Martin Marietta Materials Inc (MLM) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to the Martin Marietta Materials Incorporated fourth quarter 2008 full year financial results conference call. Today's call is being recorded.

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

Thanks for joining us on a beautiful, sunny day in Raleigh, North Carolina. I have with me Howard Nye, our President and Chief Operating Officer; and Anne Lloyd, our Chief Financial Officer.

The fourth quarter was extremely challenging as we coped with a 21% volume reduction in our aggregates business along with a sharp contraction in lime demand to the steel energy in our specialty products business. The volume downturn in aggregates was partially mitigated by a 9% pricing improvement, along with about $8 million in reduced diesel fuel expenditures as energy prices trended down. We also experienced down aggregates volume in all areas except northwest Louisiana and Arkansas, which were driven primarily by energy-related projects. Granite shipments into Florida also increased as contractors prepared for the beginning of a $1.4 billion highway work from the accelerated Florida initiative. Shipment volumes were particularly weak in North Carolina and South Carolina, which were down over 30%, and Atlanta, which saw a volume drop close to 50%.

During the quarter, we continued to manage our costs effectively, which produced earnings per diluted share of $0.80 prior to $0.20 in nonrecurring charges. Severance charges accounted for $0.08 as we reduced our workforce consistent with the decline in business. The remaining nonrecurring charges were for resolution of a royalty dispute, property losses, and a writedown related to structural composites products.

SG&A expenses declined $2 million or 6% during the quarter. For the year, SG&A expense was down $3.8 million and was 8.1% of net sales versus 7.9% in 2007, with sales decreasing 5%. For the year, earnings per diluted share of $4.20 included the $0.20 in nonrecurring charges as well as a gain of $0.24 per diluted share on the sale of quarries in our transaction with Vulcan Materials. Aggregates volume was down 13% while pricing improved 7%. Specialty products results were reduced $3.3 million for the structural composites writedown as well as well as by the sharp fourth quarter in lime shipments. Although energy was cost was positive in the fourth quarter, our results were reduced by $0.43 a share for the high energy prices that prevailed most of the year.

Even though it was a difficult year, we continued to generate excellent cash flow as net cash provided from operating activities was $342 million in spite of a net income drop of $87 million for the year. Control of working capital, coupled with lower cash taxes and the benefits from bonus depreciation deductions, were beneficial to cash flow.

With respect to liquidity, in December 2008, we refinanced our expiring $200 million of 5.875% notes through our revolving credit facility, effectively converting the fixed rate notes to a floating rate, which is currently LIBOR plus 225 basis points. We expect this to reduce interest expense in 2009 by about $3 million. We expect to take some further actions that will improve our liquidity to assure we are fully funded for upcoming debt obligations along with being prepared to take advantage of some possible acquisition opportunities.

As we look at 2009, our current view is a weak first half with some growth opportunity in the second half, fueled primarily by passage of an economic stimulus package. Current spending numbers appear to be in the $30 billion range for highways plus $15 billion to $18 billion for transit and airports. We firmly believe the states are ready to move quickly on this level of work with notable impact on our business in the second half of 2009 into 2010. We're also encouraged that attention is being given to significantly more funding for transportation in the follow on Transportation Act, which will replace the current program that expires in September 2009.

For 2009, we expect volumes will be down 9% to 12%, excluding the impact of the stimulus package. The rate of price increase for the aggregates product line is expected to be 4% to 6%, which reflects increased competition based on lower capacity utilization. We expect our specialty product segment to contribute a record $32 million to $35 million in pretax earnings. We also anticipate $35 million to $50 million in energy cost reductions. Given these assumptions, we currently expect net earnings per diluted share to be $3.70 to $4.30, excluding the stimulus package. If the stimulus package is passed with approximately $30 billion in highway expenditures in the program, that could add $0.50 to $0.75 per diluted share. At this time, I'd be pleased to take any questions that you may have.

Thank you, sir. Today's question and answer session will be conducted electronically. (Operator Instructions). We'll pause a moment. And we'll take our first question today from Arnie Ursaner from CJS Securities.

Hey Steve, how are you?

Hi, Arnie.

And good afternoon to you, Anne, as well.

Good morning.

My question is, can you give us a little bit of a feel for the shape of the volume decline you saw in Q4, meaning several of your parties I'm assuming shut down fairly early in the quarter. And where I'm going with that is can you also perhaps comment on how that might translate to when we would see some pickup in activity in Q1? I know you've generally spoken broadly about Q1 in your view being nonexistent. Can you walk us through the monthly pattern of the trends you're seeing?

