渥肯建材 (VMC) 2006 Q3 法說會逐字稿

Welcome to the third quarter 2006 Vulcan Materials earnings conference call. [OPERATOR INSTRUCTIONS] 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 third quarter earnings conference call. I'm Don James, Chairman and Chief Executive Officer of Vulcan. Joining me today are Dan Sansone, our Senior Vice President, Chief Financial Officer; and Mack Badgett, Senior Vice President of Construction Material.

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 some brief comments, we will be happy to answer questions from those of you who have dialed into the call. Let me remind you that a replay will be available approximately two hours after the end of this call at our Website.

Our sales and earnings through September continued to meet our overall expectations. Earnings per share from continuing operations have increased 49% year-to-date. Our coast to coast footprint focused on supplying aggregates to a diverse group of end users in the fastest growing U.S. markets, provides the platform for delivering results that add value for our shareholders. Over the past two years, we have been focused on increasing our sales and earnings and improving our margins rather than on simply shipping more tons.

We were surprised however by the lower level of aggregate sales volume in the quarter, particularly in the sharp drop due to very wet weather late in the quarter in some key markets. Slowing residential construction, some temporary delays in highway construction projects also contributed to the volume shortfall. I will comment in more detail later on volume.

Even in the face of lower volumes, I'm pleased to report that we again achieved record sales and earnings and our margins continue to expand. Sales increased in each of our major end use markets, leading to an overall increase in net sales of 13% from the prior year's third quarter. Gross profit increased 20% from the prior year's third quarter. As a percent of net sales, gross profit improved to 32% from the prior year's level of 30%. And has improved every quarter in 2006 compared with the same quarter last year.

Third quarter operating earnings increased 25% from the prior year. And earnings per share from continuing operations increased 18% from the prior year to a record third quarter level of $1.45 per diluted share. This result is within our previous guidance for the quarter. Higher pricing in all three major product lines; aggregates, asphalt and concrete, led to margin improvement versus last year's third quarter. Despise lower volumes and increased costs for liquid asphalt, cement, diesel fuel and electricity.

The average price for aggregates, excluding freight to remote distribution sites, increased 15% from the prior year's quarter. And drove operating earnings and margins higher than last year, in spite of a 6.6% decline in shipments. Shipments in the third quarter were negatively impacted by slowing residential construction activity, some temporary deferral of highway projects due to escalated liquid asphalt costs, and particularly wet weather in Virginia, North Carolina and Illinois in the latter part of the quarter.

Our earnings growth in California is a good example of how our operational footprint creates regional diversification and provides us the opportunity to offset unusual wet weather patterns or cyclical construction patterns. In California, gross profit increased more than 40% from the prior year's third quarter. Offsetting the effects of wet weather on shipments in the east coast and Midwest markets I mentioned earlier. Both asphalt and concrete earnings increased sharply in the third quarter due to higher selling prices. Pricing for asphalt mix was up 42% from the prior year. And the pricing for our concrete was up 17%.

These price increases more than offset lower shipments in both products, a 67% increase in the cost of liquid at asphalt, as well as higher costs for cement and aggregates supplied internally from our quarries. In our view, it is the sharply higher cost for liquid asphalt that has resulted in many highway bids exceeding engineering estimates. This has resulted in some projects being deferred. Fortunately, we are currently seeing costs for liquid asphalt falling in most markets, as crude oil prices have fallen. Although, there is not a perfect correlation from liquid asphalt and crude oil prices.

Aggregates earnings were influenced by higher unit costs for diesel fuel and electricity. The cost per gallon of diesel fuel increased approximately $0.20 per gallon from the prior year and reduced pretax earnings $3 million in the quarter. Year-to-date, the unit costs for diesel fuel is up approximately $0.39 per gallon and has reduced earnings $18 million. As we have indicated previously, each $0.10 change in the cost of diesel fuel affects annual pretax earnings by $6 million.

Other income increased $6 million from the prior year -- other income decreased $6 million, excuse me, from the prior year's third quarter primarily to a smaller increase in the carrying value of the ECU earnout, relating to the sale of our former chemicals business last June. The third quarter 2006 increase in the value of earnout was $4.7 million or $0.03 per diluted share, compared with $0.06 per share in the third quarter of 2005. In September, we received the first ECU earnout payment of approximately $128 million.

We are likely to receive the remaining $22 million from the earnout in September of 2007. We have included a table in our press release financial schedules, which details the earnings affects of the ECU earnout on both a pretax and after tax basis. We hope this information will be useful in your review of the underlying operating performance of our business. We will continue to provide this data as long as it's necessary.

