Martin Marietta Materials Inc (MLM) 2011 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Martin Marietta Materials, Inc first quarter 2011 earnings results conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, the conference call is being recorded. I would now like to turn the conference over to your host, Mr. Ward Nye, President and Chief Executive Officer. Please go ahead.

Good afternoon, and thank you for joining first quarter 2011 earnings call. With me today is Anne Lloyd our Executive Vice-President and Chief Financial Officer. We are pleased to report our quarterly results, and trust you find this discussion helpful. Given winter's typical backdrop, both of our business segments performed very well in the first quarter. The result, a 240 basis point improvement in our consolidated operating margin, excluding freight and delivery revenues, over the prior year quarter.

First, our aggregates business demonstrated greater stability, evidenced by our first quarterly price increase in more than a year. We repeatedly predicted that aggregates pricing would stabilize following a moderate period of volume recovery. In line with these expectations, and following our volume growth in the last 3 quarters of 2010, Heritage aggregates product line pricing was up almost half of 1% for the first quarter of 2011.

Secondly, our specialty product segment reported record net sales from and established a new first quarter record from earnings from operations. Our aggregates business benefited from some milder weather earlier in the quarter facilitating aggregates volume growth in both January and February.

Still, momentum gained early in the first quarter slowed during the critical last 2 weeks of March when weather patterns deteriorated. We believe weather related delays in shipments were a primary factor leading to our overall 1% quarterly decline in Heritage aggregate shipments.

However, despite the quarter's volume decrease and the negative impact of rising diesel prices, we achieved an incremental operating margin for our aggregates business that was in line with our expectations. Again, this excludes freight and delivery revenues. Unfortunately, volatile weather has continued to dominate headlines in much of our geography negatively affecting April shipments.

Infrastructure end use, comprising approximately half of our aggregates volume, had a 3% decline in shipments for the quarter. Stimulus related infrastructure spending has been consistent with our expectations. While 4 of our top 7 states for aggregate sales lagged behind the national average in stimulus spending as of the end of 2010, Louisiana and Florida are now among the states leading in stimulus spending in 2011. As a reminder, we anticipate the 30% of stimulus infrastructure funds will be spent in our key markets during the year.

Residential end use shipments grew 15% over the prior year quarter. Although there is continuing negative pressure on the construction of single family homes, we were nonetheless seeing an increase in multifamily construction. In fact, February represented the eighth consecutive month that multifamily housing starts increased nationwide. Further, residential activity is picking up in cities and towns near college and university campuses, as well as military facilities favored in base realignment.

Shipments to the nonresidential end use market showed mixed results for the quarter. Certain heavy industrial sectors saw increased activity, particularly in our San Antonio district, and light commercial construction that typically follows housing is showing improvement in certain markets.

We continue to expect strong volumes to the energy sector for the full year. However, first quarter shipments to this industry decreased compared with the prior year quarter which we believe is more a function of timing than demand. Overall, shipments to the nonresidential end use market declined 3%.

Finally, Chemrock and rail shipments increased 2% over the prior year quarter. As I previously mentioned, we are pleased by the average selling price growth in our aggregates product line. We are also encouraged that more of our markets reported quarterly pricing increases than in the last 2 years, thus allowing us to compensate for some markets that did not achieve pricing growth.

Heritage aggregates pricing varied by geographic group, ranging from an increase of 5.8% for our Southeast group to a decrease of 2.4% in our West group. Pricing in our West group however was negatively affected by product mix, particularly in the Southwest market.

Other markets within our west group, including North Texas and Iowa, reported pricing increases for the quarter. Consolidated direct production costs increased 7%, primarily due to a 14% increase in non-controllable energy costs.

For the quarter, we paid an average of $2.81 per gallon for diesel fuel, compared with $2.03 in the prior year quarter. Diesel prices have further escalated in the second quarter, and we are currently paying approximately $3.40 per gallon.

Our unrelenting commitment to cost control is also evident in selling general and administrative expenses. Compared with the prior year quarter, SG&A expenses decreased $4.3 million, or 190 basis points, as a percentage of net sales. This reduction was due to lower personnel and pension costs.

Our specialty product segment once again contributed significantly to results by establishing a new quarterly record for sales, as well as in new first quarter record for earnings from operations. Net sales of $49 million for the quarter increased 18% over the prior year, reflecting strong demand in the chemicals business where record sales volumes were achieved for several product lines.

The sales increase, along with cost control measures, produced earnings from operations of $15 million. While we expect strong full year performance from this business, I would be remiss not to note that the remaining quarterly comparisons for 2011 will be versus record 2010 quarterly performance.

Careful management of our balance sheet, liquidity, and cash flow generation, has provided financial flexibility and positioned us for strong performance in an economic recovery. Working capital improved nearly $9 million compared to 2010, and our day sales outstanding was 45 days, essentially flat with 2010. However, operating cash flow for the quarter was $21 million, $6 million less than the prior year quarter, primarily due to the timing of federal income tax refunds.

On March 31, we entered into a new $600 million credit agreement providing a $350 million 4-year unsecured revolving facility, and a $250 million senior secured term loan. At closing, we borrowed $250 million on the term loan.

Further on April 1, we borrowed $100 million on the accounts receivable facility. These borrowings were used to repay amounts outstanding under our previous term loan, and the $242 million of notes that matured on April 1. The new credit agreement retained leverage covenant that limits our ratio of consolidated debt to consolidated earnings before interest, income taxes, depreciation and amortization, or EBITDA, for the trailing 12 months to 3.5 times.

Additionally, the covenant was amended such that if no amounts were outstanding under both our revolving facility and accounts receivable facility, consolidated debt for the covenant calculation may be reduced by defined amount of cash and cash equivalents. At March 31, 2011, the ratio of consolidated debt to consolidated EBITDA was 2.73 times. We were pleased that Standard and Poore's recently affirmed our credit rating, and upgraded our outlook from negative to stable.

During the quarter, we continued to investment prudently in our business, focusing on both proactive maintenance capital to ensure we have safe, efficient operations, and sensible organic growth projects. We invested $31 million in the first quarter of 2011, compared with $25 million for the same period in 2010.

