Martin Marietta Materials Inc (MLM) 2011 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Martin Marietta Materials second-quarter 2011 conference call. At this time all participants lines are in a listen-only mode. Later we'll conduct a question and answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Ward Nye, President and CEO, please go ahead.

Good afternoon. And thank you for joining our second-quarter 2011 earnings call. With me today is Anne Lloyd our Executive Vice President and Chief Financial Officer. We're pleased to report our quarterly results and believe you'll find this discussion beneficial. These second-quarter results are further evidence of our ability and determination to execute and maintain a disciplined approach to the profitable management of our business. Despite an extremely challenging operating environment, contributed to by both man and Mother Nature, we performed well. That's not to say, though that we're satisfied with our results.

But despite the difficult operating environment, we demonstrated our ability to achieve a primary goal, continuous improvement. While aggregates pricing momentum of the first quarter continued with the 2.6% increase in average selling prices of our heritage aggregate product line over the prior year quarter, factors beyond our control such as erratic weather patterns, reduced investment in infrastructure projects and low levels of private sector construction, all limited our aggregate shipments and reduced our net sales compared to the prior year quarter. Now, for the specifics.

The second-quarter results reflect our continued focus on controllable production costs, as well as general and administrative expenses. Overall we earned $0.78 per diluted share on the quarter compared with $1.18 in the prior year quarter. Our specialty products business achieved yet another significant accomplishment, setting quarterly records for both net sales and earnings from operations. Based on first half results and our outlook for the second half of the year, we have raised our full-year earnings guidance for this business. We're pleased that aggregates pricing improved in most of our geographic markets, led by 6.8% increase in our southeast group. Rising energy prices have also contributed to certain mid-year pricing increases. We believe this pricing growth is sustainable, and have accordingly raised our full-year overall aggregates product line pricing guidance to an increase ranging from 2% to 4%.

As you all know, weather is a significant, non-controllable variable in aggregates businesses and during the second quarter many of our operations in Midwestern states were constrained by historic levels of rainfall and extensive flooding along both the Mississippi and Missouri rivers. These extreme conditions restricted both production and shipments in a number of areas. Our southeast business being hardest hit. In addition to weather hindrances, the macroeconomic environment and spending constraints have led to the absence of long-term commitments to infrastructure investment. In fact, State's spending is trending toward projects that are more maintenance oriented. Additionally, jobs funded by the American Recovery and Reinvestment Act or stimulus, are winding down. The combination of these factors lead to a 9% decline in our quarterly aggregate shipments with a noteworthy 11% reduction in shipments to the infrastructure end use market. Despite these declines, we're encouraged by year-to-date increases in contract lettings in several of our key states, including Texas, Iowa and Florida.

Aggregate shipments to the non-residential end use market declined 9% for the quarter, primarily due to reduced energy sector shipments caused by the timing of transitions from Haynesville Shale opportunities in Louisiana to Eagle Ford Shale reserves in central and south Texas. The delayed recovery in residential construction negatively impacted volumes as shipments to that sector declined 6% for the quarter. The general consensus among economists is that current levels of residential construction activity are unsustainably low. However, economic uncertainty in the backlog of foreclosures have lowered expectations. And lastly, ChemRock and Rail shipments were 3% less than the prior year quarter.

Enterprise wide aggregate volume declines of over 9% and decreased net sales made incremental operating margin, as we previously described it relative to periods of volume recovery, less meaningful. That said, our western United States division did see increased net sales. In that environment, we delivered an incremental operating margin well in excess of the 60% stated objective. We continue to benefit from 2 areas of focus you've heard me discuss previously; cost containment and prudent capital investment. For example, direct production costs for our heritage aggregates product line were down more than 2%, with reductions in repairs, contract services and depreciation, more than offsetting a 13% increase in non-controllable energy costs. Diesel represents the largest single component of our energy expense. For the quarter, we paid an average of $3.08 per gallon of diesel, 45% more than the prior year quarter. Higher diesel fuel costs reduced our quarterly earnings by $0.06 per diluted share.

Our lean selling, general and administrative expenses continue to be industry leading. Compared with the prior year quarter, SG&A expenses decreased $1.9 million or 20 basis points as a percentage of net sales. This reduction reflected lower pension and stock based compensation costs. Our specialty products segment continued its exceptional performance. Even compared with the record second quarter in 2010, this business established a new quarterly record for both net sales and earnings from operations. Net sales of $50 million for the quarter were 4% above the prior year, reflecting strong demand in both the chemicals and dolomitic lime product lines. This sales increase, along with cost control measures, produced earnings from operations of $19 million, a 380 basis point margin improvement over 2010. As we have clearly stated, a strategic goal is to establish or maintain leading market positions in geographic areas with attractive demographics.

During the quarter, we acquired a family owned aggregates business in western San Antonio, Texas where population and economic growth have consistently outperformed the national average. In addition to the 6 acquired aggregate locations, the business also has downstream asphalt and ready-mix concrete operations. This acquisition adds more than 200 million tons of aggregates reserves, compliments our existing vertically integrated operations and enhances our leading market position. We continue to prudently allocate capital and, for the 6 months ended June 30, invested $59 million in organic growth initiatives. Of note, we started the new dolomitic lime kiln project at our specialties products business in Woodville, Ohio. This $53 million project should be substantially complete by the end of 2012.

During the quarter, we also opened an aggregate sales distribution yard in Tampa, Florida, expanding our rail distribution network serving the interstate 4 corridor. For the full-year, we have revised our forecasted CapEx to $155 million; $20 million less than previous guidance. We also believe it's critical to maintain one of the industry's strongest balance sheets, especially in an environment like this one, which not only gives us the ability to make capital investment, but also to have significant working capital flexibility. As previously reported, we refinanced $242 million of notes maturing on April 1, with borrowings under our term loan and our accounts receivable facilities. In substance we replaced fixed rate debt with variable rate debt. Due to the current low interest rate environment, the refinancing lead to a $3.1 million savings in interest expense for the quarter. At June 30, 2011, our ratio of consolidated debt to consolidated EBITDA was 3.09 times, in compliance with the limit of 3.5 times.

