渥肯建材 (VMC) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2005 Vulcan Materials earnings conference call. [OPERATOR INSTRUCTIONS] I would now be happy to turn your call over to the host of today's call, Mr. Don James, Chairman and Chief Executive. You may go ahead, sir.

Good morning. Thanks for joining our third quarter conference call. I'm Don James, Chairman and Chief Executive Officer of Vulcan Materials Company. With me today are Dan Sansone, our Senior Vice President and Chief Financial Officer; as well as Mac Badgett and Jim Smack, who are Senior Vice Presidents in our construction Materials Group. Before I begin, let me remind you that certain matters that we will discuss in this conference call may contain forward-looking statements which are subject to risk and uncertainties that could cause actual results to differ materially from those projected. Descriptions of those risks and uncertainties are detailed in the Company's SEC reports, including the report on Form 10K for the year. After my brief comments, we will be happy to answer questions from those of you who have dialed into the call. Let me remind you that a replay will be available approximately two hours after the end of this call at our website.

Yesterday, as you know, after the markets closed, we reported record third quarter results. These results demonstrate the underlying strength of our business, particularly in light of the disruptive effects of five hurricanes in the quarter on production distribution and demand in our key markets. These quarterly net sales in earnings for construction materials were the highest in our history. Net sales increased 15% from the prior year levels while earnings from continuing operations increased 39% to 128 million or $1.23 per diluted shares. Third quarter net earnings, which includes discontinued operations, was 122 million or 1.17 per diluted share compared to 99 million or $0.96 per share for the prior year.

In the third quarter, the Company completed two aggregates acquisitions, totaling approximately $20 million. Year-to-date, we have spent approximately 93 million for bolt-on acquisitions that will contribute to future earnings growth. This represents our highest level of acquisition activity in the past four years. The 10 aggregate facilities and 5 asphalt plants acquired so far this year complement our existing operations by extending the geographic scope of our business as well as adding additional reserves. During the third quarter, we bought back approximately 796,000 shares at an average price of approximately $68 per share. During the first nine months of this year, we have repurchased approximately 2 million shares at a total cost of about $123 million or an average price of about $61.30 per share. The number of shares remaining under our repurchase authorization is 6.5 million shares.

In June, as you know, we closed the sale of our chemicals business. The reported loss of 6 million or $0.06 per diluted share in the quarter was due primarily to related exit and disposal costs. In the prior year, earnings were approximately 7 million. In the fourth quarter of this year, we expect a small after-tax loss of approximately $0.02 per diluted share from discontinued operations. In construction materials, the 15% sales increase resulted mostly from sharply higher prices for aggregates, asphalt, and concrete. Net sales in our legacy operations increased approximately 17% from the prior year with aggregates increasing about 13% and asphalt and concrete up 28%. Strong demand led to a 9% increase in aggregates prices versus the prior year and we achieved asphalt price increases of 17% and concrete price increases of 15%. Above last year's quarter.

Aggregate shipments were 3% higher in the quarter, which included 1% from recent acquisitions. Shipments in production were limited somewhat by wet weather and disruption in construction activity and logistics, due to the hurricanes. Asphalt and concrete volumes in the third quarter were up from the prior year due to strong overall demand in Arizona and California, which were not affected by the hurricanes.

On the strengths of price increases in our legacy operations, gross profit as a percent of sales increased slightly from the prior year's levels. For the Company, as a whole, gross profit as a percent of sales approximated last year's level, due in part to a higher sales mix of asphalt and concrete. Our challenge, as well as our opportunity, is to continue to achieve productivity improvements in our plants in order to meet increased demand and offset higher costs for energy and materials. Unit prices for diesel fuel increased over 50% from the prior year and reduced our pretax earnings in the quarter approximately $11 million. Diesel prices, of course, increased sharply as a result of Hurricane Katrina. Unit costs of liquid asphalt, which is also energy-related increased 18% from the prior year and reduced earnings by about 2 million in the quarter.