For the full year, we expect capital spending to be approximately $175 million, including $25 million of a $53 million investment for a new dolomitic lime kiln at our specialty products segments with the low high facility. This project is expected to be completed by the end of 2012.

Several factors complicate the outlook for 2011. We are operating under a congressional continuing resolution of safety loop, which we believe is likely to continue for the remainder of the year.

Still, we believe re-authorized infrastructure legislation could be accelerated if congress, the President, and state and local authorities focus on infrastructure as an area in critical need of investment, as well as the means of job creation and economic growth. However, if a new federal highway bill is passed it may be at flat or reduced funding levels with a shorter duration than the typical 6-year term.

Given this uncertainty, our 2011 outlook assumes that additional continuing resolutions will maintain current federal funding levels for the year. We believe infrastructure shipments will be flat to slightly down this year.

Nonresidential shipments should grow in the mid-single digits with modest recovery in the commercial component. Residential shipments are expected to have modest growth, and Chemrock rail shipments are expected to be relatively flat.

As said, we our overall 2011 aggregate shipments to range from flat to an increase of 3%. Stability in aggregate shipments will likely lead to sustainable price increases. However, aggregates pricing is expected once again to vary significantly by market.

Overall, we anticipate aggregates pricing to range from flat to an increase of 2% for the year. That said, rising energy costs may lead to certain mid-year price increases. We expect aggregates production costs per ton to range from flat - slightly less to 2010 even with rising energy costs.

Our specialty product segment is expected to contribute $50 million - $52 million in pre-tax earnings. Selling general and administrative expenses will likely be lower than 2010 primarily due to lower pension expense, and interest expense should be approximately $60 million. And our effective tax rate should approximate 26%.

We thank you for your interest in Martin Marietta Materials. If the Operator will give the proper instructions, we will be pleased to answer any questions.

(Operator Instructions) Our first question comes from Arnie Ursaner of CJS Securities. Please go ahead.

Hello, good afternoon, Ward, good afternoon, Anne. Ward, could you spend a little more time discussing incremental margins. It's been a been a key area focus for the company, and it's very difficult to get a strong feel for them in the first quarter, which is seasonally unimportant, particularly one like this that has a lot of weather issues. But you did indicate they were in line with your expectations, and it's obvious despite terrible weather and much higher fuel costs. How should we be thinking incremental margins going forward for the rest of the year?

Arnie I'll tell you how we looked at it. If you look at the aggregates business, and you look at the sales for 2011 and 2010, what you should see are incremental sales of around $3.2 million. Of the $3.2 million, the way we've looked at it, about 2.7 of it drops straight to the bottom line. I think one reason we said it's in line with our expectations, if you do the math on that, that's an incremental margin of around 84%. I mean that, candidly, that's a pretty eye popping number. I think it's hard to take first quarter volumes and really extrapolate that, and say that's what it's going to be. I think one thing, though that I do take heart in Arnie, is if you go back to Q4 last year as well when we did see volume up, and we are seeing incremental margins even in the face of pricing down, at that point in time, and diesel up, we were still seeing incremental margins over 60%. And with diesel flat, we were seeing incremental margins then at around 76%. So coming back and looking at this number, I think the primary thing it tells you is we have our cost structure very much where we need it to be. I hope that's responsive.

Very responsive. One other question, if I can, you also mentioned that several of your key states, I think you said four of your top seven, had been lagging the national average in terms of their spending for highway spending relative to funds. Can you freshen that up a little bit? Perhaps update us on where they stand at the moment. You did mention Florida and Louisiana. But perhaps expand on that a little bit as well.

Sure, Arnie. The four states that lagged national average were Florida, Georgia, Louisiana and Texas. To give you a sense of it, for outlays as of the end of the first quarter, the US average was around 69% on stimulus dollars. Florida was at 53%, Georgia was at 52%, Louisiana at 59%, and Texas at 62%. So if you look at the other side of the equation, Florida still has the balance to go of 47% of stimulus dollars. Georgia has 48% of it still to go, Louisiana 41%, and Texas still at 38%. To try to put some scope to that, just in raw numbers, from a stimulus perspective, Florida had around $1.3 billion in stimulus funds. Georgia was at $904 million, Louisiana at $433 million, and Texas at $2.2 billion. So we feel like those four, really over the last couple of years being laggers, hasn't necessarily helped us coming into '11. Candidly, we're happy to see it.

Thank you very much.

Thank you, Arnie.

Our next question comes from Jack Kasprzak.

Hello, Jack.

Ward, you mentioned $3.40 a gallon is what you are paying right now for diesel. Can you tell us what you paid in the first quarter on average?

In Q1 this year it was $2.81 per gallon. And to give you some measure to that, in Q1 last year it was $2.03 a gallon. So there is about a 38% delta between those numbers. And to give you a little bit more color, Jack, anticipating your next question, we used about 5.8 million gallons of diesel in Q1 this year versus around 5.2 million gallons last year.

Great. And I know you believe me when I tell you that was my next question, but I do have a couple more. Harking back a few quarters when you guys had expensed some aggregate because you didn't think you could sell it within 12 months, and the number was maybe 10 or 11 million tons. How much of that is left in terms of what's sitting on the ground today?

We look at the inventories, they have candidly remained relatively static for awhile. And, really, what you are going back to is you are looking at what we typically refer to as what we have in excess inventory. And that number hasn't materially changed. What's going to change that number, Jack, is when we see an increasing amount of new projects, because the product that is right now in some form of cap-type of mode tends to be a base product. And that's going to be disproportionately used in newer projects.

And that leads into my next question on your outlook for the highway bill, which seems like we will be under these continuing resolutions, at least for the balance of this year. That probably means states don't want to plan, or have the money to plan, for long term projects. Maybe they do more maintenance. How does that impact your business, do you think?