We were pleased that during the quarter Standard and Poor's reaffirmed our credit and upgraded the outlook on our long-term rating from negative to stable. We continue to monitor activity in Washington DC, viewing transportation funding as our most significant risk for the rest of 2011 and into 2012. As a reminder, we're currently operating under a congressional continuing resolution that extends SAFTEA-LU through September 30, 2011. Recently, Representative John Micah, Chair of the US House Transportation and Infrastructure Committee, released his committee's outline for reauthorized transportation bill. The committee's proposal is a 6 year bill with total funding of $230 billion, a 30% reduction from current funding levels. Senator Barbara Boxer, Chair of the US Senate, Environment and Public Works Committee, supports a 2 year reauthorized bill with total funding of $109 billion, essentially consistent with existing funding level adjusted for inflation. While we support many of the reform aspects included in both proposals, the level of funding is widely regarded as wholly insufficient. In fact, on June 27, the American Society of Civil Engineers issued a report indicating decaying infrastructure costs the United States $129 billion per year. $97 billion a year added to the cost of operating vehicles, plus travel delays that cost $32 billion.

Notably, the US Chambers, Tom Donahue commented on this report saying, and I quote-- without more robust economic growth, the US will not create the 20 million jobs needed in the next decade to replace those lost during the recession and to keep up with our growing workforce. End quote. The debate, lack of consensus and now inevitable committee work related to the national debt sealing and the 2012 budget, will likely constrain Congressional ability to negotiate, resolve and enact Re-authorization Bill prior to the expiration of the current continuing resolution. As uncertainty emanates from the Federal Government, the willingness of states to use alternative means to fund their long-term aggregates intensive projects will become more significant.

We continue to believe that Federal and state officials realize investment in infrastructure, is efficient means of jobs creation, necessary for economic growth and essential to public health, safety and welfare. It's increasingly challenging to forecast full-year 2011 given the variety of factors beyond our direct control. We expect infrastructure funding by state to remain relatively constant, and at least 25% of stimulus funds to be spent this year. While our outlook assumes additional continuing resolutions to maintain current Federal funding levels, the extent of such levels is uncertain. Further, as mentioned earlier, project mix is shifting to more maintenance level work. These factors suggest that aggregate shipments delayed in the first half of the year due to weather may not be recovered in the second half of the year. Another complicating issue is the uncertain timing of housing recovery.

Given this backdrop, we now believe that overall aggregate shipments will range from flat to down 3%. Infrastructure shipments are expected to be down in the mid single-digits. Non-residential shipments should range from flat to up slightly. ChemRock and Rail shipments should be stable compared with 2010 and the rate of improvement in residential shipments should be better than 2010. We expect aggregates production cost per ton to range from flat to slightly less than 2010, despite rising energy costs. Our specialty products segment is now expected to contribute $54 million to $56 million in pre-tax earnings. Selling, general and administrative expenses will likely be less than 2010, primarily due to lower pension expense. Interest expense should be approximately $60 million, and our effective tax rate should approximate 26%. Thank you for your interest in Martin Marietta Materials. If the operator will now give the required instructions, we'd be pleased to address any questions that you may have.

(Operator Instructions) Our first question is from Arnie Ursaner from CJS Securities. Your question please.

I think in summarizing the report you had, the things that you can't control, weather and volume caused some of the problems, but I think you guys continue to do extraordinarily good job controlling the things you can control. You mentioned in your prepared remarks Ward, you expected flat to down cost per ton and that's despite significantly higher energy cost, yet your starting point is you've been doing a pretty good job cutting costs. Can you tell us more about the types of actions you're taking to continue to bring down your costs on a go-forward basis and how sustainable it is?

Arnie, really if you go back and take a look at it, the areas where we're reducing our cost tends to be depreciation, which is really just coming through from the lower capital investment of the last several years, we're seeing reduced M&R, we saw that pretty considerably and we're seeing reduced contract expenses. And here's what's really driving that, Arnie. If you go back and look at what we've done with CapEx prior to the downturn, we were investing in CapEx well in advance of DD&A, what that's giving us the opportunity to do, is pull back on CapEx now, but at the same time run at a very efficient level. What you'll remember is last year we actually saw a slight spike in some of the M&R expenses as some volume came back.

We anticipated at that time that M&R as we went into this year would be lower, and indeed it has. Going also to, to contract expenses or bringing in third parties at times to do work in your facilities, one of the big expenses that we would typically incur during the year as you would imagine, is stripping or working simply to move dirt that's covering reserves in some places. While that can be a significant expense, we've seen those expenses come down pretty considerably over the last several years, in fact, what I would tell you today is in some places you're probably moving dirt for about 50% of what you would have several years ago.

So I'm assuming that your view is, this is sustainable? It's not a short-term blip that's causing it, but something that you do see sustainable?

Arnie, we do think it's sustainable. Again in my view, I think the story of the quarter is several fold and I think you hit it. I think we do have sustainable cost decreases that we have put through. I think to have a quarter where you see volume down nearly 10%, and pricing up and production costs down, is actually pretty remarkable and I think our operating teams are in a position to continue that type of operating performance.

Okay. If I could, could you just expand a little bit more on your mid year price increases sort of the discussions you're having with customers and I know it takes some time for them to work their way in. I assume the much bigger impact would be on next year?

Well, your timing is exactly right Arnie. The conversations have been much more robust this year than they have been in the last couple of years. Again we anticipated that would be the case. If really I take a look across our entire enterprise we're seeing it almost in every major market in which we're operating. We've seen increases of $1 a ton on list price in certain places in North Carolina effective July 1. We've seen increases of $0.25 to $0.35 per ton in portions of the midwestern United States as well. By that I mean Indiana and Ohio. Notably, we've seen price increases on cleanstone on asphalt stone in Florida. We've seen probably a 2.5% increase there as well.

Obviously Texas has come through this downturn in a lot of respects better than most. And we've seen price increases, again, mid-year in San Antonio, Houston, as well as south Texas. And even if you move up to north Texas which traditionally has been one of the more challenging markets, we're seeing $1 a ton type increases on limestone, $0.50 a ton increases on sand. Now in fairness, a lot of those increases in north Texas are more geared toward September 1, so the practical effect is, you won't feel a lot of the impact of that in this year. You will feel it next year, and it also raises the bar on pricing as we move into 2012.

Thank you very much.

Our next question come is from Todd Vencil of Davenport and Company. Your question please.