In the quarter, we spent significantly more for repairs, maintenance and operating parts and supplies. These expenditures were necessary to achieve targeted operating improvements at our recent acquisitions and to achieve record aggregate production levels in our legacy operations. As I mentioned earlier, improved productivity is one way to offset cost pressures for diesel fuel, parts, and supplies and we watch certain metrics very closely to gauge our performance. As an example, we continue to focus on efficiency in our aggregate plants and year-to-date, our tons of production per man hour continues to improve from last year. Selling, administrative, and general expenses increased 10 million, due mostly to the effect of higher stock-based incentive compensation.

In 2003, we changed our long-term incentive compensation from all stock options to 50% stock options and 50% performance share units. Through 2005, the value of the performance shares is expensed while options are not. Approximately 70% of the increase in SG&A expense was attributable to performance shares, which replaced options. Performance share expense is influenced by the degree to which business targets are achieved as well as by the stock price which increased sharply in the third quarter.

We continue to be encouraged by the slowing rate of increase for our healthcare costs. In the third quarter, healthcare costs were flat with the prior year. These costs seem to have begun to moderate as a result of changes to our company's healthcare plans, which were put in place at the beginning of the year. Our other income increased 9 million from the prior year's third quarter, due to an increase in the carrying value of the contingent ECU earn-out agreement, included as part of the consideration received and the sale of our company's chemicals business. This earn-out is accounted for as a derivative instrument with future adjustments for the carrying value, if any, recorded as other income or charges in continuing operations. Earnings from continuing operations benefited from a lower effective tax rate. The current year's tax rate decreased due principally to a reduction in estimated income tax liabilities for prior years and a favorable settlement of federal refund plans. In the third quarter of 2004, an increase in the contingency for uncertain tax positions raised the quarterly effective tax rate. Hurricane weather has certainly been a major news topic throughout the quarter.

And continues to be a story even into October. Due to Hurricane Wilma. The resulting wet weather and disruption to construction activity has both a direct and indirect effect on aggregate operations. Quantifying direct costs due to property damage or lost productions are relatively straight forward. The indirect impacts due to lost sales or reduced production at plants is certainly more subjective. Our estimate of the direct cost associated with the five hurricanes in the third quarter is several million dollars. We have not attempted to quantify the indirect cost. In the fourth quarter, heavy rains and winds from Hurricane Wilma have resulted in power outages and flooding at our large quarry south of Cancun, Mexico. We are working diligently to minimize lost production and resume the loading of our ships.

Turning to the outlook, we believe construction activities should remain robust and result in increases in both aggregates, prices, and volume in the fourth quarter versus last year. In the fourth quarter, we expect to earn in the range of $0.64 to $0.84 per diluted share from continuing operations. As a result, we expect to earn from $3.05 to $3.25 per diluted share for the year from continuing operations, which is an increase of 21 to 29% from our prior year's earnings. Our fourth quarter guidance assumes prices for diesel fuel and liquid asphalt will be significantly higher than the prior year. Diesel fuel costs are expected to increase approximately 13 million from last year's fourth quarter. At this point, we do not expect the effects of Hurricane Wilma on our Mexican operations to affect our earnings guidance for the fourth quarter or full year.

Setting aside the disruptive effects of the hurricanes, overall demand in our markets has continued to grow. Within this overall demand, both private and public end markets continue to show strength. Private non-residential construction continues to improve while residential activity remains strong. On the public side of construction spending, highways are showing signs of growth. Obviously, a very significant event in the third quarter was the passage of the new multiyear Federal Highway Bill. For the nation, as a whole, this will provide certainty through steady growth in funding over the next four years. The costs of project lead times, it takes a while for these new funds to be actually spent by the states on new construction. Actual spending tends to ramp up steadily over the life of the bill.

For the life of this new bill, the average growth rate in spending for highways in the non-Vulcan-served states will be approximately 28%. For Vulcan-served states, the outlook is considerably better with our increase at about 32%. For example, in Arizona, Texas, Florida, Indiana, and Illinois, all states where Vulcan has a major presence, we are getting very large gains or increases under the new highway bill. In the Washington, D.C. area, where we also have a large presence, substantial increases in funding also occur under the new Highway Bill.

