us do things like reduce communication costs through renegotiation of contracts, their more judicious use of communication media. That's one area we're focused on. You're going to see us focus very hard on purchasing. We think we have potential opportunities on the purchasing side of our business, and we're going to attack those from the senior management level and down. So it's getting a lot of attention. These are times that are very unusual, certainly the most difficult that I've seen since the early 1980s, and I think you have to respond accordingly.

Second question, if I can. Can you speak f speak a little about the energy side of you're equation and perhaps highlight a little bit more about the structure of the long haul transport contracts you have in shipping and how that could be affected by lower energy costs.

Okay. A couple of aspects of the energy costs. I made the comment that as we look at 2009, we do think that we're going to be in a deflationary energy environment. We actually were making those kinds of comments well before oil prices came down as sharply as they have in the last couple of weeks. It's pretty clear to us that there was going to be downward pressure based on demand. If you take consumption for us and look at it just on diesel, diesel next year, given reduced volume, we'll probably consume somewhere in the neighborhood of 35 million to 38 million gallons of diesel, and it would not be surprising to me that we would see reductions over the year of $0.50 to $1 as we look at what we paid in 2008 versus what we were likely to pay in 2009. So there's some real opportunity there. Natural gas and our magnesia business looks like it's going to come down sharply. It would not be unusual to see a reduction there that might be as much as a third of our natural gas costs. Clearly, that would be a positive force. Then with respect to the transportation contracts, we have energy escalators in those contracts. The railroads hit us with energy escalators. We typically get hit with the waterborne shipping with the barging escalator or deescalation being very significant with diesel fuel going down. We would expect that we're going to see positives with respect to our transportation cost. Less so for the railroads, but more so for the waterborne transportation. So that should be another plus.

Thank you for that answer. That's great. Thank you.

We'll go next to Kathryn Thompson with Avondale Partners.

Thanks. Could you give a little bit more color about how we should think about your volume trends and pricing for aggregates? And really, specifically, what was your pricing at the end of the quarter relative to your average for the quarter for aggregate pricing? And then, I noticed there's generally are regional pricing differences, but within certain regions you were able to get greater leverage with pricing during the quarter.

With respect to the end of the quarter versus the average, really no significant difference. If you were to look at the individual months, you would find that they were clustered very tightly around that average. With respect to regions, we lay that out for you. The reality is that we have gotten better pricing in the southeast. The areas that have been more pressured from a volume perspective have gotten lesser pricing. And it's really pretty much what the economists would predict. As we go into next year, I think we're going to see modest pricing across the board in line with the comments that I made. I don't think you're going see the degree of regional difference that you've seen in the last couple of years because frankly, you don't have the same opportunity in the southeast that we had in recent years. So it's going to move back closer to the median price level, medium price -- rate of price increase. So I think you'll see a lot less disparity next year.

So for that median price increase going into next year, do you still see it in generally in that mid to high single digit range, or do you see it pulling back more?

Too early to comment. We've just said moderate rate of increase. Moderate would be less than what we're looking at this year, the range this year being the 6% to 8%.

Well, that would imply that you're going to still see some negative volume trends going into 2009. Is that a correct assumption?

Yes, we stated that we certainly expect the first half of the year to show negative volumes. The key to it is the credit market situation. What we're seeing out there that, I certainly have never experienced and probably most on the call, is projects that are starting or are actually underway in some cases where's the lenders are pulling the funding and the developer/contractor are left hanging. That's just something that we've not seen. So the credit markets have got to free up and get back to something that is more normal. Not necessarily back to where they were, because they're not going back there, but they need to be in a more -- function in a more business-like manner. We've seen purchase orders just disappear where we've got a PO in hand, we're getting ready to ship to a project, in some cases we will have run inventory for that project and all of a sudden, the project's not there. That's the big thing that has to happen to get this construction economy back on a much more even footing.

When this trend picked up, I assume in the quarter, being the quarter you're reporting?

I'm sorry, I didn't hear the question.

I would assume that this trend really came to a head during the third quarter?

Absolutely.

-- with your purchase orders just disappearing?

Yes, absolutely. As we looked ahead, based on what we had in hand, what we thought we were looking at, we thought the third quarter was going to be an okay quarter in the midst of a downward trend line that had developed, but nothing like what we saw in terms of the volume decrease. Keep in mind, we also got a storm overlay that certainly was not helpful.