So Ward, if I look at your volume guidance your updated volume guidance and I back out what you actually did in the first half, it looks like your range implies you think volumes are going to be flat to up 5% year over year for the back half, am I looking at that right?

What I think you broadly are looking at that right. To give you a sense of how we were seeing the trend in the second quarter, Todd and I think this probably gives you a sense of how we're looking at it even separate and distinct from your numbers. Our volume in April, which was a remarkably wet month as you recall, were down 21%. Our volumes in May were down around 5.5%, and by the time we got to June, our volumes were down 1.7%, so we were clearly seeing the rate of decline, decline. And I think as you come back and take a look at the second half, I don't think you're miles off.

Yes. So if, if you look at your plan, and just as background, I sort of fed in the first, or the second quarter actually, into my model and I looked at your guidance, I was-- my full-year implied number without changing my back half assumptions was within the range of your guidance. If you look at your plan is that sort of what happened there. We obviously had a very difficult second quarter and you made the point that you don't necessarily think you're going to get everything in the back half that you may have missed out on in second quarter, but have you really had to make many modifications in your own expectations for what you're going to see in the second half.

No, Todd, we really haven't. I think the primary thing that you're seeing, and it's not just a Martin Marietta issue I think it's across the industry. I think there's a bit more caution. I think you even see that in some of the guidance that McGraw-Hill and others have come out with. If you remember when we came into the year, McGraw-Hill was saying overall construction was going to be up 8%. I think their latest revision show overall construction down 2%. The only issue that I would tell you, we continued to watched carefully though as we moved into the second half of the year, is really what's going to happen with energy as we go through the year. When we came into this year, we assumed for example, that energy was going to be up pretty considerably, if you look at what diesel was last year at this time, diesel was $2.12 a gallon and we've just finished a quarter where it was $3.08 a gallon and in fairness it's probably trending more toward call it $3.20 a gallon. So clearly, it is heading up.

And you anticipated my next question, which is are we about $3.20 right now?

That's certainly what the forward curve is showing, yes Todd.

Okay. And can you tell me how many gallons you burned in the quarter?

Yes. Well, I can tell you in Q1, we were at 6.8 million. In Q2 we were at --

8.5 million.

8.4 million. So half one is 15.2 million gallons and my guess is that will put us somewhere in the mid 30 millions again by year-end Todd.

Got it. On the CapEx guidance cut, which you mentioned but you didn't kind of layout why you did that. Can you talk about what's behind that?

Well, if you think back to the way we set up our guidance at the beginning of the year, Todd, really what I had was around $100 million going into our heritage aggregates operation. We had around $25 million going this year into the new kiln in Woodville, Ohio. We had $25 million in some separate growth initiatives in the south and we had around $25 million also in competitive capital, and we were going to save the competitive capital for capital projects that just had really, very, very attractive internal rates for return but we were also going to have that there to pull back at some point if we needed to. So what you're going to see is the pull back in the competitive capital.

Is that just in response to, related to the reduction, expectations for the year?

It is.

Of the business?

In my view that I think everyone is simply being more cautious and we viewed that as a prudent step.

Fair enough. Just a couple more on capital if I can. Can you, can you give us anymore information on the San Antonio deal in terms of what the volumes look like there, what the financial performance looks like?

Yes, what I can tell you is again we're very pleased with what we bought in San Antonio. From the Coach family it's a closely held transaction, we believe that obviously is going to fit very, very nicely with the heritage business that we have there. It's 220 million tons of reserves. Pricing in the San Antonio market is actually well below the corporate average and we feel like obviously growth in Texas for a lot of reasons will be a pretty attractive place for us to participate particularly in that world. That's a business that certainly has permitted capacity annually up to 6 million tons, it's not at 6 million tons at all, right now, Todd but that gives you a sense of what it can do.

And then again, that's what we have from a purchase price perspective and I'm sure that's something that you're curious about. We obviously have agreements in place to prohibit us from talking about that, but if you were looking at this transaction and trying to put some metrics to it, what I would encourage you to do is to go back and take a look at how we've valued reserves if they were on a lease basis and take a look at that and then come back and you'll get a pretty good sense of the type of value that we placed on this transaction.

And Todd, for this year, obviously in the quarter, we had about $1.7 onetime costs related to business development and acquisitions that were included in OIE and your question on financial performance, we actually expect it to be, the transaction to be slightly diluted this year but accretive in '12.

And I guess final question for me and I'll jump back in the queue but it looks like from the cash flow statement there was about $10 million in there that you used to buy in a joint venture interest, can you tell us what that was?

Yes that was JW Jones. It was a transaction that was done just about, almost exactly 10 years ago. And there was a certain amount paid down at closing, and this was finishing up the transaction. It's a business that's, that's west of Indianapolis, so it's been a part of our portfolio for a decade.

Got it. Thanks a lot.

Our next question is from Garik Shmois from Longbow Research.

Just wondering, just looking at the pricing in the southeast group second strong quarter in a year over year basis. Just wondering if you can flush out a little bit more, what's happening there. Is it mix driven is it prices that you secured in 2010 that has benefited this year and just wondering how sustainable this high single digit year over year increase is through the balance of the year.

Gary that's a good question. I guess it's driven by several different things. If we look at that southeast market in many respects it's the most single challenged market that we're faced with in this quarter particular if you think about what's happening with some of the material coming down the river among others. What I'll tell you, even in markets that I think are incredibly challenged right now and if I had to give you 2 markets that were remarkably challenged I would say north Georgia is one, and Alabama is one. And we're actually seeing price increases in both of those markets, I think something else that's notable is when I take a look at what's happening in Florida because I think this is now, at least the second quarter in a row that we've come back and told you that pricing in Florida is at least from where we sit, moving in the right direction. We saw pricing in Florida for the quarter up 7%.

I think going back to your question really what this tells us, Garik and I think we've been consistent with this, is that the business was looking at least for some degree of equilibrium. Now none of us may be happy with the equilibrium from a volume perspective that we found but at least some degree of it has been found. And I think what you're starting to see now is that our business and I think really the industry is starting to, to move in a way that historically you would have seen it move. So I think there is sustainability to that, and that's, at least gives you some color on what we saw in that market. Is that helpful?

No. That is, and just a question on the disruptions in the river market. Are those disruptions behind you is that market operating smoothly right now? And, is it possible to quantify at all how much of the EBIT impact came from these disruptions whether it's higher costs coming from increased distribution or in changes in inventory or something like that?