I think they will have some reservation until they have greater, longer term view forward to go forward with particularly large projects. I think one thing that's pretty clear though, even as we come back and look at state funding, Jack, is the state funding tends to be a remarkably stable animal in all of this, despite the ways much of this works. Realistically, even if you look at state budgets like North Carolina or Texas, we still anticipate this year seeing a billion dollars worth of projects [let] in North Carolina. In Texas we still plan to see more than $4 billion worth of projects let. So, I think your caution is not wholly misplaced on large projects. That said, so much of the money that state funds -- or the states are spending are not necessarily driven by their typical general fund circumstance, that is probably not as acute as you might think otherwise.

Got it. Great. Thank you very much for your help.

Our next question comes from Jerry Revich of Goldman Sachs. Please go ahead.

Good afternoon. Ward, can you talk about what kind of pricing increases you're seeing out of your concrete and asphalt mix of customers at this point? I realize it's a wide variance, but perhaps you would give us some color. Thanks.

Jerry, it is an incredibly wide variance. What we were seeing early in the year is there were a number of ready mix players who were coming back and basically saying that they could no longer afford to cut pricing. In fact, we saw some players who are doing their best to reinstitute 2006 pricing levels in many markets. I'm not sure that all of those types of price increases have stuck. In fact I'm relatively confident they have not. At the same time, we are seeing ready mix pricing going up in a number of markets and we are pleased by that. And I think as a general rule we believe that's probably the toughest segment to actually get price increases in. And we feel like when we're seeing that type of traction in ready mix, it underscores our view that what we have in aggregates is a much more stable circumstance, as we try to make certain that we outlined in the release.

And do you have a best guess in aggregate out of your end markets? What are the ready mix players, what kind of price increases they actually realizing, 1Q and 2Q? I realize it's not an exact science, but would love your best estimate there.

You know what, Jerry, that's going to be a tough guess, and probably one better placed directly to them. But I think you could clearly see yardage increases from $5 to $10 a cubic yard and I don't think that would be surprising numbers in many markets.

Can you say more about the pricing trends you are seeing in the west group, the groups that led your volume growth there? For the past year you mentioned some mix headwinds here from a pricing standpoint. Can you say more? Are you optimistic that we can get better pricing in this region versus the others? And then perhaps touch on the 2% pricing you delivered in other regions? Can we expect that to continue into hopefully seasonally stronger 2Q?

Jerry, I certainly think so. As I'm looking at the numbers that we have, I clearly see a lot more green than I do red, and that is a nice trend. What I will tell you is we saw pricing up in Iowa, we saw pricing up in Arkansas, we saw pricing up in north Texas. I think what we had really focused on was the pricing was down in south Texas, particularly coming out of San Antonio. And keep in mind, much of what's happening there is you are starting to see more volume headed to the Eagle Ford shale play in south Texas. Keep in mind that's going to be a mix issue, that's going to be a predominantly base product. And even as we look at the first quarter, we are only talking about a quarter of a million tons that probably found its way into that Eagle Ford deposit. At the same time, what that does tell you is why Q1 is not a good barometer to use what's going on with pricing, because when you've got a market where, candidly, a couple thousand tons can move what ASP looks like, it tells you it's a pretty refined snapshot in time.

That's very helpful. And lastly, Ann, can you talk about what you are seeing in your M&A pipeline, and comment on what kind of net debt to EBITDA you would be comfortable with, in Ward's comments, clearly you changed the covenant structure there. Can you talk about how we should think about your target leverage ratios if you get some good M&A opportunities? Thanks.

Jerry, we're going to bifurcate that. I will talk about the pipeline, and Ann will come and talk about how the financing looks on some of that, or how it could look on that. Obviously, we have been very busy, and we have been looking at a number of different opportunities. We have been doing a lot more than talking, we have been doing a lot of work, and we have been engaged in a good bit of due diligence, as you would expect us to be. We continue to see reasonable activity from the public company side as well as closely held family businesses. We are engaged in a number of conversations in every geography in which we operate. But as we said before, we're going to be disciplined. We are going to be careful. We're not going to overpay, and we're going to understand a business exceptionally well before we close on one. That said, our aim continues to be to find markets that we believe have good long-term attractive demographics. And our aim typically is to have a number 1 and number 2 position in those markets. It's that broad term strategy that will continue to guide what we are doing on M&A. Now with that said, let me ask Ann to weigh in and talk a little bit with respect to the financial situation.

With our refinancing we were able to amend our debt covenant, it's still at three and a half times our debt to EBITDA on a run rate, but then 3.75 times for an acquisition. We are also able to use a net debt covenant, assuming we don't have any outstandings on our facilities. You know, for the right acquisition, would we push those debt covenants? Yes, we would. It would have to be the right one that we think would create value for the long term. And, I think we are in a stage where we are feeling more comfortable in our ability to estimate what might happen, as opposed to two years ago when you really weren't sure of the trajectory of volume declines or profitability.

Perfect, thank you very much.

Thank you, Jerry.

Our next question comes from Ted Grace of Susquehanna. Please go ahead.

Thank you guys. Good afternoon.

Ted, good afternoon.

I was hoping to start by revisiting the margin question. Whether it's Ward or Anne, I was wondering if you could walk us through the puts and takes on your expectation for flat to slightly down aggregate costs per ton of production. I guess the way I think about it, maybe just to lead into this is, sources of leverage would be labor, D&A and services, and then nonleveragable costs would be petroleum, repair and maintenance, supplies, raw materials and royalties. Could you help us understand how we should think about each of those components, or at least the most important ones?

