渥肯建材 (VMC) 2003 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q4 2003 Vulcan Materials earnings conference call. My name is David and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. At the present time during the call you require assistance key star zero and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call Mr. Don James, Chairman and Chief Executive Officer. Please proceed sir.

Good morning, thank you for joining the Vulcan Materials conference call to discuss our fourth quarter and full year 2003 results, as well as our current outlook for 2004. I'm Don James, Chairman and Chief Executive Officer of Vulcan. With me today are Mark Tomkins, our Senior Vice President and Chief Financial Officer, Mac Badgett, Senior Vice President of construction materials east and Brad Rosenwald, president of our Chemicals division.

Before I begin, let me remind that you certain matters discussed in this conference call contain forward-looking statements, which are subject to risk and uncertainties that could cause actual results to differ materially from those projected. Descriptions of these risks and uncertainties are detailed in the company's S.E.C. reports including the report on Form 10-K for the year.

After I make a few brief comments we would like to spend most of our time responding to questions from those of you who dialed into this call. We hope this dialogue will be helpful to you and others who choose to listen to this call through our Web broadcast. Let me remind that you a replay will be available approximately two hours after this call at our website. Now, let's begin by discussing the results for the fourth quarter and the full year.

We are very pleased with the improved results in both of our businesses in the fourth quarter, as well as for the second half of '03. Net sales in the fourth quarter were approximately $658 million, up 13% from last year's $581 million. Net earnings were $57.3 million or 56 cents per share, compared to 36.6 million or 36 cents per share achieved in the fourth quarter of '02. Earnings per share from continuing operations increased to 59 cents per share, an increase of almost 60% over last year's 37 cents per share. For the full year, net earnings were $1.90 per share compared to $1.66 last year. Earnings from continuing operations before the cumulative effect of accounting changes were $2.18 per share, an increase of 26 cents or 14% from the prior year. For the year, cash from operations was $519 million, an increase of 57 million from the prior year. After capital expenditures, cash flows were $325 million for the year, a record for the company. Cash and cash equivalents increased $246 million to $417 million at year end. Our debt to total cap ratio decreased by 260 basis points, from 35.6% in the prior year to 33% this year. Factoring in our cash balance increase, net debt to total cap decreased from 31.1% to 20.7%. For the year, selling, administrative and general expenses increased by $20 million. The unfavorable variance was due primarily to higher pension and health care cost and performance based incentive compensation.

Turning to our segments, for the quarter, net sales in Construction Materials increased 12% to $522 million. The segment earned approximately $106 million, compared to $78 million in the prior year, a 36% increase. In the fourth quarter, aggregate margins increased significantly from prior year, and accounted for most of the earnings improvement in Construction Materials from the fourth quarter of 2002. Higher volumes in pricing more than offset increases in pension, health care and diesel costs. During the quarter shipments increased 15%, and pricing improved 2% from the fourth quarter of 2002. Shipments benefited from improving economic conditions that began in the third quarter. A driver of this economic shrink was low interest rates that helped generate record high housing starts. In addition, weather in the fourth quarter across many of our markets was favorable for construction activity. The volume increase for the quarter was particularly strong in the southeastern Gulf coast and southwestern markets. Diesel fuel prices were 15% higher in the fourth quarter than a year ago.

During the quarter we continued implementation of our strategic plan to divest access land from the Cal Matt acquisition. We sold 33 million of this excess real estate in California and Arizona in the quarter resulting in a pretax gain of $18 million. Also during the quarter we adjusted the value of additional parcels of similar real estate to market prices resulting in a pretax charge of $11 million. The net result was about a $7 million gain or about 4 cents a share. As part of this strategic plan, to date we have sold approximately $214 million of excess real estate and currently project about another $110 million available for sale.

