渥肯建材 (VMC) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2006 Vulcan Materials earnings conference call. My name is Michele and I will be your coordinator for today. At this time all participants are in a listen-only mode.

We will be facilitating a question and answer session towards the end of today's presentation. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Don James, Chairman and Chief Executive Officer. Please proceed, sir.

Good morning. Thank you for participating in our second-quarter earnings conference call. As the announcer said, I'm Don James, Chairman and Chief Executive Officer of Vulcan Materials Company.

Joining me today are Dan Sansone, our Senior Vice President and Chief Financial Officer and our two senior Vice Presidents in construction material Mac Badgett and Jim Smack.

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 our most recent report on Form 10-K.

After my brief comments, we would be happy 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.

In the second quarter, we achieved excellent earnings growth on top of a record start in the first quarter. Second quarter earnings from continuing operations increased 50% from the prior year to a record level of $1.47 per diluted share, and year-to-date earnings from continuing operations increased 83% from the prior year's first half to $2.16 per diluted share.

Higher pricing in all three major product lines, aggregates, asphalt, and concrete led to a 15% increase in second-quarter net sales and to margin improvements versus last year's second quarter. Gross profit as a percent of net sales has improved in each of the first two quarters compared to last year. Second quarter gross profit as a percent of net sales improved to 32% from 30% realized last year. Year-to-date gross profit as a percent of sales has increased 360 basis points compared to the first half of 2005. Operating income in the quarter increased 42% from last year's second quarter and is up 66% year-to-date.

Now, looking specifically at second-quarter results, strong earnings growth was achieved in all three major product lines as a result of considerable improvement in pricing and despite increased cost for energy and key raw material. The average unit price for aggregates, excluding freight to remote distribution sites, increased 13%, compared to the second quarter of 2005.

Following a very strong increase in the first quarter, second-quarter aggregate shipments were approximately 2% lower than last year's record second quarter. Favorable weather in the first quarter accelerated some shipments that would have normally occurred in the second quarter.

Additionally, wet weather in certain key markets such as California, early in the second quarter, and certain mid-AtLantic markets late in the quarter slowed shipments in those markets. Year-to-date aggregate shipments have met our expectations of 4% growth above our all-time record first-half shipments in 2005 and are consistent with the upper-end of our full-year guidance for 2006.

Both asphalt and concrete earnings increased sharply in the second quarter due to higher sales prices. Pricing for asphalt mixe was up 42% from the prior year and the pricing for our concrete was up 18%. These price increases more than offset lower shipments in both products and sharply higher raw material costs.

Energy related costs continue to be of concern. Costs per gallon of diesel fuel increased approximately 32% from the prior year and reduced earnings 8 million in the quarter. Selling, administrative and general expenses increased approximately 9 million from the prior year, due primarily to higher provision for incentive compensation. Including 1.6 million related to expensing stock options for which there was no comparable charge in the prior year. We also had increased professional fees primarily for business development.

Other operating income in the second quarter was 27 million higher than the prior year's second quarter; due principally to the sale of contractual rights to mine our Bellwood Quarry in Atlanta. The city of Atlanta plans to convert the property into a city park in Green Space, as part of a larger economic growth in development project around the cities perimeter. We worked with city and county officials to achieve this mutually beneficial transaction.

Over the next two years, we will continue operating the quarry as we transition customers to our 12 existing quarries in the greater Atlanta area and into a new zone site we purchased in 2004 in anticipation of the Bellwood transaction.

Other income increased 10 million from the prior year second quarter; due to an11 million increase in the carrying value of the ECU earn-out. This earn-out agreement is accounted for as a derivative instrument with any adjustments to the carrying value recorded as other income or charges in continuing operations. We have included a Table E in our press release financial schedule, which details the earnings contribution from the ECU earn-out on both a pre-tax and after-tax basis.

Additionally, we have also included in Table E the earnings contribution for the sale of the contractual rights in Atlanta, I described a few minutes ago.

We hope this information will be useful in your review of the underlying performance of our business, and we will continue to drive this table as necessary to provide a better base line for analysis. The effective tax rate in the second quarter was 33.4%, compared to 31% in the prior year. The higher rate is due mostly to an adjustment estimated income tax liabilities for prior year, which amounted to about $.03 per share, and a reduction in tax-exempt interest income.

During the second quarter, we repurchased 4.2 million shares of our common stock at a total cost of 334 million. This brings the year-to-date total to 4.5 million shares repurchased at a total cost of $353 million. Load-on acquisitions are important to our continuing growth strategy. Year-to-date, we have spent approximately 20 million for three aggregate facilities in North Carolina, Virginia and Indiana. Turning to our full-year outlook, the very strong pricing momentum and solid demand we experienced for our products in 2005 is continuing in 2006. And as a result, we remain very optimistic about the full-year earnings growth. Overall construction spending remains strong due to economic and infrastructure growth.

