Martin Marietta Materials Inc (MLM) 2009 Q3 法說會逐字稿

Good day, and welcome to the Martin Marietta Materials, Incorporated Q3 2009 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Stephen Zelnak, Chairman and Chief Executive Officer. Please go ahead, sir.

Thanks for joining us today. I have with me Ward Nye, President and Chief Operating Officer and Anne Lloyd, our Chief Financial Officer. The third quarter was a very difficult one, as volumes continued to be well below our expectations. Construction activity continues to decline based on tight credit markets and the shortfall in revenue at state departments of transportation. We also experienced another wet quarter, which didn't help.

Total net sales declined 18% with earnings per diluted share coming in at $1.23 versus $1.57 in the prior year period. In spite of the challenging conditions, we achieved an EBITDA margin of 31.4% versus 29.9% in the prior year period. We view this as exceptional performance, given business conditions.

Period aggregates volume dropped 22% with all of our major geographic units showing a decrease. Pricing in aggregates increased 1% versus the prior year period, with the major negatives in Florida and the river markets. Increases in the other areas averaged mid-single digits. At this time, Ward Nye will cover some of the detail relating to the operating units.

We continue to confront the most significant volume decline our industry has seen since the Great Depression. Specific geographic volume declines range from down 38% in north Georgia to down only 1% in east Texas. Aside from those sales volume extremes, some of the hardest hit areas for our Company included Florida, down 36%; Ohio, down 30%; Carolina, off 27%, with Charlotte and central North Carolina down around 29%, and Raleigh off 27%. San Antonio dropped 26% and north Texas was off 24%. Our river area was off, too, but on a comparative percentage basis in the high teens.

Against such an extended volume fall, our operating personnel had been aggressive in thoughtfully managing our cost profile. The results of their sustained efforts include a 14% reduction in both quarterly and year-to-date direct production costs for the aggregates operations, mitigating expected increases in depreciation and pension expenses. Quarter-on-quarter cost savings in personnel, maintenance and repair, and supplies were all achieved.

In addition, energy savings have been significant, as diesel fuel prices decreased in the third quarter from their peak in 2008. Compared to the prior year period in heritage aggregates, this decrease in diesel pricing, together with a reduction in natural consumption contributed to a $17.5 million decline in diesel expense for the third quarter and a $49.9 million decline year-to-date. Our quarterly average cost per gallon for diesel was $1.75.

Following 14 consecutive quarters of aggregate volume decline, our business remains one of the few industries that continue to see an overall price increase, albeit at reduced levels. To be specific, we broadly saw more markets with price increases than price decreases. However, decreases were as low as 12% in some areas and similarly, were up as much as 12% in others. The range of pricing is tighter for the year-to-date period, ranging from a price increase of 9% to a decrease of 4%.

The geographic areas in which we saw the greatest quarterly pricing pressure was Florida, the river, and portions of the Southwest. Despite unusually wet weather in July and August, which contributed to a 15% quarter-on-quarter volume decline in Iowa, our Midwest division had record third quarter earnings. Divisional shipments were underpinned by infrastructure work, both stimulus and traditional Department of Transportation budgeted projects.

As previously indicated, Iowa was particularly aggressive in getting Recovery Act projects under way and as such, stimulus shipments are expected to grow to nearly one million tons by year end in the Midwest division. Infrastructure projects were further complemented in the Midwest by alternative energy jobs, specifically wind farms. Together with an aggregates volume decline, there was not as steep as in many markets. Our operating personnel managed the cost side of the equation very well. Among other things, this meant calibrating divisional plant work loads that varied greatly; some being extremely busy, while others worked reduced hours. We believe our operational actions and the quarterly results in our Midwest exemplified what will happen across our business as varying degrees of volume return to our well-placed quarry locations.

Our magnesia specialties division also had an outstanding quarter, driven by good cost control, lower natural gas cost, solid production and disciplined pricing. The result was operating earnings of $11.9 million, $3.3 million greater than the prior year quarter. This represents record earnings for the three-month period, as gross margin for the third quarter expanded nearly 1200 basis points to a record 36.4% and operating margin expanded over 1200 basis points to a record 30.2%. With steel and finished product inventories at relatively low levels, we saw greater steel mill activity and consequently our dolomitic line business experienced some of its best production and sales volume since September of 2008. Particular strength was demonstrated in our hydroxide slurry and cell guard product lines.

We continue to see an increase in the level of bidding activity, as state departments of transportation have until March 2010 to obligate all stimulus funds. Nonetheless, one of the larger issues with stimulus remains one of timing. The American Road and Transportation Builders Association or ARTBA,provides twice monthly updates on stimulus obligations and expenditures. Their latest report reviews data provided by the Federal Highway Administration as of October 16, 2009.

At mid October, states have obligated $19.6 billion or 72.8% of the $26.9 billion of Recovery Act funds available. States have approximately four and one-half months to allocate the remaining $7 billion or return the money to the Federal Highway Administration. Payments to contractors have almost hit $3 billion.

Nationwide, ARTBA reports 11.2% of stimulus funds have been paid out to the states and in the District of Colombia. To date, 14 states have paid out over 20% of their total state and local recovery funds. However, of the 14 states, only Iowa, Nebraska and Oklahoma are significant Martin Marietta states and our aggregate locations in each state benefited. Conversely, North Carolina paid out close to the national average, while Texas has paid out only 7.2%.

