渥肯建材 (VMC) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by and welcome to the Vulcan Materials fourth quarter 2005 earnings conference call. My name is Carlo, and I'll be your coordinator for today's presentation. [OPERATOR INSTRUCTIONS] It is now my pleasure to turn the presentation over to your host for today's conference, Don James, Chairman and Chief Executive Officer of Vulcan Materials. Please proceed, sir.

Good morning. We thank you for joining our fourth quarter conference call. I'm Don James, Chairman and Chief Executive Officer of Vulcan. With me today are Dan Sansone, our Senior Vice President and Chief Financial Officer, and Jim Smack, Senior Vice President of Construction Materials. Before I begin, let me remind you that certain matters discussed in this conference call contain forward-looking statements which are subject to risks 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 SEC reports, including the report on Form 10-K for the year.

After my brief comments, we will be pleased to answer questions from those of you who have dialed into this call. Let me remind you that a replay will be available approximately two hours after the end of this call at Vulcan's website.

Yesterday after the markets closed, we reported record results for the company. Our fourth quarter results were excellent and underscored the very good performance we saw throughout the year. Fourth quarter earnings from continuing operations were 92 million or $0.89 per diluted share, an increase of 44% from the $0.62 per diluted share reported last year. Included in earnings from continuing operations is $0.06 per diluted share referable to an increase in the carrying value of the ECU earnout. Fourth quarter net earnings of 91 million or $0.88 per diluted share include $0.01 per diluted share loss from discontinued operations for the quarter.

Improved pricing and higher volumes for all major products led to a 24% increase in net sales to 681 million and gross profit as a percent of net sales improved in all major product lines. For aggregates, gross profit as a percent of net sales increased to approximately 200 basis points over the prior year's level, despite energy-related cost pressures, particularly diesel fuel. Pricing improved 10% from the prior year, and volumes were up 6%. Excluding acquisitions, aggregate shipments increased 5% from the record fourth quarter level of last year. These solid gains in both price and volume reflect the current strength in demand and pricing for aggregates in our markets.

Unit costs for diesel fuel increased 45% from the prior year and reduced pre-tax earnings over 9 million for the quarter. Sales of asphalt and concrete increased 78% and 29% respectively from the prior year fourth quarter. Selling prices for asphalt and concrete improved significantly, and more than offset the effects of cost increases for raw material, which included a 40% increase in unit cost for liquid asphalt as well as market-based transfer price increases for the aggregates we supply internally. Sales volume for both asphalt and concrete were higher than the prior year due to improved demand and better weather.

Last year in the fourth quarter, the lingering effects of four hurricanes and an unusually high number of rain days in California, Texas, and in some parts of the southeast resulted in lower productivity in our aggregate plants and higher unit cost for the quarter in all major product lines. Gain on sale of property, plant, and equipment declined approximately 7 million due to lower sales of real estate.

Moving now to the full year, both net sales and earnings were records. Net sales increased 18% from the prior year to 2.6 billion, and earnings from continuing operations increased 32% to 344 million or $3.30 per diluted share. Full year net earnings increased 35% to 373 per diluted share, including $0.43 from discontinued operations. Discontinued operations include approximately five months of operation of our former chemicals business as well as charges for exit and disposal costs related to the sale of that business. This compares with earnings of $0.25 per diluted share for a full 12 months of operation in 2004.

Aggregates pricing increased 8%, and volumes were up 7% to 260 million tons. Acquisitions accounted for 1% of this volume growth. Aggregates pricing and volume improvements more than offset the effects of increased costs for diesel fuel, parts and supplies, and maintenance. Unit costs for diesel fuel increased approximately 48% from the prior year and reduced pre-tax earnings by approximately 33 million. Sales of asphalt and concrete increased 36% and 12% respectively from the prior year. Asphalt sales increased due to both higher pricing as well as increased volume. Price improvements more than offset cost increases for raw materials, such as liquid asphalt, which increased 28% from the prior year.

Selling, administrative, and general expenses increased 36 million from the prior year, due primarily to performance based incentive compensation plans. Compensation expense, under the company's plans, is influenced by the degree to which business performance targets are achieved. One of these plans, a performance share plan, is also affected by share price which increased 24% in 2005. Other income increased from the prior year, reflecting a 20 million or $0.12 per diluted share increase in the carrying value of the ECU earnout.

Our businesses continue to generate strong cash flows. For the year we generated 473 million of cash from operating activities. This allowed us to invest in projects that enhance the prospects for future earnings growth as well as permitting us to return cash to shareholders in the form of dividends and share repurchases.

Earnings growth prospects going forward should be enhanced by the capital projects we completed in 2005. These include plant productivity projects in our existing operations, the acquisition of 11 aggregates operations in five asphalt plants in four states, and the start of aggregates production at four new greenfield sites we have been developing over the past several years. In January of this year, we acquired an additional quarry in North Carolina. In 2006, we expect these acquisitions to produce almost 7 million tons of aggregates, up from the 4 million tons they produced for us during the period we owned them in 2005.