The effective tax rate in the third quarter was 31%, compared with 25.8% in the prior year. Last year's tax rate reflected a reduction in estimated income tax liabilities for prior years and a favorable settlement of federal income tax refund claims representing approximately $0.10 per diluted share. The tax adjustments this year totaled $0.03 per diluted share. During the third quarter, we repurchased $2.2 million shares of our common stock at a total cost of $169 million, representing an average cost of $75.50 per share. This brings the year-to-date total to 6.7 million shares repurchased at a total cost of $522 million, an average cost of $77.37 per share.

Turning now to our outlook for the remainder of 2006, we expect the pricing momentum realized through the first mine months of this year to continue and we anticipate strong growth in sales and earnings in the fourth quarter. For the full year, we expect aggregate pricing to improve 14% on flat to slightly lower volumes compared to last year's record volumes, assuming normal weather patterns in the fourth quarter. Overall, we now expect 2006 earnings from continuing operations of $4.55 to $4.80 per per diluted share, compared to the $3.30 per share earned in 2005.

In the fourth quarter, we anticipate closing a real estate sales contract in California that would result in a net after tax gain of $0.26 per diluted share. Because the timing of real estate sales sales transactions is always difficult to predict, we have not included the potential earnings from this transaction in our full year guidance for 2006. We continue to move an aggressively to capitalize on the opportunities presented by continuing economic growth and depletion of competitors' aggregate reserves in our markets.

We are proceeding on a number of capital projects that will add capacity and increase efficiency and boost aggregate reserves at existing operations over the next few years. We're also pursuing several new quarry sites and distribution facilities to serve our markets for the long term. 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 U.S. Gulf Coast and south Atlantic markets.

In California, the Gulf Coast and the south Atlantic, the industry reserve base for aggregates is shrinking due to depletion, regulation and litigation. We have significant reserves available to serve these high growth markets and are further developing production, transportation and distribution capacity to grow our presence in these markets. Our estimate for capital spending on property, plant and equipment for 2006 remains 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 and markets more effectively going forward. They will also help us reduce production costs, as well as additional reserves.

Let me conclude with some preliminary comments on our outlook for 2007. I mentioned earlier in my remarks how we are uniquely positioned as a leading supplier of aggregates and how that leadership position has led to very good earnings growth for the Company thus far in 2006. We expect the pricing momentum experienced in 2005 and thus far in 2006 to continue into 2007 and drive sales and earnings growth. At this point, we have not built any volume growth into our 2007 outlook. Our preliminary outlook for 2007 earnings from continuing operations is $5.25 to $5.65 per diluted share, which would more than double our earnings per share from continuing operations in three years. Our full year guidance does not include any potential adjustments in the carrying value of the ECU earnout.

Weather in the first quarter of this year was very favorable to construction activity. The result was that earnings in the first quarter of 2006 far exceeded typical seasonal trends. Typically, the first quarter contributes 5% to 10% of operating earnings for the full year. And we would expect the first quarter of 2007 to be more in line with normal seasonal trends than with the exceptionally good weather we experienced in the first quarter of 2006. Overall construction spending in 2007 should remain at high levels, providing a firm footing for demand for our products. We see relatively low interest rates, falling office vacancy rates and the solid fiscal condition of most states, providing catalyst for public infrastructure and private nonresidential construction activity.

Residential construction is likely to be restrained by an excess supply of single family houses well into 2007. However, relatively low interest rates and continuing population and job growth in our markets should temper any decline in new home construction. It is worth noting that approximately 75% of our aggregate shipments go to the more aggregate intensive public construction and private nonresidential construction end markets and we are well positioned to benefit from growth and demand in these end markets.

Most categories of nonresidential construction continue to improve and our geographic footprint positions us well in the regions expected to show the most growth in 2007. We expect highway construction to pick up in 2007 as a result of higher state tax revenues and an increase of $3.4 billion in the federal highway authorization for fiscal year 2007, a 10% increase over fiscal year 2006 authorizations. The U.S. House of Representatives passed its version of a Transportation Appropriations Bill in June and the Senate Appropriations Committee reported out its Bill in July. Both Bills would appropriate $39.1 billion for highways in 2007 including $842,000 in adjustments.

This would be a 10% increase over 2006 appropriations, matching the 10% increase in 2007 authorizations in the previously passed Highway Bill. We anticipate that the final fiscal year 2007 transportation appropriations will enacted by the full Senate after the November 7 elections, during a lame duck session. Additionally the recent trend in falling liquid asphalt and diesel costs should bring highway bids back in line with project budgets in the future and increase highway construction activity in markets where projects have been deferred.