It's hard, I'll answer your first part initially. It is operating in a much more efficient more normalized setting right now. It really worked as you would imagine, you had initially upriver disruptions at your production facilities then you also had disruptions at your yard facilities down river for a while as well, so it literately affects the entire system over a period of time. The system is operating much more efficiently and almost normally now. I think as a practical matter to your point, though, it's very hard to go back and really come out with varying degrees of precision on what is attributable to weather, what was attributable to a reduction in sales, and what was attributable simply to not being able to operate in a highly productive mode when you're dealing with those types of downstream circumstances. But what I can tell you is, is obviously the volume numbers in river were off 20%-ish. So it was pretty considerable.

And Gary, if you look at the second quarter results as a whole the 9.3% decline in volume cost the Company about $35 million of gross profit. Difficult to bifurcate that between weather and, or other issues that might be going on in the underline economy. But a pretty significant hit.

And Gary, the last component I think that you asked that we haven't responded to, is you did ask us about mix. And that's a fair question, because when we came into the year last year, we told everyone that mix was going to have a pretty considerable effect on what was happening with pricing. Our view was coming into this year, mix would not, and I think as a practical matter in what we've seen from an enterprise wide perspective, we're safe to say that we've been right that mix has not had a profound impact on that.

Okay. Great. Thank you. And just one last question for me. Ward, you mentioned that you're expecting to see a bigger shift to maintenance projects. At least in the near term. If we assume that this is going to continue over the, next several years, if we have a secular shift to more maintenance projects, can you speak to, the potential implications on pricing and volumes with respect to the aggregate intensity in maintenance projects versus new road build?

Maintenance projects can tend to be relatively aggregate intensive because in large part they're hot mix asphalt driven. So from that perspective you're dealing at least with an end-use product that is primarily obviously aggregate. I think the biggest challenge that you're going to have if projects tend to be more short-term is you're going to be back in a mode that you're pushing several individual products to the exclusion others. In other words, clean wash stone is going to move to the head of the line and you're going to have base products move, again, toward the back of the line. So I think running your businesses at their most optimal and keeping your inventories in balance will be the biggest challenge in that. Actually having an average selling price perspective, you may actually see some help there, because that tends to be some of your more high priced products.

Great. Thank you very much.

Our next question is from Kathryn Thompson of Thompson Research, your question please.

It certainly was a challenging quarter from a volume standpoint. Given all the weather and I think as we read today, it would have been better served as a roofer than a producer of rock in the quarter. So understanding the overall volume which makes sense, where we need a little bit of help is understanding how much gross margin this pressure by volume versus mix versus some other external factor. Could you walk through this?

Yes, I think the best way that I can address that for you. I think Anne might have said it a few minutes ago, really is we sat back and looked at the quarter and we really parsed it out. We saw, as we analyzed our gross profit role forward, that volume weakness all by itself, all by itself cost us around $35 million. And Kathryn, I, by my quick back of the envelope, we're probably in the 70% fixed cost land right now. So when you have 9.3% volume decline, that's really going to be the show. Again, Kathryn back to the comments that I made to Arnie, I think when you've got that degree of volume decline and can still demonstrate the ability to pull back on direct production costs and raise price, it's a pretty good story. But right now this business is in very clear respects, about volume.

Thank you. That's helpful. I was also hoping you could clarify a little bit more how you're looking at calculating that aggregate production cost per ton. Are you pulling out certain items, because we were looking at it, there's a little bit of an increase but it could just be a difference in how you're, you're looking at calculating that?

Kathryn we're talking about direct production costs, so those are at the quarry costs so if you look at the total distribution of costs, you're taking out that embedded freight that moves items between a producing and selling location. And the differential between the direct production costs that went down and then total production costs that are up are on the liquid asphalt cost to rising cost of that, one of those other energy driven factors as well as some energy pass-through on that embedded freight.

So Kathryn if you're sitting where I am, I can tell you the buckets that I'm going to look at when I calculate that, I'm going to look at labor, I'm going to look at energy, I'm going to look at supplies, I'm going to look at M&R, I'm going to look at DD&A and in large part I'm going to look at contract services. Those are going to be the primary direct production cost drivers that we're going to be focused on.

Okay. And I'll follow-up later just a few more questions I have on that. Also just in prior quarters you've been able to talk about the pricing at the end of the quarter versus intra quarter. I assume there hasn't been a meaningful change or if there has, could you expound on it?

No, Kathryn there's not been a meaningful change, so you're correct.

Okay. And finally, you made, you talked in the release that some of the loss revenue in the quarter from weather wouldn't necessarily be recaptured. What's driving this?

I think that's simply back to the caution that a lot of people have, right now, Kathryn. I think we're going to see some pull back obviously in varying degrees of non-res in some parts of the country and I just think we're taking a more conservative view and I think we're following at least in part what we've seen others including McGraw-Hill indicate as they've looked at the balance of the year.

Okay. Perfect. Thanks so much.

Our next question is from Jack Kasprzak with BB&T Capital.

With regard to that last comment, Ward, so you guys have seen in the last couple of months I guess, projects that you thought would go ahead or might move forward, either delayed or cancelled. Is that a fair statement? And specifically on infrastructure, given all the, uncertainty over the Highway Bill the ongoing dithering in Washington. Are states getting frustrated and pulling back, canceling projects real time that it's causing part of that caution too?

Well, I don't think we're as cautious right now on the infrastructure piece of o it Jack that looks pretty stable. And actually I'll tell you the state component of it actually looks remarkably stable. Much more stable than you would think. And that's a good thing actually because our view is the states are going to have to step up in ways over the next several years and frankly probably through this next Highway Bill in ways that they haven't had to historically. So really what we're more focused on when we become more conservative in our view, tends to be more the non-residential and portions of res as well.

With regard to residential, I think you said that you expect, I guess a little bit of improvement in the back half, maybe a better rate of change, less negative, however you want it say it.

Yes.

Is that as much of anything a product of the easier comparisons in residential that we all know we have post tax credit expiration from last year?