Well, the trends obviously were sharply down in the quarter with a 21% volume decline. What we chose to do was to make sure that we did not build inventory. We actually produced in line with our sales, so we cut back sharply on production. With that, it said to us that we need to shut plants down early, and based on the outlook in the first half of 2009 that we're going to need to keep those plants down much longer than normal. And in some cases we may have some plants that don't come up all year where we will serve that business out of existing stockpiles as well as supplement it from other nearby locations.

So we're very focused on the balance between sales and production. If you look at our year, we actually brought down inventory by about 3.7 million tons. The inventory valuation went up because of the increased cost, but we scaled the volume back, which is pretty substantial volume decline. So we won't be producing at very high rates. Certainly not in Q1. And if you think back to prior Q1s, certainly going back to 2006 and '07, which were incredibly good years, we were producing at very high rates because of demand. So we have a very low production to amortize costs against. I'll reiterate the comment -- the first quarter is going to be pretty nonexistent. The weather's been tough. On top of that, there's just very limited demand out there. There's no reason for a contractor to go to work early.

My second question --

Hopefully that helps.

That's very helpful. My second question relates a little more generally. You have one very highly visible public competitor where your views are quite different in terms of quantification and outlook for 2009. Perhaps you could comment a little bit on your view of where you think you may differ from your leading competitor in aggregates in in terms of the outlook for '09?

Obviously we're looking at what other people put out and always read it with interest. There is a disparity in views with respect to volume. If I recall, you're referring to Vulcan. I think their volume outlook was 5% to 10%. We're 9% to 12%, so we expect a further volume decline. We operate in a lot of the same areas, but not in all the same areas. So the big difference would be the presence in California that they have which we do not, and a much larger presence in Florida -- we have a small presence, focusing on the granite market. So I would assume that they have a positive outlook for California and a positive outlook for Florida to get to that forecast, but I'm just speculating. With respect to pricing, their forecast for pricing is higher than ours. Again, it may relate to those markets. I would think in the markets where we're both in the same place, it's going to be pretty similar. That's probably the best I could do on that one.

In Q4, the Southeast had 16% pricing improvement versus high single digit for the year. I'm assuming that's just mix?

It was very much mix. It relates to the decline in volume in the Carolinas or in Georgia -- Atlanta, in particular -- and the decline in volume of truck business relative to what was pretty good business with long haul transportation. So you're trading off tons on long haul. You got tons that are selling for, say, $20 a ton and on the truck market, half that. So it is a mix issue. By no stretch of the imagination do we increase prices by double digits in the Southeast.

Thank you very much.

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

Thanks. Good afternoon, everyone.

Hey, Jack.

I was wondering if you guys could give us an estimate for the tax rate for '09 and interest expense?

Jack, this is Anne. We expect the tax rate for '09 to be 30%. Right now, assuming current interest rates and our current mix of fixed to floating, we would say interest expense would come in around $70 million next year.

And with regard to SG&A which Steve mentioned in your prepared comments was down in absolute dollars for the full year. You think it could be down again in absolute dollars in '09?

Yes. That certainly is the expectation.

And you mentioned the potential impact from the stimulus package, 8 million to 10 million tons for you guys, which seemed consistent with a forecast that had been on your website for a while. But the stimulus package as it appears today is about $30 billion for highways. Unless I'm mistaken, the initial estimate was maybe that it might be $50 billion to $70 billion for highways. Am I not squaring the two estimates correctly?

What we've done is gone back and done a little revision, jack. The numbers that correlated with the $50, billion we had a much lower market share than the actual numbers. I think we used the 6% number, and the number's closer to 7.5% We used the figure of 10,000 tons per $1 million. I think that number's going to be higher. So expectation is the 8 million to 10 million tons looks to us to be a pretty good number. That essentially divides the tonnage up into one-third of it coming in the latter half of '09 and the rest of it coming in 2010.

Steve, you mentioned also in your comments that you thought there was more attention being given to higher transportation funding in the next highway bill. Were you referring to anything in particular that's occurred recently or just a general feeling that a Democratic regime is more friendly to highway spending?

No, there's some proposals floating around. Probably the baseline proposal is to look at increasing the gas tax on an inflation basis running it forward from the last increase at the federal level in 1993 to 2009 or 2010, whenever they actually get this done. That could be pretty significant numbers. You may be looking at roughly $0.15 a gallon, and it's about-- $0.01 equals about $2 billion.