And then there's California, which, as you know, is very important to us. We're not just the largest aggregate supplier in California, we're also a significant asphalt supplier and our largest concrete business is located in California. California receives a 34% increase in federal highway funding over the life of this bill, compared, again, to 28% for non-Vulcan-served states. In California, as well, there is an additional 1.3 billion from gasoline sales taxes which will be going into transportation projects, as a result of the reinstatement of proposition 42 funds by governor Schwarzenegger earlier this summer. Overall, the California Transportation Commission is projecting to earmark 4.1 billion for transportation projects during fiscal year 2005-2006. As a result, we are very bullish on the opportunities for California. Now, if our operator will give you the required instructions we would be pleased to respond to your questions.

[OPERATOR INSTRUCTIONS] And the first question comes from David MacGregor from Longbow. You may go ahead.

Hi, Don.

Hey, David, how are you?

Good, thank you. I wondered if you could talk just a little bit about customer inventories at this point. Is it possible that with the bad weather, shipments in the third quarter have left inventories on hand that might preclude fourth quarter shipments and result in just -- just slower economics for you?

David, I don't have any information on that. But I -- I don't have any information that customer inventories have changed in any meaningful way. That is not -- while we don't do real-time inventory literally, we almost do -- our customers do not tend to stockpile our products.

Okay, thanks. Just a couple of other questions, if I may. The July price increases, I'm mindful that you don't get the full increase immediately. I'm just wondering if you could give us some sense of what percentage of that increase was being collected at the beginning of 4Q and what percentage of that do you expect to be collecting by the end of 4Q?

I would expect in the fourth quarter, David, that a very significant percentage of our price increases will be realized. The only place where there is a lag on that, is in long-term highway projects, where we quote a fixed price and then as the project -- throughout the project -- but that's a relatively small portion of our total demand.

Okay. And then just -- I guess the guidance, $0.64 to $0.84 seems a little wide and I recognize there's a lot of uncertainty with respect to cost assumptions at this point, but just on the revenue line, what kind of revenue growth are you assuming here year-over-year?

Let me get Dan Sansone to answer that for you. With respect to the why we're going into the fourth quarter with a $0.20-spread, I think, clearly, if you followed us very long, you realize the fourth quarter is highly dependent upon weather and we tend to put a broader range for the fourth quarter relative to the size of the quarter than in other quarters because of weather issues.

Diesel fuel is also a -- an unusual factor in this quarter. As you know, diesel fuel has been very volatile, generally on the high side as opposed to volatile on the downside. But we have a lot of sensitivity to diesel fuel and if diesel fuel were to follow gasoline prices down, then we have some upside there. If they continue to go up, we have some downside. As I said in my earlier comments, we have projected about a $12 million quarter-over-quarter increase in diesel fuel prices, but projecting what those are going to be for the full quarter is problematic at best. Dan, have you got any--?

Yes, Dave, in terms of fourth quarter revenue growth, we're probably looking at something in the neighborhood of around the double-digit range, plus or minus a little bit.

Okay? Any -- hello?

Yes, and your next question comes from Jack Kasprzak from BB&T. You may go ahead.

Thanks, good morning, Don, how are you?

Great, how you?

Great, thank you. I was going to ask about the -- ask about the weather effect, the hurricane effect a little differently in the kind of jobs with the comment Dan just made about the fourth quarter revenues and the question is, thinking about the underlying growth rate for volume, what do you think that is, if you could exclude the impact of the hurricanes, very difficult, I realize. But I mean 2% legacy volume growth, 1% from acquisitions, is this -- surely it's running higher than that and coupled with the common amount of double-digit fourth quarter revenue increase, if prices are running up 9%, is this low teens, mid-teens? I guess that depends on your answer to the volume question.

Well, Jack, as you know, year-to-date our aggregate volumes were up 7%. The third quarter was an interesting quarter in that in July, volumes were down about 6.5%. Then they jumped up to 7%, -- a 7% increase in August and a 9.5% increase in September. So volumes -- we, overall, the quarter was weak on volume. Both relative to what we see as the underlying demand and also what's gone on year-to-date. We think the volume in the third quarter was an aberration. How much of that is really tied to weather is very hard to quantify in a way that I would feel comfortable giving public guidance on, but certainly the weather in the third quarter affected volumes. 7% year-to-date is a better indicator of what demand is -- 7% volume growth, than what we experienced in the third quarter.