In the fourth quarter, we repurchased an additional 1.6 million shares of our stock in the open market at an average cost of $66.67 per share. For the full year, the number of shares we repurchased is over 3.5 million at an average cost of $63.67. This represents about 3.5% of the shares outstanding at the beginning of 2005. The number of shares remaining under the current authorization from our board is approximately 4.9 million.

Additionally, in 2005, we increased our dividend 11.5%, marking the 13th consecutive year of increase. Lower net interest expense resulted from the retirement in April of 243 million of debt and higher average balances for cash and cash equivalents.

Turning to our outlook for 2006, we expect another year of increased demand for aggregates and, as a result, growth and earnings. Construction spending should continue to benefit from economic growth and improving state and local fiscal conditions. Highway construction should benefit from improving state and local tax receipts and the passage of the new multiyear federal highway bill in 2005 should add stability to construction activity. The Rockefeller Institute estimates state government tax revenues continue to climb from their trough in 2003. And looking ahead to 2006, the most recent fiscal survey of states by the National Association of State Budget Officers shows an increase in tax collections in 2006, compared to 2005.

In California, our largest state in terms of revenue, the economic outlook is certainly brightened with revenues up almost 4 billion from personal, corporate, and sales and use tax collections. And now Governor Schwarzenegger has put forward a comprehensive proposal to implement 222 billion in infrastructure improvements in the state over the next 10 years. Transportation projects account for 107 billion of the total amount, utilizing both existing and proposed new funding sources. If the total plan comes to fruition, it could mean an increase in the average capital outlay from 4.7 billion to 10.7 billion annually according to the governor's strategic growth plan as outlined in his recent State of the State address. The success of the plan will, of course, be influenced by the continuing economic rebound in California, the fiscal policies adopted there, and ultimately the political environment in the state.

Across all of our key markets, the recovery in private, nonresidential construction should continue, and residential construction activities should remain at high levels. As a result, we expect Vulcan's aggregate shipments to increase 2 to 4% above the record 260 million tons we shipped in 2005. We believe the momentum underlying the 8% price improvement we achieved in 2005 is sustainable into 2006. Aggregates are broadly used, and demand in our markets is strong.

In some markets, securing new reserves is very difficult. Additionally, higher prices are necessary to offset sharply higher input costs we have experienced. As a result, we expect to achieve 6 to 8% price improvement for aggregates in 2006. We expect the average cost for diesel fuel to increase above 2005 levels. Additionally, higher costs are expected for certain parts and supplies, as well as for other inputs, such as explosives. Higher costs for liquid asphalts are also anticipated.

In light of these assumptions, we expect earnings from continuing operations of $3.85 to $4.15 per diluted share for 2006 and $0.20 to $0.35 per diluted share in the first quarter. Effective January 1 of this year, Vulcan will adopt FAS-123R, accounting for stock-based compensation which requires companies to begin expensing stock options. Our 2006 earnings guidance includes up to $0.06 per diluted share in expense referable to stock options for the full year, of which up to 3% will occur in the first quarter. Our 2005 earnings from continuing operations did not include any expenses referable to stock options. Earnings from discontinued operations in 2005 included a charge of $0.03 per share related to modifications of stock option awards in connection with the sale of our chemicals business.

Remaining costs related to the sale of our chemicals business are expected to result in a loss of approximately $0.04 per share in 2006 and approximately $0.01 per share for the first quarter. The continued economic growth we expect in 2006 and the resulting strong demand in our markets presents us with some very good opportunities to reinvest in existing operations as well as new greenfields. These capital investment opportunities provide attractive returns and will help us serve our customers and markets more effectively going forward. They will also help us reduce plant cost as well as add additional plant capacity and reserves, improving the efficiency and capacity of our transportation assets, serving the coastal markets, particularly those on the gulf coast, is another opportunity for us in 2006.

As a result, our initial roll-off of these projects leads us to estimate a 275 million to 325 million for capital spending on property, plant, and equipment for the year. Because the timing of expenditures for certain projects is still preliminary, we will provide updates each quarter as the timing of the actual expenditure becomes clearer.

In recent years, we have generated significant value for our shareholders through the development and sale of reclaimed and surplus real estate related to our aggregates business. Our current estimate for real estate gains in 2006 ranges from 0 to 40 million of pre-tax earnings. However, the timing of real estate sales is difficult to predict and, as such, we have not included any real estate gains in our earnings guidance for 2006. Additionally, our earnings guidance for 2006 does not reflect any future adjustment in the carrying value of the ECU earnout referable to the sale of our chemical division.

At the end of 2006, Vulcan will celebrate 50 years as a New York Stock Exchange listed public company. Our rich history of dedicated employees, adding value to our shareholders through effective management of the assets of the company, is reflected in our superior track record of total shareholder return. We believe we have the best employees operating the best assets in some of the best markets in the United States and, as a result, our shareholders have been rewarded for their confidence in our performance. Shareholders, with a long-term outlook, have found Vulcan to be a good steward of their investment. Vulcan's total shareholder return in 2005 was 26.3%, significantly better than the 4.9% return of the S&P 500. And whether your time horizon is one year, or two years, or five years, or ten years, or even 40 years, an investment in Vulcan has outperformed a similar investment in the S&P 500. Going forward, we will be working hard to make 2006 another year of earnings growth and solid returns for our shareholders. We thank you for your interest in Vulcan. Now, if our operator will give the required instructions, we'll be happy to respond to your questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] And sir, our first question is from the line of Jack Kasprzak with BB&T Capital Markets.