Just stepping back and looking at broader in terms of the whole cycle, if you go back to the early 80s, you had about a 32% decline in bonds peak to trough, and it looks like right now, you're tracking 20% to 22% decline. Do you see the current cycle also tracking closer to that 30% plus decline in terms of just volumes?

I certainly hope not. You're correct that by the end of the year, we should be somewhere in that down 20% from peak area. It's difficult to know what's going to happen. Certainly the first quarter, first half is going to be very challenging on the volume side. The other side of that is that energy cost is clearly going to be coming down. So with the cost actions we're taking outside of energy plus energy, we should get some relief with respect to the cost that lies underneath the revenue structure, so we'll just have to see how those two balance out. Can it be down 30% plus? I wouldn't say that it couldn't, because it's been there before. In the early '80s, that actually was two back-to-back recessions that stretched out well over three years. But we're on our tenth consecutive down quarter right now, so it would not be surprising if we're going to see three years of down quarters. I wouldn't rule it out. I'm certainly not looking for it, but I can't say definitively it won't happen.

Okay. And then, just final two questions. Could you speak to visibility as it relates to volume and then finally, just housekeeping. What are your debt and free cash flow targets for the current fiscal year?

With respect to visibility, I think there's very little that comes back to the credit markets, and that's something we don't control. We're operating off of what contractor customers have in hand and when you get to a situation where purchase orders disappear on you and you think you're getting ready to ship, that just gives you virtually no visibility. So I think it's extremely difficult to call. I'm going to let Anne answer the question with respect to the debt and free cash flow.

Yes, free cash flow, Kathryn, for the year, we expect to be in a range of $110 million to $130 million depending on final earnings. Debt estimated for the end of the year will be around $1.325 billion.

Thank you very much.

Okay.

And our next question comes from John Fox with Fenimore.

Hi, good afternoon, everybody.

Hey, John.

How about a number of questions. One, Steve, could you maybe comment on liquid asphalt? Has that come down with oil and diesel, and do you see that having any type of mitigating effect on paving type jobs?

It has begun to come down, in fact from the peak which was roughly $800 average in a few places where it got up into the $850 range. Based on current numbers that we are seeing with our customers as of last week, the numbers look to be averaging around $625 and dropping just like fuel prices are dropping. Some liquid asphalt, as low as $550.

Okay.

So there's clearly strong downward pressure on that. The entity on the other side of that can purchase more asphalt paving based on that liquid coming down because the price of asphalted concrete should adjust down with it.

Right, sure. Okay. Could you maybe comment a little bit more on the, I guess the strategic review, that there was some expenses in the quarter? More on what the nature of that is, and then on the reason for the change in the debt covenants? Thanks.

With respect to the strategic review, I already gave you more than I wanted to. (laughter)

I figured that.

That was my fault, John.

The fact was that the column that it was in, it popped out and we felt like we needed to comment. Obviously, we're not going to comment in detail on any strategic initiatives. We have a couple things that we've looked at, worked on that we thought could add value for our shareholders. We'll continue to do that, but the key part of that statement is add value for our shareholders. We're not do anything that we feel does not do that and do it very quickly. We continue to be very busy and active in looking at opportunities, but we've stayed away from some opportunities that some others took advantage of that perhaps they wish they hadn't at this point.

Okay. And that covenant, is there any additional information on that?

John this is Anne. Essentially, we felt like it was appropriate to give us more room and flexibility with that debt covenant as we move forward through the next 24 months.

Okay.

Just the prudent thing to do in this environment.

Sure.

And we've got great cooperation in doing it, which our understanding is that most companies out there who are trying to those kinds of things are not getting great cooperation. That's what differentiates us.

Well, it's good to have that flexibility. Then on the debt that's due December 1, can you just talk about the plan for that at this point?

We continue to evaluate alternatives there including access to the public market and other types of financing, but obviously, we have capacity of our revolver, $325 million available to finance that.

Okay. And have you looked at all or anticipate using any of these government programs on the commercial paper? Would that be anything that would be advantageous to Martin Marietta?

Well, the government programs as I understand them are only for A1 P1 commercial paper. Our paper would not qualify for that program.

Okay, thank you.

We'll go next to Mike Best of JPMorgan.

Hi, good afternoon. I had two or three questions if I could. Steve, the first one was returning to an announcement previously where I think you said that the aggregate prices were similar and the end of the quarter to the average. Does that mean that the mid year price increase is largely failed or is it the case that because of contracts, et center, they'restill to show any benefit? That's my first question.

