渥肯建材 (VMC) 2002 Q3 法說會逐字稿

My name is Leslie and I will be your facilitator today. I would like to welcome to you Vulcan's 3rd quarter conference call. All lines are on mute to remove background noise. There will be a question and answer period. If you would like to ask a question, press star 1 on your key pad. If you would like to withdraw, press star 2. I would like to introduce your host, Mr. Don James. You may begin, sir.

Good morning and thank you for joining our telephone conference to discuss vulcan's 3rd quarter results.

I am Don James, and with me are Mark Tomkins our Senior Vice President and [INAUDIBLE] Senior VP of Construction Materials East. Brad Rosenwald and John Holland who is President of our performance Chemical Unit. After I make brief comments, we would like to spend most of the time responding to questions from those of you who have dialed into the call. We hope this dialogue will be helpful to you and others who choose to listen to this call this call through the web broadcast.

Before I begin, let me remind you that certain matters discussed in this conference contain forward looking statements which are subject to risk and uncertainties that could cause actual results to differ materially. These are detailed in the company's reports, including the report on form 10-k for the year. As we move into the quarter results, our net sales for the quarter were $714 million, down 7% from last year's 766 million. Net earnings of $77 million or 75 cents per diluted share were down from the $92 million or 90 cent per share achieved in the 3rd quarter of 2001.

The nine months of 2002 net sales were $1.9 billion compared to 2.1 last year. Year to date earnings was 133 million or $1.30 per share below of 176 million or 173 per share reported last year. We continue to focus on capital spending, minimizing operating cost in the aggregate operations and improving efficiencies in what has been a more difficult economic environment than anticipated. Strong free cash flows that is operating cash flow less capital expenditures of $102 million for the first nine months of the year allowed us to reduce debt while increasing dividends.

Turning to the segments for the quarter, our construction material segment reported net sales of 567 million compared to 604 reported last year. Aggregate volumes lower by 9% due to a slow down in private nonresidential construction as well as weaker highway construction in most markets. As in prior quarters, aggregate demand in the 3rd quarter varied by state. For example, aggregate shipments in the Texas, Tennessee and Gulf Coast markets approximated last year's levels.

Most other markets experienced lower volumes with notable shortfalls in Georgia, Southern California, and Western North Carolina. Aggregate prices for the quarter increased nearly 3%, excluding the impact of freight to remote sales yards. Our construction materials segments earned 132 million compared to 144 million last year. The effect of lower aggregate volumes was partially offset by pricing improvements and the elimination of good will amortization, approximately five million in the segment. Year to date we posted net sales of 1,513,000,000 down 81 million from 2001. However our year to date earnings of 306 million are higher than the 299 million reported in the same period last year. This increase in earnings results from pricing and cost improvements that we have achieved in aggregate operations as well as the elimination of good will amortizations.

Finally we completed two acquisitions of aggregate properties during the quarter included aggregate operations in Tennessee and Illinois. Our chemical segment continues to be adversely impacted by weak market conditions in the economy. For the quarter, our chemical segment reported $148 million compared to $162 million in the prior year. The segment lost 17 million compared to earnings of of 2 million reported in the 3rd quarter of 2001. This decline in net sales in earnings is attributable to lower cost in soda pricing and lower sales and production of Industrial feed stock.

While prices for caustic soda increased $30 per ton over the 2nd quarter of this year, prices in the current quarter were $135 per ton less than last year's 3rd quarter. Additionally, the demand for chlorinated and organic products was soft, reflecting continued weakness in the in the industrial sector of the economy. Turning to the outlook, our 4th quarter results will be influenced by both pricing and the pace of construction activity.

For construction materials, the full year outlook assumes price improvement of 2-3 percent and a decline in aggregate volume of approximately 6%, subject to the normal sensitivities to weather which are imported in the 4th quarter. This segment will achieve full year earnings in the range of 385 to 400 million. For chemicals, caustic soda prices continue to improve. That is from 2nd to 3rd quarter of this year. However caustic soda prices remain below last year and demand for chlorinated organics, particularly feed stocks is weak.