Okay. That's very helpful. And with regard to hurricane rebuilding, can you give us some feedback on what is happening -- are you guys shipping aggregate to the area now? Just how big of an impact do you think this could have?

We are shipping aggregate to the area now. I think we see the Mississippi Gulf Coast recovering faster from our standpoint. There will be more highway work there, probably more commercial construction there and more hotel/apartment reconstruction quickly. New Orleans may be a little slower for any number of reasons, but we believe that there will be a very significant demand for our products in the rebuilding of the Gulf Coast which may last two to three, four years, perhaps. We can't, at this point, quantify it in a way that we would feel comfortable giving out.

Okay. Are there any price increases announced yet for 2006, in addition to what's already occurred?

Yes.

Can you tell us what the amount of those are?

Well, they're all over the board. I --.

Are they a similar magnitude to what we've seen this year?

We have had the most robust pricing environment -- at least in our recent history in 2005, as I said in my comments, those certainly provide a lot of momentum going into 2006. We will give you, Jack, as is our custom, in our Q4 earnings release, a projection for price increase percentages in 2006. At this point, I'm not prepared to give you a precise number on what that will be.

Okay, fair enough. Thank you, Don.

And your next question comes from John Fox from Fenimore Asset Management. You may go ahead.

Thank you. I have a couple of questions. Could I get the average price paid for diesel for Q3? And what you think it will be in Q4?

Yes, John, we paid about $1.99 a gallon for diesel fuel in Q3 and in our projection we have got $2.33 for Q4.

Okay, thank you. And maybe for Dan, just curious on the working capital and the cash flow generation of the Company.

Yes.

What seems down from last year -- and I don't know if the chemicals -- if anything's going on there, but can you talk about that? And the receivables balance was pretty high I know sales are up, but do you see the cash collections getting better in the fourth quarter, and the cash flow for the year? Can you comment on that?

Yes, I can. The cash flow schedule as it's prepared under GAAP includes both the effects of continuing and discontinued operations. There is no real GAAP way to strip that out. We've done a little -- we've done some analysis on it offline and the -- while the year-to-date cash generated from operations is down, that is driven heavily by the tax effects of the sale of the chemicals business. And specifically, there's at least $70 million included in there that went out in tax payments referable to chemicals. Some of it related to the actual gain on the sale of the business. And then secondly, under the tax rule, there's been an estimated tax payment based on the estimated cash that we will receive in the future from the ECU earn-out. So that's probably the single biggest distortive effect in the cash flow schedule related to the chemicals business.

Commenting on continuing operations -- excuse me, the -- even after working capital increases, which are higher this year, based on both the higher revenues and then also based on the timing of our shipments during the quarter, as Don just commented, our shipment levels in July were actually down sharply and then they were up in both August and even more in September. So that's left more receivables sitting on the books at September 30, than was the case last year. So even after that effect, the best estimate we can get for cash flow from continuing operations is still favorable to the same period in 2004.

Okay. So it's really that $70 million --

Yes, that's really the biggest swing factor in there. The tax items referable to the chemical sale.

Okay. Thank you. And I had another question on the Gulf of Mexico rebuilding. I understand it's hard to quantify but maybe you could just describe for us your competitive position and your ability to deliver aggregates to that area, where you stand in the industry competitively.

John, we are very -- very well positioned strategically to serve the whole Gulf Coast from the -- really from Tampa all the way around through Brownsville, Texas. In the area affected, that is the Alabama, Mississippi, and Louisiana Gulf Coast, we have a series of distribution yards which we serve by ship from Mexico. By barge down the Tennessee, Tom Bigby Waterway as well as the Mississippi river system and we also rail in to those markets with several unit trains a week coming out of Alabama and in some cases coming from Kentucky. We -- calculating market shares and those multiple markets is a little tricky, but we believe we are certainly the strongest supplier in those markets with the greatest number of opportunities to supply both from the standpoint of production facilities as well as transportation and distribution. We are very focused on adding to our capacity, both from a production and transportation standpoint in anticipation of very strong demand in those markets.