Thanks, good morning Don.

Good morning, Jack.

Congratulations on another great year and a great quarter, in particular.

Thank you very much.

My first question is with regard to pricing and your 6 to 8% guidance for '06. Just wondering if you could help us understand if that's based on price increases that you've already put into effect, for example, the start of '06, or is it based on your view of what you think you'll get for the full year of pricing that you may implement during the year as well?

It's really a combination of the two. Some of those prices are in effect and others will roll out during the course of the year, probably more toward the first half.

And would you think that there's a possibility, -- I mean, it just seems like there are some areas of the country, particularly where you guys have operations along the Gulf, where we could maybe see what is being termed a second round of price increases. Is that an accurate way to kind of look at it in terms of a potential upside or would that not be accommodated by the market do you think?

Well, our price reports, Jack, as you know, are based on, -- we're taking long distance transportation out, so the actual selling prices for aggregates, for example in the Gulf Coast, may be substantially higher than that, but a transportation component will be in there, and transportation logistics are substantially more expensive today than they've been historically, primarily because of the increased cost of energy as well as the increased cost of railcars, and barges, and boats, and ships, and things that are made of steel. Do we have any upside to our pricing guidance? Certainly we hope so. But at this point, our best judgment is 6 to 8%.

Okay. My second question is with regard to the earnout. Could you just update us if the current pricing dynamics remain in place, what might be left in terms of potential there for that earnout?

As we move forward, the variables in the ECU earnout are ECU prices, which remain very strong, at historic highs, natural gas costs, which fortunately are moderating, so there may be some benefit from lower natural gas prices in the formula used to calculate the ECU earnout. And with the passage of time under the valuation model that our outside valuation experts use, there is less uncertainty about the future. So I would say that natural gas pricing and the continued reduction in uncertainty about the calculated amount of the earnout would be places that could result in a further change in value.

Is there not a maximum amount?

Under ECU earnout, there's a maximum of 150 million. On the 5CP earnout, there is not a cap.

Okay, and then just what would you expect your effective tax rate for 2006 to be?

Jack, we think it will be about 32.5%. It was lower than that of course in 2005, but in 2005 we had some favorable settlements of tax audits and some other miscellaneous items running through the tax account. But our best estimate today is 32.5% for '06. Certainly that can move around depending upon relative earnings from asphalt and concrete relative to aggregates where there's a different, -- there's no depletion on the earnings from asphalt and concrete as there is in aggregate.

Right, okay. And the current portion of debt that's on the balance sheet, do you still plan to retire that in the spring?

We retire 240 million today.

Today. Okay. Very good. Thanks, Don.

And sir, our next question is from the line of David MacGregor with Longbow Research.

Yes, good morning gentlemen.

Good morning, David.

Nice quarter.

Thank you.

Just to continue on some of the model assumptions, your 3.85 to 4.15 guidance, can you just talk a little bit about some of the cost assumptions you have in there with respect to diesel fuel, asphalt costs, pension, so on and so forth.

I covered those in my comments. Let me go back and reiterate those. I think we are projecting that -- will let my colleagues help me with -- okay. We didn't quantify those increases in our comments. We certainly expect diesel fuel to be up. We expect parts and supplies to be up. We expect explosives to be up. We expect liquid asphalt to be up, as well as cement. We -- quantifying those is difficult for us, but built into our numbers are what we believe are valid projections for the year-over-year cost increases for those, and I don't have the details of that in front of me now, but we base it off market reports and not any kind of internal calculations. With respect to pension, we don't expect any significant increase. Probably pension costs will remain flat for '06.

Okay. You were talking about the CapEx and you got some pull forward from some projects I guess that are still underway, but it sounds like a big internal growth here. And I was just wondering, is there any way you can quantify for us just what the impact of the internal growth, the organic growth would be for 2006.

Well, the internal growth will come from a combination of acquisitions, new greenfields. I mentioned we started production at four new greenfields in 2005, and those certainly will move forward in '06, as well as volume growth in our existing plants. A lot of our capital is to reduce cost, add capacity, improve productivity and efficiency. I do not have a breakdown in front of me. Replacement cap -- pure replacement capital is a relatively modest piece of that total capital spend.

We are looking for most of our -- or much of our capital into what we would call profit-adding products, that is either cost reduction, productivity enhancement, or capacity expansion. We're also -- have the opportunity to increase our transportation capacity, and we are projecting a fair amount of capital spending in order to serve the growing demand in the U.S. Gulf Coast, not only from the hurricane areas, but just the general rapid growth in Florida and Texas as well as the central Gulf Coast, as well as growth along the south Atlantic Coast all the way from the tidewater areas of Virginia down through North and South Carolina.