4th quarter earnings in the chemical segment will be impacted by higher maintenance and improvement expenses as well as lower volumes. They are expected in part from the impact of hurricane-related plant shutdowns earlier this month than our guys from the Louisiana chemical plant. As a result, chemicals is expected to report a loss in the range of $70-75 million for the year. Based on these expectations and excluding the good will impairment from the adoption of FAS 142, our earnings guidance for the year is now $1.80-$2 a share.

Obviously the results in our chemical segment are unacceptable. Recovery in the manufacture sector of the economy in general and caustic soda prices in particular will have a positive impact on the chemicals business. But improved market conditions alone are not likely to return the chemical segment to acceptable levels of profitability. We are addressing our cost structure in chemicals both with respect to plant processing efficiencies and fixed cost in overhead structure. We are committed to reducing our cost in improving plan efficiencies. We continue to address our chlorinated organic product mix impacted not only by current market conditions, but the phase out of ozone depleting chemicals pursuant to the Montreal protocol.

The new 5 cp plant is up and running shipments to Honeywell are underway. This will replace in part the feed stock for 141 b which will be phased out by the end of the year. We expect it to be an excellent product for many, many years, the ramp up in the profitability will take time as it replaces declining sales of metho chlorform that we produce for 141 B. We will continue over the past decade to address the product mix challenges brought on.

With regard to next year's outlook as part of our normal budgeting cycle, we are in the process of analyzing economic conditions within our markets and the business factors of our operation as is our historical practice we will present views on the upcoming year in greater detail with our 4th quarter report at the end of the year, which I guess will be in January or early February of 2003. We would now be pleased to respond to your questions.

At this time if you would like to ask a question press star and 1 on your telephone key pad. We will pause for a moment to compile the roster. Your first question is from Rob Stillman of Janie Montgomery Scott.

Good morning, gentlemen. You mentioned in your press release that published industry prices for caustic soda increased more than $30 per ton over the 2nd quarter. In your prepared remarks, you didn't mention published industry prices. How much of the published industry price did you guys actually see?

By published industry prices, we mean the newsletters that public news letters that are published by consultants and CMAI is one of those. We see increases that are very comparable to what the published numbers are. Sometimes ours are higher and sometimes lower. We believe the published industry prices give a fairer view so it's not influenced by regional product mix.

Understood so on a sequential basis?

Yes.

Great. Just as a follow-up, in terms of the contract that is locked into pricing from say threes or six months ago, to what extent can you see the full impact of that sequential improvement in this quarter in 2003?

The substantial portions of our caustic output are subject to contracts. We sell much more by contract and relatively on the spot market. Generally, our caustic prices will lag the spot prices going up and will also lag them coming down. We are in a period as you know of rising caustic prices. In fact, I believe one large producer yesterday put out a $70 per ton price increase announcement. We are seeing at this point a supply-driven pricing environment. That is a supply of caustic soda is dropping and projected to drop further as capacity is taken off stream. We are not enjoying a demand-driven pricing structure currently. That will take an up turn in the industrial economy. As you know, there a number of plants that have gone out of production permanently and others are scheduled to cease production this year.

Just to quantify, what's the average length of caustic soda contracts? Terms of pricing adjustments?

Generally we are, although every contract is slightly different, we are on about a quarter lag.

Okay. Thank you.

Your next question is from Jack Haterach of BBMT Capital Markets.

First on chemicals, the guidance implies a 4th quarter loss similar to what we saw in the 3rd quarter. I think you said there were some downtime in the 4th quarter which presumably would hit the EBIT line. If current conditions prevail into the 1st quarter of '03, what do you think the run rate on the EBIT line of chemicals is.

I'm not sure I followed your question let me take a stab. We have already experienced the downtime earlier this month as a result of hurricane Lili. That's probably $2-3 million hit in earnings from the 4th quarter for that shut down alone loan. We are getting better pricing for caustic soda in the 4th quarter, we believe. We will have better pricing than in the third. We are spending as we indicated in the press release and the prepared comments, we are spending money getting our plant processes improved. Getting our plants in good shape in anticipation of better market conditions going forward and that is costing us money in the quarter as well.