We received purchase orders for stimulus finance jobs in virtually every state in which we operate. Total shipments through the third quarter have exceeded two million tons and existing purchase orders exceed five million tons. As we have indicated, we expect shipments to begin providing a welcome infrastructure volume lift through 2010. It's important to remember, however, that aggregate shipments become increasingly weather-sensitive in late fall and winter. We now expect that about 15% of the tons related to stimulus jobs will ship in 2009, approximately 70% in 2010, and the remainder in 2011.

In the final analysis, when measuring these varying operating components cumulatively, despite significantly reduced aggregates demand and increased pricing pressure, we delivered a third quarter consolidated gross profit margin of 27.5%, the highest quarterly consolidated gross margin reported this year. And on that note, Steve will continue with his comments in the quarter and the balance of the year.

We continued to do a good job of managing SG&A costs, as expensed declined $4.8 million or 13% for the quarter compared to the prior year period. For the year, SG&A expense is down $10.6 million or 9% after absorbing increased pension costs of $4.8 million. Also, we continue to reduce capital spending as volume contracts.

We now expect capital spending for the year to be approximately $150 million versus our initial plan of $185 million. That compares to an estimated depletion -- depreciation and amortization for the year of $178 million. Even at that level we will be investing in some growth projects in selective margins.

Despite the challenges, we continue to maintain a strong balance sheet. We ended the quarter with $194 million in cash, equivalents and have a total of $423 million of borrowing capacity on our secured accounts receivables facility and revolving credit agreement. As of September 30, our rate of debt to 12-month trailing EBITDA was 2.95 times, well within our leveraged covenant of 3.25 times. Netting out the cash on hand, the ratio is 2.5 times. We remain in a strong position, particularly as compared to many other companies in our industry sector.

As we look at weak construction activity, we expect to have an unusual number of plant shutdowns in the fourth quarter of 2009 that will continue into the first and second quarters of 2010. For the remainder of 2009, we now expect aggregates volume to be down 21% to 23%, with pricing up 2% to 3%. We expect specialty products to contribute $31 million to $33 million in pretax earnings. This should produce net earnings per diluted share of $2.20 to $2.45.

Based on our early look at 2010, we expect volume to increase moderately and our aggregates business led by stimulus work and home building. Also, we expect pricing to improve 2% to 3%. In specialty products, we expect earnings to increase in both our dolomitic lime and magnesia chemicals product lines. At this time, I would be pleased to take any questions that you may have.

(Operator Instructions). We'll take our first question from Arnie Ursaner with CJS Securities.

Good afternoon.

Hey, Arnie.

My question, Steve, you mentioned plants -- shutting an unusual number of plants in the quarter, and given the high fixed cost of your business, can you give us a little bit of feel for what inventory you have on the ground? What cost it has? And given the volume declines you're looking for, should we assume -- you mentioned a large number of plants. In the past, you used to not make money in the first quarter because the season would start slow. I assume you're shutting them down much earlier than normal. How should we think about that?

We will be shutting down plants earlier, on average, than we typically do based on low demand. Expectation is that we are going to keep them down longer than we typically do on average. The issue that we have with respect to inventory is one of inventory by size balance What really creates issues at this point is that you will have a plant that will have some business. That business will be concentrated in one size that you have to make in order to meet the customer demand.

In turn, you will accumulate other sizes of material that become inventory. They may go into the calculated inventory numbers that we present to you or they may go into what we call capped inventory, which increasingly we're seeing that category, where we have more material on the ground than we think we're going to be able to sell within a year. The policy is that we will cap the inventory at that level. Effectively, we count it in our inventory tons, but we do not put a value on it.

What happens when the economy picks up, every time since I've been in this business, is that you begin to get better balance and you have that inventory that is on the ground, but not booked. Therefore, you get some real benefit because you have already expensed costs of that material. And as you know, rock doesn't spoil, so it will be there when the business comes back.

Okay. Overall, your volume view for 2010, is it a little premature to try to think about that?

Based on what we know today, we think we're going to have a moderate increase. The view really hasn't changed in terms of categories. If you look at stimulus, it's clearly gotten pushed over more to 2010. Some of that has to do with execution. Some of it has to do with weather.

We will see more of the stimulus concentrated in 2010. That should be a positive. We continue to believe that we'll see some increased home building activity.

Our other category, which is railroad ballast to ag lime and true gas to sulfurization should be an upper. Then we're going to have the very ugly piece of it that is about 30% of our business that is non-residential construction. And that's going to be down sharply, but too early to say how much. That's what we're dealing with.

Thank you very much.

Sure.

Thank you. Next we'll go to Garik Shmois with Longbow Research.

Thanks. Good afternoon. First question is, Steve, if you could clarify, in your press release, you said you are starting to see pricing return to levels consistent with the full year. Are you seeing an easing in the competitive environment? Or is this a geographic or product mix, which should get pricing up in the fourth quarter more in line with what we saw in your full year guidance?

It's much more geographic in product mix. The mix we had in the third quarter tended to pull it the other way. Expectation in the fourth quarter is it's back to a more normal mix. We've tried to peg pretty candidly where we think pricing is going to be this year and next. We believe we'll see some price increases next year, but do not underestimate the level of competition.

If you look at where we are volume wise, we are at the end of the third quarter from peak on a 12-month moving total. We are down 36%. That is greater than the 34% decline in the 1980s. You have to go back to the 1930s to find a more significant rate of volume decline in this industry. The fact that we're able to get a little bit of pricing in this kind of environment says a lot about the industry.

Sure.

In a positive way.