For the full year Construction Materials sales were approximately 2.1 billion and segment earnings were 389 million, up slightly from the $383 million in the prior year. Aggregate plants serving new residential neighborhoods saw considerable growth. Spending on highways was down slightly in 2003 due in part to state budget deficits and uncertainty about the size and timing of the new six-year bill to replace T-21. Aggregate volumes increased 7% and pricing was up slightly from 2002, but offset by product mix weighted more toward lower-priced aggregate products. Several markets in the Southeast, Southwest and Gulf coast were stronger in 2002 throughout most of the year while other markets experienced a stronger second half of 2003.

In asphalt, margins were lower in 2003 than in 2002. Lower volumes in 2003 due to less demand in the first half of the year and higher liquid asphalt cost were the primary drivers for the lower margins. In the second half of 2003, volumes approximated the same period in 2002.

In Chemicals, the fourth quarter was marked by better plant operating performance, and some improvement in volumes for certain products. Net sales for the segment increased 22 million to $136 million, and earnings improved by $10 million to a loss of $6 million. The earnings improvement was mostly due to better operating performance of our plants, higher sales volume of our new 5 CP product, as well as caustic soda, chlorine and certain other chlorinated organics. Better operating performance in the fourth quarter meant our plants ran better, particularly our Geismar and Wichita plants. Operating price was higher and controllable costs were less. Natural gas prices and calls for other key raw materials increased versus the prior year. During the quarter we accrued $9 million for estimated future groundwater monitoring and remediation cost at our chemical plants. This $9 million noncash charge is included in the segment loss of $6 million and the company's results under other operating cost. In line with earlier projections, the Chemicals segment reported a loss of $28 million for the year compared with a $64 million loss in prior year. Pricing for caustic soda and chlorine were up compared to the prior year. Natural gas prices and key raw materials cost increased in 2003, and negatively impacted results. The impact of natural gas was somewhat mitigated by the company's hedging program. 2003 marked the first full year of operation for the company's new 5 CP plant. The new product made a significant contribution to our segment earnings improvement for the year, and we're encouraged by the success and future prospects for this new product.

We are cautiously optimistic about the outlook for 2004, given the strong demand and growth in aggregate shipments in the second half of 2003. Our earnings outlook is predicated on residential construction approximating 2003, highways increasing modestly and nonresidential construction increasing later in the year. We expect year-over-year aggregates volume related to highway spending to increase slightly, now that Congress and the President have approved the fiscal year '04 appropriation for highways. The appropriation for fiscal '04 contains an increase of approximately $2 billion or 6% above the fiscal year 2003 level of $31.6 billion. This should allow state DOTs to release highway projects that have been on hold pending the outcome of the '04 appropriation process.

The five-month extension to T-21 passed in September expires at the end of this month. We, along with the transportation industry coalition and others, are urging Congress to pass this new six-year bill as soon as possible. The Senate has taken up debate on this bill, we understand, beginning today. Nonresidential construction has remained weak in 2003 with retail the one bright spot. Moving into 2004, the outlook for private, nonresidential construction could be improving, and we look for recovery in some markets to begin later in the year.

Our full-year outlook for construction materials assumes a modest increase in both aggregate volumes and pricing. We also expect operating cost improvements in our aggregate plants during 2004. Higher prices for diesel and liquid asphalt are forecasted for next year or for this year in 2004. In light of these assumptions, construction materials is expected to achieve full year earnings in the range of $415 million to $445 million. With respect to chemicals, segment results should continue to improve. Because of better operating performance. Pricing for chlorine should be relatively flat year over year, our caustic soda is forecasted to decline. We expect to complete our program for improving the reliability and efficiency of our chemical plants by the end of the year. Furthermore, our outlook assumes somewhat higher energy and raw material cost reflective of current pricing trends in natural gas and in hydrocarbon based raw materials. As compared to the prior year's loss of $28 million, we are projecting a segment level loss in the range of five to $15 million for the year.

For the company, we expect strong free cash flow performance again in 2004, as we continue disciplined capital spending in vigorous pursuit of cost controls. Health care costs are forecast to increase approximately $12 million for 2004. We project pension cost to be flat in 2004, with 2003's results. In April, the company will retire 240 million in debt out of available cash resulting in lower interest expense for the year. Based on our current economic outlook, we expect earnings of between $2.45 and $2.65 per diluted share. In the first quarter, we expect to earn between 10 cents per share [inaudible] 5 cents in the first quarter.