Yes, I will try to hit the highlights for you, Ted, and I think it will get you there. If you look back to cost per ton last year, you're really looking at around $6.96 per ton. And if you go through the major buckets as you identified, I would rack them up as labor and benefits, energy, DD&A, maintenance and repair, supplies, contract services, raw materials. What I really see as I sit down and take a look at it, is obviously the area is that going to be the biggest swing factor to the bad, meaning more cost, is going to be on the energy side and really on that it's going to be almost uniquely diesel for us this year. I think several things are going to happen as we do the build. I think it's a practical matter. You are likely, year on year, to see lower labor and related benefits. I think you will see up on energy. I think the other big places that you are likely to see us pull back and do better on the cost side. I think we'll see less maintenance and repair dollars this year. And I think by the time you go through and look at what we think M&R is going to be, when you look at what we think personnel is going to be, and then when we just look at the balance of the other costs, I think we feel like less M&R, less personnel, and less on the other cost line will more than compensate with what we think will be, or what we know will be, a much higher energy cost. Keep in mind, Ted, when we came into the year, and I think we said this with our full year and Q4 earnings, we had anticipated energy would be up plus 20%. But even by the time we got to February, energy was up plus 30%. And here for the first quarter it was up plus 38%. That said, even if we lay in an additional $20 million on energy for the year, we still feel like, if production volume, in particular, is up percentage 2 or 3, that by the time we come back to the full year, and look at cost per ton, it's likely to be down. Does that help?

Yes, that is helpful, and I have a quick follow on to that. Could you remind us where your 2Q, 3Q and 4Q diesel comps would be on a per gallon basis? So we can calibrate our expectations.

What I will have to go back and look at exactly what they were through last year, as I said, I know in Q4 last year they were $2.03 a gallon. And so go back through and take a look at what they were all the way through. For the second quarter, $2.12 a gallon, for the third quarter $2.05 a gallon, and for the fourth quarter $2.32 a gallon. So that gives you a pretty thorough march through, Ted.

Okay, that's helpful. Now the other thing I was hoping to touch on was coming back to your comment that aggregate pricing would stabilize following a moderate period of volume recovery. When we roll your numbers up, certainly would look directionally if that's the case, but when you decompose the areas, Southeast volumes are down 10% yet pricing is up 6%. West coast volumes are up 3% and pricing is down 2%. Is there something going on in between, whether it's a mix shift? And I was wondering if you can decompose the pricing as you have in prior quarters? Help us understand what the real underlying pricing was as opposed to the optical reported number when you take in geography and whatnot.

What I think last year when we came into '10, Ted, we particularly spoke to what we knew was going to be a profound mix change. We knew the mix was going to be different last year relative to geographic mix, and we knew it was going to be different relative to project mix as well. I think when we came into this year, we felt much more broadly that the mix of work was not going to have the type of swing in '11 that we saw in '10. So I think it's a practical matter. What we're looking at is a much more apples to apples comparison. I think the only place in this quarter that I'd particularly draw your attention to, is what we mentioned and what we pulled out in particular in the Southwest. Because if you recall last year, when we were talking about shale activity, we were talking primarily about the Haynesville and Barnett shale deposits. And now this year, what we are primarily speaking to, at least so far, has been Eagle Ford. So, last year, much of that shale activity was coming out of Arkansas and coming out of north Texas, and this year more of it is coming out of south Texas. I think with that type of mix shift as the exception, I think in large part it's a much closer jump ball this time, Ted.

Okay. That's helpful. Best of luck this quarter, guys.

Alright, thank you.

Our next question comes from Todd Vencil of Davenport and Company. Please go ahead.

Thanks. Good afternoon, guys.

Hello, Todd.

Not to beat this particular dead horse, but look particularly at pricing in the Southeast group, I think that's down for 6 straight quarters, and it's been down longer maybe a bit more than a lot of the other segments, and you had a nice quarter this quarter. Was there anything in particular within the Southeast, either geographic or product mix, that jumps out at you as a shift? Or was it more or less just product pricing?

I guess the couple of things there that I took note of. Number 1, in 1 of the markets, Todd, that I think has been the toughest market hit over the last several years, in north Georgia in particular, we saw pricing flat. I think given what Atlanta has been through to have something in north Georgia that is flat, I think is encouraging to see. Here is what I thought was really encouraging to see. Our south Georgia group though, is really broken up into a couple of different buckets. One is truly south Georgia and the other is Florida. And actually what we saw were pricing up in Florida, and we also saw pricing up in south Georgia. So, the fact that we saw those two markets with pricing moving up, I was pretty encouraged by. I guess on the other side of the coin, the one market that I think, Todd, continues to really struggle and is looking to find bottom is Alabama. And I think that state, at least in the markets that we are seeing right now, continues to struggle and obviously the news reports over the last week have detailed a circumstance within that state itself that's very sad and tragic. But from a market perspective, Alabama is, both from a volume and pricing snapshot, one of the more difficult markets in the Southeast that we see.

That's incredibly helpful, thanks. And then thinking not just (inaudible) Southeast but broadly speaking. Are you seeing any differentiation in the trends for the different products? And we can call them broadly between Queenstown and basin times.

Not particularly, Todd. I think what we are seeing in large part is the same type of movement between products that you would expect in these markets.

Got it. And then, final question from me, you mentioned a couple times that your volumes were up in January and February, and in the back half of March you lost momentum due to the weather. Can you tell me how much volumes were actually up for January and February year-over-year?

If we look at January and February, I want to say in January they were up almost 3%, almost 3.5%. If we look in February, they were up slightly over 7%. And then when you look in March, they were down around 8%. The thing I would encourage you to do -- if you think back to March last year, Todd, part of what we had actually thought was that very few people would come back to work at all in the first quarter, we thought people in '10 would probably really not show up until April. They actually showed up last year in March with a vengeance. So March was going to be a tough compare even with good weather, and with the bad weather it made it even more difficult.

Got it, that's very helpful. Thank you.

Thank you, Todd.

Our next question comes from Kathryn Thompson of Thompson Research. Please go ahead.

Hello, thank you for taking my questions today. My first question is on SG&A. In prior calls you mentioned that SG&A is going to be lower year-over-year because of lower pension expense. But in the past you said it was going to be about $6.5 million dollars lower. My question, is this number still accurate? And will there be additional SG&A rejections above and beyond the lower pension expense in 2011?

Kathryn, we do have some personnel costs that we think will be down. But the big driver's going to be the SG&A cost, and that's resultant of better actual returns on our investment portfolio last year that actually lowered the cost projections as we moved forward.

Is that $6.5 million still in the ballpark?

It's reasonable.