If we take a closer look at construction spending in each of the major end-markets, we see public infrastructure construction growing and private construction activity beginning to return to a more traditional balance between nonresidential and residential construction.

Approximately 75% of our aggregate shipments go into public construction and private nonresidential construction, and we are well positioned to benefit from growth in demands in both of these end markets.

Public construction, which includes highways, is strengthened above 2005 levels and should continue to benefit from both higher funding as a result of the new multi-year Federal Highway Bill passed in mid-2005, as well as, improving state and local tax receipts. Higher state tax receipts in 2005 and in the first calendar-quarter of 2006 appear to be providing a catalyst for highway projects.

In private construction, most categories of nonresidential construction continue to improve. And while residential activity remains at historically high levels, single-family construction is showing signs of slowing in certain markets. I say, certain markets, because in states such as Texas and Georgia, there continues to be significant backlogs of residential construction activity. On the other hand, housing markets in states like California, Arizona, and Florida are showing signs of a slow down in residential construction.

During a time when economist and others are trying to predict a time for a soft landing for single-family housing, it is important to note two of Vulcan's key strengths. One, is our broad geographic footprint with operations strategically located across diverse, high growth U.S. markets.

The other strength, is our strong focus on public infrastructure and private non-residential construction.

As a result of our footprint and its regional diversification, and our end-market focus,we are well positioned to benefit from continuing growth in public infrastructure and nonresidential construction activity. And to offset weaker residential construction activity in certain markets.

In California, our largest state in terms of revenue, the outlook for transportation related construction is very encouraging. In the 2007 budget in California signed by the governor in June, $5 billion is included for new projects, an increase of $800 million from the record $4.2 billion allocated in fiscal year 2006, and a huge increase from the $900 million allocated only two years ago in fiscal year 2005.

An important feature of the 2007 Budget Act is the full funding of Proposition 42, and the early repayment of past Proposition 42 funds that were borrowed from the highway funds. Proposition 42 directs gasoline taxes into much needed transportation projects in California.

Governor Schwarzenegger has put forward a comprehensive proposal to implement $222 billion in state infrastructure improvements over the next 10 years. Transportation projects account for almost half of that at $107 billion with funding coming from both existing and new sources.

One new funding source contemplated by the plan is general obligation bonds. In May, leaders in the State Legislature approved a 37 billion bond package for the November ballot. Included in this package is 20 billion for transportation.

Another November ballot initiative, which we fully support, is to further protect further Proposition 42 funds for any use besides the transportation projects for which those statutes were intended.

The new Federal Highway Bill provides a 34% increase for California and the average funding levels for highways when compared to the average annual funding level of TEA-21.

This 34% average annual increase compares favorably to the U.S. average of 30% and the non-Vulcan served state average of 28% per year. Aggregate shipments in the first six months of 2006 have met our expectations of 4% growth above the first-half record levels of 2005. Overall, we expect the broad strength in public infrastructure and private nonresidential construction in our markets to more than offset weaker residential construction activity in certain key markets.

Full year aggregate shipments should increase 2 to 4% from the record 260 million tons we shipped last year. As a result of the solid demands in infrastructure nonresidential construction in our markets, we believe the momentum underlying the 8% price improvements achieved in 2005 is certainly continuing in 2006.

In many markets, securing new reserves, it's very difficult and expensive. Additionally, higher prices offset higher energy-related costs. Our full year outlook for aggregate price improvements is now 12 to 13%. We are forecasting cost increases for diesel fuel and liquid asphalt to continue in each of the remaining quarters of 2006. We will continue to work to offset the earnings impact with efficiency and productivity improvements. A $0.10 per gallon increase in diesel fuel prices reduces our pre-tax earnings approximately $6 million annually. We expect higher earnings in 2006 for both asphalt and concrete.

Pricing for both products should continue to increase as a result of solid demands in infrastructure and nonresidential construction, and offset the higher pricing we pay for raw materials.

In light of year-to-date results in our current outlook, we now expect earnings from continuing operations to be in the range of $4.60 to $4.85 per diluted share for the full year, compared to $3.30 last year.

In the third quarter of 2005, we will recognize a benefit of 10.1 million, or $0.10 per diluted share, as a result of a reduction in estimated income tax liabilities for prior years, and a favorable settlement of federal refund claims. These special items are not expect to occur in third quarter of 2006.

Additionally, our third-quarter and full-year earnings guidance for continuing operations in 2006 does not assume any potential adjustment in the carrying value of the ECU earn-out beyond the $0.13 per diluted share recorded year-to-date. In the third quarter of 2005, we recorded $0.06 per diluted share in income from the ECU earn-out.

In the third quarter of 2006, we expect to earn from $1.40 to $1.56 per diluted share from continuing operations. Last year in the quarter, in the third quarter, earnings from continuing operations were $1.23, including the previously mentioned $0.16 referable to income taxes and ECU earn-out.