Construction Materials earnings are projected to be up slightly from the first quarter results in 2003, given normal weather patterns. As most of you probably read yesterday, we announced the acquisition of Columbia Rock, products in Columbia, Tennessee just south of Nashville. This acquisition is consistent with our bottle on strategy to identify and realize opportunities for profitable growth that enhance our presence in existing markets and allow us to expand to adjacent high growth markets. In Chemicals segment results should approximate the first quarter last year as pricing for caustic soda and chlorine remain at their current levels. Now, we would be happy to respond to your questions.

Thank you sir. Ladies and gentlemen, if you have a question or comment at this time, please key star 1 on your touch tone phone. To withdraw your question or if your we has been answered please key star 2. Once again, that's star 1 for questions and we'll pause for just a moment for questions to queue up. Our first question comes from Trip Rodgers from UBS. Please go ahead.

Good morning Trip.

I was surprised with your chemicals guidance. After seeing that if you take out the charge, yu could have made money in chemicals this quarter. This with the new 5 CP product coming on so just like you feel caustic is particularly weak and the energy is up or can you go into a little more detail on that?

Trip, we are trying to be cautious with respect to chemicals. Predicting what caustic price will be for the full year is always tricky. I think as I said, we are -- we believe year over year, caustic will be down some, probably about $10 a ton. And that, as you know, can change rapidly. Energy prices of course will be up. Fortunately our hedging program is working well for us I think for the year we're about 60% hedged at about 4.57, and that will help us, although energy cost and raw material cost will continue to be up.

All right. Aggregates, I think you said you're assuming modest price increases. Is that kind of the level of pricing you're assuming, we got in '03, just assume that could be an area that you're being conservative as well.

You know, we believe we'll see price increases in '04, as well as volume increases. I think what we've got built into our projection, are sort of low single digit increases in both -- in both price involved.

I guess finally with the debt coming down so so much, and after you make -- you meet this bond maturity, do you start to look to buy back your shares, or is that on the radar screen?

That's certainly one of our options. At that point, as you know, historically, we have repurchased a lot of shares. And the decision about what to do with our free cash flow certainly includes the possibility of resuming our share repurchase program. We will make that decision, you know, at the time.

Can you remind me what your authorization is currently for share repurchases?

I think it's about 8.6 million outstanding share repurchase authorization.

Great. Thank Thanks a lot.

Thank you and our next question comes from Jack Kelly from Goldman Sachs. Please go ahead.

Good morning, Don.

Good morning Jack. How are you?

Good. Just a question about chemicals and something on state spending. Talking about operational improvements in chemicals in '04 versus '03, is that a net number? In other words, you've been spending, you've been incurring some expense to generate those improvements.

Yes.

And so if -- you know, can you kind of net that out for us, give us a gross and net for '04? I mean obviously it's going to be a plus I guess '04 over '03. But is that net of some other restructuring expense that you might be, you know, putting out, and how big is the number? How big is the net positive number?

Well, we don't have any restructuring expense in '04. We expect the -- our plant's on-stream time to be up about 3% in '04 above '03. And that has a very positive impact on our earnings, and that is net of the conclusion of our plant reliability program, which we will expect to finish in '04.

Okay. So the 3%, Don, that's a utilization rate?

)) 1Yes, yes. We call it on-stream time. It is how efficiently we can, you know, keep our plants operating, and we've made great strides in that area.

Okay. And then, on the state spending, putting aside the money that the states might get from, you know, the T-21 or its successor, in terms of states spending their own money, what to you sense there? Could that decline this year, this is beyond state and local rather than on the interstate program.