So when you talk about investing in transportation, are we really just talking about barges?

We're talking about railcars, rail yards, barges, Bluewater transportation assets, and distribution yards, and the infrastructure at distribution yards. We have reopened and added to our distribution yard capability in the U.S. Gulf Coast, and there's a capital -- modest capital, but nevertheless additional capital associated with those and then the assets necessary to move those. Today the constraint on our ability to sell additional quantities of rock in the U.S. Gulf Coast is not a production constraint, it is a transportation constraint.

What do you think that would amount to for reference?

Well, through the end of January, we have sold about a million tons on hurricane-related projects in the central Gulf Coast. We have built into our forecast for the year what we think we will be able to do in those markets given our capital spending program, but we believe, if we can increase our transportation capacity and our transportation efficiency, that there's a tremendous opportunity in the Gulf Coast.

Okay. Last question. Again, with respect to assumptions, the highway construction growth that you talked about sounds pretty encouraging. What should we be using in our models as a growth number for '06 over '05 from highway construction growth?

We belief it will be about 4%. In aggregate volume, it'll be more like 11% in revenue. And you can -- when you take volume and price and roll it up, you get to plus or minus 11%, always.

Okay, and then Don, can I trouble you also for numbers on your assumptions with respect to private non-res and then you talked about residential, it sounded like your thoughts there might be a flat market (multiple speakers).

No, they really aren't. For '06 we're looking for probably on a macro-basis of revenue for construction put in place for private non-res, probably a 6% growth there on top of the 6% growth we saw in '05, and that would translate into maybe a 3% aggregate volume when -- and some pricing on top of that.

And then the residential is what I thought -- sounded to me as though you were (multiple speakers) --

In residential, we're actually seeing residential construction put in place being up in our markets, something like 11% in revenue. Tonnage for residential, the growth will be more modest, probably in the range of 1%.

1%. Okay, great. Thanks very much.

You're welcome, David.

And sir, our next question is from the line of Fritz [VonCarp] with Sage Asset Management.

Good morning, gentlemen. I wanted to follow up on your comment on some of the regional color you gave on how the fourth quarter volumes were in Texas, California, the southeast, the regions, with the weather and everything. Could you just give me some more on that, please?

Well, we had a lot of -- we had an unseasonably wet weather in southern California in the fourth quarter last year, continuing on into the first quarter of '05. They had something like 22 inches of rain, it seems to me, in the Los Angeles basin in the first quarter, which was sort of more than a year's normal rainfall. We also had a wet fourth quarter of '04 in Texas, and we had much more normal weather in '05 and then, in Georgia, we just had a really wet fourth quarter of '04 and more normalized weather in '05. Georgia was affected by the hurricanes, not so much wind as just the rain that came through following all the spinoff of those hurricanes. We had a much more normalized fourth quarter this year. In fact, we probably had slightly better than normal weather in the fourth quarter.

Okay, thank you. And then on a different topic, if that's all right, obviously you gave guidance for '06 and you didn't give it for '07, but as we look to '07, is there any reason that we -- that you can see at this point in general, why we should think particularly differently about '07 than we do about '06, as we make our own '07 forecasts?

We have never given forecast out that far. And without trying to quantify anything, certainly my view is that I see nothing on the horizon that would cause '07 to be dramatically different from the trendlines of the last couple years, '05 and '06.

Okay, thank you very much.

Sir, our next question is from the line of Barry Vogel with Barry Vogel & Associates.

Good morning, gentlemen.

Hey, Barry.

Don, I must admit this is the best quarterly announcement that you've had in so long that I can't believe it. It's like a perfect storm.

Well, I might argue with you about that, Barry, but I'll take it. So --

[laughter] Going back to some of these things that have been raised, and some of these questions can be answered by you and some by Dan. First of all, Dan, a minor thing. Your depreciation and amortization for '06?

Probably in the range of 230 to 235 million.

Okay. And, Don, as far as this Katrina related business and the transportation constraints, I didn't hear you say anything about maybe needing another ship. Do you have enough ships to move material out of Mexico into the Gulf Coast right now?

Barry, as you know, we have two ships of our own. We use some additional charter capacity. And we are building a third ship.

When would that come on stream?

Probably not until early part of '07.

Early to mid '07, Barry.

Okay. And as far as, -- you talk about the very significant business opportunities because of the devastation in the Gulf Coast, and you sold a million tons so far, which is obviously early on. Built into your very bullish estimate for '06 earnings, relative to what you've done before in your estimates, can you give us an idea of what you've built in for tonnage in '06 for the Gulf Coast hurricane-related business?

We have some -- obviously we have some volume growth in the central Gulf Coast particularly over '05 when, as a result of the hurricanes, there was not a great deal of activity there. The central Gulf Coast is a relatively modest part of our total market, maybe 5% or less. But the ultimate growth in volume in that market, as I said earlier, will be controlled by transportation assets, not so much by demand or by productive capacity. But I don't have a number in front of me of the volume growth we have built in, but it will be above the 2 to 4% guidance we've given for our total company.