No. Actually, the third quarter pricing improved because of the mid year increases. So we had a positive trend line there.

But normally, you have contracts in place that delays the impact, or was that not the case given the way markets have changed? Is it more immediate now, the impact of those mid year price increases?

No. We always have contracts in place. They were quoted at different times that have different prices, and those prices are typically going to be lower prices. So we have to roll through those. Those'll be commitments on public work. Those, in some cases will be commitments on large nonresidential jobs, and that's more than 50% of our business, so there's always some roll forward. We were quite pleased with what we saw pricing in the third quarter. I think it validates once again that there is pricing opportunity in the business after 10 consecutive down quarters of volume, and it gives us confidence in talking about a moderate rate of price increase in 2009 as we go into what's clearly going to be another challenging year.

You led me quite nicely onto 2009 there. I think as we entered 2008, there was sort of similar expectation that the first half would be difficult and they would see some recovery in the second half. Obviously, circumstances have changed. The recovery that you were hoping for is very much going to be federal program based, or do you also expect thinking from your other direction, do you expect that you might see housing picking up later in the year? Is that another factor behind why you think it might be better in the second half of '09?

I do expect to see some improvement with respect to the demand for stone from the housing segment. Don't confuse that with any pickup in housing starts. The issue that's out there in certain markets is that there is going to be a shortage of buildable lots in some of those markets and some additional subdivisions are going to have to be developed. Subdivision work has been nonexistent the last couple of years. We think by the second half of '09, we're going to see some of tha begin to come back just to support the start level that's out there. We will see what the democratic Congress is going to do. But I think any program they come out with is going to be designed to try to put a bottom under housing and to begin to move it back up, albeit it may not be sharply. I think they understand that it is creating a significant downdraft on the economy. Likewise, they are most committed to job creation and in long-term investment in the United States, which is why they have the focus on infrastructure. So be it after the elections or in next January, depending upon how the debate and the votes go in Congress, I think very likely that you're going to see something that would be positive for our industry coming out of new Congress or the one that finishes up.

Okay. On the asphalt, obviously it has an impact in terms of budgets don't go so far, but were you caught at all with fixed price work at the much higher asphalt prices or are all your contracts at flexible pricing or were they were flexible pricing?

We're not significant asphalt producers, and we do very little construction, so it's negligible for us. It's not own a factor what you ought to think about when you're thinking about Martin Marietta. You'll have to talk about the other companies that have big asphalt presence and the big contracting presence, and you know who they are.

Thank you. The last question, Steve, the weather hit in Q3. Is that just in reality gone or would you hope that there can be some capture of that over the next couple of quarters?

I think quite honestly, in this environment, Mike, it's an environment where there's no pressure on people to do work today that they might be able to defer, because one of the things they see is they see the price of that work going down. If you're an asphalt contractor, more than likely, your asphalt work is tried to some type of fixed price, you'd rather wait and do it next year as opposed to do it this year, because your view would be that you're going to be paying less for liquid asphalt next year. Likewise, you're going to be paying less for fuel, contractors are fuel intensive. If there's steel in the job, they're going to be paying less for steel. So I thing there's a tremendous incentive to defer work in a field that -- if you are a contractor, you'll make more profit or avoid losses, put it that way. If you are the ultimate buyer, you're going to buy more for your money.

Okay, that's great. Thank you very much.

Sure.

We'll go next to Trey Grooms of Stephens Inc.

Good afternoon.

Hey, Troy.

Just real quickly, you talked about your thoughts on federal stimulus help coming next year possibly. Can you give us an update on what's going on with the status of some of the other big infrastructure products that are looming out there in some of your primary states?

e talked about toll roads in North Carolina and the first landing of toll roads, and the issue there comes back to credit markets. You've had the letting, now all you have to do is finance it with the bonds and when the credit market clears up, that financing will get done and then the work can proceed. So that's 2009, even though the first round of work has already been let. You've got similar issues across the board. The states are challenged in two ways. They're challenged on the revenue that comes into their DOT because of declining gas taxes, and in some cases, they have used taxes translate that sales tax on vehicles. Vehicle sales have declined, also, so where that's a factor in their revenue, that's declining.. So they have that factor they're trying to contend with, and then where it is bond funded work, it becomes a matter of the placement of bonds.