I heard Mary Peters who is the administrator of the Federal Highway Administration speak about a week ago. And she observed something which I think we all know from our own experience, is that states will never miss Federal Highway dollars for lack of matching funds. And she said she had no expectation that that would occur going forward because in her view it had never occurred in the past. I think you're correct, though, that to the extent an individual state has shortfalls in highway funding revenues, they will first use that money to match the federal dollars, and then any shortfall will occur in state-funded programs. And as you know, that varies from state to state, from year to year. But if there is a -- we think overall, highway spending in '04 will be up slightly from '03, certainly as we've indicated there's about a $2 billion additional appropriation in '04 from the federal government, which will require some portion of state matching funds. That will be offset somewhat, as you indicate, by weaker spending on purely state projects, but net-net we see highway spending being up slightly in '04 above '03.

Okay. So state -- were states -- this would be nonfederal related?

Nonfederal matching programs, that's right. That would be the state, to the extent the state has to cut its highway program, it would be in the nonfederal match portion of state spending, which would be on essentially state -- nonfederal aid state highways.

Right. And you think that could be up slightly this year?

No, no, no. We think total highway spending will be up slightly, driven largely by the increase in the federal appropriation. State highway spending could -- could be lower, and that's really a state by state program. But rolling it all up into total highway spending, we see a slight increase of '04 over '03, with federal spending going up some, the state match following that, and if there is a weakness it will be in the state-funded portion of the highway programs in individual states.

Thank you.

Thank you and our next question comes from Nishu Sud from Smith Barney. Go ahead.

Good morning.

Good morning.

My first question is your outlook for commercial construction. You mentioned you foresee an increase later on this year. How has your outlook changed in the last several months and particularly in terms of the timing of that, have you seen that pushed out or brought forward and the trajectory do you think it's going to be more dramatic recovery or less dramatic?

Well, if we look at the segments of private nonres, retail has been I guess the strongest component of that. Certainly the big-box retailers have continued to expand, and retail is a particularly aggregate-intensive segment of private nonres because of the essentially in addition to the pad and the tip-ups of the walls of those buildings, they have very large parking lots, which we're very happy to supply the materials for. On the industrial side of nonres, that continues to be very weak. There are not very many new industrial plants being built in the U.S. In between, of course, would be -- would be office buildings, and as we look out in 2004, we, in some markets there may be some recovery late in the year, beginning of recovery in the office building market. But we see -- we see retail being the best, industrial being the weakest, and in some markets, as vacancy rates reduce, some recovery in offices.

Overall, have you become more optimistic say in the past few months?

Yes.

Okay. And on your first quarter guidance on the construction materials side, what kind of volume and pricing assumptions are you making for the first quarter?

We are looking at volumes being up slightly over last year's first quarter, and pricing being up slightly over last year's first quarter. As you know, the overwhelming factor in first quarter construction materials earnings is the weather in March. And you know, predicting that is uncertain at best.

Right. So making, let's say assuming a normalized weather pattern, and given that you've had such a strong performance in the -- in terms of volume and pricing in the back half of '03, does that seem like a moderation, then, from the trend you began to see in the back half of '03?

No, we don't think so.

Okay, so a continuation really of strong volumes. Obviously you're coming off of a much weaker base of the back half of '02?

Yes, and you know, we -- we don't believe -- housing we think is going to continue strong, as you know Vulcan has had a focus on being in high-growth markets, and then within high-growth markets, being in the high-growth corridors. And certainly, that has paid off with respect to the housing -- single family housing demand. That has really been strong in all across the southern tier of the U.S. and in the west. The South and the West have had housing starts that have been very robust and we certainly have benefited from that, and we expect that high level to continue well into '04.

Right. And just a final question. The new Chemicals product, the 5 CP Chemicals product, how much contribution is that making, you know, in rough order to Chemicals now, and just more broadly, is it going according to plan, and what are your forecast for it over the next couple of years?

It added about 10 million in plant margin for '03. We see that ramping up over the next couple of years. I'm not prepared to give you projections for that ramp-up but it is a good product. And we see good growth in demand from that product, and we're very, very pleased with it.

Okay, thank you.

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

Hello Don.

Hello Jack.

First question is, do you have an estimate for us what as to what capex will be in 2004?

We're looking at something in the range of about 230.