Jack, that's entirely what's driving that. I guess the other comment that we would have, simply as we look at res, that's the answer to near term issue. I think as we look at res in the more long-term, part of what we're still struck by, is if you go back and look at res from 1959 to 2010, housing permits during that 50-year period averaged 1.4 million per year. And here we have been parked at 600,000-ish for the last couple of years. So to your point, the compares are going to be get easier but at the same time what we have right now is artificially low, we understand why, at the same time at some point that's going to have to turn. And we think it's going to turn slowly and we think we're going to see certainly some improvement in the second half.

Okay. I was just curious too your comment about 2 examples of very challenged markets being north Georgia and Alabama. What is, specifically on north Georgia what's causing it to be that among those most challenged markets is it the housing issue?

I think it very much is a housing issue. I think north Georgia probably as much as anyplace was pretty considerably over built. I think they could certainly say the same thing relative to their office and retail portion as well. And keep in mind, even as you look at Georgia, that's one of the few states that actually funds its transportation broadly from its general fund as well. That's a bit of an anomaly from other states particularly in the southeast. And while Georgia has in large part gotten their system much more on track here of late, that's certainly a DOT that over the last several years, in particular has suffered, Jack.

Okay. Great. That's very helpful. Thanks very much.

Our next question is from Adam Rudiger with Wells Fargo Securities.

Ward you mentioned to a previous question that there was a volume story right now. I agree with that but as I was wondering and I recognize this is a very difficult question to answer considering the difficulty in even thinking about the rest of 2011. But as you look into your crystal ball for 2012, do you see that being a meaningful growth year for volume? There's plenty of reasons to believe that 2012 could be dead as well? So I'm just curious on when you think about the future, when you think we might get that volume spike that you need?

Well, what the nice thing about being at the volume place that we are right now, you don't even need much of a spike to see remarkable returns because any degree of volume at this level that moves upward has a profound impact on what we can, what we can do. Here's how I would walk you through that Adam, and I'll probably go in reverse order. Our ChemRock and Rail segment I think is a very different segment for us than it is for others. I think we clearly have a much more significant part of our portfolio that goes that way we're the number 1 shipper on UP, VN, CSX, number 1 on Kansas City Southern and number 2 on Norfolk Southern. What I'll tell you is we view that portion of our business going into next year as very stable.

Again you've heard what I've just said to Jack about res, I think we see that as something that's likely to be stable to very much improving. It's simply a matter of timing. I think what we're seeing this year on non-res as I've said in my comments, in large part right now evolves more around the types of transitions that are going on from the Haynesville to Barnett Shales into the Eagle Ford. We are seeing some degrees of life in non-res in big box and some other activity there, so we continue to think that's going to show some improvement. And then when you come back to the infrastructure piece of it, in large part it's going to be driven by what happens in Washington DC. The things that we can't control, Adam, are really 3 fold. We can't very much control volume. We can't control energy, and, if anything, that we've all learned from this past week is nobody can control Washington DC. And if we can come back and get some degree of at least extension of SAFETEA-LU, perhaps through the election, I think we'll all feel better about that.

The one commentary I've come back and offer you on that, and Adam our view still is, that we're likely in our view to have a CR through the presidential election. There is increasing conversation, in fact, folks that we speak to in DC, gave us as much a 60/40 read on it yesterday, that there would be some form of a Highway Bill. Now, I'm not of the view that there's going to be a 6-year Highway Bill, and neither are most of the folks that we speak to. But there is a growing view there may be a 2 year, may be a 3 year Highway Bill, and depending on how that shakes out, it could certainly influence the way that the infrastructure piece of that pie looks as we go into 2012. We'll obviously give you considerably more view on that as we go into next year but keep in mind one thing we still need and it's still pertains to this year, before we even look at 2012 is we need the CR that's in place now that expires on September 30, to go through the end of the year.

That's helpful. Thank you. And then secondly, I just had a question on pricing, and is it, like what's the elasticity toward pricing now? If you were to say-- just hypothetically you wanted to go for volume more, would lowering prices meaningfully help drive volume or is it just a question of you highlighted, you said caution a lot of times on this call, and I know your customers might be cautious. If you lowered prices or just kept them flat while everybody else tried to raise them, would that really even drive meaningful volume for you, or is it just an inelastic market now?

At this point I don't think it does that, and candidly my view is we have a product that is so difficult to get, and is so irreplaceable, I wouldn't be inclined to do it that way. But I don't think that's the way it works right now, anyway, Adam.

All right. Thank you.

Our next question is from Trey Grooms from Stevens.

Ward, just kind of going back to the comment you made on the recovery in commercial. I know you mentioned big box, but are you actually seeing signs of, of things starting to turn there on the commercial side? Currently or, is that just more of kind of an outlook for the balance of the year?

No. Trey, we are seeing some of it starting to turn currently. It's not widespread, so what I would tell you is we see some of that in Texas. We're seeing some of that in portions of North Carolina. Those are the primary places that we're seeing that. So we are seeing pockets of it. But again, those are pockets that we would not have seen for the last couple of years, so we are seeing something there that's trending much better.

Is your expectation for a more broad kind of improvement in the back half or does it, or do you still kind of look for, just these little pockets?

I expect more in the back half, little pocket type activity, Trey, that's probably as good a way to put it as any.

Okay. And then the only other question I had was, so you announced this acquisition and then, in the past you've talked about acquisition opportunity and things, and really just trying to get a feel for on the M&A front, are you starting to see more opportunity now with what I would expect is outlooks and potential sellers outlooks becoming, kind of coming in some or maybe becoming more realistic?

I think what I would tell you, Trey is we are still looking at a good number of acquisitions. Actually this transaction that we announced today is one that we started on and finished ahead of some deals that we've been working on actually much longer than that one that are still very much in our pipeline. The dialog that we're having in a number of geographies is probably not remarkably different today than it was 1 year ago. But it remains very, very steady. And the dialog can range from, again, very small closely held businesses to, to much larger businesses. From markets in which we currently operate, to markets in which we want to have a significant presence. So, so they're all over the board, but that's still a very busy segment of our group.

Okay. And then as far as other, other folks at the, at the table, I guess, if you will, are you starting to see people getting more aggressive in this field? Are you starting to see more people at the table or is it, are you still kind of, is it about the same?

It's the usual suspects who are there right now, Trey. And in candor, it's not a lot of them.

Right.

So if we're looking at a transaction that might be in one of or markets or an adjacent market, maybe there's 2 folks there, but typically not more than that.

Okay. That's all I had, thanks.