Okay. And tagging back on the earlier question on stimulus, as a percentage of sales how much of your revenue is directly related to stimulus in the first quarter? And how much do you think it will be in fiscal '11? And how does that compare to last year?

Kathryn, going to the first quarter I would think actually very little would have been attributable to that. As a practical matter, the only places in the first quarter that you would have seen significant volumes going would have been warm weather-type climates. I think it goes back to the volume trends and some of the pricing trends that we spoke to in south Georgia and Florida. Again, going back to the stimulus dollars themselves, what we are looking at this year is going to be somewhere less, across the entire country, of less than $9 billion, certainly less than $10 billion of stimulus that will be out there. It's not going to be an enormous needle mover in any markets. But I do think in a couple of markets, and again I would identify Florida in particular, and I would identify Texas in particular, as well as Georgia. The role that we are going to have in a state like Florida, where we are seeing more infrastructure work this year that may be stimulus related, particularly as energy pricing goes up, can be a very different circumstance for us because of the type of product that we are coming into Florida with. Granted, it's going to be a much preferred product in that market if it's going into asphalt simply due its lower absorption potential.

Yes, and I was thinking about what you were talking about earlier, about some of your markets seeing a greater impact, maybe not as much as you would have liked to have seen in prior year. When other companies were benefiting, other states were benefiting, but you are seeing a greater benefit this year. So, it's really trying to get a sense of how much of an impact would it be for you this year? More on the positive side, just so we can frame it relatively.

Kathryn, I don't think we have that completely broken out but we do have it rolled up into our projections for infrastructure spending -- infrastructure volumes for the year. I mean, it's obviously helping offset some drag.

Okay. Great. And then finally we've also been hearing field about the possibility of a mid-year price increase. Could you clarify how that would work through the market? Does it happen mid-year literally? And how does that executed in the market and what -- how long would it take for it to take hold, assuming the market accepts the price increase?

Obviously each company's going to have to do whatever they feel like is appropriate, exercising their own judgment. It's a practical matter. The timing of that is going to be up to anybody who wants to deal with that, if that's part of what they want to do. If we go out with a mid-year price increase, and let's use easy numbers, let's assume for ease of discussion, we went out on June 30, put in some X-dollar per ton mid-year price increase. There are obviously going to be a number of projects the contractors are going to be protected on. What that really means, Kathryn, is you're going to pick up some degree of protection in the second half of the year. You are likely not to pick up an enormous amount of protection. It's not, for example, going to cover all of the extra costs, for example, that we are incurring on diesel fuel. It will make up for some of it. And importantly too, what it will do, is it simply sets the bar higher as we go into 2012.

We typically are going to realize about a quarter of that increase, or 25% of that increase, Kathryn.

Okay. That's very helpful. Finally, you talked in the past about seeing some strength in heavy industrial. Any updates with this type of project, what type of projects, and are you still seeing continued strength in that segment?

Kathryn, we are seeing good strength in that segment. We continue to see some projects, for example Caterpillar has a large project in Winston-Salem. We see that. We're seeing a large Norfolk Southern undertaking in Charlotte. We are seeing continued heavy-type work at some nuclear plants as well. But part of what I'm more taken with, Kathryn, is even what we are seeing on the light side because that's been the area that has been particularly hard hit of late. And I will tell you, at one of our more recent meetings one of the statistics or factoids that I heard that I found stunning is, for example in the Metroplex area in Dallas/Fort Worth, they are looking to build 12 new Wal-Mart facilities within that community. So you are seeing that type of level of activity that you would not have seen, and that's not just on the heavy side. It's on the more commercial side as well. So we're seeing more activity on both sides of it right now.

Great. Thank you very much.

Sure, Kathryn.

Our next question comes from Keith Hughes of SunTrust. Please go ahead.

Thank you. In the press release, you talked about your residential business being up 15% on multifamily construction. A little surprised at that skew in that number that much given the size of that market. Do you have a special niche there, or what exactly is going on?

I guess the big thing I would say to you, Keith, is that it's been a market that has been so dead for so long that when any degree of activity comes back to it, it tends to have a remarkable swing in it. Part of what's interesting is even when we step back and take a look at what's going on broadly in multifamily period, 1 of the best statistics that I've seen is actually been 1 that I noted the other week with respect to portions of Texas. My recollection is that we were looking at around -- in February last year, around 400 different permits that had been handed out for multifamily construction, and during the same time this year, over 2,000. So when you are seeing that type of change in that type of market, again on a percentage basis, it can make some pretty big changes. Keep in mind, though, it's important to remember, even as we look at our residential business last year, as a percentage of our business, it was only 7%. So when ChemRock and Rail became a bigger percentage of our business in residential, that's actually when we named ChemRock and Rail instead of referring to it as Other. I guess my view is, Keith, it's not that it's that great, it's just that it's coming back from something that's very, very low.

Okay, that answered it. Thank you.

Sure.

Our next question comes from Scott Levine of JP Morgan. Please go ahead.

Hello, good afternoon.

Hello, Scott.

In reading your release, it sounds like the results were roughly in line with internal expectations, despite a couple of the more important external variables like fuel and the weather working against you. I was wondering if you can comment whether that's true, number 1. And secondly, if it is, what areas may be surprised to the upside, relative to your expectations as you put the quarter together?

That's a fair point. I think the big issues that -- I'm not going to say they were a surprise to us I think the big issues that were headwinds is what we identified. We are talking $4.6 million more in cost simply for diesel fuel in Q1 this year as compared to the prior year. When I took the first question from Arnie Ursaner, if you recall, we were talking about incremental margins. Actually, if we took that $4.6 million and made it equal to what it was last year, the incremental margin that we were talking about in the conversation with Arnie, I said it was around 84%, candidly it could just about double.

I think while it's not necessarily a surprise, I think that does come back and underscore in our minds, as we said before, that the cost structure is in the right place. I'm not sure that we had many other significant surprises. I think we were clearly disappointed with the way that the weather responded in the second half of March. But at the same time, part of what we said forever is this is an outdoor sport, and when weather does what it does in March and when it does what it did in April, it has an effect on the business. I think, taking all of that into account, the type of performance that we saw the aggregates group turn in, and frankly the superior performance that we saw the specialty products group turn in and they've done that repeatedly now for awhile, I think are the two notables from the quarter.