On January 1 of 2006, Vulcan adopted FAS-123R., which requires expensing of stock options. Our 2006 earnings guidance includes approximately $0.05 per diluted share in expense referable to stock options for the full year and $0.01 in the third quarter. Year-to-date, the adoption of this standard has resulted in a charge of $0.03 per diluted share. Remaining costs related to do our former chemicals business are expected to result in a loss of $0.05 per diluted share for the full year in discontinued operations. The first full year of the ECU earn-out ended in June. We expect to receive our first earn-out payment by December 30 of this year. Our estimate of the first cash payment to be received is approximately $128 million.

In recent years, we have generated significant value for our shareholders through the development and sale of reclaimed and surplus real estate. 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, so we have not included any future real estate gains in our earnings guidance for 2006. We are moving forward aggressively to capitalize on the opportunities presented by continued economic and infrastructure growth in our markets. We are proceeding at a fast pace on a number of capital projects that will add capacity, increase efficiency, and boost aggregate reserves at existing operations in high-growth markets.

Additionally, we are pursuing several new quarry sites and distribution facilities. Several of these projects are focused on enhancing our ability to serve the expected increase in aggregates demand from highway and other infrastructure projects in California. We are also investing in projects to increase the supply of aggregates to attractive south Atlantic and U.S. Gulf Coast markets.

Accordingly, we are revising our estimate for capital spending on property plant and equipment for 2006 to be in the range of 400 to 450 million, exclusive of acquisitions. The capital investment opportunities contemplated in this estimate provide attractive returns and will help us serve our customers in markets more effectively going forward. They also help us reduce production costs, as well as, add additional plant capacity, reserves and distribution capabilities.

In closing, I would like to reiterate some of the points that underscore our optimism about another great year at Vulcan. Construction spending remains strong.

End-market demand is returning to more normalized levels that match very well with our geographic footprint and strategic focus.

Pent-up demand for improved transportation infrastructure is finally moving forward to construction in key Vulcan states such as California.

Because of its broad use in construction, aggregate provides good demands balance among end markets.

With public construction growing and strength in private construction beginning to transition away from residential and to nonresidential construction, we are very encouraged by potential sales and earnings growth, particularly in light of the fact that 75% of our aggregate shipments serve public infrastructure and private nonresidential construction.

As a result of the solid demand in our markets and difficult in securing new reserves, we believe the momentum underlying price improvement achieved in 2005 will continue throughout the remainder of 2006.

Our current earnings outlook for continuing operations will market substantial growth in earnings in 2005.

We are working hard to make 2006 another year of solid returns for our shareholders. We thank you for your interest in Vulcan.

Now, if our operator will give the required instructions, we will be happy to respond to your questions.

Thank you, sir. [OPERATOR INSTRUCTIONS]. One our first question comes from the line of David MacGregor of Longbow Research. Please proceed.

Good morning, Don.

Good morning, David. How are you?

I'm well, thank you. I'm trying to understand the shipment story here and I understand the bad weather and [inaudible] in the first quarter.

Just to isolate the weather for a moment, what we are talking growth has been in the states that did not suffer from bad weather. So, if you excluded the California and the Carolinas, those two bad weather points, what did the rest of the model deliver?

Well, with cost of weather patterns in the second quarter, David, it's really not so much state specific as it is market specific.

Clearly, the places that were hit hardest were in the Washington, D.C., and the Virginia areas, particularly north of where we calculate. We had 12 days this year where wet weather impacted shipments compared to 5 last year. On the other hand, Charlotte was just about 11 versus 10. No real impact there.

Birmingham, which is not a real market for us, saw wet days which was more than any of our markets. San Antonio had 5 wet days compared to 1 last year. So it is -- it's very market specific, but in these markets, we could see a pronounced drop in shipments as a result of the wet days. And we had more wet days in those markets.

Now, in many other places, as I said, Charlotte, Nashville, Greenville, Spartanburg, South Carolina, Los Angeles, we really didn't have any appreciable wet weather. In fact, weather was about as good this year as it was last year.

Our next question comes from the line of Jack Kelly of Goldman Sachs. Please proceed.

Good morning, Don.

Hi, Jack.

Can you give us a sense, Don, of what the mid-year price increases were? Obviously, they were probably better than you thought, because that's why you raised your pricing guidance for the year. But -- that's the first question.

Jack, I am going to say the same thing that I've said many times before, is that we don't operate principally in a single state or a couple of major states. Our footprint is much broader than perhaps some of the other people in our industry. And as a result of that, we don't have a single price increase that goes into effect everywhere at the same rate at the same time.

That said, however, I would say that our price increases, mid-year price increases that have gone into effect range from 10% in some markets down to low single-digits in other markets. But by and large, we are getting mid-year price increases across our footprint and as a result of that, we are certainly -- that is the basis for our increase in our full-year pricing outlook.