So we think there's an opportunity. We think there is some real appetite, and I'll tell you what gets my attention. This administration is clearly focused on job creation. This Congress, it has to be focused on it if they want to be re-elected in 2010. You've got an infrastructure program that's going to be put out there, certainly appears that it will very shortly. If you do not have a follow on that maintains at a similar level, those jobs are going away. So I think there's going to be a tremendous amount of pressure on the Congress to have a follow on that perpetuates the jobs. And then with that, they would be hoping to see economic recovery which would take it forward even more. That's what gives me some optimism. I actually like the structure of what has been put out there as opposed to some very large overwhelming number that removes the problem for a while. I think this just refocuses people on what has to be done with the renewal.

Great. Thanks for that. That's it for me.

Sure.

Thank you. We'll take our next question from Garik Shmois with Longbow Research.

Good afternoon.

Hey.

First question is on your pricing guidance. How much of that is dependent on opportunities you might see in the middle of the year once you get more visibility from the stimulus package?

Essentially none. We have a couple of places where we think we may have modest mid-year opportunities, but we do not believe that given the economic environment and given the cost environment that there would be much of an opportunity to look at mid-year price increases. So pricing we have put into effect reflects prices that are either already in effect as of January 1, or will be by April 1 -- some of the markets are different in terms of timing just to when we put them in -- and reflects a little carryover from mid-year price increases that were put into effect in 2008.

Okay. Thanks. And on commercial construction, do you have a forecast on what you're using as far as demand for this year?

Yes. We think it's going to be an ugly nonresidential market in 2009. We've recently relooked as we tried to formulate our volume forecast for the year. Expectation is that we're going to see volume declines there overall that -- probably in the 12% to 15% range. It will be very severe with respect to office and retail. I would expect those numbers are going to be 30ish. Then when you get to capacity driven projects, I'd think the decline there would be very modest.

Okay. Thanks for that. Just lastly, I think the end of the last quarter, you talked about the North Carolina tollway initiatives that were set to get underway at the end of '08 or early '09. Can you just provide an update on those? Have those been pushed up?

Pushed out a little bit based on the ability to place the bonds. The first project's already been let. The timing on letting the other projects -- I haven't seen any slippage, which would be two projects in '09, another project in 2010. What the toll North Carolina Turnpike Authority is trying to figure out the timing on is the placement of those bonds. They have indicated publicly that they hope to place those bonds in the first quarter. And frankly, in terms of work actually getting done, there wasn't anything that was going to be done anyway over the winter to any great degree. So hopefully we'll get those placed in the quarter and those projects will get underway in Q4. That's the project in Raleigh, by the way.

Thanks for the update.

And we'll take our next question from Chris Manuel with KeyBanc Capital Markets.

Good afternoon.

Hey, Chris.

Couple questions for you. First, could you just maybe run us through the year end -- just maybe if you update us on the percent of your business coming from the different markets? How it ended the year, residential public works, private nonres, et cetera? And you've given us a little bit of an update on where you thought 2009 would be for the private nonres side. Could you fill in the pieces for the remainder as well?

I'll take a crack at some of it. We're not ready to give you the end-use markets yet. We're still working our way through that. We do that compilation once a year. We'll provide that a little bit later.

As we look at 2009, I've already talked about nonres, which we think is pretty ugly. Expectation that the infrastructure market is going to be down probably mid-single digit. I'm a little more optimistic, perhaps a lot more optimistic about housing than most people. The qualifier on that was that I was bearish while other people were still bullish. So I may be right, may not, but I've got a somewhat different view. My expectation would be that we will see a bottoming of housing probably third quarter, and we'll begin to see a little bit of activity. Understanding is that in the stimulus bill as it is being put together that the $15,000 tax credit has been stripped out, but that the $7,500 -- we'll have to see if this is the actual language -- becomes a credit or some type of recovery as opposed to a loan. I want to see what that really is.

So anything there, I think, is going to be helpful. Most of the houses that need to move are houses that are priced at less than $500,000 -- you can get conforming the loans on those houses. The interest rates are pretty attractive, and as you know, home prices have come down sharply. They're still coming down. My expectation is by the middle of the year, you're going to have pricing in the home market that's pretty attractive for those people that are qualified buyers. On top of that, if the home builders are going to stay in business even at the modest levels out there, they're going to have to start to develop more subdivision properties. I don't expect that to just break loose, but I do expect to see some activity for the first time in well over two years.