So what I would tell you is, we have some states that have stepped up to address revenue, but the biggest states for us have not done that yet. North Carolina is in the throes of looking at it, South Carolina's is going to have to make a move, Georgia very much needs to make a move. Their program for next year if they don't make a move is going to be down sharply. Texas is short in their DOT fund. The turnpike part of it continues to be fairly strong. But there's nothing out there that is robust right now that's out of the norm. It's going to be dependent upon federal stimulus I think initially and depending upon the states following up in additional measures. The bottom line, it is going to cost you more to drive, period.

Also, can you give us your thoughts regarding buyback looking out into '09?

Yes. Buyback in this environment from the standpoint of share price, obviously, we love it. But from the standpoint of credit dynamics, our first priority is to pay down debt, and it's going to be to continue to pay down debt. This is an environment where you just simply don't want to take the risk. As you know, and I think probably everybody on the call knows, we cash flow very, very well. But at the same time, were not going to speculate on that. We're going to pay down debt. We get to a point where we're very comfortable, then we can consider it again, but I think that's well out.

Okay. And just one last question. You've been seeing some really good work come by way of some of these energy related projects with oil coming down, and natural gas coming down. Would you expect to see a fall off of that kind of work as a result?

Well logically, with the decline in the price of oil and natural gas in the last month or so, I would expect that that hot area that we talked about in east Texas and northwest Louisiana, we're probably going to see a reduction of activity. That would be logical. What I don't think is going to come down, and in fact, likely will continue to trend line up is wind energy. We continue to see a lot of wind energy activity. My guess is at the federal level, with whatever comes out of there, you're going to see more impetus for wind energy in an attempt make sure that funding backup is there to move those projects along. So I don't think that's going to be impacted in a negative way, I think probably a positive way from the federal level.

Quickly, could you remind us which states are your biggest states for the wind energy that you're seeing?

Yes. Texas is the number two wind energy state in the country. Obviously, we're big in Texas, and that's become a very nice of business in south Texas down in the NAFTA corridor. Likewise, other opportunities throughout west Texas. Iowa was the third largest wind energy state, and we are the largest producer in Iowa. We're seeing a lot of activity there. It looks like there will be follow on projects to some of the ones that are already under way. So we're pretty optimistic about that aspect of energy.

Okay, thanks a lot.

Sure. And just -- there's some of you that I've given this metric. For those that I haven't, we've got enough wind energy business now so we've got our own metric of about 1,500 tons per turbine, and that's a combination of the concrete pad and the roadways that go in there to erect the turbines. Pretty big business.

And our next question comes from Todd Vencil with Davenport.

Hi, good afternoon.

Hey.

As we talk about volumes coming down and if we talk about costs coming down and all of the things you guys are trying to do to save costs, how much pressure does that begin to put on pricing? Do you think you could potentially find yourself in a situation where if energy comes off and competitors don't necessarily have the wolf nipping at their heels in terms of higher diesel costs that you can see people start to cut price or at least be less disciplined about price increases?

Don't make any mistake about it. There are people who cut price today, there are people who cut price all the time, but certainly over the course of the last two years, on particular jobs and where people might be long on particular sizes, you will see price reductions to do that. If you think about where the rate of price increase has gone, we've peaked out at 13.5% in 2006 down to the 10% level in 2007, between 6% and 8% this year, and below that, moderate rates will increase next year. So in fact that's happening, and that's in our equation in terms of estimating what types of pricing might be available to us. The reality is, if you sit down with your pencil and a piece of paper, it's pretty hard to volume your way out of this economic downturn because if you cut price and take business from a competitor, being the macho business that this is, the other party is going to turn around and do exactly the same thing. Based on my calculator, that says that all the parties in the market have simply cut their price and traded volume, and I don't think that leads to particularly good outcomes. But that's for other people to figure out. We're running our business by size, by customer, by job, and there are opportunities on that basis to get some price increases, but certainly not like what we had two or three years back. It's already reflective of it.

Okay. Switching gears on you, and just to sort of expand on some of the things that you said about government spending, especially federal government spending, we're going to have to do something about either reauthorization or some other form of a federal plan after September next year. My understanding is that we're doing -- right now we're funding federal highway work through a continuing resolution and I guess everybody's probably waiting to see what happens in a week, but can you tell what you're hearing about the shape that people are talking about the next federal program might take? From where I'm sitting, it looks like the highway trust fund structure that we've had, unless can you convince somebody to raise the tax at some point is sort of tapped out in terms of growth.