The run rate -- and we are cranking up as mentioned in the comments as well, we are cranking up the five cp plant for shipments to Honeywell to make the replacement product even though it will be running at projected capacities in the 4th quarter, it doesn't send any earnings to the bottom line at this point. That will come as we get fully ramped up, so even though we are making the transition from the phase out of one product to the new product we developed, the earnings flow are negative at this point. On a run rate in the 4th quarter, we are looking at I guess what we have built into our projection. Probably up $7-10 million loss for chemical segments.

Okay. Do you have, to clarify one point, the downtime from the hurricane in the 3rd quarter would cost?

4th quarter. It occurred -- we had a hurricane in late September which we took part of our plant down and fortunately that hurricane veered off before we had to take it down. Some of our plants take a longer time than others and the ones with the long lead time, we took down for the earlier hurricane, Isidore. How can I forget. That impacted the sum of the 3rd quarter, but not a material amount. Then in the first week of October is when Lili came storming right up into Louisiana and we as a safety precaution, took down virtually all of the plant. We were out for seven or eight days from the beginning of the shut down to the start up. With large plants, they rarely start up beautifully and efficiently. There is a fair amount of start up time. But it is hopefully not a recurring issue. We are in the part of Louisiana that we have to be sensitive. Lili came close. Fortunately we had no significant damage. It was a production outage issue.

Okay. Do you have UCU prices for the 3rd quarter?

Sure. The ECU's in the 3rd quarter were in the 340 range.

What were they last year for comparison?

Last year's 3rd quarter, they were in the 320 range. The difference in last year and this year is the big swing between caustic price and chlorine price. Last year's 3rd quarter chlorine price was about $55 a ton. This year was $215. The flip side of that, caustic was about $250 and this year something like 115. We were in a much better pricing structure a year ago because of relatively high caustic, which as you know is more significant to the bottom line. Even though the ecu value is up $20, the 135 or so per ton decline in caustic soda is at $6 per $10 of price is about $81 million. That's in annual ebit impact to us. The ecu is an important number, but for us it's the caustic number. That's the reason the results have declined so severely. Caustic soda prices.

Switching to construction , specifically on the comments you made in the press release on weak highway business, there seems to be a disconnect between what we see on highway contract awards which are lumpy and August was a weak month and it was a bounce back in September and generally the awards have been stable and yet the actual construction put in place for highways has been weak this year. I was wondering if you can shed light on the explanation you guys might be throwing around for that? Our projects are being let out, but delayed or cancelled because of state budget concerns or what might be going on?

We saw the same phenomenon as you recall in the 2nd quarter. That is the contract award data was positive. The construction put in place data for highways is negative. We are seeing certainly the same phenomenon in the 3rd quarter. Without further study, one would conclude that there is a building backlog out there. I don't know how valid that conclusion is, however. There very large high dollar engineering projects like big bridge and one that comes to mind is a bridge in Charleston, South Carolina with high dollars and not a lot of yield for construction materials and much more engineering and construction. That evens itself out from state to state to quarter. If there is [INAUDIBLE] that regard, it would be short lived. I guess we are one possible explanation is that states are being cautious as you know.

The '03 federal highway bill is still being debated in Congress. The existing bill -- I mean the existing appropriation expired at the end of September and the states and Congress are going forward with monthly resolutions at the level of last year's highway bill which is in the $31-32 billion range. My speculation is that states are leery about spending too much money right now until they get some final action by Congress which we are certainly urging both as a company and an industry to go ahead and get this buttoned up. The two numbers floating around, the senate number is $31.8 billion and the house number is something like $27.7 billion. I think certainty about what that number will be for '03 is important to the states. We would hope that Congress understands that and goes ahead and gets that resolved. Our expectation is the number will come somewhere in between the two numbers. We are really talking about the state directors at this point. That's all over the board.

Thank you.

Your next question is from David Weaver of Legg Mason.

I'm talking about 3rd quarter. Do you have significant impact aggregate shipping operations in the quarter? David, the early part of the 3rd quarter in Texas, we got deluged with rain. We have not mentioned that anywhere. You asked the question. We had two of the Texas quarries flood and were flooded for weeks as we pumped them out. We were generally able to maintain shipment and in fact Texas was one market where shipments were up year over year. We really haven't had an impact from the stand point of sales.