So I'm a bit more positive about that. I would expect housing demand for us to be down this year, but probably modestly based on that subdivision component, if I'm correct there. And one differentiator between us and other companies is the other category of business. About 10% of our aggregates business falls outside building construction. We think that 10%, which railroad ballast, flue gas desulfurization stone, and agricultural lime is going to be flattish, plus or minus a little bit. That would be our view of the world as we look at '09 and that's how we come to the 9% to 12%. And that big number is driven heavily by nonres.

That infrastructure piece you talked about down mid-single digits, that's not taking into account stimulus?

That's correct.

One of the challenges that I wrestle with is thinking about as we look at all the state budgets and local municipality budgets and public private partnerships, et cetera, that are all seemingly under so much pressure and hearing of projects being delayed, put on hold waiting for the stimulus piece to be passed is trying to figure out what is incremental. When we look at that $30 billion in that proposed stimulus piece of incremental for infrastructure and another $90 billion I think in total for all these different projects. How could you help us,maybe think about that as to what is incremental, what is effectively going to be less pocket federal government replacing right pocket local, state, sort of funding?

I would say to you that I don't think it makes a difference. What we're trying to give you is a forecast that is based on the condition of the states we're in as they stand today without stimulus. So whether it turns out to be replacement or some other projects really doesn't make a difference. We're trying to baseline it. So whatever comes out of the stimulus program is incremental to that volume that we would expect to do. Doesn't make any difference which project it goes on, it's going to be incremental tonnage running through our plant versus what we expect to have come without it. And we've been pretty explicit in terms of laying out those expectations, the 8 million to 10 million tons in 2009. That's not been done without a lot of thought.

Sure.

And we've laid out a margin expectation, too. I'll tell you how we did that, because we've had some questions on it. Pretty straightforward. We're running at very low levels of capacity, roughly 65% of capacity utilization. Incremental tons coming through our plants right now are going to be 50% incremental margin at a minimum. So if you take a $10 aggregate price, which is actually understated for us, you put a 50% margin with that, which I think is low end expectation, and then put that with 8 million tons and 10 million tons, you're going to get an EPS that pops out the back end an incremental number of $0.67 to $0.82. We framed it as $0.50 to $0.75. So that's the math that -- assumptions goes with that for us.

Okay. Thank you. Then just one last housekeeping question, or a couple housekeeping questions for Anne. In the press release, you talked about pension expense being up in '09. Can you tell us what the assumption is for both the expense differential year-over-year and also the cash funding?

Yes. The cash funding needs will range from $7.5 million to $36 million, with a best estimate today of around $20 million. And the incremental cost, the number's going up about -- it's doubling. It's going up to $36 million.

What is your free cash estimate for the year that corresponds to your EPS guidance?

Corresponding to the EPS guidance, assuming the $185 million in CapEx, we're looking at free cash flow around $150 million to $175 million excluding the stimulus.

Thank you very much.

We'll take our next question from Trey Grooms with Stephens Incorporated.

Good afternoon. This is Will Greene on the line for Trey. I wanted to expand on cost reduction if I could. What kind of cost reduction do you expect from the workforce you reduced from Q4 and how much of that was going to be in SG&A versus cost?

The SG&A component of it -- and it's not just people, it's a lot of services, too, that we scrubbed pretty hard -- could range up on the order of $8 million to $10 million is what we're looking at there. On the hourly side of the equation, based on demand out there, we've got more that we're looking at there to match up with demand. A lot of it's not necessarily people reduction. It's that we will have a lot of people who will be working light hours for the year because they're simply not going to be called back to work. So it's hard for me to give you a number there. We've got a bottoms up forecast plant by plant that we built and that's rolled up into a cost of goods sold. I wouldn't try to give you a number per se on hourly workers coming out.

Then on the margin compression, it looks like if you exclude the one-times, it was mostly a volume issue. Can you remind us what the cost structure looks like right now for fixed versus variable, if [main] fixed costs in DD&A.

Your fixed costs are in that. That's about one-third of total costs, Will.

Okay.

That really hasn't changed a lot. You were talking about DD&A and some other property tax cost, insurance cost, et cetera.

Okay.

I appreciate it. That's all I have.

And we'll take our next question from Todd Vencil with Davenport.

Thanks, guys. Good afternoon.

Hey, Todd.

Couple things. Just to clarify something on that last bit. Is that greater pension expense this year running through SG&A?

It'll match the employee. It'll go through either COGS or SG&A depending on where the employee is. It's going to be pretty well split between the two.

Okay, I got it. Steve, with regard to pricing, is there any market right now where you're seeing prices start to fall off?