I don't think it was a surprise, Scott, but a reaffirmation that the cost structure's in line when you able to, as Ward indicated, we got pretty strong volumes in January and February and incremental earnings power that we got off that volume was really able to essentially carry March. It was very negatively weather affected.

Got it, thank you. With regard to March, I think you said volumes were down 8%. Do you have a rough breakout first half versus second half of the month? I think you indicated in the release the second half of the month was where you really felt the brunt of the weather impact.

Well, we always do. We don't have it broken down between half 1 and half 2. The reason that we always reference half 2 is that's when the weather traditionally, particularly in the southeastern US, turns better. In fact, most D.O.Ts, if you look at their standard specifications, often don't even open up for business, per se, to permit asphaltic paving or otherwise until after March 15. But because of the weather this year, that really didn't happen, and sadly we don't have a break down for you between half 1 and half 2 in March.

Got it. Okay, 1 last 1 if I may. On gross profit on the corporate line item, it looks like that went from a half million dollar loss a year ago to $2.3 this quarter. I was wondering if there was anything notable in there?

It was a reserve that we provided there for some sales tax contingencies.

Got it. Great, thanks.

Thank you.

Our next question comes from Trey Grooms of Stevens, Inc. Please go ahead.

Hello, good afternoon.

Same to you, Trey.

So we've had some pretty tough weather, and you said April is continuing most of your markets to be pretty tough from a weather standpoint. So do you think that this is going to create some pent up demand here that we could see maybe a bit of a spike up once all of this weather clears out, and all of the water recedes?

Trey, I do think the work that is there has been pushed to the right. I think in some degrees, it's been pushed the same way that ag lime was for a number of years. Now granted, ag lime took a number of years before we saw something that we truly described last year as pent up demand, and then when we had a dry fourth quarter we really saw it hit. Now I'm not going to say there is some huge degree of pent up demand out there, however I will say I think there are a number of contractors who are very anxious to get to work. Number 1, on the projects that are there. I think the other the other thing that we need to be mindful of, and it's nothing to take lightly, when you do have these types of weather events there will be construction that naturally comes from the events themselves. So I think to answer your question, Trey, I think the work that's there has been pushed to the right. I think we have anxious contractors, and I think there is now more work to be done in a number of communities as well.

Okay, that's helpful. And then -- so looking at the different cost buckets you broke out earlier, it sounds like pretty much everything's going to be lower on a cost per ton basis, with the exception of energy. I know, obviously, volume is going to play a little bit of a role, but the volume guidance you have given hasn't, isn't really a huge amount. So just kind of wondering, other than just volume, what else is playing a role in that?

You know what, Trey? That is the story. That really is the story. I think part of what we have said, and I guess it's good to be right, but it's hard to be right in this context, we said for a while that our cost structure was so tight that even small degrees of volume make a big difference on our business right now. And I think what you said is right, I think if we look at all of those buckets you are going to see great exercise of cost control. I think you will see numbers go down. And I think to have that type of performance, even when we are seeing energy do what it's doing, and come back and say, okay let's say we do produce 3% more this year, under that scenario we would actually have reduced cost per ton, Trey, I think it's a great story. But, to your point, it's all volume.

Well, that's pretty amazing. And looking at the pricing, just another real quick question. Look at the concrete, you said $5 to $10 a yard increases in some markets. I guess that's mostly due to the fuel cost moving up with these guys, and it really looks like the stage is being set for you guys to have a pretty good argument for mid-year price increases. And, as it was mentioned earlier, I think there is actually some reports out there of people getting prepared for that already. So I guess the question is, number 1, timing. I think you used June as an example, but just hypothetically if that were to happen, is that a, June-ish kind of time frame? And also, thinking about magnitude. Any color you can give us there?

Trey, again, the magnitude is going to vary by market. I think it's a practical matter if we start coming out with mid-year price increases it will probably be somewhere just in advance of mid-year, I think that's the way historically, that we've certainly dealt with that. Really, Trey, I'm not comfortable going to pure magnitude questions on that either. Again, that's what we may do in 1 community, that may be 75 miles from another community, maybe an entirely different snapshot. So I think that's a very difficult one to answer.

Trey, I think with some certainty we'll tell you it's not going to be 38%, which matches the increase in diesel. How is that?

I think that's fair. Okay. Thanks, guys.

Thanks, Trey.

Our next question comes from the Garik Shmois of Longbow Research. Please go ahead.

Thank you. Good afternoon. First question is if you had seen any destruction in your plants from the tornadoes that hit recently?

Good question, Garik, the tornadoes that have come through recently, obviously the ones most recently went through Alabama. And first of all, we want to extend our thoughts and best wishes to everyone in that state that has been hit extremely hard. I'm happy to tell you that as a practical matter, as a corporate family, and as families within our organization, it appears that we came through that series of storms exceptionally well from a human being perspective and from an iron perspective. I don't have anything except some very minor damage that I will report to you, and I'll follow-up with that and say the same is true of the storms that came through North Carolina about 10 days prior to that. I remember listening to radio reports that day, and literally hearing of a tornado going through the Lemon Springs community in Sanford. And that put my heart in my throat, because we have a quarry in Lemon Springs, North Carolina. There were homes that were very close to our quarry that were damaged extensively, but our operations there and our people are safe.

That's very good to hear. We did touch upon multifamily housing demand. I recognize that residential is a small portion of your business right now. But how much of residential is multifamily right now for you?

Right now, the single biggest piece of what we are seeing in res is going to be multifamily by far. I would say probably three-quarters of what we're seeing in that is property in the multifamily piece of it. And keep in mind, Garik, even if we go back in time, what we would have said on residential, if you reflect on it, is we said around half of the times that we would see in a normal time in res, are going to the house or the improvement of the lot. The other half is going to the improvement of the subdivision. And keep in mind on the single family side right now, many of the subdivisions are already built out. Which is why from a percentage perspective right now, I would come back and tell you that it's a much higher percentage, a disproportionate percentage, that is going into multifamily right now.