Okay, and, Dan, what did you use for average shares in your fully diluted number of 3.85 to 4.15?

Let me just take a look, Barry. Around 101.5.

Okay. And, Don, back to your volume gain estimates for the new year of 2 to 4% for aggregates, given everything you're talking about, which were really very positive comments, and given the fact you have four new greenfields coming on as well and you have acquisition volumes for the full year this year that you didn't have for the full year last year, and given the fact you're probably going to make additional acquisitions during '06, it seems that your volume gain seems very conservative.

We don't have any volume from acquisitions in our projection. So to the extent we are successful in acquiring new facilities in '06, that would be an upside to our volume.

Have you included the greenfield tonnage?

Yes. We've included the tonnage from greenfields that opened in '05. We have not included tonnage from greenfields that we may get open in '06, but that will be relatively modest, if any. I would make this observation, Barry, that our managers and our people are very focused on profitability and margin, and we are committed to supplying our existing customer base. We are not out chasing additional volume for the sake of growing volume.

Okay. And as far as your stock purchases, I know historically you did a great job in buying back huge amounts of shares over -- on a consistent basis, and it really helped the shareholders. And you finally, I guess, with your renewed optimism and your key leverage balance sheet, you stepped up very, very well last year. If this continues, and of course you're now delevered by another $240 million as of today, should we expect the kind of activity in terms of stock buybacks that we saw last year in the current year?

Barry, as you know from your long association with Vulcan, we do not give guidance in advance on the quantities of shares we expect to purchase. Certainly the conditions that led us to repurchase our shares in '05 seem to continue to be in place for '06. That is, we have a very strong balance sheet. We believe returning cash to shareholders in the form of share repurchases is an appropriate thing to do. And our projections for earnings and cash flows for '06 give us optimism, plus we expect additional cash flows from the, -- in '06 from the earnouts in the chemicals business. So without committing to a particular level of share repurchase, I would expect that unless conditions change, we would continue to look at that as a favorable use of cash.

My one last question. How would you view the acquisition environment today for you, looking for acquisitions?

Well, as you know, we bought 11 aggregate facilities in '05 and closed on the 12th in January of '06. We're very active in looking for acquisition opportunities, particularly bolt-ons but also larger businesses. It's very difficult for us to predict a given amount of volume increase or acquisition spend, because these things are largely driven by the interest of the seller which we don't control. We can certainly buy a lot of properties if we're willing to pay too much for them but, as you know, that's never been our culture. So we continue to be active. We think we will have opportunities for additional acquisitions in '06, but it's very difficult for us to build those into our projections.

Thank you very much. And if you continue to do this, Don, I will be a very happy camper.

Thank you.

And sir, our next question is from the line of Mike Betts with JP Morgan.

Yes, good morning.

Hi, Mike. How are you?

I'm fine, thank you. I had sort of two or three questions if I could. The first one, and it leads on to another question, if I could just check the capital expenditure number for '06 because I joined a bit late. Was it 275 to 325?

That's correct.

275 to 325.

That's fine. My question relating to that -- I mean somebody asked earlier about the amount of maintenance CapEx, could I ask the question maybe a slightly different way? In the stuff that's not maintenance CapEx, what would be your sort of average payback period on that investment, or IRR, depending on how you want to answer the question, but some idea of the returns that you could expect to make from that.

On what we call profit-adding CapEx, the range of internal rates of return might be from 12% to multiples of that. We have, -- we believe that is the best use of cash available to us and to our shareholders are internal profit-adding investment projects.

Okay, thank you. And then just on the real estate that you briefly mentioned in your speech, firstly, was there any real estate profits in the numbers for 2005?

We had relatively modest gains from real estate. My colleagues will check that number for me. There were some parcels that for some reason or another did not close in '05, and those will roll forward to '06. We're moving from a period, Mike, in which real estate sales generated relatively significant revenue streams with relatively modest accounting gains to a period in which a larger proportion of the revenue stream will result in accounting gains, meaning the projected selling prices will have more gain in them than historically. For '05, full year '05, we had about 8.3 million of real estate gains.

Okay. Is it possible to give an update? You always used to give a number in terms of what you had to sell from CalMat, but I mean at group level, is it possible in any way to sort of give an indication of what you might have to sell in, -- I don't know if you want to do it over a time period of three, five years, or whatever time period, but is there any way you could give an indication of what sort of revenue you might be able to get from real estate sales?

It's tricky to put a timeframe on it simply because the rate at which we go through the process of reclamation and development of these properties to get them in a position to sell, but it is, -- we currently have identified plus or minus 150 million of properties that might be sold over the next few years.

Okay, and my final --

These are again reclaimed property, reclaimed from mining or properties that we own that for some reason or another we have concluded that we've gotten a better site or that are surplus to our needs.

So many of them, the reclaimed properties would be in the book for next to nothing presumably.

Not necessarily, because many of those, as you know, came out of the CalMat acquisition, and we wrote those up to market values at the time that we bought it. So they do have a basis, a book basis.