There are markets where we've got certainly more pressure than others. I indicated that Atlanta's the market where the volume's off about 50% in the fourth quarter. Atlanta's a market that has a lot of price pressure. Our expectation is that we're going to see a very modest improvement in pricing. But it's split between sizes and material. If you're in the market for base material in Atlanta, based on that soft granite there, there's an abundance of base material. You may well buy that at a lesser price than you paid in '08, but you're going to pay more for cleanstone would be the expectation. So I would cite Atlanta as being a highly competitive market right now. If you get up into the north central area, the automotive belt, also, highly competitive. Those are the two most competitive markets that I can think of at this point.

Okay. But still in Atlanta, for instance, you think you feel like the average is going to remain rising?

Yes. I think we're going to be up a little bit. Every one of our markets is budgeted up anywhere from modestly to in some cases higher single digits. We certainly have no double digit increases in our plan anywhere.

Got it. Anne, on the debt, can you just remind us what maturities -- you spoke a little about prepared remarks. Just looking maybe to the end of 2010, what are you looking at for maturities and what are your covenants?

The only covenant we have is 3.25 times debt to EBITDA with the exception of 3.5 times for 180 days post an acquisition. And the maturity schedule, we have $250 million due in April of 2010 and another $225 million in April 2010 and $250 million in April of 2011.

Got it. Thanks for that. And then with the comment there on the covenant, you segued me in. Steve, as I recall, back in the third quarter, you guys spent a fair amount of money on professional fees, looking at what may or may not have been a deal that didn't come off. Is there any chance that that thing resurrects itself or otherwise are you seeing anything interesting in the market that's available now that hasn't been in the past?

We think it's a very interesting time. As I'm sure you know, we haven't been active in the acquisition market to any great degree since 2002 after an eight-year run where we did 62 of them. We weren't enamored of the pricing. You're at a point now where there may be reasonably motivated sellers. You're clearly not going to be buying off of peak earnings. I don't think we're going to be paying double digit EBITDAs. That gets a lot more interesting, and we happen to be in a position where we could take advantage of that, and we are looking. There are a number of things out there that are for sale. We are an active looker. We will likely be an active proposer or bidder on a few things, and we may land something that's interesting, but I've defined what the metrics won't be on it. I think if in fact we do something, it will be interesting for our shareholders. Limited competition out there right now because of the very bloody balance sheets on the part of most employers. Tough to get out from under those 10 to 12 times EBITDA off peak earnings that some of the guys paid.

Thanks, guys.

We'll take our next question from Kathryn Thompson with Avondale.

Thank you very much? What are your debt and free cash flow targets for fiscal '09?

We talked about free cash flow earlier -- that $150 million to $175 million of free cash flow after $185 million of CapEx. We'll see what incrementally gets added -- if we're fortunate it's a $0.50 to $0.75 from the stimulus that would contribute another $20 million to $30 million of free cash flow. You're wanting to keep your debt to EBITDA targets within the covenant. We would anticipate by the end of the year assuming these projections hold true that we would be substantially below the 3 times level.

Tagging along with the acquisition question, what is your thought process for how you'd fund an acquisition, yet still keep a fairly clean balance sheet? In other words, how willing would you be to do -- to fund the acquisition with equity?

It comes down to the deal. And the reality is that if you're going to do something now of any size, you're going to have to do it with equity, certainly significant majority equity. We've had a lot of express support from some of our major shareholder with respect to the possibility of wanting to fund something like that. There seems to be interest. I think there certainly is a sense that there may be some good opportunities. If we see it, and obviously we're going to calculate it based on the amount of equity that we're going to have to put on here to do it as we look at the deal -- if it looks attractive, then we're not going to be reluctant if we think it's something that works both short term and long term. It's not going to be one of these deals where it works three or four years out. It's going to have to work in the short term, too.

Perfect. As far as pricing, did the pricing at the end of the quarter vary at all from your average pricing throughout the quarter? And if you could talk about any type of pricing trends that have changed since the quarter end.

No significant variation in the quarter relative to normal quarterly trends. So there was nothing there. And as we come into 2009, we've articulated what we expect. We really haven't seen anything that changes our views there. As I indicated earlier, we put our price increases into effect for most of what we're going to do January 1. We've got some places where they may stretch out as far as April 1 based on the individual market, but the customers know what those are. We have reached agreement. I don't expect any surprises there.

One additional question I forgot to ask on the acquisition side. Who is your competition for acquisitions? Is it mainly private players or is it also publics? If you could get some sense on the type of people that are competing for these properties that are up for sale?