If you go back to the commission that was set up to study the issue of transportation financing, they came out with their recommendation which was to raise the gas tax $0.50 a gallon. I think that one was pronounced dead on arrival, and I would agree, it was dead on arrival. I think the bigger question is what is the form of financing going forward and increasingly, what you're hearing is people focused on VMT or vehicle miles traveled as the way that the revenue structure ought to be oriented. By mandate, you're going to have increased gasoline mileage per vehicle. So that's going to cut fuel consumption. I clearly see changing habits on the part of the American public, and I think even with lower gasoline prices that some of those changing habits are going to stick. You have a younger generation that use things differently, and I think they're likely to go about their business in a more fuel efficient, much less road intensive way. So it begs a VMT approach. Whether or not that's actually what gets done, I don't know, but certainly, the politicians are focused on that. The collection of that would have to be done in a very simple way, and in fact, it might be at the state level. In North Carolina, what we're looking at as possibility is collecting the VMT at the annual safety inspection where the odometer is read at the safety inspection anyway and then applying a rate against that collecting it once a year. That could be a vehicle for the federal government government also, but they can't stick with the gas tax. I don't think that's going to palatable for big increases and clearly, the trend line on revenues are going down.

Okay.

The other thing I would mention is that I can't recall authorization of a new bill that's ever been done on time, so you should expect a continuing resolution as they try to figure it out. Hopefully, it is a continuing resolution that follows behind some specific stimulus action that has already been put out there.

Got it. Then housekeeping. You mentioned $185 million of Cap Ex. Was that '08 or '09?

That's '09. 2008 we expect to be in the $255 million range.

That's what I thought. Okay.

-- come down sharply. We'll have a very good free cash flow generation next year and back to applying that to debt.

Okay. Thanks a lot.

We'll take our next question from Jack Kasprzak with BB&T Capital Markets.

Thanks, good afternoon, everyone.

Hey, Jack.

Hey Steve, I wanted to ask about this -- you mentioned credit disruptions and cancellations, et cetera. Is that based -- are you just seeing that across more or less all your markets, or is it fairly centered in more places than others?

Certainly, we're seeing it in the southeast, some in the southwest. I mean, in our market areas, we've seen more in the southeast than anyone else. If you think about lending, you might draw the correlation with Wachovia, who was an aggressive lender and to the construction markets, both res and non-res, and you can take it from there.

Okay. You mentioned housing in an earlier comment, but I wanted to ask, harkening back to the Q2 call where you made, I guess what were some positive comments about housing, just looking farther out into mid '09 or so with not a lot of subdivision activity having gone on for quite some time and maybe the need to pick that back up. Has the recent credit market disruptions kind of put off any hope that we might see even some stabilization in housing by mid or late '09?

I don't think so, Jack. If the recent credit market disruptions continue the way that has been evidenced in the third quarter, you can just kind of lock up shop and put off everything because frankly, nothing's happening much of anywhere. Certainly, there's an expectation that with federal government's action of injection of liquidity into major banks and regional banks and insurance companies, that there's going to be some move to normalcy. Granted, the party on the other end is going to have to be able to pay it back. It's a novel concept. I think you will -- once we get some stabilization and the money begins to flow, which supposedly they started this week, the banks should get back into the lending business, albeit very carefully. And if that is the case, they'll start making choices as to who they lend to and who they don't. That in turn is going to beg consolidation of players in various industries, probably including the housing industry. So there probably will be fewer borrowers out there. But the ones that are there are more credit worthy and likely to get credit extended to continue to go about their business would be my view.

The Portland Cement Association recently updated their forecast for '09, and they see a 30% decline in nonresidential construction in '09. I realize you guys aren't in the cement business, but they're just talking about overall construction activity. Do you have any opinion on a 30% decline in non-res in '09?

It does -- it seems to be a number to me that would formulated off of what is going on right now, and again, if what is going on right now has been going on in the last six weeks or so continues, who knows what the number is. But I find it difficult to believe that we're going to go forward as we get into next year without some reasonable credit market functioning. If that's the case, one thing that we're already hearing is that there are developers out there who are looking at declines in the price of construction who are saying you know, I've had this project sitting. Now is actually a pretty good time to move on it because my cost of construction is going to be lower based on materials costs, based on the fuel component that goes into construction and based on the fact that I've got a lot of contractor choices from contractors who have very little work and are hungry and are bidding with very low margins. So we're actually -- it's interesting that you asked the question, because in the last two weeks for the first time, we're beginning to hear those kinds of rumbles. So some contrarian view out of the developer community.