Our next question is from Ted Grace of Susquehanna.

I was hoping to come back to Kathryn's question and I apologize it's just been a real long earnings season for me but is there any way you can provide a bridge to help us reconcile the change in your revenue versus the change in your operating profits? Because when I look at just the aggregate business, you've got an $18 million decline in revenues I'm looking at it, which is net and you have a $28 million decline in profits. And so I know Ward you went through kind of the bits and pieces but could you give us a little more granularity to help us understand, what was absorption versus it looked like if diesel was $0.06 that's about $4 million of pretax kind of hit. Can you just bridge us a little more, with a little more color? Or Anne?

Again, I think the volume piece of it was the largest effect of that, with $35 million of, of costs. We had non-production costs and liquid asphalt costs that hit us, the non-production cost meaning anything that we might be buying and having to use for resale. There were, again, the cost of those raw materials for liquid asphalt and then freight emerged and other charges that we had during the quarter from the activity or inactivity perhaps on the river were some of the driving factors that's causing that differential.

But Ted what I'll tell you is you can rack up everything that Anne just said with the exception of volume, and it's going to be a very small number.

Okay. And just, just for a point of clarity on that, is most of the liquid asphalt concentrated in the west region where you're more vertically integrated?

It's all there. Our only asphalt businesses are in San Antonio and in Arkansas and at the same time really when you add those up, I want to say last year probably 1.2 million tons of asphalt probably 350,000 cubic yards of ready-mix so not a big business there for us in that respect.

And yet still the gross margins in the west were up 220 basis points whereas southeast were down 1,500 basis points and mid east almost 600?

Southeast is where you're going to get hit with all the freight emerge and all those charges Ted.

Okay. Great the second question I was hoping to ask you, is, to Adam's question, just thinking a little longer term out, would you be willing to either take a stab or give us a framework for how to think about when you might be able to get back to some semblance of mid-cycle earnings. For us we think about that being about $5 for your Company and I recognize there are a myriad of factors between here and there, but, whether it's, if you'd even take a stab at 2013 in your internal models. '14, '15, '16?

What, I'll tell you, that's where you guys are at your best. So I'm going to let you go back and sort out when you think that's going to happen. I guess what I would tell you, Ted and you've heard us say this before, and this isn't necessarily a mid-cycle answer, this is a top-cycle answer. It doesn't take the 80 million tons that we've lost to get back to the point that we're making more money than you saw at peak. We can do that by picking up 50% of the volume that we've lost. It's still remarkable to me to go back and take a look at tonnage that we've just done in the second quarter this year. 33.9 million tons is the lowest amount of tonnage for the second quarter that we've ever seen as a modern Company. If I went back to 2007, we were at 50 million tons in the second quarter. In other words, I'm not going to answer your question on what mid-cycle looks like, but I'm telling you all this takes is it takes some degree of volume and it does not take 205 million tons of volume to get back to peak.

All right.

And Ted we've said before that in our internal model so for a 5 year view, we had assumed that there would not be a new Federal Highway Bill until after the presidential election. So I don't think that our 5 year forward view has changed drastically because I think we're going to, unfortunately prophetically be correct that it's probably going to be extended or at least some short-term bill that gets us through a presidential election. And then sets in place a better bill for the industry.

Okay. And then the last question I have is, just for a little more clarification, Ward, I think I heard you stay state spending has been pretty stable. And I guess the way we look at it is based on the monthly census bureau data and the last 3 months on a reported basis, those numbers have been down double digits each month. And if you back out the stimulus they've been down north of 20% so I'm just, could you just help us understand when you say state spending has been stable, given these numbers are really state spending because that's where the money, the work gets done,. I was just, anymore clarity on, on how you're kind of viewing it as stable would be great and I'll leave it at that?

I will. I think in large part when we say that, what we're doing, Ted is, we're coming back and looking at the states that are, that are big players for us. If we're looking at NC DOT, again we continue to see good steady work here in North Carolina even as we look at 2011 going into 2012. We see the transportation budget having gone up, somewhere say call it 4.5%, 4.6%. We continue to see construction and engineering spending in a state like North Carolina at over $2.5 billion. At the same time we go to a state like Texas. Texas had $4 billion worth of leadings last year and $4 billion worth of leadings this year. And actually we continue to have very nice infrastructure work in that state. Participating in the DFW connector. Highway 161, we have some work now on the LBJ in Texas.

At the same time even looking at states like Iowa that are coming back with good solid budgets moving forward and even looking at the extension of roads like Highway 20 which actually matters a lot to us there. And then when we come back and take a look at even the states that we said were going to have a significant stimulus effect for us this year, keep many mind we had said all stimulus spending had been a headwind for us for the last several years we thought it was going to be helpful to us this year. What we had pointed out in particular is that Texas, Louisiana, Florida and Georgia had lagged and they did. But calendar outlays in those states so far this year, Texas has put out 15.1% of its stimulus dollars. Louisiana 20.5%, Florida, over 16%, and Georgia over 16% as well.

And all of those states are still showing 30% plus remaining for the balance of the year and that's on top of what they might have otherwise. So as we look at the states and really where their budgets are right now, and what they're able to put out on the floor, it's not bad. Part of what we've seen even as we look at, at a month like May, is general fund revenues in North Carolina, Florida, Georgia, Indiana, and South Carolina are all up and sales taxes in all of those states are up as well. So again, we recognize that the Federal side of it is a pretty tough story. I think what I'm trying to tell you with this, is that the state side of it is probably better than you would otherwise think at least from where we sit.

I think you may have, indirectly kind of what I was asking is if you look at the leading edge of stimulus spending, it was down 60% in June, down 50% in May, and down 30% in April.

Yes.

And that's for the whole country, so recognizing there are footprint differences.

Yes.

Your leading edge kind of read on stimulus spending is obviously leaves you as comfortable as you are?

Yes it does.

Okay. Super, well I will jump back in queue.

Our next question is from Scott Levine from JPMorgan.

So I realize this is probably hypothetical but I'm -- really what I'm trying to do here is determine what your second half outlook appears to be now versus maybe what it was, and I know you don't usually guide to the second half, but it sounds like your outlook for private sector in general is a bit weaker. And I'm just kind of wondering whether, because the volume growth that you're implying second half now is consistent with what we were looking for. Is the idea here that weather pushed off some demand in the back half of the year, but you're reducing your private sector outlook? Can you comment maybe in terms of what your new second half outlook is versus what you guys were previously thinking for the second half without maybe putting some numbers to it. Because I know you don't guide first half versus second half.