The impact we had was from the standpoint of cost, both the additional cost of pumping the quarries out and the impact of not operating. That was not significant enough for us to comment if it was under $1 million. We haven't attempted to quantify that number. The other impact is that we had in the southeast and the east coast, south atlantic and south east, we had an extraordinarily wet ending of the and beginning of the 4th quarter. I don't like to hide behind weather because it evens itself out overtime. It's raining here today and raining in Atlanta and it impacts shipments. One fact of in the 4th quarter unlike the others is if you miss a shipment because of weather in the 4th quarter, it's hard to catch them up in the 4th quarter.

In that regard the 4th quarter weather sensitivity in the quarters, quarters two and three. How do we quantify that impact? We can't. It's just hard to come up with anything that is reliable about that. It's obviously having an impact on construction activity when people can't lay asphalt because of wet conditions. Do you have an impact on the water-based shipping operations?

No. On to energy prices in general, it looks like difficult comps for the 4th quarter. Natural gas looks up 60-70% from a year ago. Can you give us an idea of what your hedge suggest for gas? I will let Mark Tomkins address that.

We don't have -- we have about 30% of the rest of the year hedged, but we think we will be in the $4 to 4.20 range. That's on natural gas. Last year in the 4th quarter, we were about 4.40 in the 4th quarter. We think we are in a good position. 3rd quarter we were at about 3.70. Not a big difference in chemicals based on what we see now.

Are there changes to the Cap-X budget, given conditions?

We think we will be at about 275 for the year. I think that's the guidance we gave at the end of the 2nd quarter also.

Any early numbers on '03.

No, as Don mentioned, we will cover that with the year end press release.

Thanks a lot.

You're welcome.

The next question is from Roger from UBS Warburg.

In the guidance you had for construction materials, looks like you taken it down $10 million from a month ago. Is that because things are difficult in the past month or what have you seen that would make you take it down?

We look out the window and we see it raining. That's a concern and we are -- as all the -- we looked at double-digit declines and building in the 3rd quarter. We talked about highways, but highways are not robust. We are having a concern about aggregate volumes. We are doing a superb push job, I think, in maintaining low cost as we are producing lower volumes. Our operating divisions are doing a great job there. We're doing a great job as well in maintaining good price performance with declining volumes. There is not a lot we can do about volume that makes any sense when nonres is falling and highways are probably down 3-4%. We are just being cautious about volumes in the 4th quarter and basically as we looked at roll up numbers from the divisions, we didn't think it was likely that we were going to approach the high end of the range we were given previously and took it down by about a dime.

Excluding the rain, does it seem like business conditions have trailed off in the past month or headed steady?

I don't know that they trailed off, but they were weak in the 3rd quarter. I don't put much significance to this, but September was actually a little better than July and August had been. I don't put significance on that. We will continue to see weak demand conditions in the that we saw in the third.

Looking at your bigger markets where we have seen weakness in Georgia and Southern California. Georgia you had environmental issue and California was a market that was held in pretty strong. Can you tell us what you are seeing in the markets?

Georgia, our principal Georgia market is Atlanta. One of the impacts on highway construction in Georgia is the current construction is being done principally in south Georgia. And east Georgia because of the problems with highway construction and environmental issues in Atlanta. Hopefully that's largely behind us and we will see as the dot restores funding, we will get the benefit of that. That won't happen in the 4th quarter, but it's on the horizon. In Southern California unlike the southeast and mid-atlantic, we have had incredibly good weather for the full year. If there is a weather impact in Southern California, it's probably been positive. That is not all set declining nonres construction in California. Residential in California remained strong and the numbers likely to be strong for at least as far out as the projections we have seen. Year over year, it's down. I attribute that largely to private commercial construction decline.

Briefly, you mentioned a $70 decrease for caustic chemicals.

That was not our announcement that was one of the other producers in the industry. That is in addition obviously all the previous announcements. The probability won't be seen until the in any meaningful way, but particularly for us because of the lag we talk about in a prior question.

The size of the 4th quarter that is --.