And also, Garik, as we highlighted, both in the press release and in Ward's comments, we are seeing a lot of that multifamily work in the college and university communities, which really makes some sense. As well as in those communities who are favored in base realignment.

So part of what's interesting about that, Garik, if you think about our number 1 and number 2 state owned revenues, North Carolina and Texas share a number of things in common, number 1, we have a lot of colleges and universities in both. And we have a lot of military facilities in both as well. I think that has probably been one of our good friends.

And I'd imagine the intensity per project on some of these larger multifamily projects that you are highlighting would be more significant than on a construction of a new house.

Yes. It absolutely --.

--Just sheerly from the parking lot alone.

Okay. And then just switching real quick to the specialty products. Ward, you didn't indicate you are up against tough comps in the back half of the year. The profitability run rate there appears like it's going to have to moderate to hit your guidance. Is it just a function of being up against tough comps, or is there anything else going on there that is slowing the growth rate on the operating profit line?

You know what, really, I think it's just being up against tough comps. But what I will tell you is that is a team that has continuously performed formed against tough comps in the past. And steel is running at about 76% of capacity right now, it's still early, Garik. So I think in large part we are just wanting to give ourselves a little bit more time to look at that. But there is nothing else that's remarkably going on in that business, as we indicated in our comments we had a couple of product lines that did particularly well, our hydroxide slurry did, as did paraclays. Again, evidence of what's going on in the steel industry. But it's more comp driven than anything else, Garik.

Okay, sounds good. Thank you very much.

Thank you.

Our next question comes from Brent Thielman of D.A. Davidson. Please go ahead.

Hello, thanks for taking my question. Just a question on the energy component of your business. I was a little surprised to see lower shipments in that side year-over-year. Do you think that's a function of weather related markets, or simply difficult year-over-year comparisons.

I think it's really a function of weather. I think it's a function of shipping, some of it, too. I think there's some fringes of the Barnett and Haynesville shale deposit that have seen some of that activity shift to south Texas. So I think what we are seeing, when I'm talking about a quarter of a million tons that are going into south Texas, I think that's what you are primarily seeing this year. Keep in mind, too, last year the weather much better in March. We've seen a lot of that activity ramping up in Arkansas, Louisiana and northeastern Texas. I think what we've indicated coming into the year, and we would still say, is we see that business very similar to what we saw last year, probably slightly up.

And, Ward, is it all on the upstream side in terms where we are seeing activity? Or where are the areas where you've seen the most growth?

I want to make sure I understand your question, Brent.

I mean, is this for drilling projects, or?

No, this is primarily building the roads into the deposits, and it's also building the pads out for them. So, really, it's for their own forms of infrastructure in being able to access the resource.

Got you. Okay, thanks.

Sure.

Our next question comes from Mike Betts of Jeffries. Please go ahead.

Yes, thank you. I have 3 questions as well if I could, Ward. First one, could you -- the weakness that you saw in March, could you highlight the particular states that that occurred in? I presume they were in the Southeast region, but which were the ones worst hit? And have they been the same in April. That's my first question.

I think what we saw in March was some cold weather that came in, and some rainy weather that came in. I think what we are seeing in April is tornadic activity, as well as just some remarkable flooding. So you are seeing geography move a little bit in that, Mike. So a large part, if we're looking at what would have happened in the second half of March, much of the east coast, in particular, would have been affected by that. So we would have felt that in the Carolinas, we would have felt that in Virginia, we would have felt that in north Georgia, for example. What we are seeing now is really more of an effect in portions of the business that we have going down the middle of the country. Clearly we're seeing and feeling some of that in Arkansas, we are feeling that in Kansas City, we're feeling that in portions of Oklahoma as well. Is that helpful to you, Mike?

It is, thank you very much for that. My second question is one about the timing of the price increases earlier on this year. I mean, the Symex call on Friday indicated that in their aggregates businesses, the price increases this year that had gone typically in January, which is a bit earlier than normal. Was that the same for you?

You know what? And, again, I think everybody is going to deal with that a little bit differently and it probably depends entirely on the market, and I'm not sure if Symex did the same thing in California that they had done in Florida, and maybe they had done or not done in Arizona. I just don't know. I think there were some price increases that we put in that went in January. Some went in in April, and in large part I'm not sure that it makes an enormous difference because volumes are so muted in the first quarter anyway. I think we saw a number of different ways that we dealt with it in different markets. But effectively all done at some point during the first 90 days of the quarter, Mike.

And it didn't change particularly from 2010 when -- or 2009, there was no structural change in the intention at least?

No, there is not, Mike.

Okay. And third and final question is probably for Anne. And correct me if I'm wrong here, Anne, but I think you know the tax rate guidance from 28% to 26%, is that correct? If so why? And does it have any impact of further adding to what you think might have happened to the tax rate?

Yes, we did lower it from 28% to 26%, and primarily it's where we stand on our estimates of pre-tax earnings for the year, and the relation of our percentage depletion deduction to those pre-tax estimates.

Okay. So presumably that means that internally your expectations for the year have gone down. Is that the right way to look at it?

They have moderated, they haven't gone down. If that's a difficult thing to pull through because you also have other one time events that are going to affect that tax rate.

Okay. And I think long-term you've indicated 29%. Is that still an expectation of the long term rate, or is that an old number?

I think between 28% and 30% is very reasonable for a long-term rate assuming that the tax regulatory scheme stays as it is today.

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

Thank you, Mike.

Our next question comes from Chris Manuel of KeyBanc Capital Markets. Please go ahead.

Good afternoon.

Same to you, Chris.

Most of my questions have been answered but I do still have a couple left. 1 is, if it we were to think about, as you talked about earlier in prepared remarks and in the press release, that should we get a shorter highway bill it could be at or below given austerity type of things in the country. What would you postulate when you say potential for lower? How much lower could you think a highway bill could be?