Great, okay. Thank you very much, Steve.

Sure.

We'll go next to Ajay Kejriwal with Goldman Sachs.

(inaudible)

Can you speak up, Ajay? We can't hear you.

Can you hear me now?

Still need to speak up. Very difficult to hear you.

Can you hear me now?

Yes.

Okay. Thank you and good afternoon. Just maybe a question on 4Q guidance to start with. The $0.40 range one month into the quarter,does that reflect the uncertainty on volume or any trends in October that you think play out of next couple months? I'm just trying to figure why that wide range. It's all about volume. Volume's going to govern that number. We certainly have our cost structure under control. Again, we're managing that I think extremely well. So it's going to be what we can put up on the revenue line that will determine the profit number. Maybe if you can give some color on what you saw in October versus September. Sounds like things worsened off in terms of construction projects getting pushed off. But just in terms of any numbers, around shipments or contracts if you can help us.

Not appropriate for me to comment on that with respect to fourth quarter. We'll talk about it at the end of the quarter. The one comment I did make was with respect to energy costs and the significant decline that was have seen. I thought that was fair game, but really not appropriate for me to frame the quarter beyond that.

Fair enough. Upload the lower forecast for next year. Maybe if could you give us a sense of how much of that $185 million is base maintains Cap Ex versus any new projects that you're working on and how much flexibility you have in taking that Cap Ex down if the situation deteriorates further with respect to the economy next year?

We normally frame maintenance Cap Ex as something around DD&A. That DD&A number for us this year is going to be around $168 million. What I would say to you with respect to next year is that given volumes that are off 20% from peak by the end of the year, we're going to have a lot less pressure on maintenance capital than we typically have. So with the 185, you're going to have a maintenance capital number that is well below the 168. What we do have in there is that we've got some strategic initiatives, particularly as they relate to Florida. You will see us carry those out, and we also have strategic land purchases in there as they relate to long-term metal reserves. So even though we're in a difficult marketplace, keep in mind, this is a 50 year plus gain, and if you're not making the 50 year moves all the time, you'e going to get yourself into trouble, and we don't plan to take our eye off the ball with respect to the long term aspects, and that's the way we built our business.

If, in fact we were to see something that worsens beyond our expectations in 2009, we are fully prepared to tighten down on capital spending as tightly as we have to. I'll tell you how we're going to play it. When we came into 2008 based on the open authorizations for capital that we had already approved. We had a carry over number of about $100 million of spending based on those open authorizations. We have spent the year 2008 buffering back, dampening down on authorizations, some of which already existed and certainly limiting new authorizations. So as we go into 2009, our carry over number is $20 million or 20% of last year's. What that says is we come out of the chute, we have very little capital spending that we must do. In Q1, we'll look at it by the quarter, and we're going to measure it accordingly. So we'll manage it very, very tightly. So I think we're in a position to do just that.

Great. Just continuing on that a little bit, how much flexibility do you have in cutting costs at the quarry level? I mean, could you postpone removing of the overburden? Are there any other major cost buckets that you could take out at short notice versus, delaying something in the quarter and that comes back the next quarter?

Certainly, you take a look at your overburden needs and you try to measure that in terms of efficient pit development. We have places where we need to strip in order to be an efficient officer, and we have some significant stripping projects underway at those places. But where we do not need to strip, in order to have an effective pit, cost efficient pit, then you don't do it in these times. You put it off until another day when your volume goes back up and in fact, you've got to remove it faster because you need to get to more rock. So we've gauged that based on the marketplace. The biggest single cost we have at the quarries is in the labor component, and in fact, our man power has come down sharply over the course of this year. We're down through the first three quarters over 300 people against a base of about 5,500 at the beginning of the year. I would suggest to you that by the end of the year, that's going to go down probably -- would not be surprising it goes down 150, 200 more just based on not running all of the plants based on other initiatives that we have to make sure that we're limiting and controlling costs.

We've cut overtime hours to the bone. We're managing overtime hours at a very senior level in this company. It gets senior level attention, not just operating level attention. So I think we're doing that. And we have the reporting mechanisms that allow to us manage that realtime. So those are the things that we're working very hard on. One of the things you don't want to do is do short-term things that impact your ability to operate effectively and sometimes operators will defer maintenance. We will measure what maintenance we do, but I can tell you we're not going to defer needed maintenance for two reasons. One, you're going to make yourself an ineffective cost operator. But secondly, when you defer maintenance, you can create safety issues and we have no intentions of compromising safety. That's the way we're approaching it.