$50 a ton. We haven't gotten the full impact of that in the 3rd quarter. We didn't get the full impact in the 3rd quarter because of the ramp up under the contracts. That ramp up continues into the and the $70 a ton, assuming we follow or announce our own price increase that may or may not be different than that. That would follow into next year. That would impact next year and not this year.

Did you mention if you had natural gas hedges for '03.

We are hedged at about 10-15% for next year.

Thanks.

The next question is from Barry Vogel from Barry Vogel and Associates.

Good morning. The first question I have is can you tell us the cost of the two acquisitions in the 3rd quarter and how much cost you've had in the nine months and what's likely to happen in the in terms of acquisitions?

Ballpark, the two acquisitions together were in the $13-14 million range. Year to date, we probably have spent about $42 million in acquisitions.

What do you think it will be for the year when it's said and done?

I don't currently expect this to close acquisitions in the 4th quarter. That is certainly a possibility, but not a high probability. We tend to believe that there acquisitions that are value-creating for us in construction materials. There is not any big transaction projected to close this year.

As far as Calmat is concerned, do you have an estimate about what Calmat might be in terms of accretion and what they were. I don't remember what they were last year.

Cal mat is doing -- our western division is doing very well. They're well up over last year. We don't normally give our division operating results. I don't think I will start that now, but we will give the EPS accretion. The western division year over year is doing very, very well. We are pleased with that acquisition. Calmat on a year over year basis is improving. We continue to improve our variable as we previously reported, but we feel in the mid-atlantic states where the tarmac locations are, year over year it's the bottom line and still no earn figures we charge the full amount. I've gotten some on the EPS accretion for cal mat and for the full year, we expect cal mat to be about -- for year to the nine it's about 20 cents a share.

How much do you think for the year?

My calculator sitting to my right is busily working on that. How about if we get back to you on that.

Tarmac will be dilutive this year and last year?

It will be less this year than last and will be diluted by a penny or two. Okay.

Mark, as far as the land sales, to get back and get proceeds from the cost, for the first months, did you sell any land from cal mat? If so, how much and what are you expecting for the year and if that expectation is made, what would you have left going into 2003.

We sold about nine million. It's tough to tell if we will get transactions closed by the end of the year on land sales. Our estimate right now is we won't e anything major happen in the on those.

How much would you have left?

About $65 million.

Do you think you will sell some next year?

That's out of the original portfolio. Have gone through an update in review of all the western division properties. We can give you more detail on that in our projections for '03, but we have got maybe more than 150 million in proceeds yet to sell in California. We will give you the detail on that in the '03 outlook at the end of the 4th quarter.

Thank you very much.

The next question comes from Jack Kallie with Goldman Sachs.

Good morning.

Hey, Jack.

Two questions on chemical and one in construction. On chemicals, you indicated market forces were unlikely to return to where you wanted it to be. I guess it leads to a potential downsizing. The first part of the question is could it occur in the how big the charge might be and does it make you more inclined to sell a business? Secondly, if we look at the 4th quarter, you indicated some extraordinary expenses. You mentioned $7-8 million number where as the over all projected loss will be 13-18. There is a difference between 13 and 18 and the 7 to 8 the effect as well as the plant maintenance on numbers. In terms of aggregates, looking ahead to next year, if nonres is hurting and the cycles are long, is it fair to assume at least for the first half of '03, your nonres business, I'm talking away from t 21 and the states that that business would be down in the first half?

Let me go in reverse order of your questions. We are still taking a look at our market segments in construction materials in '03. I don't have a projection that I want to share at this point in that because we are not final. We look at it both from a bottom up perspective and then we compare that to the Macro forecast that comes in the budgeting forecast that's ongoing today. I don't think I can give you any information that is credible or I would consider credible at this point. With respect to chemicals, the $7-10 million was in the unit and our specialty unit is also included in the segment results. That's probably a $5 million plus or minus loss for the 4th quarter. We are working very hoard strategic initiatives in both of the chemical businesses. I cannot at this point give you details on how and when those strategics will be implemented and announced. We are working hard on finding a way to improve the results in our chemicals business and I'm confident we will get there. It won't happen in or two quarters. The market is a big part of it, but we have got to take control of the things we can control. Performance and operating performance has overhead cost. We will begin to quantify that for you when we give '03 outlook. You made a reference to some special charge in the 4th quarter we don't currently anticipate in the 4th quarter. We did take asset write downs in the 3rd quarter as a result of lower capacities in certain plants. That was about dollar doctor 3.2 million in the 3rd quarter.