Well again if we're looking at infrastructure, to give you a sense of what we're saying for the year, we started out at the beginning of the year saying it's going to be flat to slightly down. And then as we come out with revised we're saying well it's going to be down, but it's going to be down in the mid single digit range, so that's going to be the single biggest movement that we think you're going to see. We took non-res too and we showed it up mid single digit range when we came out at the beginning of the year and now we're saying that's going to be flat to slightly up. So those are the 2 places that we're seeing movement. Realistically as we look at residential and as we look at ChemRock/Rail we're not seeing that much movement right now.

Got it. And if we think about your specialty products guidance, okay, you're raising that, your talking about a positive demand environment there, is it really demand driven, or are you outperforming your initial margin expectations for that business? What's driving the upside to, to prior expectations for that business?

With steel, the last number I saw in steel was steel was running at about 76% right now. So you have to believe in many respects that's the single biggest driver on that. At the same time on the chemical side of it, you're in the season where slurry is going to certainly be needing to find a home and it is. So I think those are the 2 issues that are really driving that and obviously periclase in that business has been a good strong component as well. So I would say it's a 3-fold driver on specialty products.

And Scott, we originally formed our plan for '11 in the specialty product business we assumed a 70% utilization in steel and it's run 76% really the whole first half on average.

Got it. That's clear. Maybe one last one just to clarify the point on the Highway Bill as well. When you guys say that you're expecting a CR through the end of the year or I don't know if it ends up going through the next election, does that imply continuity in the front of your mind or could there be a scenario were there is a CR or but at a reduced level of funding. Or is the point at which funding is reduced coincident with a new Highway Bill of some sort whether it's 2, 3, or 6 years.

I think what we have been anticipating is that you would have a CR and it would tend to be relatively flat.

And, Scott, again, there is probably a pretty slim chance that Congress after recess would come back and get a bill passed before the September 30 expiration. So our thoughts are we'll see some kind of continued resolution to the end of calendar '11 just to allow them to finish the legislation and officially that being at its flat level. And then moving in to, to whether or not we do a 2 year bill at the levels. Right now it's kind of that 60/40 split -- 60/40 way that we think we'll get to a 2 year bill.

But again Scott there does need to be a bridge to get us to the end of the year, no questions about that.

Understood. Thanks makes sense.

Our next question is from John Baugh of Stifel Nicolaus.

'12 to '11 what would you anticipate would be your stimulus headwind and then secondly, are you indifferent on housing starts whether they're multiple family versus single family or does that make a difference? Thank you.

It does make a difference, let's talk about stimulus first, I guess what we're seeing is we think probably somewhere between 25%, 30% of stimulus goes this year. Again to track it over time, around 20% in '09, call it 40% in '10, year-to-date so far this year, 12%, 13% of it, we think by the end of the year, 30% ish. We think 8%, 9%, 10% of stimulus going into next year. I think that's the best way to track that. I think going back to your question on housing, does multifamily or single family housing matter to us? The answer is, yes, it does. We very much prefer single family housing. Keep in mind in the areas that we have most of our geography. You tend to be building not just homes but you tend to be billing subdivisions as well.

So when we look at our residential component, it's not just going to be the stone that's going into the structure itself or into the lot. It's going to be the stone that's going into the roads that are going into the subdivision, it's going to be the curve and gutter, it's going to be the sidewalks it's going to be what's going into the utilities as well. And clearly that is a much more stone intensive undertaking than is multifamily. So we recognize that historically we've been a good leading indicator of when res activity is starting to takeoff. The fact is, this time we're likely to be a lagging indicator, because you still have a lot of subdivisions that have been built out, you just don't have homes there yet. So instead of requiring a bunch of stone on the front end, you'll see what I like to refer to as sticks and bricks on the back end.

Right. And lastly, quickly, I think I understand the, the issues with Q4, and the continuing resolution. As we looked at '12 and you sited this is your biggest risk, if you will, the infrastructure piece, kind of handicap if you can, if we got a new bill, you're saying if we just get a continuing resolution for the next year or 2, I guess it would be the similar rate, but handicap the best case and worse case in your mind if we got, say, a 2-year bill. And I think you mentioned Micah's bill which was down 30%. Is that sort of the worse case number and then what in your mind would be the best case number for, say, a 2-year bill starting in '12. Thank you.

It's hard to handicap that. Again this past week is evidence of anything can happen over, any period of time. We certainly haven't seen anything that's any worse than the 30% down that, that Mr. Micah and his committee have come out with. So I think you could certainly bracket something saying that's the bottom end of it. At the same time, even when Mr. Micah talks about 30% down, he's talking about a very different bill. He's talking about a bill that is all about highways, bridges, roads and streets. It's a much more pure bill and, in fact, what he would submit to us, is that given the bent of that bill, giving a lot of reform components. Given how much more quickly some of those projects will go to market, you might have a more aggregate intensive bill with a smaller number. And that's certainly something that we as an industry like to hear.

But at the same time, I think that's probably your bottom end of that net. I think the upper end of that net could be considerably more attractive if people came to the view that spending on highways actually equals investing in highways and investing in highways is a good way to create jobs. Because whether you want to look at some numbers that DARPA or others that put out in the last several years, for every $1 billion of infrastructure investment you're creating somewhere between 28,000 and 30,000 some jobs, so very job generative. And at some point in this economy that's going to matter a lot. So if that becomes something that can really get some fire today, and, in fact, I did hear some of the President's comments today just after the Senate had voted, he again was talking about infrastructure. So what the upside beyond where Micah is right now or where Barbara Boxer is coming out of the Senate, it's hard to handicap that.

Thanks, Ward.

Our next question comes is from Bob Wetenhall of RBC.

Just curious on SG&A spending. It looks like pension expense is down. I was curious for 2011, do you think it would be good to use $125 million type of number?

For total SG&A or pension expense?

For total SG&A. I think you were $133 million last year?

Yes, our pension expense we depict to be about $18 million this year. I think that differential -- that run rate is probably about right.

Sorry so looks to you like a $125 million number.

Yes, you're there Bob.