Not all of these price increases will flow through 100% in the second half, but they will certainly begin to at least show up in the third quarter, and certainly in the fourth quarter.

The asphalt decline, the unit decline in asphalt, obviously, that's somewhat related to weather, and the facts as you describe it.

Do you have any sense, Don, that the asphalt volume is being hit by the higher absolute price and basically fixed budgets, whether they be coming from the federal government or the states, impacting actual paving volumes?

So, in other words, price is up and volume is down because the states are kind of constrained in terms what have they can spend?

Jack, I concur in that. The price of liquid asphalt, which for us is raw material, has moved up very sharply. And as a result of that, the price of asphalt mix has gone up sharply.

The price of aggregate component in asphalt mix is relatively modest compared to the big spike in the liquid asphalt and that's just global -- that's just global crude oil issues are affecting that.

As a result of that, with a fixed budget for spending, the states can by fewer tons of asphalt mix.

However, from a revenue and margin standpoint, that is not unfavorable to us. We would, all other things being equal rather sell few tons at high margin than more tons at lower margin. And as a result, it is -- the projects that are not being built today are going -- are being deferred and they will be built tomorrow and the next day and the next year.

It's really building the backlog. The one effect of this is its building the backlog of public infrastructure projects for the future.

Just explain to me, Don, why higher margin? In other words, 90% of the way of asphalt is stone, so you are selling less stone --

95%.

Where does the higher margin come from on lower volume?

It comes from higher pricing.

Yes, well you would have had that any way, right? You mean higher pricing on the aggregate that's sold into the asphalt side?

Well, that's -- that is true. And talking about unit margins, but we are also selling asphalt in California, Arizona, New Mexico and Texas. And while raw material prices, liquid asphalt are going up, our margins are asphalt are also increasing.

Okay. And just one final question, coming back to the weather impact.

While it might be a little bit harder to discern in the southeast kind of the impact of weather, I mean clear in California the weather was extremely wet in April. Maybe you could share with us what April looked like. I would have thought in California given that we had May and June, that you could have recouped a decent part of that volume.

California had a very, very strong second quarter. We don't publish volumes by state but California is performing extraordinarily well for us right now. As is Arizona and New Mexico; that whole western division. So we did have a lot of wet weather, particularly in northern California in April. But by and large, we are doing very well in California, particularly on the margin side, as there is a real shortage of material and demand is exceeding supply in many of the markets.

So you wouldn't attribute any of the -- I won't call volume shortfall but the volume performance in the second quarter, you wouldn't attribute any of that to California, then, Don?

Yes, I would, because when everybody is running at capacity or capacity plus, if you miss shipping days, it's really hard to get them back. Now, in other times where demand is not so strong and there is some extra capacity to load trucks and produce material, you can often recoup it. But in many of our, particularly our big, high growth urban markets, when you miss a day, it's very hard to make it up in this economic environment.

We are running in those markets at very high capacities. One of the reasons, Jack, we are boosting our capital spending is to try to improve our productivity and efficiency so that we can have more flexibility in our operating hours and our ability to supply markets, when we do get rained out for a week at a time, that we can actually have the capacity to serve our customers when the sun shines.

But that capacity, that shipment is eventually recouped or does that customer go to another competitor? He needs the stone.

That's true, except in many of these markets, everybody is essentially sold out. I mean, this is, in most parts of the cycle, we are able to recoup wet work dates. In many of our markets, right now things are very tight, and not only for us, but for our competitors as well. And it's more difficult in that situation to, if you lose 5 days in April, to catch up before the end of the quarter.

Now, we will over time catch up but it's tough in Q2 and Q3 when everything is going wide open. We are running most of our plants in big urban markets at -- with a lot of over time. Our customers are running at over time. Our customers, often times, can only pave at night because of the traffic congestion on the highways.

So there really -- there really strong constraints on when you can actually ship material and recoup lost work days.

We are making too big a deal out of lost work days but that has been a factor. And, of course, we had the terrific weather the first quarter where everybody was working, particularly in the last part of the first quarter, was pulling -- pulling aggregate and asphalt and concrete at record levels out of our plants and accelerate a fair amount of the work into the first quarter. That probably is at least a big a factor in the second quarter demand is weather.

Thank you.

Our next question comes from the line of Jack Kasprzak of BB&T Capital Markets. Please proceed.

Thanks. Good morning, Don. My first question is with regards to the transition in demand that you are describing with some housing markets weakening but infrastructure markets and nonresidential markets gaining strength or remaining strong, does that transition in demand have any -- all things being equal, have any implications for margins?

No. In fact, we probably get -- we don't have any materially different margins by end use market.

But the specifications tend to be tighter for public infrastructure and private nonresidential and residential and all things being equal, we believe we are in a stronger competitive advantage the tighter specifications are.

So if anything the shift away from residential to public infrastructure and private nonresidential construction should benefit us from the margin standpoint. Certainly from a competitive standpoint.