As a follow-up, what you are contemplating doesn't necessarily imply an across-the-board cut back in production to get rates up and hopefully get returns up?

We want to do two things. We want to improve the production from our existing capacity. The efficiency of that production. That is a major goal for us. The second major goal for us is to reduce our over all cost structure. We are in the process of working on our plans to do that and the of that are there when we give you the outlook.

Thank you.

Your next question is from Fritz Srocarp with Merrill Lynch.

Most of mine have been answered. A quick one. In Southern California both private residential and nonresidential markets, what are you seeing in the highway markets in California?

Generally highways have been not great, but not bad in California. We have a little higher nonhighway mix in California than in the rest of our markets. We are in the asphalt business as well as aggregates. Our strategy in the California market has been because reserves are more limited than the rest of the country. Our strategy has been to maximize the value of our reserves. We had very significant success in pricing for both aggregates in California and we are willing to accept lower volumes to pursue that strategy which has been r successful in terms of bottom line results. California as you know from the surveys done by the federal highway administration now has the worst highway intpra structure of any state in the nation. If you drive there very long, you would agree. We think there is a huge demand there. California has some other issues, what the governor seems committed to highway spending. He is approved plans to increase money going into highways and the population in California has consistently supported the initiatives on the ballot in the last two elections. One was to allow caltrans to out source engineering. That passed with a high margin the second piece of the initiative t P. It was to take an existing sales tax on gasoline and commit it to the highway fund.

Just so I make sure I understand, Governor Davis's increase or provision of the new funds overlaps the prop 42 new funds thaw mentioned passing this year. Was it the governor's permanent?

There was an overlap and I can't explain the extend, but there is the earmarked sales tax on gasoline will in substantial part fund the governor's new highway program for a period of four or five years and then the tax will continue to stay in the highway fund beyond the governor's program.

Okay. Thank you very much.

Operator: The next question is from Steven Kim with Citigroup.

Thanks very much. I guess my question starts off with the aggregates business. My impression is the outlook willing uncertain for another2s because not only u have the debate over 03 ande we are a month or two months away from that. You begin the whole debate about the 04 budget. That's in the confines a new Bill and may not be ready in time. You will have a funding measure again. I guess it would be prudent to seam you areot3arig to get visibility or clarity for the states, even 6-12 months out. If that's the case, have you considered what might be reasonable in the confines of another three% decline of shipments next year?

We indicated we are not prepared to comment the outlook for 03. As a result of that, it's difficult to comment on 03 margins. I think from a cost stand point, we are much more confident about where we will be than we are at this point from a volume or margin standpoint and I think we will certainly address your question in the next conference call. At this point I think any comments would be premature.

I guess the reason why is I figured you would have visibilities is not something new, but has been going while. Over the last two ear three years, your ship have been close to flatten. I guess I would some of the cost 5s you have been taking have been you should for a while.given that you anticipate an immediate hit to the cost structure to have a material improvement on the bottom line volumes remain negative?

Let me start by saying I don't agree with the predicate of your question. Our volumes have not been flat to down over the last three years. We have added volume through acquisition, but this is the first year that our legacy or heritage vowel have been lower over the past decade. to cost, other than in the recent acquisition and by recent I mean tarmac and cal mat. We believe that maintaining good cost reduced volume is excellent cost performance and that would be a goal we have. With respect to cal mat and tarmac,there additional improvements and we are undertake currently after having spent about three years getting the permit, the rebuild of our pleasanton, california, a large plant in the east bay area of San Francisco which will have very, very positive impacts on the cost structure at that plant. There others in the works as well. As we are able to get the plant modifications in rebuilds in place and up and running, we will expect continued improvements, coming from recent . ---acquisition to see cost impact in the 1st quarter.