Great. Thank you.

Sure.

We'll go next to Garik Shmois with with Longbow Research.

Good afternoon. My first question is, you talked about markets that had experienced some pretty sharp volume declines in the quarter. Did you see any pricing weakness in any of your markets?

Prices in those markets continue to move up. Certainly, we would not have a 6% to 8% pricing metric overall for the company if they did not. Do you see more price competition on some individual jobs because of declining volumes? It's just what the economists would tell you. Absolutely. So you just have to pick and choose more carefully. You can't get away from the fact that with reduced volumes, you're going to see some degree of greater price competition. The amazing thing about our business is that we're still seeing above average rates of price increase above our long-term trend line coming into this last cycle here in the third year of volume decline. I think it speaks pretty well for the business.

Are you seeing, just with diesel prices coming down, are you seeing new entrants coming into your markets and potentially pressuring pricing or has the market structure still remains relatively stable.

It's tough for people to do that. We see occasional pot shots by, particularly a couple of distant entrepreneurs trying to pick off a little piece of business down the road 50 miles or so on occasion. But when you begin to look at how the quarries are laid out and remember, the customer buys delivered costs, in most cases we have such a significant transportation advantage over those folks that it's just very difficult for them to cut a price enough to be an effective competitor. But yes, we are cognitive of it, and there are a couple of situations where we've seen it take place.

Okay, and just lastly, just a little bit more clarity on the CapEx for next year. I think you're supposed to start several new projects along the fall line of Fayetteville, Selma, Columbia. Are those projects still on track to get started?

Fayetteville is moving along. That is a new green site location for us. In fact, we expect to be crushing rock and selling rock in 2009 out of the Fayetteville location, which by the way, has significant haul advantage over our nearest competitor. So we think we're going to do very well there. A lot of work at Fort Bragg and Fayetteville area. The Selma project is not one that we are likely to crank up on in '09. We may do a little bit of ground scratching to get ready. Depends more on market conditions. That is a green site. e've got some bigger projects that are in that five-year plan in South Carolina and Georgia, and we may scratch the ground, break ground on one of those projects toward the end of '09 in Georgia. But that was the only one that we were planning on potentially starting in '09. It's really a 2010 project.

Okay. Thanks a lot.

Sure.

Our next question is from Chris Manuel with KeyBanc Capital Markets.

Good afternoon.

Hi.

Most of my questions have been answered, but I wanted to tie back on a couple pieces. One is, if I can kind of piece together some of the things you said today, it sounds like heading into 2009, that towards the middle end of next year, housing could get a little bit better but probably not appreciably so. On the public works side, it sounds like -- that's where I really want to kind of circle around. We've seen significant slowness through the quarter, so starting July through August and into September on the public works side, or has that stayed relatively steady, I guess is my question?

With the kind of volume declines we're having, everything is down. If you think about from the state standpoint, they have been very nervous about the status of federal monies coming out of the highway trust fund because they knew there was an issue there. And the federal government actually cut off funds to the state at one point during the third quarter because they literally had run out of money, and that's when you got the short-term fix that took place where there was $8 billion worth of revenue transferred to the trust fund from the general fund to fix that problem through the expiration of the bill in September of 2009. So the states are playing it somewhat cautiously because they don't know at this point how good a partner the federal government is. If the Congress comes in and makes it clear that from a funding standpoint that the federal government is a reliable partner, then I think you'll see the states begin to move more aggressively because they'll know the money's going to be there. They've been a bit into limbo. So it really comes down to what is the Congress going to do with respect to infrastructure stimulus as far as public works goes? That'll be the big piece. The other piece is the bond markets getting to rational functioning so that bonds that are already authorized for both road projects as well as, particularly school projects, can be issued and those projects proceed. Now, we've talked about it before, but I would just remind you that with construction costs declining, the federal government, the state government are all looking at that aspect, too. We certainly had some of them consult us wanting our opinion on whether or not declining construction costs were likely to be the trend in '09, and our answer to that is we think so based on materials costs coming down. Other than aggregate, which we told you's going to go up and pressure on contractors because there's limited work.

Okay. That's good. I bet I can guess for you where some of this federal money's been going to. I hear they've been bailing out a few banks.

That's the rumor.