Okay, and my final question, if I may, and it's just back to the cost issue, but I wanted to ask it more in a general terms, if I could, than the individual items. In terms of the guidance that you've given, does that assume that the cost pressures overall are similar to what they were in 2005 or does it assume that the cost pressures actually tail off a bit? Because looking at diesel and a few of the other things, I would assume that the cost pressures may be, at least as it looks today, may be a bit less than they were in 2005?

We overall, -- we think we have built into our guidance cost pressures that are roughly comparable in '06 to what they were in '05. That is the rate of increase.

Okay. That's great. Thanks very much.

And sir, our next question is from the line of Jack Kelly with Goldman Sachs.

Good morning, Don.

Hi, Jack. How are you?

Good. Just to follow-up on one of the questions on pricing in terms of how it plays out of 6 to 8%, turned out to be the correct number. It would seem based on the price increases that you put through last year and when you put them through, that you maybe have a carry-over of 3 or 4% from last year. So I guess one of the questions is -- I know last year in the first quarter you actually increased prices, I think, in January where you, I think, typically did it in March. So was there a price increase in January? And if we do do better than 6 to 8, would that be a market driven phenomena or would that only occur if costs required it?

Jack, we have put in place price increases effective first of the year in many markets for many products. If we are able to raise prices above guidance, it would largely be driven by market conditions. We try not to base our pricing on our cost inputs, although certainly in 2005, the escalating input costs have probably created conditions in the market that have been favorable for us to get larger than average price increases. And as we indicated in response to the last question, those input cost pressures, we don't expect to diminish for '06, so they do provide a basis for supporting higher market prices for our products.

And in aggregate, what was the average price increase that you implemented throughout the system in January, Don?

I think it is generally within the range of guidance that we gave you, 6 to 8%.

Okay, so 6 to 8% in --

That doesn't mean it was in that range in every market, some markets are higher than that, and some are lower. It all depends on market conditions.

But on average it was 6 to 8?

Yes, on average, yes.

Well then, if that's what you did in January and there was a little carry-over from '05 and there's a possibility you could do more in the middle of the year or later, it seems like you're already at the 6 to 8 that you used for the full year.

Well, I understand the point of your question. We have tried to build all of that into our pricing projection of 6 to 8%. As I said in response to an earlier question, we certainly hope for and will work hard for some upside to that, but as we sit here today, that is our best estimate of the full year realized price increases for aggregates.

Okay, and then just looking at your forecast for the full year, it looks like that - - the pricing scenario that you've developed versus your best guess on costs, it seems like the spread between price increases and cost increases is going to be much more favorable this year because it's almost implicit in your numbers that you're looking for pretty sharp improvement in margins.

Well, and there are some other things working through there. We talked about productivity enhancements and capital spending to achieve those. We certainly have, as a strategic thrust, to offset as much of the escalating cost of inputs as we can through productivity and efficiency enhancements in our plants. There's not much we can do about the cost of diesel fuel, but hopefully there's a fair amount our guys can do about continuing to improve the efficiency and productivity of our plants to offset that. And we have a fair slug of that built into our plan for '06.

Okay, and, Dan, just on the share count, in '05, it looks like we had share creep of maybe 2 million shares or so, if I'm doing the numbers right. You had indicated a number, - - an average number of 101.5 for '06 which is slightly higher than the average for the fourth quarter. So the question is, are we not going to have any share creep this year or are we going to have share creep and you've built in some kind of repurchase to kind of keep the share count flat?

Well, the 2006 assumption has a lot of moving parts in it, including our best estimate of the effect of exercising of stock options. It also has into it the delivery of shares to employees pursuant to the performance share plan. The first award of which will pay out in the spring of this year. It also has our best. - - it has an assumption for some level of share buyback embedded in it and it has some assumption embedded in it for share price increase, and that's actually relevant to the share count because of the treasury method of counting for stock options. So there's a lot of moving parts in there. That's just our best guess at this point in time, Jack.

Okay.

Of all the variables that go into that calculation, the two that are obviously the most difficult to quantify at any point in time is, number 1, how many shares will we buy back, if any? There is point number 1. And then number 2, the escalation in share price or the change in share price actually can have a pretty big impact on the share count because of that treasury stock method for the outstanding options. And that did impact us pretty considerably in 2005, which is the reason that, despite having purchased 3.5 million shares, the weighted average share count was basically flat. So anyway, that's the difficulty with the numbers. I don't know what the share price is going to do, and I can't tell you what our exact buyback pattern is going to do.

If we put aside the buybacks which we can't predict and maybe holding stock price constant, we're going to get the grant in May. How many shares would that be roughly? You said I guess there was going to be a grant in May based on '05 performance.

No. There was a grant that was made in 2003 which matured December 31, 05, but it's already built in. That's already built in, because that's in, - - we're talking about diluted, I'm sorry.

Yes.

That's embedded. That's already embedded in the fully diluted shares, Jack. I'm sorry.

So the 101 assumes some level of share repurchase is the bottom line.

Mm-hmm, yes.

Thank you.

And sir, our next question is from the line of John Fox with Fenimore Asset Management.