Definitely. Are you getting the sense that competitors -- you mentioned it's extremely competitive out there. Do you get the sense they are getting closer to cash costs and some of the competition might let up over the next maybe one to two quarters?

Certainly in some markets, they seem to be playing the game that way more so than they have throughout this downturn. We're seeing some very aggressive pricing in some markets, which we indicated. The reason we gave you the spread of pricing from minus 12 to plus 12, just to indicate to you that there is a huge variation based on individual markets. And you can typically correlate that with the particular players in those markets.

Sure. And just lastly, you highlighted the performance in the Midwest and in Iowa in particular. Could you provide maybe some color with regards to what margins you're seeing with a little bit of volume and what -- and do you think these margins can be revocable in other markets?

We're holding margins very nicely out in that area, even in the midst. We had declines -- double-digit decline in volume in Iowa in the quarter -- Iowa, Nebraska, Minnesota area. What we've said is as volume comes back is that we have an expectation that we're going to see incremental margins that are going to be in the 60% range. We haven't seen anything yet that would cause us to alter that view in the margins. Anne just looked up the margin performance in the Midwest. It was actually up 490 basis points.

And well above the corporate average.

Yes. Right. It's nice to have a little volume coupled with cost cutting.

Sure. Thank you very much.

Sure.

Thank you. And our next question comes from Kathryn Thompson with Thompson Research Group.

Thank you very much for taking my questions. How much of the guidance cut today is due to your public spending outlook versus other factors such as weather?

It's a combination of both, Kathryn. On the weather front, you and others do a lot of individual market polling to try to assess things. If you've been doing it, which I'm sure you have, you know it's been raining. And the biblical 40 days and 40 nights we've seen a fair amount of. Certainly not the quantities, but a lot of rain days.

October -- the key months for us during the year are May, August and October. And the key month in the fourth quarter is October. And I can tell you, October was a very wet quarter based on number of rain days and impact on business. We have factored that in.

Then the other part of it is that with the uncertainty with respect to transportation budgets, the states are being very cautious. It's pretty hard to blame them. They don't know exactly how the Congress is going to play it. The politics go back and forth. They also have uncertainty about the revenue stream based on their own individual state collections, gas taxes, and other fees. They continue to be very cautious, unlike the federal government. They can't print money. They have to balance a budget. So it's both.

If you hadn't had the handicap between the two, which would you say was the greater influence for the balance of the year?

Yes. I would split it pretty close to down the middle. Maybe it's 60/40 one way or the other, but both are significant influences.

Could you talk -- ust give a little bit more color by region about volume trends since the quarter end?

Since quarter end? No. We'll address that when we talk to you after the close of the fourth quarter.

Sure, sure. Also, hearing some rumblings in the market of some players delaying price increases in certain markets. Are you seeing that? What are your thoughts on that trend?

I think that will certainly be there in certain markets. That's why you're looking at a 2% to 3% rate of price increase as opposed to some of the higher rates of increase that we've seen in recent years. It's certainly buffered down.

Okay.

No surprises there.

Okay. Obviously you've been having to manage inventory with the mix and the type of rock that's needed for some stimulus projects. You've talked about that in previous quarters. Wanted to get an update of how is that inventory management going and how do you see about tackling that for the next couple of quarters, as we deal with what we're dealing with the public spending -- obviously whether that's happening in the near term?

Our run rates are really going to be dictated I think pretty much throughout the country by the demand for asphalt stone. That's really the driver.

Sure.

They tend to be short on the asphalt stone side and when you make it, you're going to be long on the base stone side. And if you look at the competition in individual markets, you'll find a lot of the pricing competition really reflected in base stone prices -- there's a long on that product. The concrete stone falls out in the middle and the same thing with sand or screenings that are used in asphalt.

Do you have any specified targets for inventory management -- purely for those products and just overall inventories? Just something so that we can keep an eye out on?

It really doesn't work that way. If you want to serve your customers and they have work, then you're going to have to tee it up and produce what it is that they need. Remember that a lot of these asphalt plants are located on our quarry sites.

Absolutely.

And there's no way that we can let a customer down. The type of work out there dictates what you must produce. Then you're going to wind up with an inventory residual beyond that, some of which will go into accounting inventory. All of which will go on the ground. Some of which will not go into accounting inventory and we will save it for another day.

Okay. Not to beat a dead horse, I assume that when you're shutting down some plants early, that should help the overall inventory level.

Yes. It's an effort to control and it's being done where we have adequate -- where we think we have adequate quantities of all sizes to meet demand during the winter period, the slower period. If we don't, we typically have a plant nearby that can supplement or we may have to crank back early. Cranking back up early would be a joyful thing.

Sure. Absolutely. Great. Thank you very much.

Sure.

Thank you. Our next question comes from Carl Reichardt with Wells Fargo Securities.

Hi, guys. Thanks for taking my call. I want to go back to the cash cost question you mentioned in the release. The competitors need for cash flow and setting prices relative to their cash costs. Can you explain to me how far on the worst case scenario is that below what your costs would be? Are they discounting 10%, 20%? I'm just a little unclear on that.

You don't play in this business unless you're cost competitive. We think we're cost competitive. Remember that in our business, the customer buys delivered costs, so it's not just the plant costs. It is the plant costs, plus the transportation to get it to a particular spot.

That's what you're really competing with. A competitor -- I'll put it to you this way. You could have the most efficient competitor in the aggregates business and they might have a cash cost advantage of $0.25 a ton on some other player. That's about one mile of transportation by truck.

Okay. Thanks.

That's not the driver.