Well, certainly, private equity folks are back looking -- different sizes of firms that have any interest in our kind of business. You have a few public firms that potentially could get into the mix. It will be a question as to whether or not they have the will and whether or not they have the ability to get synergies, I think. One of the advantages that we have is that when we look at something, we're typically able to get better synergies than other people. I can say that with reasonable conviction, having gone through a lot of these exercises in some cases with other players where we may have been jointly looking at the possibility of buying something together or splitting it up or JV or whatever. Our synergy numbers and synergy capabilities seem to be far in excess of anybody that we've seen out there. Comes back to our systems. Comes back to the management approach. So you can look at the balance sheets of the public players. You know very quickly which ones can play and which ones can't. It's a very limited number. Frankly when we started.

I --

Pardon?

Oh, no, go ahead.

If you go back in our history, when we started acquiring heavily going back to 1994 when we came out in public, it was a similar situation where there were only a couple people out there who were in a position to bid because the balance sheets were bloody coming off the late '80s and early '90s. So we actually liked the environment.

Okay. Just to reconfirm, so that would imply that some larger, private players wouldn't have as much dry powder as you for making a meaningful acquisition?

I think we can be competitive with the large private players, put it that way -- in terms of the size of the deals that are likely to be out there and particularly in terms of ability to manage them and generate a return.

Okay. And just touching on a topic you talked about earlier, just to reclarify -- so for your stimulus calculations, you're using an incremental and not a normalized margin for that?

That is correct.

I want to make sure I'm clear on that subject. If you could just explain one more time why you used incremental versus normalized?

Okay. What we've given you is a normalized forecast, which is the 9% to 12% down volume, the pricing and the earnings estimates to go with that. So we've taken the fact that the states are going to have down programs without stimulus. And we've impacted our volume estimate with it. So that is your new baseline. From that baseline, the stimulus program will create additional tons. And those tons are going to be incremental to that baseline. So in order to put it with the baseline earnings that we've given you, what we've tried to do is to estimate both the tons, and I've taken you through the calculation of what we think that will yield in terms of earnings. And it is an incremental yield, right, because those are new tons outside of our forecast.

Thank you. I missed a portion of those comments. I was just cut off. But thanks for going through that again. Then my final question is on the status of state budgets, particularly state DOTs going into their fiscal year in July really fiscal year '10. What is your sense of where state budgets on the DOT side stand and how has that impacted your forecast?

It's impacted it in a negative way because certainly we think revenues for the states without stimulus are going to be down. Another part of that is that the cost of construction for the states is going to be down, too. Contracting capacity is readily available. You're seeing very aggressive bids. Fuel has come down, and contractors consume lot of fuel -- don't underestimate that, on the work they do. Liquid asphalt is down. Essentially all materials are down, with the exception of the aggregate hanging in there with modest increases. The states are going to get much more of a bargain on any construction activity they do. But they're going to have fewer dollars to do it with. Even with that decreased cost, we think the reduced dollars against that decreased cost takes you down mid-single digits in terms of what they can do.

I'll also say the state DOTs are probably gaming it a little bit right now. Given the times, they're being very conservative. They expect to see the stimulus money come rolling out, and they're just sitting on the sidelines waiting to see it come. And then I think you'll see more work at the state level than you expected, because they will feel that they under a much better position overall to move forward and have a bit more buffer.

Do you think that -- and just additional color on that. Do you think that when state DOTs in particular are talking about their budgets in '10, when they give a number, they're basically sandbagging?

I think they're having been burned in the last couple of years both by escalating costs and by recently declining revenue. I think they are being extremely conservative. And I think part of what they're trying to tee up in each one of their states is a premise, which is true, they need more revenue. So politically, it's something that they're promoting to try to get some more revenue.

Okay. Great. Thank you very much. Appreciate it.

Sure.

And we'll take our next question from Mike Betts with JPMorgan.

Hi, good afternoon. I had a number of questions, Steve. Can I just go back to the pricing issue? Could you just maybe remind us or maybe finalize -- what on average did you get mid year '08 in the end? Was it sort of a couple of percent across the board or was it a bit more than that?

It was in that range, Mike. We had talked about it before, but if you go back to the original forecast, we did not expect to get any significant mid-year increases. With the sharp escalation in fuel prices and energy, we were able to go out and do that. So a couple of extra percent at that time and if you recall, we actually bumped our yearly forecast up to reflect that and then you've got the carryover effect of it.

Remind me again. Typically it takes, what, six to eight weeks? If you put a price increase in July, it would be really sort of August/September before you got that? Or was that an out-of-date view of mine?