So last question I had was when you look at the specialty products business, I know a good chunk of that goes to -- for steel and wen we look at steel production or at least some schedules for what steel production might be in the fourth quarter, it looks like many of these folks' mills are going to be running at 50%, 60% utilization, yet this may be -- the math kind of holds of what you're projecting for the full year, your strongest quarter in the year for steel. Can you give us a little color there? Do you have many of these contracts in hand, or have you seen any deferrals or things on that side of the business as well?

We're not immune to steel business pulling back furnace shutdowns. We certainly know what the steel mills are planning in Q4. We confer with them in order to understand what the demands on our dolomitic lime will be. In fact, we saw some of that in Q3.

What we do expect in that business is that we believe that overall, we're going to have record shipments of dolomitic lime for the year. We think we're going to have a good solid dolomitic lime demand in 2009. Probably not as high as it was in 2008 from a tonnage standpoint, but we think we'll see some improved margins based on reduced energy costs. That should be a nice positive for us. And then there's the other side of the business which is the mag chem business, the chemical side. Tha business is growing substantially and in fact, from a profitability standpoint, we have some significant additional profit coming in '09. One piece of it is going to come from contractual obligations to furnish heat resistant materials. The second piece will be the acquisition that we announced early in the year, Elastamag. We've been told manufacturing the product this year, as we get ready to move the production facility to our location. In 2009, we will produce that product at our location and we will have margins that go with that production. So there's some moving parts here underneath the surface that cause us to be pretty confident in terms of our performance in specialty products in 2009.

Very good. Thank you.

Sure.

We'll go next to Owen Gibbs with Austin Fryers.

Hi there. I was just wondering, is the level of volume decline that you have in mind where you would -- where you could you see your pricing at zero potentially negative?

I really don't. Our view is that as we go into '09, given the state of the economy, that we are going to see some federal stimulus. Do we get to that, as mentioned before, back to the 1980s, 30% or so volume declines from the peak? If we get somewhere in that range, certainly there's going to be a lot of pressure, even more so than there is today. Bit I bring you back to the fact that it's not very productive to just sit there and cut your price, because you may take some volume away from another company, but they're going to turn around and take it right back from you in the same marketplace. The bigger concern was already mentioned, and that's people trying to come in from way outside the market because of declining transportation costs coupled associated with gasoline diesel prices. That's just very limited. So I think it would be a scenario that at this point, I just can't envision that is going to take you to flat or negative pricing for this business.

Okay, thanks. One other point, just on your renegotiated covenant. What was the quid pro quo for the increase in that?

We increased the facility fees and at the current credit rating, it would be LIBOR plus 225.

Alright, thank you.

And we'll go next to Kathryn Thompson of Avondale Partners.

Hi. Just one follow-up question I wanted to ask was what gives you confidence that you'll see, if a stimulus package passes late in the current calendar year or early next year, what gives you confidence that you'll see benefits by Q2? And what type of numbers have you seen floating out there in terms of the magnitude of an infrastructure spend?

The confidence that I would have with respect to Q2 is that the conversation about infrastructure funding and a stimulus package is very much oriented toward jobs on the ground as quickly as possible. And what has been asked of the states is what magnitude of work do you have that could be started within 90 days? And the answer that has come back from the states is a number that is -- plus $18 billion. So they have committed that if that money is there, they can get that magnitude of work started that quickly. So whether we have a stimulus package late this year or early next year, it's likely going to hit in the second quarter. If it's this year, it's just weather that'll preclude it. If it's next year, by the time the season opens, which on average across the country is about 1 May, they deal with it in January, early February, 90 days out, you're into May. So that's the way I would look at that aspect of it.

[Catherine Ash], though, just published something thon those statistic if you want to go out and find those.

The size, I talked about $18 billion. There have been numbers that have ranged higher. It's hard to know exactly how Congress is going to approach this. You see some economists who are out there talking about $300 billion total packages as needed to really pull the economy out of the current doldrums. You've seen $150 billion as a target number floated by some of the key congressional Democrats. With the infrastructure piece of that being somewhere between that $18 billion on up into $25 billion plus, it's a floating number. But pretty clearly, substantial monies toward infrastructure if they address this. So I think that's encouraging.

That does conclude our question and answer session. At this time, I'd like to turn the conference back over to Mr. Zelnak for any additional or closing comments.

Okay. We thank you for your participation. A lot of very good questions. I wish we had a totally clear crystal ball, we'd tell you what was in it. But we're trying to do the best with the circumstances we're in and hopefully the commentary we gave you was helpful. Look forward to talking to you at the end of the next quarter. Thanks.

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