And that's up a little from '03.

Yes, we were about 194 in '03.

Right.

Most of the increase would go into construction materials. Largely in the western division, where we are in the process of rebuilding some major plants.

Okay. So I assume those types of rebuilds would typically be efficiency and expansion type projects?

Yes, yes. Particularly in the Western Division as we have gotten the necessary permitting to rebuild plants, those are -- those aren't simply replacement of existing plants. Those are significant cost reduction opportunities.

I know it's hard to look, you know, really beyond one year or so at a time. But if we look at your capex needs, say, over the next one to three years or so, I mean, do you face any major capex needs or are we sort of in still and will remain in a period where it's -- your capital expenditures are fairly discretionary, where you can adjust them with the market, keep them low as you've done for the past year or so, you know, or if things are good, adjust them upward to take advantage of it?

Jack, as we've said before, I think our plant and equipment, including mobile equipment in the Construction Materials segment, are in better shape than they have been in a very, very long time. So we have the ability to keep our capital spending in Construction Materials on a replacement basis at relatively low levels. The -- as I've said before, the '04 spending is focused on a relatively new acquisition in California. I say relatively new, it's been five years now. But it took us in most cases about three years to get the permitting to rebuild some of the major plants. But on our existing base of operations, we have wide discretion in capital spending, and basically the spending we will do will be that driven by cost reductions where we will get returns on the incremental capital substantially in excess of the cost of capital. We will always look for those opportunities, and when we can spend capital that gets high returns, we will certainly do that. But we are -- we have a lot of discretion in capital spending, typically when we make an acquisition, one of the things that we believe we bring to the party is the opportunity to take substantial cost out through plant modifications and improvements. And certainly, if we make significant acquisitions, there will be some capital spending following those, if that's -- if future acquisitions are typical of those we've done in the past.

And on the subject of acquisitions, can you tell us anything else about your Columbia Rock acquisition, terms of, annual tonnage and when you expect the deal might close?

The deal is closed. The Columbia Rock is in the I-65 corridor just south of Nashville, which is one of the high-growth areas of Tennessee. We were not in that market, we were in some markets north, a little north of that. We don't typically talk about volumes in plants. But it is a, you know, it is probably about the average size of Vulcan's quarries.

Okay. And finally, you know, given the cash on hand, given that you have, say 400 or so million dollars right now, the cash flow generating capabilities that you know, your company's shown over the years, which is very good, your capex needs are relatively low, and beyond the April refunding that you're going to do of your debt, could we see further debt reductions? Is there a level at which you wouldn't -- you would stop necessarily paying down debt?

Jack, all of our debt is fixed rate debt. We don't have any commercial paper out. We will continue to retire debt as it becomes due. Probably another 30 million or so, probably another 30 million or so throughout the year in addition to that. You know, our target is debt to total cap of about 30 to 35%. Obviously, we will have cash flows and available cash. As I said earlier, we will look at share repurchase as an opportunity. We will continue to look at bolt-on acquisitions. We will try to make the best use of that cash for our shareholders. As you know from our history, we have had a steady increase in dividends over the last ten or 11 years. We believe dividends are important and we'll look at that as we go forward. Between dividend, share repurchase, bolt-on acquisitions and construction materials, and significant returns on incremental capital projects and construction materials, those would be our options for the use of cash.

Great. Okay, thanks.

Thank you. And our next question comes from Jeff Peck from Janney Montgomery Scott.

Good morning. What is your estimated tax rate for '04?

I'll let Mark Tomkins answer that.

Jeff, it's 31%. It will be up a little bit from this year. We're anticipating a little higher effective rate in the states.

Okay, thanks. And then on the Chemicals side, I wonder if you could give us an idea of your actual operating rates. Your utilization rates in your Chemicals plants for the fourth quarter, and you know, is that -- if that's in January if that's improved or if that's kind of the same as it was.