Okay. Thank you.

Okay, sir. And your next question comes from Mike Bates from JP Morgan. You may go ahead, sir.

Hi, Mike, how are you?

I'm fine, thanks. I've got a small number of questions, if I could. The first one is just to understand the split that you gave by the months to gain. I mean July -- and correct me if I'm wrong, but the really bad hurricanes, I thought, were more in August. So I'm a bit surprised by that July number being negative. Was that weather? Was there anything else? If you look at those states like California or Arizona, where you weren't influenced by the weather, did you see any sort of difference between July, August, and September in their growth rates? That's my first question.

The weather impact in July was in the southeastern U.S., largely focused -- Atlanta being the most significant -- hurricanes hit the coast, but they move right on up through different areas. We also -- but the big impact in July was the southeast and within the southeast it was Atlanta. We -- as you saw -- had very strong recovery in demand in August and September. We believe it is totally weather-related.

Okay. And if we look at the two areas, Arizona and California, where you weren't weather-impacted, what sort of volume growth did you see in Q3?

We are getting -- we are getting a look at that. We commented on asphalt and concrete volumes in the quarter. We saw about an 8% increase in Arizona and California in the quarter.

Okay. That's great. Thank you.

In aggregates.

If I wanted to try -- I mean I take your point about being very difficult to assess the indirect effects of the bad weather. But one way that I might want to try to do it myself is to try and back out some numbers. I mean if we -- if on the cost side. If we ignored -- or you quantified for us the increase in diesel and the increase in asphalt, if you left those out, what's sort of the underlying rate of inflation cost inflation in your business? Would it be 3, 4, 5% or would I be underestimating that?

Mike, I -- I don't have the data in front of me to calculate it the way you've asked me to and I haven't done it that way before. I think that is something we will need to get back to you on either in this call or later to answer it the way you've asked it.

Okay. That's great. Just one more question, if I may. The direct costs -- two more questions -- the direct costs that you mentioned, do you not have insurance for those? Or do you self-insure? I mean I would have thought damage from the hurricanes directly to the plant, et cetera, they would be able to insure, but maybe I'm wrong.

Well, we self-insure up to a threshold. There was not enough plant damage and our self-insurance, I think, is up to about 3 million. There was not plant damage. We took a direct hit in our Cancun quarry from -- first from Hurricane Emily, which was earlier in the quarter and, of course, we lost power. The plant came through beautifully as it was designed to do. We had about 35-foot waves in our harbor and there was some miscellaneous damage but we got the plant back up, running and loading ships within about two days of the direct hit from the hurricane. So the real effect is not so much damage to our facility as it is lost production and impact on customers' ability to pursue projects according -- on a normal schedule. And that's very -- the reason we haven't given a public number on all of that is there are just so many assumptions and variables that go into that.

That's -- that's understood. And then just finally on the latest Hurricane Wilma, and you mentioned the Cancun quarry I think you said was flooded. I mean when is it expected to be sort of back to normal? Is this a matter of days or longer?

Oh it's a few days at most. We are -- we are very close to getting electricity restored. Once we have electricity restored, we are prepared to -- to load ships. We are ready to do that. So it's just -- hopefully it's a matter of hours.

Okay. That's great--.

And there is -- I saw an estimate of 60 inches of rain on the Yucatan peninsula from Wilma -- I mean that's an incredible number, 60 inches, but the quarry is draining nicely. It is in a situation with relatively porous limestone and it rains into the aquifer very nicely there. So we will be back in action without too much delay. And as I've said, we do not foresee that impacting the range of fourth quarter earnings that we have included in our guidance.

Okay. That's great. Thanks very much, Don.

And your next question comes from Jack Kelly from Goldman Sachs. You may go ahead, sir.

Hi, Don, how are you?

Hi, Jack, very good.

First question was, what should think about as the key drivers to determining the carrying value of the ECU stub, so to speak? I mean they had $9 million uptick in the latest quarter, but as we look forward it's just -- it's a tough number to get your hands around as an outsider.