Great. My second question is, just with regard to aggregates pricing. We know over a long period of time industry pricing has been stable, it generally goes up every year, but the rate of increase over the last year and a half or so has certainly been higher than what we've seen on a historical average.

I think that's caused some people to question whether the dynamic in aggregates pricing can change. Maybe you might be susceptible to sum reversion to the historical mean after a period where prices were higher, much higher than the historical rate of growth. What would be your view on that issue of that sort of rate of change in aggregates pricing that we've seen very recently being so robust versus the historical average?

Jack, aggregates are no different than any other product in that prices are determined by supply and demand. As you know, and you follow this industry for quite a time, you realize that essentially supply is fixed and is in essence declining as reserves get depleted, particularly in some markets.

Today the transportation cost to move aggregate long distances are greater than they have ever been, which has had an impact on aggregate pricing. The cost of inputs -- electricity, diesel fuel, steel components for crushing plants and mobile equipment has escalated. All of those cost inputs have gone up at much higher rates than the price of aggregates. We work hard to be very sensitive to not only the current price of those inputs but to the future projected price increases. And look at that.

I think as long as the input cost continues to escalate as they have -- and I'm not predicting that they will -- you will see much stronger aggregate pricing being driven by cost. But an even more significant factor is the limitation on supply -- the very difficult and time consuming process of getting aggregates zoned and permitted for mining and the high cost and long lead times associated with that.

Someone remarked in a write-up I read this morning that aggregate pricing seems to be focused now much more on replacement costs of reserves than on historical cost of production and I concur in that.

We are happy with our $11 billion tons of reserves, but replacing those tons is going to come at a dramatically higher cost, not only for us but our competitors. And I would say in response to your question that it is the replacement cost of tons, the replacement cost of reserves, plus the high cost of inputs that has probably moved aggregate pricing to a new level that will continue for the foreseeable future.

That's very helpful. Thanks. My last question is, just on California. You mentioned the $5 billion budget for this year and then they've got this $20 billion bond referendum for ten years. So average of $2 billion a year, I guess, in incremental bonds. Is it your understanding that it would be $2 billion on top of the 5? In other words, if the bond referendum is passed, the state could be spending close to $7 billion a year on highway projects?

Jack, that's my understanding. And, of course, this bond issue goes up for a vote of the residents of California. But there is a tremendous amount of support for additional funding for highways in California. If you've spent much time on the highways there, you can understand why.

But we are optimistic that, certainly the negatives are coming from essentially environmentalists. That's the negative vote in California.

The positive vote are coming from all of those people that drive to work and school every day and need better infrastructure. And certainly, the governor has been a real leader in addressing those pent-up demand needs. California's highway budget has been in the tank for close to 15 years now. And there's just huge pent-up demand and we believe that with the governor's leadership and with the leadership of the democratic majority in the state legislature, both of them are saying, the time has come for much stronger funding for highways in California that we are looking for a -- really a huge shift in the annual spending for highways in California.

California is one of the housing markets that everybody is concerned about. Maybe given the shift, you don't necessarily feel a slow down in housing in California as you might have otherwise? I guess that remains to be seen.

Well, we probably do see a slow down in housing in California. But we see that being more than offset by increases in public infrastructure and private nonresidential construction.

That's what it sounds like. Okay. Thanks very much. Great.

And our next question comes from the line of John Fox of Fenimore Management.

Good morning, Don.

Hey, John.

I have a number of questions. Can you talk about the decision making on the use of cash flow, obviously large increase in CapEx, and then talk about the decision to be so aggressive on the buy back this quarter?

Yes, John. We see tremendous opportunity right now for our Company in adding reserves, production capacity, distribution capacity, in key markets. Basically from Norfolk Virginia, all the way down the south Atlantic coast, all the way around the Gulf Coast to Brownsville, Texas, there is a terrific shortage of aggregates. Prices are moving up sharply and we are -- that is one area that we are highly focused on increasing our production and distribution capability.

We are also focused within that, those markets we are certainly focused on improving our ability to serve the Florida market and the Texas market, both of which will exhibit long-term growth well above the total U.S. growth rates.

We are adding productive capacity and reserves in California. And we are also adding productive capacity and reserves in the western suburbs of Chicago which is a strongly growing market.

So the combination of those areas for us we are -- as I mentioned in response to an earlier question, we are operating our plants in those markets at close to full capacity on a multi-shift basis. And we see the opportunity of being able to expand our presence in those markets as reserves decline, competitive reserves decline. And as growth continues, we believe that is the best use of our cash that we can make.

Given that, why did we buy back so many shares in the second quarter? We had, as you know, excess cash and we thought in the short term, the best thing to do with excess cash is to return it to shareholders by buying shares back. We can certainly finance the strong capital budgets that we have and the projects we have out of our existing cash flow and our credit capacity.