Jeff, we look at operating rates on an annual basis, quarterly basis gets distorted by when you take outages for various and sundry reasons. Our operating rate improved from about 89% in 02 to 96 in '03, and as I said we expect to take that up to about 99% in '04. And that's on-stream time, you know, as you know, large continuous process chemical plants need to stay on-stream. And we're making substantial progress in being able to run ours effectively.

I'm surprised that they're that high. I didn't think that -- I didn't think that the demand was there to run -- to run your plant, it's almost a sold-out -- you expect almost a sold-out position this year to run your plants at that -- that high of a rate.

Well, that -- that is the percent of effectively available time. That factors in the necessity of taking plants down annually for maintenance outages.

Okay.

So you know, on that theory we ought to get to 100%, because built into that is the -- would be the projected down time.

Okay.

We're not -- we are -- we're not -- I'm not talking about discretionary sort of market-based plant on-stream time. We're talking about operating issues. Now, obviously, if we do not foresee a market for our product, we will not make it. But at this point, we're talking about the operating efficiency of our plant as opposed to market issue.

Okay, I think that's -- all right, that's what -- that was a confusion. I was more talking about, you know, what's -- based upon the demand for your products.

Right. And we're very sensitive to that issue, and we manage that -- we manage that weekly. About -- about what plants to run at what level for which product. And these -- these are operating rates for our cell rooms. That does not -- that does not include our organic plants or our 5 CP plant.

Okay. And just one other question in construction aggregates side. For the first quarter guidance, when I look back at the first quarter of '03, it looks like that number was way down. That looked like -- I think that number was down, the earnings from first quarter of '03 was down about 25%, and maybe the previous one going way back, previous first quarter of '02 was an exceptionally strong year. But I was surprised that you only expect a slight improvement given the improvements that you've seen in the second half. It looks like that's an easy comp in the first quarter, and yet you're only expecting a slight improvement. I was just wondering if you could comment on that Don.

I think we had an earlier question to that effect, and basically, our first quarter guidance for Construction Materials is -- should not be given undue weight. It is so dependent -- first of all, volumes are low in the first quarter, and March makes up half of the quarter.

Okay.

The entire quarter is so weather-dependent that I don't -- and we've said this many times before. The first quarter in construction materials is not indicative of much of anything, other than how the weather was in the first quarter. So that's, I think that's the way you should view our first quarter guidance in Construction Materials.

Okay, that makes sense. That makes sense. Thanks Don.

Thank you. And our next question comes from Leo Larkin from Standard & Poor's. Please go ahead.

Good morning. Could you give us guidance for DD&A in 04 and also possibly the timing of some of those asset sales?

Leo, DD&A should be somewhere around 265 to 270 million. The timing of what asset sales are you referring to?

I think earlier in the call there was a mention of about 110 million in asset sales or property --

We have a lot of property in the California area, and the timing is very, very difficult to predict. We're obviously selling that as it becomes feasible to do it. But at this point, I don't think we'd want to predict any of those sales in 2004, although we hope to get -- to turn that into cash as soon as possible and some of it may happen in '04.

Okay, thank you.

Thank you. Once again ladies and gentlemen if you have a question or comment please key star 1 on your touch tone phone. Next question comes from Alan Mitrani from Copper Beech Capital.

Chemicals business has been a tough go, you guys have admitted this, other competitors have had tough gos in this market. Can you comment on the outlook and whether it's going to remain a strategic asset for you?

Some people have talked about the chemical industry being in a perfect storm. And by that they mean that the combination of steeply escalating energy cost, particularly natural gas, in the teeth of a severe industrial downturn in the U.S., the combination of sharply higher cost and sharply lower demand has been tough on our Chemicals business as well as I think virtually everyone else in the industry. At this point, we don't see any long-term moderation in energy cost, at least over the next few years. You know, the issue for us is to control what we can control. And that is, to improve our plant operations, control our cost, our production cost, as well as our overhead cost. And to try to return this business to a level of profitability and free cash flow that is acceptable to us. As you know, we sold our specialty chemicals business in a series of transactions earlier this year and we have said that we are looking at the strategic options for our Chloralkali business. We continue to do that. We are working diligently to improve that business. I think we've made a lot of progress. We've got a lot more progress that weigh need to make, and I expect that we will make. And that's where we're headed.