Hi, good morning, everyone.

Hi, John.

I have a number of questions. Just on the share count, I want to con - - the 101.5 is for diluted shares.

Correct.

That was my understanding.

That's correct.

Okay. If everything stays as it is, which I know it won't, what would be the cash collection on the chemicals earnouts for 2006?

We think it will be about 130 million.

Okay, great. And would there be a cash pension plan contribution required in '06 at this point?

No. None required and probably even none permitted.

Okay, and then, Don, I had questions on two of your comments. There's quite a bit of anxiety about home building and residential real estate, et cetera, and in your comments in the press release, you said that you thought they would stay strong in your markets, so I just wondered on if you could comment on why you feel that way at this point.

It is based primarily on what our guys in the field are hearing from their customers. As I indicated earlier, we're only looking for about a 1% volume growth in residential construction in aggregates in '06, but it's certainly not down. And our markets tend to be ones where residential construction is continuing to grow, although very modestly, compared to the prior year or two.

Okay, let me just clarify. Earlier in the call, I thought I heard you say about residential, you would see 11% growth.

I said the construction put in place, in dollars, for residential for '06 is projected to be about 11%.

So that's for the government figures put in place.

Right. And that's dollars.

Okay.

And so that's not --

Right. I was trying to get through prices and tons. Okay. And then you also will mentioned the release about in some markets where it's difficult to bring on supply in aggregates. I was wondering if you could just identify what markets that is.

John, before I do that - -

Okay.

- - the residential construction put in place in dollars for '06 is more like 5 to 6%. Okay. And of course given the higher cost of all the inputs to residential construction from lumber to roofing shingles to plumbing pipe, aggregate's just a piece of that.

Right.

Okay. Now I'm sorry, go ahead.

I just wondered if you could identify some of the markets. You mentioned in the press release the difficulty of getting reserves in some markets for aggregate. And if you could just identify what markets that is occurring?

Well, I think that is a true statement with virtually every metropolitan market we serve.

Okay.

It is certainly possible to get reserves today in rural markets, but that is not where our business is focused by and large. And as you well know from your years and years of involvement in following Vulcan that the transportation costs which have historically been significant in moving aggregate long distances from remote reserves into metropolitan areas, that cost has only escalated substantially with higher fuel prices and higher costs.

Right, sure

So the restraints on additional reserves in metropolitan areas is probably greater today than it's ever been.

Okay, great. Thank you.

And sir, our next question is from the line of Jonathan Goldberg with Highline Capital Management.

Hi, good morning. Congrats on the results.

Thank you.

Just had one question. You've talked about this a little bit already, but as far as operating leverage, you showed some in the fourth quarter, and I was just wondering, looking out at 2006, if you could give a little bit of color just on where you think the opportunities are to grow the margin, and is that based on CapEx that you spent in 2005? Is it based on restructurings that you're doing at the core level? I was wondering if your could give some more color on that.

Margin expansion can come from higher pricing. It certainly, we believe, can come from plant productivity improvements which, in some cases, require capital, in some cases do not require capital, but is a constant focus of ours and frankly I think our guys who run our plants are the best in the industry and work very hard to constantly improve productivity and efficiency, so we expect some margin expansion to come from that. The traditional sort of notion of operating leverage, that is, if you sell more volume out of an existing plant, you have dramatic margin expansion, is not a significant place to look for margin expansion in this industry, in this economy, at least for Vulcan. Now, we will get some, but we are by and large utilizing our asset base very efficiently today. We will add to that capacity and improve our efficiency, but I don't think it would be valid to assume that, if volumes go up an additional 2 to 4%, that that alone, without price increases or without plant productivity and capacity additions, is going to yield higher margins. Should we start to see a return from, - - on some of the restructurings you did at some of your acquisitions in '05? Yes. I don't call them restructuring. What we tend to do is to buy plants and then go in and improve them. A lot of that is expense as opposed to capital. But there is some capital. But we certainly expect improved performance in '06 from our '05 acquisitions.

Thank you.

And sir, our next question is from the line of Leo Larkin with Standard & Poor’s.

Good morning. Could you give us some guidance for interest expense for '06?

Dan, would you?

Yeah. Probably in the 9 to $9.5 million neighborhood. Not materially different than what it was in '04.

In '05?

In '05, I'm sorry, in '05 Not materially different.

The other thing, based on the guidance you're giving with higher sales and so forth, should working capital again be a use of funds? Should we expect that?

I'll try to take a quick look. What's embedded in that working capital change in 2005 is some of the anticipated receivables referable to the ECU earnout.

Mm-hmm, okay.

And some of that's going to be collected. That's a big item that's somewhat distorting the underlying working capital change in '05. So the assumption, I think, that I see in '06 is that's going to be collected, and that will have a probably, a net favorable effect on the working capital changes as they show up on the cash flow schedule.