Okay. Great. And residential, can you share with us, maybe your thoughts for what you think the rez market will be down or what was in your plan for this year?

We look at it two ways, John. We look at it as construction put in place in dollars.

Right.

And then construction put in place in tons. Let me give it to you in dollars first. For '06, we see highways up 13%. Public Works up 9. Nonresidential up 13, and housing up 6. Now that's in dollars. And when you translate that into aggregate tons. Highways, we see up 6, Public Works up 4, nonrez up 4, and housing down 1. Now, why is our housing drop only 1% in light of a all the doom and gloom that showed up in the press and that's simply because housing is perhaps a lower percentage of our total demand than many others in this industry. And secondly, states where we are strong as I mentioned like Georgia and Texas really are not seeing the housing decline that is being seen in some of the condo markets in South Florida and some of the markets, high-growth markets in the west like Phoenix, Las Vegas and Southern California.

Right. You read my mind because if you look at say home builder new orders, and I don't know what the lag on those is compared to when they by the aggregate, orders are down certainly in the teens to 20 to 30% in some areas. So can you comment on that?

Well, I don't have any specific market data on new house orders. As I've tried to indicate, we do hear from our micro sources from the bottom up sources, as well as from our macro forecast that housing is slowing in some markets. It clearly -- it clearly is evident in some markets.

I guess the point I'm trying to make is that it is -- it has a diminished effect on us relative perhaps to some other people in this industry and we happen to be in some markets where there is still a lot of legs to the housing market.

Right, you mentioned just a couple of states in the release, so.

And we are not in Las Vegas, for example.

Right.

We are a big player in Southern California and in Phoenix and we will see it in those markets, Northern Virginia and the Washington, D.C., suburbs is also a place warehousing is slowing.

But fortunately our heavy emphasis on public infrastructure and private nonrez mitigates, more than offsets, what we see as a decline in housing. John, one caveat I should give you, the construction put in place numbers in dollars are for total U.S. Whereas, the aggregate demand factors that we calculate are for the Vulcan-served counties.

Okay.

A little bit of disparity there.

Thank you. One last question on the pricing industry, thinking about '07, what would be normal, you talked about mid-year price increase, and obviously, some of that will flow into next year.

Would you consider or does the industry consider raising prices January 1st or into the spring or how does that normally work?

John, generally, we raised prices Jan 1, or early in the year for the construction season. The mid-year price increases are a relatively new phenomenon for the industry but certainly we would be looking at -- we would be looking at price increases for January 1st. I am certainly not in a position to speculate as to what those might be at that time or where they would occur but that's been a pattern in the industry.

Okay. Thank you.

Our next question comes from the line of James of Citigroup. Please proceed.

Hi, [inaudible]. Just a couple of questions. Firstly, in terms of California, would I be right in thinking that as much as 25% of your revenue comes from California? That's correct. If you could give an indication of how much comes out of Texas? And second question is, in terms of kind of acquisition pipeline, if you could give an indication, give us a feel for how the vendors are reacting to the good pricing environment? Is it causing them to see it as an opportunity to maybe sell their businesses at a good price currently or are they actually holding back in anticipation of a more favorable environment over the next couple of years? Let me address the second part of your question first. As I indicated in my earlier remarks, we have bought 3 quarries year-to-date. I would say, at this point, we see much more opportunity in internal capital projects than we do in acquisitions. We are in great places with great reserves. And we think we can get higher returns on capital by building our own internal projects at this point. We will continue to make acquisitions but you will likely see much more capital going into internal growth projects than into acquisitions for us, at least over the next six to 12 months.

With respect to the percentage of our revenues that come from the state of Texas, that runs about eight to 9 %. -- something in that range. There are a number of states in that same range: Georgia, Virginia, Tennessee, Texas, all in the 8 to 9% of sales -- and revenue. [inaudible] in California, was that the state that had a good price rise? Yes, California prices are perhaps the strongest in the Company. Thanks very much.

Our next question comes from the line of Barry Vogel, from Barry Vogel & Associates. Please proceed.

Good morning Gentlemen. In terms of -- you talked about your cash flow and your credit facility will allow to you continue to increase your capital projects, improve returns in the company and also buy back shares. Can you then give us a little bit of an idea of what your current financing mode is to accomplish that?

Let me refer that to Dan Sansone, Barry.

Could you be a bit more specific? I'm not sure exactly what your point is.

Do you have a credit line right now, a specific credit line that you are using?

We currently have $550 million in place syndicated bank facility that we use as a back stop to our commercial paper program and all of the short term debts that's on the balance sheet at the moment, other than the current portion of long term, but all of the short-term debt is currently commercial paper.

And obviously we will -- we are always evaluating whether it's an appropriate time to term that out or not and that's basically under regular evaluation. But as you know, Barry, this is the first time in a long time we've been in a position where we've had any meaningful short-term debt to put into that evaluation model.