Okay. Could you remind us how much of the current debt that you have on your balance sheet is assigned to the Chemicals business?

Our debt is at the corporate level, it's not assigned to the segments.

Okay. So I guess in any sort of sale or any sort of strategic alternative, it would just be the decision, your decision in terms of what would go with the company or how you'd work that if anything were to happen?

Yeah. There is one in the joint venture with Mitsui, there is about $30 million of debt that is consolidated in our number. That's the only piece of debt that's in either segment. But certainly, I mean, the allocation of debt to our business segments is an issue that is easily manageable by us.

Thank you. One last question if I can. Can you talk about how -- which regions within the U.S. from a construction perspective, I mean you mentioned in the press releases, from an aggregates perspective were stronger, can you talk about your outlook for price increases, mostly in the Southeast and Southwest where a lot of your operations are?

I don't believe we see any material difference across our various markets in opportunities for price increases in '04. Saying another way, we think we will see, within a relatively narrow range, comparable opportunities for price increases across all of our Construction Materials market.

Thank you.

Thank you. And we have a follow-up question from Nishu Sud from Smith Barney.

Hi, just had a follow-up big picture question, I suppose, on construction materials. There seem to have been let's say over the past several years three categories of things that are holding back construction materials margins. First let's say being energy cost, SG&A expenses like pension and health care being the second and thirdly the downturn in volumes. You mentioned your outlook on energy cost on what you were just discussing in Chemicals. Let's suppose as volumes recover, and pension and health care and other admin expense returned more to normal levels, what is your outlook several years from now for where you expect the construction materials operating margins might go?

I don't think I can sit here today and predict where construction materials margins will go. Certainly Construction Materials margins are highly sensitive. Unit margins are highly sensitive to volume. We got -- we improved our margins in '03, over '02, in aggregates. And we improved our margins in '03 compared to '01 on lower volume. So we're making, with higher diesel cost. So we're continuing in higher pension and health care. So we're continuing to make improvements at our plants that certainly help with margin expansion. As we indicated, our pension cost year over year ought to be flat. So health care is something we're paying a great deal of attention to, to try to rein those costs in. Diesel fuel prices we have less control over but they don't -- they're not a hugely significant piece of our total operating cost and production cost in construction materials. I guess going forward we believe there are opportunities for continued margin expansion in construction materials. We worked very hard on a number of different fronts to achieve those. What those are likely to be going forward, I'm not able to give you with any precision, other than to say directionally, we believe we have the opportunity to continue to expand margins.

Right. So maybe stated slightly differently, what kind of drag do you see from overall from the higher energy or the higher pension costs or even from the -- in the volume category? You know, what sort of -- if it's a drag, how much of it could be lifted in coming years?

As I said, pension is back to flat. So that -- we don't see that, you know, that depends a lot on what the overall stock market does and interest rates, because the interest rates and market values affect our pension cost. Diesel, you know, if it -- it is higher, it was higher in '03 than it has been for a very long time. And if -- and unlike natural gas which we don't see moderating in the near term, I think diesel certainly has the opportunity to go back down. Which will help, but as I've said, it's not a huge component of our cost. Health care is a continuing issue, and we will believe we have some opportunity to at least restrain the rate of growth in health care cost. So the real issue is the pennies per ton of production cost in the plants that our management teams are able to get through greater productivity and efficiency. And those come from a lot of different areas, and we are very focused on that. And certainly, to the extent that we can continue to get modest annual price increases, that, too, will help our margins.

Okay, thanks.

Thank you. And there are no further questions at this time, gentlemen.

Thank you very much for your interest in Vulcan. As I said, we're very pleased with our fourth quarter and our second half in particular, and we look forward to talking with you again after the conclusion of the first quarter. Thank you and good day.

Thank you, sir. Thank you ladies and gentlemen, today, for your participation. This concludes your conference call. You may disconnect. Good day.