I understand. And then if I look at the segments, I'm curious, as of now, not peak, but now, where is the commercial segment the most important to you in terms of the three geographic segments? What's the greatest portion of your -- where is it the greatest portion of your business now?

Where is the greatest portion of our rolled out business right now? For commercial.

For commercial. Yes.

It's going to be in the heavier industrial commercial type of work.

No, I meant geographically. Is it Mideast, Southeast or West?

At this point, we're seeing more of it in the Midwest and portions of the West than any other spot in our portfolio as we speak.

Okay. Great.

It's falling off dramatically in the Southeast which used to be the driver, the Southeast. We've seen that business retrench to levels that we just haven't seen -- I haven't seen in my career which has been a long one at this point. Southwest has pulled back sharply. The Midwest continues to perk along very nicely.

Great. I appreciate it. Thanks much, guys.

Sure.

Thank you. We'll take our next question from Trey Grooms with Stephens, Inc.

Good afternoon.

Hey, Trey.

Steve, the main thing I would like to get your input on right now, I know there's a lot of uncertainty right now regarding the Federal Highway Bill. I would really just like to get your thoughts on how you see that shaking out.

Boy, I wish I knew.

I know it's a tough one, but just as far as best case scenario in your mind on -- or the most likely scenario in your mind on how it shakes out.

The politics of it are really going to be interesting. You've got some -- three particular elections that are coming up that have been highlighted. If Republicans win those elections in New Jersey, New York and Virginia, I think there's going to be some real pressure on Democrats to step back and do some rethinking. And you're going to have a tug of war on the Democratic side. You'll have an administration that may be more inclined to want to keep putting it off. You're going to have people in Congress who all of a sudden feel threatened, who think they might want to roll that forward. How the politics of that will play out, I don't know.

But I do think if Republicans are successful in early November, it will put more pressure on to address it earlier. If you think about the GDP numbers in the third quarter, and I was reading some economic analysis the other day which I don't know that it's precisely accurate, but I suspect it's in range. That analysis indicated that 92% of the GDP increase in the third quarter was based on stimulus and inventory rebuild which says effectively, you had nothing going on. You come into the fourth quarter, and I can tell you that in our view, the underlying economy certainly hasn't gotten any better.

You go into the first quarter, pretty hard to see it getting much better then. It's probably second quarter before you got a chance for a real lift. I think there's going to be some news that will come out that will put, again, increasing pressure on the Congress to take some actions. Am I optimistic? I'm probably more optimistic than I ought to be for ugly reasons.

Okay. Thanks for that. My one last question is, can you guys give us an update on the M&A front -- what you guys are -- what's going on there.What the pipeline looks like. Anything interesting out there to you guys?

We continue to be busy. We've got a couple of small ones under letter of intent. Ward might want to comment on and give you a little bit of flavor there.

Trey, we've got, as Steve said, two relatively small ones in LOI. We're going through diligence on those right now. We've got probably four or five others in addition to that that we're valuing right now. We'll have letters of indication heading out here in the very near future. As we rack it up, there's probably six or seven different specific activities that we're looking at right now.

The value on the LOI transactions would be under $50 million,. They are not big, but they are good fits -- would be very important to us for we can bring those to fruition. We did have one larger deal that we have been working for a while up in the couple hundred million dollar range. That one's been put on the back burner right now. We'll see whether or not it gets resurrected, whether it goes.

Trey, we keep our score two ways. We keep the score by the deals that we did and sometimes by the deals that we didn't.

Understand. Thanks a lot.

Yes. We're proud of the ones that we didn't do that we had the opportunity to do.

That's helpful. Thanks.

Thank you. And our next question comes from Mike Betts with JPMorgan.

Hi, Steve.

Hi, Mike.

I had three questions, if I could. One, returning to the river system and the weakness in the market there, I'm obviously pretty aware of why there's weakness in the Southeast, but the river system? Is that linked because it's supplying the markets in the Southeast? And looking at the data, that seems to have risen particularly in the third quarter. Is there anything specific going on there?

it just abruptly slowed down. Now we think that we'll get some lift there because of core stimulus or core engineer stimulus work. We've got a pretty good backlog. But in Q3, we just saw an abrupt downshift, which frankly was not expected because the river had perked along pretty well all year. Nothing that we can note that would cause that in a specific category. I think it's more stimulus work being pushed out by the Corps, but there is quite a backlog of that.

It's interesting, Mike, if you looked at it, there are probably 40-plus stimulus jobs in that market all by itself, the largest pieces of which would be Corps work.

Okay. I thank you for that. I look at the price change or the trend in that Southeast region. Was that caused by the decline more in the river than anything else, the change from six months to what you saw in Q3? Or was that weakness pretty much spread across the region?

That spelled Florida. Florida is the key driver in that. Florida has become an ultra competitive market. Lot of excess capacity in Florida. Huge drop-offs in capacity utilization. It's not unusual to see the Florida-based competitors having pullbacks from peak as much as 70%. Obviously there's a desire to try to run the plants at a little higher level. At the same time, you've still got the lake belt litigation perking, the Corps of Engineers at work down there. We'll see what the outcome of all of that is.

In your market, Steve or Ward, would you have seen close to a double-digit decline in Florida in pricing?

Yes.

Okay. Okay. My second question, if I could, the corporate charge when I look at the regional earnings split, was quite a lot lower this quarter. I'm looking on Page 9 of the press release.