Now, what are the terms of that $550 million syndicated bank facility?

It's just a standard credit facility. It's basically subject to pricing based on current short-term markets that fluctuate as the short-term market fluctuate. And so all we are doing at the moment is issuing commercial paper at spot rate.

And today if you wanted to take on some of that bank facility what would be the rate?

Well, I don't know what the rate on the bank facility would be off the top of my head. I can tell you that we are averaging somewhere in the 5.5% range plus or minus on the commercial paper and you can term that out for three to five years at -- at marginally higher than that. I would say below 6 would be the kind of the five-year term rate.

So somewhere in the 5.5 to 6% range is what it will cost us, at least right now the yield curve being still flat that's what it would cost us whether we stay short or term some of it out.

Okay. And, Don, as far as your authority to repurchase shares, what is it today as of the end of June?

The last authorization we had was 10 million. We used about 5.5 of that; 4.5 of that. I'm sorry. We have about 5.5 left.

You have 5.5 left. And obviously, we haven't seen you this aggressive in a long, long time.

You haven't seen us with this much cash in a long, long time.

It's not only this much cash, it's your projections of more cash going down the road obviously. If things were to continue to remain very strong in the second half, is it logical to conclude that you would be, with the stock now trading below the average of $78 per share, which was approximately your average purchase price in the first half, that you would continue to buy shares?

That would be a pretty good assumption. I can't commit to what our share repurchase plans will be in advance but if we bought it at 78, would we by it at $69.50? You can figure that one out.

Now, can you tell us, Don, if you have any weak markets?

We don't have any weak markets. We've got some markets that are stronger than others. I think in this environment the sort of fast population growth urban markets are stronger on average than small town and rural markets.

That's -- I mean, we are no different than the world generally. Job growth is occurring there in those markets. Population growth is occurring. Our demand is a function of population and job growth. So wherever you see that we are strong.

Now, the exception is in rural markets where there are Greenfield automobile plants primarily in the southern half of the country. And there you get really strong growth in less urban markets.

And, as you know, there are Mercedes, Hyundai, Toyota, Honda, many of the Asian and European manufacturers have built Greenfield automobile sites in our footprint and I would say those are huge drivers to demand, not only for the construction of the plant and the transportation infrastructure to get parts into the plant and finish cars out, but all of the suppliers that are building big box facilities and all of the housing and retail that follows the job growth. The unemployment rate in the state of Alabama right now is at an all time low. We are 3.5 in a state where functional unemployment is probably higher than that.

So it's been a remarkable impact on the economy of the markets in most of our footprint. But those are -- that's an exception to the notion that the big urban markets like Washington, Atlanta, Houston, San Antonio, Los Angeles, San Diego, Phoenix, are the big drivers for demand for our business.

Thanks very much. Keep up the good work.

Thank you, Barry.

As a reminder, [OPERATOR INSTRUCTIONS]. Our next question is a form up question from the line of David MacGregor, please proceed.

Can you talk about the extent to which 2007 pricing will benefit from '06 price announcements? In other words, the spill-over effect? Can you clarify that for us? I can tell you that they will benefit.

I cannot quantify that in any way that would be reliable. But clearly, '06 price momentum will continue into '07.

Your major competitors mid single-digit number. Is that consistent at least conceptually with where you see that going?

I don't have the analysis to confirm or deny that.

Okay.

But logic tells you that price increases that you put in -- in the second half of '05 are going to play out into '06, even if you don't make any other price announcements.

Okay. Thanks.

And then the other question I had, I was dropped off the line last time around and you may have addressed this since I was off and got back on.

But you had talked earlier about certain markets where the weather and other factors had been a negative on your business and contributed to that negative 2% shipment number.

Then you talked about a number of other markets where you thought this business was much better. I guess I was still trying to get to what the volume growth was in the good markets?

David, I don't have data to -- you know, I certainly have volume growth market by market and I've got wet work days market by market. Certainly, where we had good weather, you can see the effect in strong demand. Where we had poor weather, you can see the effect in weaker demand.

Would it be in the markets where volume was good that it was consistent with that 4% number that you stand at year-to-date? Would it be fair to say?

There are a number of our markets where demand grew at more than 4% in the quarter. And there are obviously somewhere we had less than -- I mean our shipments were more than 2% down. There is a strong correlation between wet work days and demand for the quarter.

It is -- once we get the individual markets, it's harder for me to address those individually except to say that, for example, in Washington and Norfolk, and I'm looking at those two markets here, where we had a lot of rain in the latter part of the second quarter. We saw shipments slow sharply.

In other very similar markets where there should be no difference in demand drivers where we had good weather, we saw relatively strong shipments.

You've been talking about Charlotte, Greenville, Nashville, Spartanburg.