Got it. And you mentioned in the ChemRock business that volumes looked stable. Any thoughts on pricing given strong demand from steel?

Again that's completely, that's different world. ChemRock and Rail for us to give you a sense of it. The Rail piece of it is what's going into ballast, the ChemRock in that is what's either going into agricultural lime or it's going into flue gas desulfurization. So really, what's going into steel is more coming out or Woodville, Ohio facility into specialty products. If again if you're talking ChemRock and Rail I think we see business to the railroads being very, very steady. I think actually in the second quarter we saw some pretty significant headwinds on getting some of the scrubber stone to power plants because much of that's going up and down the Mississippi river and there wasn't much going down the river except water during the second quarter. And, again, the ag lime season tends to be even the first quarter or the fourth quarter. As you recall, last year in Q4, we had a very strong ag lime quarter. Our sense still is that there's pent up demand in ag lime. It can be cold in Q4 and ag lime still goes it just can't be wet in Q4 for ag lime to go. I think that probably gives you more color around the ChemRock/Rail piece.

So it's somewhat contingent on the weather?

For ag lime in particular that's entirely true and it's a Q4 driven phenomenon.

How about the steel driven business?

In the steel driven business, again steel is running at 76% of capacity right now. It's very steady it's been very good for us and we've clearly seen steel move around a bit and pricing has been, has behaved very nicely.

Okay. Thanks very much.

Our next question is from Mike Bets Junior of Jeffries.

I got disconnected earlier so if you already covered this, please say so. There was some pretty serious disruptions on the river system, I think some of your quarries were flooded in the quarter. Were there any kind of one-off costs or in reality people can't work and they were just manning the pubs and stuff like that.

Hopefully they weren't manning the pubs. I'll tell you what if volumes don't get better they may be manning the pubs. But no, we didn't have any significant one-off costs in that. I think the primary thing that we were faced with, is you just had remarkably inefficient operations when you had that much water going through. Our yards down river were hit. There was some places that access was cut off. I think when people want to reflect on what's going on with the river business, they think distinctively about what we have up and down the Mississippi river. That was certainly affected by it. Actually we have had some operations affected by it up and down the Missouri river as well from that. Fort Calhoun operation in particular felt some effects from it, but again it's more of an efficiency issue than it is one time cost issue, Mike.

We did have a little demerge, which is just really idle, idle freight movement, but not, not, huge.

Okay. And just last question on that river issue, because obviously we see the percentage of shipments for the full year by the river by water. Is that much different in Q2 and Q3 because presumably Q1 some of that stuff doesn't happen?

Yes. You're correct Mike. It's going to be a Q2 and Q3 story. No question.

Understood. Thank you very much.

Our next question is from Brent Bowman of DA Davidson.

Obviously energy diesel has been moving up, but if you were to see some moderation in the coming quarters, does that concern you in your ability to continue to get momentum and pricing that you've seen?

No. Brent, I think in many respects if you looked at the comments that I said, I said I thought the rising energy prices contributed to it. I don't think that's really going to be the big driver of it. I just think you're starting to see these markets having found equilibrium, I think you're starting to see pricing move in the way that you would typically expect it to in this industry.

Okay. Thank you.

Our next question is from Clyde Lewis of Citigroup.

Two questions if I may. One on, let's see, the contracting prices that are coming through in terms of the market in particularly in terms of infrastructure at the moment. Can you maybe just give us an idea of what is happening in that front? I see you started to push up prices a little bit more. I'm just wondering what the overall impact how much rock there might be within a sort of $1 of the sort of overall -- either stimulus spending or sort of highway spending? Just give an idea of where that's moving? And the second question I had was on some of your fixed cost elements, and if we are looking at maybe a stable sort of continuing resolution through 2012, or even a slightly lower new bill under Micah, would you be tempted to go back and have another go at the fixed cost base in some meaningful way at all?

Let's talk about pricing, first. I think the primary thing that you're probably thinking back to, Mike is the types of pricing that we were seeing in 2009 when some of the stimulus work came out originally. And there's no question that stimulus pricing came in considerably lower on a ASP percentage than things we were seeing prior to that. The infrastructure work that's going now is not going for the types of pricing that we would have seen in 2009, so I think when we're showing you what our pricing looks like now, you can assume that's what it's going to look like going forward on infrastructure as well. And as a reminder as a practical matter most of the work that was stimulus related that was more pricing challenged, my guess is will be rolling off by the end of the year, so I think you're seeing nice stability there.

With respect to volumes and what we do with fixed costs. I guess the one thing I would say to you is, again, to have volumes down, 9.3% and have production costs down is a remarkable story. This is a Company that understands costs and this is a Company that is focused on continuous improvement every year, every quarter, on costs. So we're going to have a go at costs anywhere that we feel like we need to. And that's something that, Mike, I mean, Clyde when you're in a world that you're looking at $10.27 per ton for material, you better be good on costs, and we understand that.

Thanks a lot.

Our next question is from Todd Vencil of Davenport and Company.

Under specialty products. Obviously strong performances as you discussed in the first half the year. If I look at your guidance, it would appear to imply a pretty big slow down in the second half relative to the first half, and even if you factor in sort of, what I am guessing would be normal seasonality. Is there something going on there, or are you being conservative or what's going on there with those numbers?

What I think that really goes back to the word I think you and I used in our first conversation, that was we're approaching things with caution right now. So I think if steel stays where it is, Todd, that I think you can obviously run your math and do some calculations there. But again, I think it's conservatism and I think it's caution.

Okay. Perfect. Thanks a lot.

Our next question is from Kathryn Thompson of Thompson Research.

Hi, thanks just a quick follow-up to the question I had earlier. How much did price benefit from higher embedded freight cost in the quarter?

I'll have to dissect that for you. (multiple speakers) Volumes were down quite substantially in that part of the world.

Okay. Well, I'll follow-up after the call. Thank you.

I'm showing no further questions in queue at this time. I would now like to turn the call back over to Mr. Nye for any further remarks.

Again. Thank you all for joining this second quarter earnings call and for your interest in our Company. As we continue to operate in a challenging economic environment, we remain committed to creating long-term shareholder value by operating as the best in class Company, optimizing our assets, performance and teams and we look forward discussing our third quarter results with you in November. Thank you all very much.

Ladies and gentlemen, thank you for your participation. That concludes the conference. You may disconnect and have a wonderful day.