Is there anything particular behind that? I'm looking at the earnings from operations right at the bottom there, minus 3.8 rather than minus 6.9 a year ago. The run rate for the year, nine months is 21.1% so it seemed quite a bit lower. Was there anything specific there?

No. Just overhead reduction which we've been doing pretty well.

Okay. That leads very nicely, Steve, to my final question. You've obviously talked about pricing for 2010. Can we talk briefly about costs for 2010? I can't see that there's any great inflation that's in there in the system, maybe correct me if I'm missing something. Secondly, what carry-over in terms of cost reductions that you haven't had the benefit of for the full year in '09, would you be carrying forward into 2010? Is there any way of giving me a guide on that?

I can give you a little bit of anecdotal guidance. If you look at energy, obviously we have seen a significant reduction. If you look at energy pricing today, we ended the third quarter at $1.75 a gallon. If you look at the fourth quarter last year, we paid $1.78. Diesel has flattened out. Expectation as we go into next year is that it probably stays in a similar range.

If you look at supply items that we buy, consumables, I would expect that we would see some modest reduction on consumables. We would also see some modest reduction on services that we buy, repair and maintenance services in particular. Stripping costs; those kinds of things which people in those businesses are capacity-driven also and have low utilization rates. Beyond that, I think our labor cost is going to be very well behaved. I don't see any upward pressure unless we have another energy bout, which none of us can really predict. I think costs will be well behaved.

The key to our year next year is moderate volume increase because we get such great incrementals with a little bit more volume, that that's going to be critical. A little bit of pricing, a little bit of volume, and well-behaved costs racks up and leads to some good outcome. That's the scenario for 2010.

Okay. That's great. Thank you very much.

Sure.

Thank you, and our next question comes from Timna Tanners with UBS.

Good afternoon.

Hey, Timna.

Hey. Wanted to follow up on the question about M&A, just to ask in general about your priorities for cash use. You talk about cutting back CapEx, and if we extend that into next year and look at your free cash flow in this recent quarter, looks like you could be generating quite a bit of cash. Just wondering if you could give us some priorities that you would think about for using that M&A or otherwise.

Priorities, we're not going to pass up good opportunities. If we find good opportunities that are of size, then we would have to round up more equity capital in order to balance out our equation. First priority for excess cash would be debt repayment. Clear and simple. We think in this environment, as risky as it is that we ought to make sure that we take care of the debt side of the equation.

In fact, that's what we're doing. We've got a maturity that comes up in April of next year. We've already accumulated more than sufficient cash to pay that down. We're in great shape with our borrowing capability.

We've got a lot of fire power to do whatever it is we need to do. But at the same time, I think it's a time to work your balance sheet in a conservative manner. You should not expect to see us in a stock buyback mode in 2010. I think that's very unlikely. I think we'll concentrate on debt and hopefully some more M&A opportunities.

Okay. Great. And then the other question I had was about the specialty magnesia business because the improvement was quite remarkable. You talk about improved steel conditions, but utilization for steel mills in the third quarter was still just 54%. How much of this improvement could we continue to see going forward, given -- is it directly proportional to utilization? Or how should we think about the drivers there?

The interesting part of that business is that we are vertically integrated with respect to the lime component which is a very nice component of the business for us. We feed lime to our magnesia chemicals business as a starting point for the manufacture of the mag chem. We're selling lime into the steel industry and then we're feeding a portion of that lime to ourselves. Depending on relative demand, we could feed anywhere from 25% to a third of that lime to our own operations. To the extent that we have good demand in magnesia chemicals, that really helps the lime component of our business and that's part of what's going on here.

The mag chemical business is going well. We had a very good quarter with respect to our magnesium hydroxide business which is a neutralizing agent that our cell guard business in the paper which is a neutralizing agent. It's not just steel. In times gone by, steel dictated where that business went. That's not the case today.

Okay. Great. Is this going to be your last conference call as CEO? Can you remind us where that stands?

That's for you to speculate about. If you're telling me I'm getting older, you're not the first person who hs said that.

No, no. I've heard commentary from the organization about timing. I'm not trying to speculate. I'm just asking for some clarity there. Sorry.

See the more polite people say that I don't look it, but we'll pass. When we get to a point -- it's no secret that certainly I'm coming up toward retirement. When we get to a point where it's appropriate to layout the plan specifically, we will do that for you.

Understood. Thank you.

Not time to do that yet.

No, not rushing you out anyway. Thanks.

Thanks, Timna.

Thank you. And our next question comes from Jack Kasprzak with BB&T Capital Markets.

Good afternoon, everyone.

Hey, Jack.

A comment in the press release about how industrial jobs, including alternative energy have been good through the year so far, but now your customers are reporting a decrease in the number of heavy industrial construction jobs and backlog are coming up for bid. Is that -- could you talk a little bit about that? Does that include alternative energy projects that you thought might happen and are getting pushed out? Or is there something else going on there?

Jack, this is Ward. Good afternoon.

Hi, Ward.

It certainly includes that, among other things. And part of what we see with alternative energy projects in particular, is they can be there and go away. Or they can not be there and suddenly show up. I think what we're trying to gauge right now is really how much of the work that we hope will be there next year, will in fact be there. What we've seen some in of the markets we've seen as we pull away, as we see some tick-up in infrastructure work, in candor.

Is still -- when we sit back and simply look at that commercial piece of it, it's 30% of it. Clearly the opposite in retail is in a very, very good place right now. And the heavier side as well is suffering a little bit and catching its breath.