Or, put differently, I don't think we'll be ramping up - - I mean, if the business continues to grow, we'll probably end up with higher receivables and potentially higher inventories, but our working capital utilization statistics, measured on a per day of sales or any of those kinds of things, have not deteriorated at all, so I think the answer from a cash flow is that if the business is bigger and stronger in the second half of '06 as compared to '05, you may see higher levels of operating working capital. That should be dampened to some extent by the collection of some of the ECU earnout. And I misquoted on the interest expense number. I was looking at the wrong thing earlier. That's probably a $20 to $21 million item in 2006. I just grabbed the wrong schedule.

Okay, thank you.

[OPERATOR INSTRUCTIONS] And sir, our next question is from the line of [Allen Metrani] with [Sylvan] Lake Asset.

Could you maybe go into the earnouts a little more? I understand the ECU earnout of $130 million, but can you talk about the other part of the earnout that is not capped?

It is based on a product that we developed called 5CP and we share in the margin of that product above a threshold level. The volume of that product has ramped up and we believe it's got a nice run. That earnout lasts for about seven years. The potential gain from that is substantially less than the 150 in the ECU earnout. I think we've given guidance in the $40 to $50 million range for what our expected earnings from that earnout to be. Of course that will be spread out over about the next six years.

Thank you, I appreciate that. And the ECU earnout, when does that hit? How many - - are there set payment days throughout the '06. Can you give me - -

Yes. The first payment date for the ECU earnout will occur at the end of the third quarter of '06. That'll be for the first full year and then, we expect, based on our current view, is that it will be fully paid out at the same period in '07. So it'll be paid out in the first two years.

Great, I appreciate that. And like Jack from Goldman, I also can do math, and it strikes me you're going to blow through your pricing assumptions within the next month or two. Can you just tell us what's holding you back from being more aggressive in price. I mean, you don't have cement or concrete, I know those costs are going up, but you competitors in other markets seem to, - - have been more aggressive in raising price in aggregates than you have been in the past and your guidance strikes me as conservative, too. Can you just talk a little more about that?

Well we certainly don't believe we've been more conservative in pricing than our competitors historically. With respect to pricing opportunities, going forward, we are guided greatly by the people who are closest to our customers and closest to the markets. We have had a strategy over a long period of time that we need to align ourselves with the best customers in the marketplace, that is down-stream users of our product, and work with them. We continue to believe that's the right strategy. We are not trying to maximize pricing in a short period of time, we are trying to build relationships that will serve - - continue to serve us well, over longer periods of time. I know that's doesn't answer your question, but I don't - - we are not consciously trying to mislead you on what we expect pricing to be in '06. We did better in '05, obviously, than our guidance at this time. We will be delighted if this time next year, we're saying that we were too conservative. But at this point, we believe 6 to 8 is the best number and we plan to.

Okay, not a problem and I appreciate that. Just a question on the capital structure. I don't remember the last time Vulcan was debt free and if I take your net debt and add in the earnout on the cash you're going to generate for sure in the first couple of quarters, it looks like you're basically there, or even more so net cash. It's been a long time coming. I want to understand your thoughts on two topics, the first is credit rating upgrade potentially, and the second, given that you're interested in buying back your stock, it's a good way to acquire a company that you know and aggregates at a good price, can you talk about the potential then for dividends, special dividends, and why not do more of a quicker buyback than wait throughout the full year as the year develops with higher pricing and better volumes. Maybe you could just talk about your thoughts about buying back stock sooner rather than later now that chemicals is out and your capital structure's very good.

I guess I, - - thinking back the last time that we were essentially debt-free was in sort of 1998, and we bought CalMat, and then we were no longer debt-free. With respect to dividends, if you look back at our history, we have grown our dividend at a compound rate of about 11% per year over ten, or 12, or 13 years. We pay dividends - - historically we've used dividends as being less advantageous to shareholders than share repurchases because of the differential in the tax rates. Obviously those are now equal, so we think dividends are as effective and efficient for returning cash to shareholders as share repurchases.

We have - - I believe fair to say, in the 50 year history of Vulcan, not done a special dividend. That's not to say we won't do one, but that's certainly not in our current thinking at this point. So I would think we will continue to grow the dividend As I said in a response earlier, share repurchase at some level continues to make sense. Where I'd really like to put the capital is in our business because we have had excellent returns from both the acquisitions and the internal capital projects we have done over a significantly long period of time. And there we believe is tremendous opportunity for the aggregates business in the United States, and related products, but we're very bullish on this industry, we're very bullish on our company and we've had great success in growing it. And we hope to continue to do that.

And on a potential credit upgrade, are you up for that?

We - - I think given our size, and - -

- - and the single industry concentration.

That's not on our agenda to achieve. It would be nice if somebody did it, but given the spreads, or lack thereof, there's really no benefit for us in trying to up - - to get a credit upgrade.

Okay.

In this market.

Thank you.

And that does conclude our question and answer portion of today's conference. I'd like to turn it back over to Don James for any further remarks.

Thank you very much. We certainly appreciate your continuing interest in Vulcan. We are, as we indicated in our comments, very pleased with our 2005 results and we are optimistic about 2006 and we look forward to reporting to you on the first quarter of 2006 in a few months. Thank you very much. Good day.