Okay. Regarding the chemicals division, I think this is probably been addressed extensively already, but as I go back and look at my notes from your script, it seems like you made a reference to the fact that the business had not sewn acceptable returns over the cycle. That would indicate you were considering something dramatic relative to what we have seen in the past. As I look back, it looks like you haven't made any money in that position are for the five-year following up on jack's question, should we be prepared to hear something dramatic in the business relative to the past and is it likely that would allow you to exit?

Steven, let me attempt to answer your question. Our for any sbs that it will earn at least the cost capital return over the business. Our chemicals unit as done that. It is not done that in the last two or three years. In that regard, I would agree with the view that it is under performing and the level of performance is not acceptable and everybody in our organization knows and could understands that. Awful lot of them remain on the table. Our current focus is in reducing cost and improving plan efficiencies. We are considering a number of options options have been fully fleshed out and are appropriated disclosure, we will disclosed.

I guess I will have to be patient. Thanks.

The next question from Armando Lopez from Morgan Stanley.

Good morning.

How are you?

Most of my questions have been answered. A quick one. I was wondering if you can talk about the effective tax rate in the quarter. It was lower than we were looking for and it counts like you will expect it to continue to be on the lower end in the 4th quarter as well. What's behind that?

Let me get Mark Tomkins to address this for you.

We have a lower statutory and tax rate in construction materials because of depletion than we do in chemicals. As the mix in earnings continues to shift because of the chemical losses, that's the primary driver in what's going on with the tax rate. The expected tax rate is 27%, but it's the mix on the rates between chemical and construction materials to drive that.

It's more of a factor of depletion and what's happening with volume?

It's a factor of depletion and then the chemical losses of being higher than what we were projected to be for the year at the end of the 2nd quarter when we said it would be 29%.

Okay. Just one other question. With respect to the chemicals operation, you mentioned the price increases and they have been coming online. You mentioned you implemented a price increase. It is better than expected or worse. How is it relative?

The caustic soda price increase is coming online as we thought it would. We have gotten on a sequential quarter basis, 2nd quarter to 3rd quarter, we have gotten a nice caustic soda price improvement. More is coming in the pipeline from the previously a -- announced price increases. October 1e had a $50ice increase and that will occur in the 4th quarter and more as we move into the 1st quarter of next year. As I said earlier, there is another price increase announcement in the industry yesterday. We at what we should do with respect to that and what market conditions are and what the plant situations are. I think the price increases for caustic soda seem to be as predicted. We are coming off a low-based compared to last year's 3rd quarter. We've got a ways to go to get back to the levels we were a year ago. That will add a lot to the bottom line. When we get back to the levels. As we said in response to earlier comments and questions, we have to do more than that. We can't wait on the market. We have to take our destiny.

What is capacity utilization in the industry? Capacities coming out, so are we close to running at full capacity or --.

I think the latest information I had seen said for the 3rd quarter of the industry capacity the low to mid-90s and probably 92. We don't have the September numbers yet for capacity utilization and in August it looks like they were in the . As you probably know, there a couple of large plants that the announcements have been made that will take a-e in this year and another will be taken completely out of service.I think we understand about November 1. Probably at least part of the reason why the price increases for caustic soda are appropriate and we expect it to stick.

And how does that capacity utilization compare with what vulcan is at.

Comparable. Wee at this point running at full rates subject to maintenance outages and subject to the outage we referenced from the hurricanes. You have to have a great operating climate to get much above 95 or 96%. Our capacity utilization is comparable to the industry.

Thank you.

Operator: Your last question is from David Weller from CSFB.

Good morning.

How are you?

Very well. All my questions have been answered, but my Main issue was the highway authorization and the amounts put in place, but you fully covered that one. Thank you.

Thank you, David. If there no more questions, we certainly appreciate your interest in vulcan. Let me assure you that we are working hard in light of the current economic circumstances as they affect both the business segments. We believe we have opportunities when the market picks up to take full advantage of but in the meantime we are going to to control the parts of destiny that we can control. We will report to you further the next time we will be together. Thank you very much.

This concludes the vulcan 3rd quarter conference call. You may disconnect.