If you take some specific projects, Jack, I would speculate that you probably won't have a new steel mill started in 2010, which there have been a couple of them ongoing over the past 18, 24 months. I seriously doubt that you're going to have a major new automotive plant started in which we've had Volkswagen in Chattanooga. Given the discoveries of the natural gas production rates in the United States, pretty tough to believe that significant expansion in L&G terminals is going to be priority.

You have some things that are changing here and it will be a question of what leads. We do think that energy is going to continue to lead. We do believe that with the financing available for wind energy and that with wind energy being an administration priority, that we're going to continue to see those projects move forward. But as Ward said, they show up. They get pulled. They show up again, same project -- very difficult to predict. But overall, we're fairly optimistic about that.

We've mentioned before that there are some nuclear plant projects where the utilities are getting underway, even though they do not have full permitting, but they are confident enough that they are going to get it. And it takes so long it build it that we have orders on nuclear plant projects and we would expect that to continue. Fairly optimistic about that piece of it.

Probably don't have the number right, but I think there are at least two nuclear plants where they have broken ground right now. Is that --

Yes, and potentially a third one coming. In fact, we have orders at two.

Okay. Thanks for that. With regard to SG&A, a question was asked earlier about costs. The third quarter SG&A run rate just for modeling purpose, is that a pretty good bogey on a quarterly basis going forward?

Yes. It should be, Jack.

Okay. Thanks a lot.

Sure.

Thank you. Our next question comes from John Baugh with Stifel Nicolaus.

Good afternoon. Thank you for taking my question. The Tar Heal State, I would love some commentary on -- you said 29% down I believe in aggregates in Q3. How does that compare to the first half of the year, number one? And any color on whether the weakness you're seeing in North Carolina is more -- and obviously the private sector is down more than public, but whether the rate of change is more in the public's eye than the commercial side in the third quarter. And then any color on that particular state budget challenges as it relates to other key states in your geographies. Thank you.

Certainly. You've asked a load of them, John. Here's the quick take on it. Realistically, North Carolina from a budget perspective, probably looking at a $900 million budget for next year/ We're a state that would have been accustomed to a $3 billion-ish budget several years ago.

No question, North Carolina from that perspective is feeling some pain. What you can see is -- you can see that very much in the numbers. We looked just at Carolina generally -- when I say that to you, that's going to be North and South Carolina. In Q1, it was 37% down. In Q2, 30%. And Q3, 27%. Those are still big numbers any way you look at it. At the same time, the numbers are coming down, but still they're significant numbers.

I think what you're seeing when you're looking at North Carolina, you're really sit back and look at the three different markets. Charlotte is very much a financial market driven world and that is a world that because everything that you and I know that has gone on in those particular sectors of business has felt an enormous amount of pain. There is no question about that. Similarly, the [tri-ad] portion, or Greensboro, Highpoint and Winston-Salem, if you really go back and look at this recession several years back, that's probably the area of North Carolina that started feeling it in the first instance. Which brings us lastly to the Raleigh district for us, which really from a volume perspective has been the relatively bright star. Part of that's driven by the fact you've got the state government here. It's the capital.

But the other thing that's happened -- this year is a good example, we've seen more work in North Carolina in Cumberland County than we've seen in the entire Greensboro district,. What's driven that is Cumberland County. If you take a look, it's where Fayetteville is, home to Fort Bragg. Any place you have military installations, it has really done quite well. If you don't have military installations, you're going to suffer a little bit in North Carolina right now. That's what we've seen. That's a march from West to Central to East and (inaudible) a portion of it. Is that responsive to your question?

Yes. What impact has the toll authority had, not just this year, but I'm really thinking more about as you look out, say, over the next two to three years?

It will clearly have more of an impact going forward. It's still a relatively new animal here. We've got ground that has been broken. We've got tonnage that will be going to the projects. We have relationships with the contractors who are on the projects. The good news from our perspective is we do have a tollway authority here in North Carolina, which is an animal we have not historically had and we needed it desperately.

The next project that is supposed to go -- the first project was here in Raleigh. We've talked about before and ground's been broken, as Ward indicated. We do have some of that work. The next project that's in the queue in the Monroe bypass in Charlotte. That's a project that we're particularly well positioned for. We'll see when he that's left, but it's supposed to be let in early 2010.

Great. Thanks for that color.

Okay.

Thank you. Next we'll go to Chris Manuel with KeyBanc Capital Markets.

Good afternoon.

Hey, Chris.

For the record, Steve, I think you're looking great --

I needed that after Timna's comment.

I'm just kidding. Anyway, question for you. First, when you think about -- looking in your press release, you talked about this year being $35 million to $50 million of help from energy, diesel-related costs. And when I went back and added up the first, second and third quarters, I think I totaled up to something in the neighborhood of $65 million or just a shade under. Are you -- am I doing the math right? Basically implying that inflationary costs are going to slip in the fourth quarter and you'll be behind by $15 million to $30 million?

No. Probably more accurately, looking at a flattish environment on the energy. You're correct, that number is likely to be larger. We hadn't revised it, but it should be a larger number. Been very beneficial.

Where I'm thinking about this is, during -- I know volumes have been a challenge for a period of time now. I appreciate you guys have done an outstanding job of taking costs out. This year has been very, very favorable when you think of a cost/price spread. And your costs have come down quite a bit and your prices still have been up. As we look forward into 2010, there -- oil's been up.

Diesel's been back up. It would appear as though we have potential for some inflation to creep back into the system. Where I'm going with this is, as you think about your pricing efforts for 2010, if inflation does creep back into the system -- I realize it's become quite competitive in certain markets, do you feel that you will be able -- you need to go out and get more price increases in 2% to 3% to keep your spread intact?