I will use this as the metric. I guess, number 1, Chris, is who knows. I guess being more serious about it, the last bill was, what $244 million -- $244 billion dollars, I'm sorry. Yes, I've certainly heard some numbers that would say you might see something coming out of the House Transportation and Infrastructure Committee that could be in the 235 range. So that is a lower number. At the same time, what people would very quickly come behind that and say is, the previous bill had about 109 different programs ranging from public parks to bike paths, to other things, all of which would likely come out of this new bill.

So we have been cautioned by people, if you see a smaller bill, keep in mind, you may have something that is a much purer bill. You may have something that's actually more aggregate-intensive bill, so don't let that headline number concern you. At the same time, Chris, I think whatever the House T& I committee comes out with is very likely to be a very different number than whatever number the Senate is going to come out with. Now obviously Congress has been on Easter recess. I think there is some conversation that we may see something coming out of the House in the next couple of weeks. It's hard to say. But I think it's fair to say, whatever comes out of the House, we will see a larger number coming out of the Senate, and we are going to see a larger number that the White House is going to want to support. And at some point all of this has to go to some degree of conference, or it just gets kicked down the road. I think really that probably puts the book ends to it for you, Chris.

But on a -- if it's shorter in duration as well, on an annual basis it may still end up being somewhat flat. Is that sort of what you are suggesting?

Yes, I think that's something that you certainly have to keep in the back of your mind.

The second question along these lines is, I recognize it's not going to be as big a hair cut as what we had a few years ago when we went -- when the bill went into lapse and I think it was funded at 70% level, but during that time frame pricing became very, very aggressive. Both from the contractor, and then to support long-term relationship with contractors, you had to help them out a bit as well. As we sit today, is that a fear that you have is that the environment could -- if it's something less than flat become aggressive again?

You know what, I think what happened, if you think back to that time, that was really probably late 2009, Chris. And I think several things were happening then. The highway bill had in fact expired, and I think there was practically no view forward on what was going to happen with the bill. That was at a point in time where I think a lot of people wondered if the entire economy was going to implode as well. And then what was happening, at the same time people were coming behind that with varying degrees of stimulus work, and I think what we were seeing with that stimulus work was obviously a lot of contractors who were moving into parts of the country that they hadn't been before. And I think that did create a very competitive dynamic during that snapshot in time. I guess my view is at this point, that this industry has now survived what I think is truly the acid test on pricing, and the way it works on these materials. Is it a possibility? I can't ever dismiss it as possibility. I don't look at the circumstance over the next several months, or even years if we end up with the CR for a longer period of time, being something that I think makes us revisit that time.

That's what I suspected but I wanted to hear you put it into your own words.

I hope that helped.

The next question I had was when we think about the 50 or so million dollars that we are spending this year for growth oriented projects. Could you give us, not an exhaustive list, but a few large ones? And what you would anticipate coming out of those?

Sure. If you look at our capital issue, what I would tell you is think of several different buckets. Assume for what we have out there right now, around $100 million is what's being spent in the Heritage aggregates business. We've got another $25 million that's actually going to be spent in building the new kiln in Woodville. We have another $25 million in large part that we are using to invest in a yard network system in Florida. Again, we were the largest granite sales company in Florida. And we want to continue to make sure that we have our network there as robust as required as that market returns. That's part of what you are seeing.

And the other $25 million, Chris, is really competitive capital. And that competitive capital is something that I hold here that I'm going to look at projects as they come through, and what we have told our teams is to get your hands on that competitive capital you better have an internal rate of return that, I think our words have been, is a pretty eye popping IRR. So far we have seen one project in particular that we thought was particularly moving, and we've used some money to do that. But that's the type of projects, and the type of structure that we have to Cap Ex this year. I think by structuring it that way, one thing we have done, too, Chris, is we've built in a certain degree of flexibility into our business. And while we don't think we will have to do it, if we got to the point that for whatever reason we felt like we needed to pull back on capital, we obviously could.

Okay, that's helpful. And for my last question, I just want to dig in a little bit to the extra capital you're spending, I think you are adding the kiln and there's a little more slated for next year. How much extra capacity will that add for you in the specialty products business?

What that will add by the time we are done with that is about 240,000 or 270,000 extra tons of dolomitic lime coming out of that facility, Chris.

And as a reminder, Chris, as we've said before, almost every pound of that is covered under a long term take or pay contract.

There will be a home for all of that before it goes online, Chris.

Okay. That's fine, I'm just trying to gauge future contribution. Thank you much.

Thank you, Chris.

Our next question comes from Clyde Lewis of Citigroup. Please go ahead.

Yes. Good afternoon. Apologies if somebody did ask this earlier, I did get cut off. But did you say anything about opportunities for some [belt homes], obviously the balance sheet is in pretty good shape these days. Just wanted to see what's happening on that front and whether there are some interesting opportunities starting to come up.

That's a good question. I would answer your question with a broad answer, yes. There are opportunities to do that. We continue to look at it and we are very active in looking at it. We are very thorough in looking at it. And candidly I hope to have some that we can talk to you about in the not too distant future. I think one thing that I need to say, and I think it's an important thing for us all to remember, is whether it's a closely held family business, or whether it's a public business, or anyone else, people understand how incredibly valuable these businesses are. And I think even as we have gone through this downturn and we have looked at a host of different acquisitions, and we looked at probably close to mid 20, 30 different types of transactions just in 2010 all by itself. People are very proud, understandably, of what they have. And looking hard to make sure you are buying something that is to the long term benefit of share holders is something that we care deeply about, but we will continue to be vigilant in looking for transactions, Clyde.

Okay, great. Thanks so much.

Thank you.

I'm show nothing further questions that the time. I would like to turn the call back over to Mr. Ward Nye for any closing remarks.

Thanks again for joining us on this first quarter earnings call and for your interest in our Company. We believe the portions of stability experienced in our aggregates business will provide a platform for the next phase of the construction cycle, recovery and growth. Consistent with our core principles and values, we'll continue to focus on managing our business for the long term benefit of our share holders, and we look forward to discussing our second quarter results with you in August. Take care, thanks a lot.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.