Well, there's -- we have published in some prior press releases a graph.

Right.

A table. A table. And the two things that you have to look at are ECU values, that is the combination of chlorine and caustic soda and natural gas prices. It is easy to calculate. We get the ECU values from CMAI and we use published natural gas prices so if you make an assumption or get a projection for ECU values and you get a projection for natural gas prices, you can predict what the total receipts of the earn-out are. At this point, the projection for total receipts of the earn-out exceed the accounting carrying value. The accounting carrying value is done through a very different sort of a process which is really, I think, sort of an option pricing model.

Jack, let me add one other dimension to it. You have the -- you have really two sets of variables that drive the valuation of that earn-out every quarter. The first set of variables, as Don described, are the forecasted ECU values and the natural gas strip values. Those are pretty easy to get. The thing that also factors into the -- and so from one quarter to the next, the extent to which forecasted ECU values have changed or natural gas pricing has changed, it's clearly going to influence the valuation of the ECU, but the other factor that that plays in -- as every quarter gets behind us, you have got a quarter of actual data that's not subject to any variability. So that's really partly what drove this 9 million, is we now have conditional -- we have three months in the bank that is known with certainty and then the remaining months are -- or the remaining years are out there as forecast. So the forecast values will shift around, but every quarter, good or bad, you're going to lock in another three months of actual data that has zero -- zero risk probability associated to it.

So the ECU number is -- that was an industry number. I thought that was something that you guys calculated off a--.

No, that's an industry average value and the forecasted amount that we use is based on the forecast from the industry trade association that they provide.

Okay, great. Don, just coming back to pricing it was up 9% in the second quarter in aggregates. 8% -- excuse me, 9% in the third, 8% in the second. Can you characterize, to the extent you can, how that breaks down geographically? I don't mean state by state, obviously, but there are some states, maybe more coastal areas that are a lot hotter than 9%. And are we seeing an uplift in all areas? Or do you have, maybe a third of the -- a third of your geographic area driving these kinds of price increases? Just some kind of color on pricing?

Jack, our prices are up significantly in every market. Obviously you're correct, they're up more in some markets than in others. California has been really strong for us. Obviously the Gulf Coast has been really strong for us. But they are -- prices are very good everywhere. We will continue to assess pricing on a market by market, product by product basis, but as I have tried to indicate earlier, there is a lot of pricing momentum in the marketplace now. Reserves continue to be difficult to add to in many, many, many of these fast-growing markets and we're in a very favorable position to serve the market and enjoy the benefits of price increases.

And again, just one more follow-up on pricing, you had indicated in the press release that your price increases offset what happened in energy. Was that because as the energy prices went up -- let's go back to the July timeframe -- that you're literally marking up your prices as energy prices went up? Or was it just because your prices were up so much, let's say earlier in the year, it covered the energy costs -- I mean it seems to me that's where the--.

It's the latter case, Jack. We put our prices in place in different ways in different markets. But let's say we increase prices twice a year, the -- we're not marking our prices up or down with diesel fuel, for example, but we -- we set prices based on market factors, not cost factors.

Right. So, in a sense then, these incremental costs in terms of diesel, whether it be the third or fourth quarter, I mean those are numbers that obviously weren't in your budget. And in that sense lowered your overall results, even though you said pricing covered energy costs.

When we said pricing covered it, that was a calculation. Now, pricing covered not only the increase in diesel fuel costs, but as -- as I indicated earlier, we spent a lot more in our plants, in Q3 '05 than we did in Q3 '04. There were two reasons for that. One is we acquired -- we have acquired 10 aggregate plants and 5 asphalt plants so far this year and as is our long-standing business model, we go in and fix them. And we did that. We spent a fair amount of money in the third quarter, much more than we did in the third quarter last year, upgrading these 15 new plants that we own. The second part is that with volumes growing, as we said, our volumes have grown 7% year-to-date and with a pretty robust demand profile looking forward, we are making sure our plants are in shape to meet this growing demand efficiently and so we spent a good bit of money in our legacy plants in the third quarter, as well, in anticipation of future growth and demand.

Thank you.