And even in Atlanta, where we had three more wet work days than a-year-ago, we saw very strong demand. So there shouldn't be, from a macro economic standpoint, there shouldn't be dramatic shifts in existing demand in those particular markets. Other than as accounted for in part by we had and to some extent housing. Housing is stronger in Atlanta right now. It is trailing down in Washington and is still strong in Atlanta. So you get some impact on that.

Norfolk on the other hand has big infrastructure projects going on, port facilities, big military infrastructure projects, so there is strong demands there that is affected of course by revenue.

Thanks very much, Don.

Our next question comes from the line of Rob Norfleet with Davenport and Company.

Hey, Don, this is actually Alan Fox standing in for Rob. One quick question. What are you seeing at this junction regarding offshore opportunities, aside from the Yucatan that would give you additional remote access.

Well, our first priority is to substantially expand our output and transportation capabilities from our Yucatan Peninsula. That we believe is the lowest cost, lowest capital intensive opportunity available to us or anybody else at this point.

So we are going to continue to expand that facility to serve growing demand, particularly in Florida and Texas, but also all along the Gulf Coast and perhaps the South Atlantic coast. Beyond that, we are not prepared to disclose what we are looking at but certainly, we are going to spend a lot of capital and substantially increase production in transportation capacity coming out of the Yucatan.

Thank you very much.

Our next question comes from Allen Matroni from Sylvan Lake Asset Management. Please proceed.

Thank you. I saw that you are increasing your capital spending guidance this year by 25% versus where you thought it would be last quarter. Can you tell us specifically -- is it to open quarries? Is it to expand use of the transportation? Are there specific projects that you are accelerating from next years budget to this year? Can you give us a little more background on that?

We announced that we are expanding in phase I, our quarry in the Yucatan, adding about 3 million tons of capacity and we currently have under construction in China a new ship that will carry 65 or 70,000 tons per load.

We have a phase II in process at Calica which would dramatically increase production and we would probably need to add a couple of ships to carry that capacity.

Those are big projects requiring a lot of capital. Reserves in coastal Texas and Florida are depleting or are fully depleted in some of those markets but certainly the long-term outlook for importing material into Florida, we believe is very positive.

If we look at other markets in California where reserves are short for most producers, we are buying reserves any time we get the opportunity and included in our capital budget are some very large purchases of reserves in California or to serve California.

Thirdly, the whole South Atlantic coast continues to grow at rates greater than the national average and we are adding production capacity and transportation capacity to serve that whole market.

We are also adding Greenfield sites to serve Florida by rail, as well as serving, as well as serving Florida by water from our existing facility in the Yucatan. And one of the higher growth markets that we see and a place that we are developing new quarries is in the western suburbs of Chicago, where there is very strong growth or population growth, job growth and we are developing underground mines there.

We are actually already in production in some of those and we are continuing to do those. Those are some examples of the projects where it would have been done at some point in the future. But because of the strong demand and limited supply in those markets, we believe they are great opportunities to invest our cash flows in those capital projects.

Thank you for all that detail. I appreciate that. Just following up on Barry's question before, obviously, your balance sheet, even with buying back stock is still severely under leveraged, especially if you start counting in these off balance sheet or the earn outs which you will start getting towards the end of the year. Can you give us a sense as to just remind us your comfortability as to the level of debt to EBITDA that you target?

I know the credit rating support to you. Can you remind us of the sense because if there's not going to be that many large acquisitions available and all the aggregate companies and cement companies seem very over capitalized, then it seems like buying back your stock and increased capital spending is going to be the norm for the next year or two.

Let me ask Dan Sansone to comment on your question.

As we look at our capital structure, obviously, the comment about being under leveraged is one thing. We have historically concurred with our debt to total cap over the last couple of years has been pretty low, particularly if you factored in our cash. A year ago this time our net debt to total cap was less than 5%.

At the end of June, the combination of the capital spend coupled with the share buybacks, we were somewhere about 20% net debt to total cap, when you backed out what limited cash balances we had.

We think that we can comfortably sustain both our credit rating and our ability to finance the opportunities we see for the business with a debt to total cap level in the range of 30 to 35%.

We have in the past spiked above that without losing our rating. We did that in the 1999, 2000 time frame when we purchased CalMat and our debt to total cap then spiked up into the low to mid-forties range. But through dialogue with the rating agencies, we outlined our plan for bringing the ratios back into line consistent with our rating and we delivered those numbers and so we held our rating.

So in a limited answer to your question, we think we can comfortably sustain 30 to 35% and have adequate flexibility to pursue the business development opportunities we see in front of us and still have very good access to the credit markets.

Thank you very much. Good job.

Ladies and gentlemen, this does conclude the question and answer period of today's conference call. I would like to turn the presentation back over to Mr. James for any closing remarks.

Well, thank you for your participation today. We always look forward to and enjoy your questions. It keeps our focus sharpened and helps us realize that we all work for Vulcan shareholders. We look forward to talking to you again at the end of the third quarter. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference call. This does conclude your presentation and you may now disconnect. Have a great day.