If inflation -- I'll speculate on this -- my view. But if inflation comes back into the marketplace in any way that is going to get people's attention, it will come from energy. Historically, that kind of inflation has come from wage inflation. I don't think you're going to see it because I don't think unemployment is at a peak yet. As I look at 2010, I do not see wage pressure which typically is a harbinger of an inflationary environment.

I think it would be an energy event and I think energy events are probably the easiest thing for people to react to. People understand it. It's measurable. I think that's the place where you can make an adjustment. If it were the old variety, where it's wage induced, much tougher to react to in this environment because of load capacity utilization. That's my personal take on it.

And the other question I had and with respect to price costs and thinking about how some of this could unfold is -- does the fact that we don't have an extension or even another six-year highway bill has probably made a lot of these projects being bid on today very short-term in nature. And without -- would you -- would it make sense to you that if we had a federal highway bill back in place and some two, three, four-year projects begin to creep back into folks' backlogs that maybe we would see a little less volatility in the price that we've seen from region to region, quarry to quarry?

I think your premise is right on target. I think what's lacking right now is that forward view of what backlog is going to be bid. To the extent there were a new transportation act in place with the funding that has been discussed which is a significant increase, I think that would be the most helpful thing for our industry that could come about. I think ultimately it's going to be there. It's a question of timing, but sooner would be better.

Okay. Last question I had was -- I know it's early, you guys haven't gone through all your budgets yet. But when you think about the capital requirement for to 2010, would there be any reason to assume that spending couldn't be at least at or below D&A levels again in 2010 like they have been in 2009?

It will be below DD&A levels, --probably will be in the same range of the $150 million-ish number that we just talked to you about as our estimate for this year. We're still formulating so that may change a bit, but it's not going to change a lot.

Okay. Thank you very much, gentlemen.

Sure.

Thank you, Chris.

Thank you and our next question comes from Clyde Lewis with Citi.

Good afternoon, Steve, Anne and Ward. Two questions, if I may. One, again coming back to the competitive forces and appreciate you probably don't want to say who is causing the most problems. But obviously, one or two balance sheets have changed recently. I'm wondering whether that's maybe given things a slightly different picture for the fourth quarter and how things are currently feeling. Is that something that you are seeing? Or is it really much more of private competitors that are really causing the bulk of the problems on the pricing front?

It's -- actually more of the independents are well behaved than I've seen in past recessions. Obviously, this is the deepest one that I've ever seen. I don't think the independents are a major issue. Certainly there are some -- few of them who are problems in the marketplace. But by and large, I think they understand their business and they are just biding their time.

With respect to the players that you referred to, obviously unnamed, if in fact there has been a change in thinking at the corporate headquarters, it has not made its way down to the field. The communication process is a little bit stunted so we will watch to see if that happens, but certainly no evidence of it to date.

Okay. The comments you're making about pricing, probably the fourth quarter, is that all mix? Or is there some other movement there that's giving --

It's mixed, Clyde.

Just mix. Okay.

Both geographic and product, particularly geographic.

Okay. The second one I had coming back to the new stimulus -- and you touched on scale expectations. Can you give us your feeling as to where you think you might settle down when it's eventually signed up?

Talking about the new highway bill fund?

The new highway bill, yes.

What's interesting, Clyde, there's a huge amount of debate about the highway bill, but the proportion of it that's usually not debated is the amount. Right now, it's really an issue of timing. We think the issue of timing may well be driven by the issue of jobs. When you look at unemployment in the United States and look at what the unemployment is in the construction sector, it's over 17%. Clearly higher than any other component really almost all by itself in the United States economy.

Our view is we're going to see a bill in the $500 billion-ish range. The issue is going to be one of timing and the issue is going to be one of which concerns how much of it, if any, is front loaded. That has certainly been a recent conversation that is going on right now. It's hard to say obviously where they are going to go with that. But at least from a bill size perspective, that's what we believe and timing is the issue.

You have an administration and a congress, at least the party that controls Congress, that has a tremendous appetite for taxing and spending. The number that has been posed for a new transportation bill reflects that. They know there's a need.

Both parties understand that there's a tremendous need. But based on their vigor in posturing other types of tax increases, I find it difficult to believe that they would not want to fund something that you actually put in the ground and it stays there called long-term capital investment. We'll see how they play it.

In terms of funding, is it still -- a high gas tax rather than some other maybe external funding?

Lot of different ideas out there right now. I don't think it's anywhere close to crystallizing. In the history of politics is that you may -- ultimately to pull enough votes together and not just a few over what they need, but a very, very solid majority, you may wind up with a set of funding metrics that are different than what we've had in the past or that anybody's thinking about right now. I think it's too early to speculate on that one.

Okay, okay. Thanks much.

Sure.

Thanks, Clyde.

Thank you. Our next question comes from Ted Grace with Avondale Partners.

Hey, guys. Just a couple quick ones. Could just frame out how you're thinking about or how you would suggest we think about free cash flow for 2010? And specifically addressing working capital assumptions?

Ted, this is Anne. We're still a little early in that process to give guidance on that perspective, particularly as granular as working capital perspective. I can tell you that I wouldn't expect free cash flow generation to be less than 2009. One thing this business has done is proved that it cash flows very nicely.