And at this time, sir, your next question comes from Omar Kara from Cobalt Capital. [OPERATOR INSTRUCTIONS] You may go ahead, sir.

Hey, guys,ow how you doing?

Good.

Just one question on CapEx, you guys had guided I think last quarter to 200 to 225. Is that still good?

Yes, that's still a good number.

Can we use that as a run rate in '06, as well?

In '06, Omar, we are probably going to put some additional capital in growth projects, internal growth projects, both Greenfield operations as well as some plant expansions in our existing plants. In particular, we certainly will expand the capacity in our plant in Mexico to meet very strong demand. So there will be higher capital spending in '06 but it is not replacement capital, it is expansion capital.

Okay. And I mean, I guess given the amount of free cash you guys have and you guys are -- have a buyback on -- is there any -- are you guys going to get more aggressive on that given your prices, I guess now 61 -- 62? And on top of that, I mean is there any more -- are you interested in other buybacks?

Well, I would say that we bought back stock at an average price of $68 in the third quarter, bought almost 800,000 shares. At 62, we're going to take a hard look at it.

Fair enough. All right. Thanks. That's all.

Your next question comes from Leo Larkin from S&P. You may go ahead, sir.

Yes, my question on CapEx was answered. But could you give us any guidance for DD&A in '06?

DD&A in '06. I don't -- in '05 it approximates capital spending -- a little more than capital spending. Yes, we don't have a good number, Leo, at this point. We need to finish our annual budgeting process, which we will do later or in early November. We will give you guidance on that at the fourth quarter press release.

Thank you.

And your next question, sir, comes from David MacGregor from Longbow. You may go ahead.

Don, can you talk at all about acquisitions and the market for acquisitions right now? And I know you've been active, as you outlined in your prepared remarks, but how do valuations look? Are they continuing to move higher? And at what point -- are approaching sort of a critical threshold, whereby like one of your competitors, you may reach the determination that they're too expensive and that you're going to focus instead on share repurchase activity?

David, I understand what you were referring to. We really look at acquisitions based on internal rates of return and what synergies we get and certainly we think the acquisitions we have made year-to-date are fairly valued and the changes that we can bring to them will accrue to our bottom line and to our shareholders. We are continuing to look at a number of additional bolt-on acquisitions. We don't believe they are too expensive. If we did, we certainly wouldn't be in the market.

Okay. Thank you. And just another question, with the acquisitions and then the various expansion programs, initiatives you had underway, where are you right now in terms of capacity utilization? And if that varies geographically, from region to region, can you give us some insight on that, as well?

David, the fundamentals of the aggregate business are, as you know, it is -- it is driven by local markets. And so every -- the -- and pick a number. We may operate in 100 different local markets. So our capacity utilization differs in every market, in every plant. We are not fully utilizing -- we are not at full capacity in all of our plants, in all of our markets. In some markets we are close to that. We can typically add operating hours, which we do, but it's -- any number I would give you in terms of sort of plant utilization, like we used to do with our three chemical plants where you've got a national and international market, really are not meaningful. So I would simply say we're not at full capacity in all plants in all markets. We have a lot of flexibility to add operating hours in many of our plants, which we do to meet increased demand. So we are not necessarily capacity constrained in any significant way.

Now, I guess the reason I ask is just in terms of trying to forecast 2006 revenues, I'm wondering if we're just really relying on pricing or whether there is still an opportunity to get some meaningful revenue growth from the volume side?

We believe there will be volume growth. We're not prepared to quantify it, which we will do at the -- in the fourth quarter press release, but we certainly believe there will be continued volume growth for us in 2006. Okay, thanks very much.

And your next question, gentlemen, comes from Jonathan Goldberg from Hahn Capital. You may go ahead.

Hi, good morning.

Hello, Jonathan.

Just had a quick question about incremental margins and I guess I was just a little bit surprised that given the pricing and to some extent the volumes that you're getting that margins were flat. You explained some of it would be the effect of the hurricane and also with some mix shifts. But could you just give a little color going forward on how we should think about incremental margins and margin improvements as you get -- as you continue to get the kind of pricing and volume increases that you've been getting?