You will have lead time. It'll stretch out even farther than that for projects where you've quoted somebody on a project where they've made a commitment. You're not going to change that price. So you've got some kind of price locked in -- typically today, it's with escalators, but it would not reflect the mid-year increase. You will have other customers who have committed work, and you're going to give them protection on that work. You're not there to destroy their cost structure. So by the time you really get that moving, you don't see the full impact until you get into the fourth quarter if you do it July 1st. That's full impact on work that you can get impact on. Contractual work, you have to wait until that expires.

I guess where I'm going with this, then I'll move to another question, but a similar thing would apply with the Jan 1 '08 increase. It would take a while to get it all through. So carrythrough into '09 from the price increases in '08 must be at least a couple of percent, isn't it?

Maybe a little bit, yes. With contractual work, you'll always be moving forward based on the contractual work that rolls off the new contractual work coming on. As you look at the January '08 increases and the January '09 increases, in both cases, you have much less protected tonnage that is not contractual. Because what we've done is go after customers early, tell not to quote work based on those old prices, because they have new prices coming. And they should check with us before they make any significant commitments. So we've attempted to minimum that lag time.

Okay. Let me then if I could move onto the speciality products. I apologize to the people involved in this business, because we probably tend to only ask about it when it's at more difficult times, but it was barely profitable in Q4. Obviously there was a $3.3 million provision. The run rate is way less than what you're forecasting for the whole of '09. I mean -- and the lime for the steel industry, are you assuming that that business is going to struggle in the first half and then it's going to strengthen in the second half? Is that the way we should look at that for '09?

I think the general trend line would be I think what you're going to see is just what we saw in the fourth quarter. The steel industry is going to be highly volatile in terms of its production rates. As you know, they very quickly adjust today as opposed to building inventory. And what you saw in the last part of the year was that steel production dropped 50%. We had shutdowns that we didn't anticipate and certainly steelmakers didn't anticipate. They said look, we're not going to build inventory. To the extent where we can make reasonable estimates, which is what we're trying to do, we tried to bake that into the forecast.

If you look at the fourth quarter, we had a good quarter in the magnesia chemicals business. That business continues to grow. A lot of water treatment products. Market share gains against caustic soda in a number of areas, good ceramic products business and lots of other chemical specialties. Our expectation is we're going to have a very good year in that segment in 2009. We've got a couple of things working for us as we come out of the chute. Last year, we produced our new [elastomag] product we acquired in the year at the existing facility owned by Morton Salt. We're moving that production to our facility. We've been getting it ready. We will cut close to $2 million to production costs. That will go to the bottom line. That's a good place to start. And then we've also got another product where we picked up a take or pay contract, and based on volume and price that contract is worth close to $3 million. So those are two things that didn't happen in '08 that happened in '09 as a place to start. So mag chemicals should have a very, very good year. We think the dolomitic lime business will be down relative to '08, we think volume and profit.

Okay. My final question, if I could, is on the redundancy costs. You've not separated them out in previous quarters, so I guess they were much much lower. How many of the 4,900 redundancies during the year, or the employment reduction -- how many of that occurred in Q4?

Total headcount reduction in Q4 is probably around 200 or so people. The SG&A component of that as I recall was [$58 million]. But we had hourly layoffs as we went and may have been a little bit more than that. I'm just working strictly from memory. I tend to compare it more year to year, although I'm looking at the sheets by month.

I guess I'm wondering why there was a significant severance cost in Q4, not in the other quarters?

Well, you had some senior long-term people who come out of the organization.

Okay.

The severance costs associated with senior salary people is really what drove that.

Okay, now I understand that. That's great. Thank you very much.

Sure.

And we'll take our next question with Timna Tanners with UBS.

Hi, this is PT Luther in for Timna today.

Okay.

Just following up on a question just asked. Can you tell us what the percentage steel represents as the end market for specialty chemicals?

Yes, about 30%.

Okay.

If you take our lime business, just to break the whole thing out for you, the terms of revenue, the mag chem business is roughly 60%, the lime business is about 40%. But 10% of that lime we consume internally. So it's about a 70/30 split.

Great, thanks. Then can you talk about what leverage you're comfortable with as you are looking at these acquisitions I guess before equity? What kind of debt levels you're comfortable with?

In this marketplace, we're not going to do anything that puts us in a liquidity problem situation. We're not going to skate close to violating covenants. We're fully committed to maintaining our investment grade rating. So we're going to protect that first and foremost. What you do when you look at these acquisitions, from there you're going to back into what you need to do on the equity line. It's going to be the significant majority if not all, and then you're going to price the deal accordingly, based on the fact that you're using equity as opposed to using the debt.