We've already benchmarked capital for you and it's going to be in the same range. If you believe that the business will have a little bit more volume and a little bit more price than it costs to well behave, you can put your own estimation metrics of that. Working capital, we certainly are very focused on controlling. It's pretty hard to see any significant movement in working capital.

The only issue we might have in working capital, Ted, is that if we do get some modest increase in volume, you're going to build some receivables but not outrageously.

Okay. That's helpful. And just given the credit environment we're coming out of, you guys have typically framed your leverage targets as 2 to 2.5 times debt to EBITDA. As we think about use of cash and deleveraging, would it be fair to assume that you'll probably be aiming for the low end of that range, just given what we've come through?

I think you're going to look at that, again -- my view in the next five years, you're going to hold more cash than you normally would have held in the last five. You're probably going to try to be a little conservative, probably in the middle of that range, depending on though, what acquisition opportunities you have. You've got really solid acquisition opportunities with good EBITDA streams, you might take more risk on the upper end of that range.

We're certainly not afraid to go after something that's attractive, but we're measuring them carefully. And the fact is, on a net cash basis, at the end of the third quarter, we sit at 2.5. There's not a lot that has to be done just running our business the way we're running it. Very quickly takes us under that on a net cash basis, which is really the way we're looking at it because we've got some debt maturities coming up next year. We have another debt maturity coming up in 2011. That gives us the ability to manage against that leverage target.

Sure, sure. I apologize if I missed it, but in all the conversations about volumes in North Carolina, I don't recollect hearing you talk about pricing in North Carolina or the Carolinas. Anything you could add on that front?

For 2010? For the current environment. If you're willing to look out to 2010, that would be great, too. No, actually, I wouldn't be willing to look out at 2010 yet. But if we're looking at the present environment, it's going to be in the mid single digits type of framework.

Up mid single digits?

Yes. It would be up above the corporate average.

Yes. Much more competitive than that marketplace has been because of volume declines. No question about that. But we've been able to get some modest price increases this year.

Just to be sure I heard you right, you said up mid-single digits even in the face of volume declines we just reviewed?

Even in the face of those volume declines. And the other thing I would remind you is we said the area that we're seeing the most volume is really in the Raleigh district. Which is in many respects, our most competitive area of North Carolina as well.

Okay. And the last one would be really aimed towards, Wade. As you look at the CEO seat, what changes would you suggest we look for, even if they are just at the margin?

I tell you what, you're awfully nice to promote me already. That's a Board decision. This is an exceptionally well run company. I knew that coming in. And part of the reason it is exceptionally well run is we have a great team of people around this table and in the field. And that's how we've been able to put up on the board what we've done. If that day should come around, we'll have a different conversation but that's where I see that right now.

Okay. Thank you very much.

All right.

Thank you. Our next question comes from Todd Vencil with Davenport & Company.

Hey, guys. Thanks for taking the question. Can you hear me?

Yes.

Okay. Thanks for taking the question. Most of them have been answered. And following around on Jack's question about the corporate -- about the SG&A number, it looks like there's usually some seasonality in there with with the third quarter at being at a seasonally low point. Am I right about on that so as I think about the third quarter's run rate, we would need to build some seasonality in there as well?

The only seasonality that really comes in there, Todd, is any of the incentive compensation that would be paid out and awarded in the first and second quarter of next year. I could imagine that with the current performance that those levels won't be quite as high as they have been in the past. There will be a little bit of increase there, but I don't expect it to mirror what it has in the past.

Okay, okay. And then on the, on the $21.3 million you mentioned in the press release, was expensed rather than being capitalized, remind me, a big part of that is related to your capped inventory. There was another piece of that, wasn't there?

It's those markets where you have limitations on capacity.

Capacity of -- capacity to produce?

Correct.

All right. That's all.

Market rates, as well as capital inventory.

Great. That's all I've got. Thanks very much.

And our final question comes from [Eric Rednar with George Reese Associates].

Thanks for taking my call. Just a question on volumes. Given your commentary on non-residential construction declines, is that decline going to offset most, if not all, of the gain you expect to see from the stimulus?

We certainly expect that it's going to pull it down. With more stimulus being pushed over into 2010, we don't think so. Our expectation is that when you rack up stimulus and a little bit of home building -- that other category, that we are going to see positive volume. But certainly, there is a deep downdraft on the non-res side, particularly in retail and office and we haven't begun to see the bottom of that yet. We're planning accordingly.

If the non-res side were better behaved, and it's interesting because when we came into this down cycle, for the first time in my career in this business which is 35 years, I didn't think we were overbuilt. Generally. you go into these things and one of the drivers is that you're significantly overbuilt on office in particular, and some retail. It looked to be pretty well balanced, but what's happened is such a significant drop in demand that all of a sudden you are overbuilt. It's going to take a long time to come out of it, based on space utilization needs. We think that's going to be ugly again next year and probably ugly again for another year or two.

It's going to take awhile. We're just trying to be realistic about it, but I don't think that in particular is going to offset stimulus because it's 30% of our business. If you look at highways and other government, that's 50% of our business.

Thanks very much.

Sure.

Thank you. At this time, I would like to turn the call back over to Mr. Zelnak for any closing remarks.

Okay. Thanks for joining us. For the first time in the 40 days and 40 nights that I referenced, the sun is shining outside in Raleigh, and I understand across the Southeast and Southwest and Midwest. That's positive. Hopefully, the weather remains well behaved in November and we can pick it up. We're very hopeful of that. We'll talk to you again after the close of business for the year and give you an update and get off and running in 2010. Thanks a lot.

That does conclude our presentation. Thank you for your attendance.