Jonathan, we are putting a tremendous amount of focus on margin and margin expansion as volumes ramp up and as we have pricing power. The -- the third quarter was a particularly -- I would say bizarre quarter, for one thing, an effect of Hurricane Katrina, a short-term effect, was that in a few plants, in some markets, we literally could not get diesel fuel and we literally could not run our quarries. When you have that situation, it really impacts cost and, therefore, margin. The third quarter is not a predictor, we believe, in any way of future performance for Vulcan. There were just so many strange things that ran through the quarter, both weather-wise and related to that cost-wise. We are disappointed that our revenue increases are not flowing through with incremental margin. It is obviously a cost issue for us and we are very, very focused on the cost issues.

Some of those cost issues are very difficult for us to control, as in diesel fuel prices and the cost of let's say conveyor belts, even with our national contracts to our procurement system, which we believe are favorable. We have relatively little opportunity to affect those in the short-term. What we can control are our operating practices, our efficiency, the performance of our plants and we are very focused on that, that was a subject of a great deal of discussion and review with all of our division presidents and senior construction materials managers at our meeting about last week. It is a major focus for us and we believe that we ought to be getting margin expansion given the price increase and we're very focused on achieving that.

Okay. Great and are you assuming any margin increase in your Q4 guidance? Seems like it's a little bit, but maybe minimal.

With the $12 million projected impact in diesel fuel in a slow quarter, which the fourth quarter is compared to the third, we had an 11 million impact per diesel fuel in the third quarter, 12 million in the fourth, based on our projection. I don't think there is a significant margin improvement built into our fourth quarter projections. Hopefully we will achieve that, but we have got to work hard to do it.

And then just -- my last question is on the SG&A side. Should we treat the incentive compensation expenses as a recurring every quarter? Or is that kind of just trued up once or twice a year? How should we think about that expense?

Well, I made the comments on the performance share, I would say we entered the third quarter with a share price of about $64 a share. We closed the third quarter with a share price of $74 a share. That movement increased our charge about 3.2 or $3.4 million. Unfortunately, when we entered this quarter at $74 and today we are, it looks like at $63, 62.96, we're going to recover that. Hopefully we don't recover a whole lot of it. Because hopefully our share price recovers in the quarter, but we have a mark-to-market on those performance shares and so that's why -- if our share price goes up, our incentive goes up. If our share price goes down, our incentives go down. That's what's happening in the third quarter and is happening so far in the fourth.

Great. Okay. Thank you.

And your next question comes from Jeff Smith from Sanford Bernstein. You may go ahead, sir.

Hi, I was hoping you could give us more color on the spending for the upgrading the new plants and the legacy plants? Maybe quantifying that and then also can you distinguish between what is the capital expenditure versus an operational expenditure?

Well, the spending I'm talking about is all -- we expense everything we can expense. Our whole business model is much more cash flow oriented than accounting earnings oriented. The incremental spending in this quarter over last year's third quarter in these categories, we -- I have that statistic here somewhere. In total increase in R&M parts and supplies, third quarter '05 over third quarter '04, I -- I will have that for you in a second, Jeff. But it's several million dollars. A significant -- 6 million? $6 million quarter-over-quarter. A significant slice of that went into our newly acquired aggregate and asphalt plants and the rest went into our legacy operations.

Okay, great, thanks.

Probably on the order or magnitude of 15 to 20% of it went into our newly acquired operations and the balance into our legacy operations. A much higher percentage went into our newly-acquired operations than into our legacy operations. On a per plant basis. Is that -- if you follow that?

Great, thank you.

And your next question comes from Rob Millfleet from Denverport, I believe?

Thank you, my questions have already been answered.

All right, sir. And at this time, you have no further questions, sir.

Thank you very much for tuning in. We look forward to talking with you again after our full year results. As I said, we believe the market is good for future demand growth, as well as future pricing operations -- or pricing opportunities. We are, as you know, now focused exclusively on construction materials and we look forward to sharing with you the results of our operations in the end of January, or early February. Thank you very much.

Thank you, ladies and gentlemen, for your participation in today's conference. This concludes your presentation. You may now disconnect and have a great weekend.