Okay. And then lastly with your free cash flow forecast, are you anticipating much benefit from working capital release from that?

I would expect not.

Okay. Great, thank you.

Sure.

And we'll go next to Clyde Lewis with Citi.

Good afternoon, Steve. Three if I may. The comment you made on fuel cost being $35 million to $50 million better this year -- was that based on static volumes or was that based on volumes being down 9% to 12%? I just want to clear that up?

It's based on the volumes that we're looking at.

Okay, great.

There are two components, so I can be clear on it. There is a diesel fuel cost component in there, which is the reduction on the price we pay for diesel fuel, and also there is a reduction related to fuel escalators we have that are attached to our long haul transportation contracts, both rail and water. So the $35 million to $50 million is a sum of that, plus natural gas savings that we're looking at in the magnesia specialties business.

Okay. Could you maybe give an indication for what you think would be on a static basis, on flat volumes?

I'd be guessing. We'd have to go back and calculate it.

Okay. Okay. The second question I had was on acquisitions. I know you've had plenty of questions already on acquisitions, probing and prodding. I mean, would you expect to sort of A) move into any new regions and new markets that the group's not in already or would you actually look at all about getting involved in other products that you're not currently involved in a bigger way? Would the focus be on where you are now and trying to grow your business share in these current markets?

Well, from a strategic standpoint, I'm an old military guy. I like to kind of move down the road and take adjacent territory as opposed to doing parachute drops into enemy territory. So we would be more focused on things that are complementary to where we are geographically that would have higher value to us, because we can leverage that from an SG&A standpoint most effectively sharing of equipment. So that's what we like the best. Would we look at something that is remote from where we are right now in the United States? We would, but it's going to have to be pretty compelling to to us want to do it. We would price it accordingly.

Products lines, certainly we're aggregates folks first and foremost, no question about that. It's going to have to have a very significant aggregates component. Some of the things that people want to sell are vertically integrated. We will look at the packages, but we're going to price it accordingly. Clearly, the vertical integration has shown its volatility, and one of the nice things about the aggregates business is that it's not as volatile with the infrastructure component, and it is a bit easier to manage the volatility I think than in the aggregates business. So hopefully that's helpful.

That's great, thank you. The last one I had, can you just remind us do you have any new quarries coming onstream in 2009 and what sort of tonnage they will contribute?

I couldn't give you that. There are very few. Even some of the ones that were announced, people have said no, I don't think so. Not right now.

Not for the market, for just yourself?

Oh, for ourself? We've got one quarry that is coming on near Fort Bragg that we got underway with late last year, and we will open that up. The Fort Bragg area in North Carolina at Fayetteville is a very high growth area. It's a beneficiary of base realignment. Probably somewhere in the neighborhood of 60,000 additional people moving in there over four years, and we would have the only quarry in Fayetteville. Certainly the only one close to Fort Bragg. So we're pretty excited about that. We've got another small quarry that we opened -- base quarry in North Carolina in the latter part of '08 in Eastern North Carolina. And we may possibly get another one opened up at a low level in '09. But that's going to be it.

Okay. 1 million to 2 million tons extra?

Won't be that much. Ultimately it will be out of those locations, but certainly not in '09.

Thank you very much.

Sure.

And we'll take our next question from John Fox with Fenimore Asset Management.

Hello, everyone. I just have a couple minor questions. I guess for Anne, do you have DD&A for 2009?

We expect it to be $182 million.

With the reduction in Cap Ex this year, will DD&A shrink for '10, or what's the relationship there?

It will eventually -- you'll see a dip in it, but I think it won't change dramatically for '10.

Okay. Great. Your free cash flow at $150 million to $175 million, that's before dividend -- is that correct?

Correct.

Okay. That's all I have, thank you.

Thank you, John.

And Mr. Zelnak, at this time, I'll turn the call back to you for any additional or closing remarks.

Okay. Thanks for joining us. Certainly a lot of very good questions. It's interesting times. Certainly everybody's challenged. We think we're managing the times quite well. I'll just add that on a personal basis, I'm extremely proud of our management group for adapting to the toughest environment we've seen since the early '80s and before it's through, maybe the toughest that anybody's seen since 1930s. So I think our group is doing an excellent job. They're being very realistic, and we're doing what we need to do to turn in the best performance that we can possibly put up and be ready for a little of that incremental tonnage coming off the stimulus program. Thanks a lot. Call us if you need anything.

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