In the third quarter of this year, our liquid asphalt costs were $140 per ton higher than a year ago. $140 per ton increase in the cost of liquid asphalt would increase the cost of asphalt mix by $7 per ton, all other things remaining constant. A 15% increase in aggregate costs would increase the cost of asphalt mix by only $1 per ton, all other things remaining constant. In California, our largest state in terms of revenue, the need for additional transportation related construction is apparent. In a report released earlier this month TRIP, a national transportation research group, found that five of the 10 urban areas in the United States with the poorest highway conditions were located in California.

TRIP found that approximately 25% of the nation's major metropolitan areas have pavements in poor condition. By contrast, in these five cities in California, 50% to 2/3 of pavements are rated poor. That said, the outlook is very encouraging, because Governor Schwarznegger and the State Legislature appear to be making headway in addressing California's longstanding transportation problems. The 2007 California budget, signed by the Governor in June, includes $5 billion for new transportation projects. An increase of $800 million from the record $4.2 billion allocated in 2006. This is a $4.1 billion increase from the $900 million allocated just two years ago in 2005.

An important feature of the 2007 budget is full funding of Proposition 42 and the early repayment of past Proposition 42 funds that were borrowed by the General Fund. Proposition 42, of course, directed gasoline sales tax into much needed transportation projects in California. In January, Governor Schwarznegger put forward a comprehensive proposal to implement $222 billion in state infrastructure projects over the next ten years. In May, the Legislature approved $116 billion of that total, leaving open the opportunity for additional approvals for infrastructure projects later on.

Transportation projects account for $87 billion of the total amount approved in May, with funding to come 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 to be voted on by citizens next Tuesday on November 7. Included in this package, is $20 billion for transportation. Current polling numbers suggest that this Proposition 1B will be supported by the voters in California. Another November ballot initiative, which we also fully support protects Prop 42 funds from any use other than transportation projects.

The new Federal Highway Bill provides a 34% increase for California in the average annual funding level for highways when compared to the previous six year bill. This average increase of 34% compares favorably to the U.S. average of 30% and the 28% average in the non-Vulcan served states. Other key Vulcan states such as Texas, Georgia, Illinois and Indiana, also have long-term infrastructure spending initiatives underway that will utilize both existing and new funding sources to address the increased congestion and deterioration of roads.

In closing, I would like to reiterate some of the points that support our optimism about sales and earning growth for Vulcan. Construction spending remains at high levels. End market demand is returning to a more normalized balance that matches very well with our geographic footprint and strategic focus. Pent-up demand for improved transportation infrastructure is finally moving towards significant funding in construction in key Vulcan states such as California. The cost of its broad use in construction aggregate demand is well balanced between end markets.

With public construction growing and strength in private construction beginning to transition from residential to nonresidential construction, we are very encouraged by potential sales and earnings growth. Particularly in light of the fact that historically, over 75% of our aggregate shipments serve public infrastructure and private nonresidential construction. As a result of solid demand in our markets and the difficulty in securing new reserves, as well as the high cost of transporting aggregates and the strategic location of our quarries, we believe the momentum underlying the price improvement achieved in 2005 will continue throughout the remainder of 2006 and 2007.

Our current outlook for 2006 earnings from continuing operations would mark a substantial growth in earnings from 2005. And we are continuing to work hard to make 2006, 2007 and years beyond, years where solid returns for our shareholders continue to be realized. We thank you for your interest in Vulcan. Now, if the operator will give the required instructions, we will be happy to respond to your questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Jack Kelly with Goldman Sachs. Please proceed.

For next year, Don, you shared with us your volume assumption embedded in our '07 estimate, which was flat. Can you give us idea of what you factored in for pricing, given the range of estimates that you have for next year?

Jack, at this point, we have said we expect the pricing momentum from '05 and '06 to continue through 2007. We have not disclosed at this point what our exact pricing assumption is for 2007. We will likely give that guidance in our conference call at the end of Q4. There are a number of judgments and estimates we make in those estimates. We're comfortable with the range of EPS but at this point, we don't want to lock ourselves into a price or cost estimate.

Fine. Secondly, with regard to diesel costs in the fourth quarter, if diesel prices stay where they are on a sequential quarter basis, does diesel cost become a tail wind in the fourth quarter? And so maybe you can give us some idea of what prices were in the fourth quarter of last year versus where they are now?

We currently believe that diesel fuel costs will be down about $0.06 a gallon in Q4 '06 versus Q4 '05. That will be of slight benefit in the quarter. But of course, production volumes are very low in the fourth quarter compared to Q3 and Q2, so it won't have as much impact in the fourth quarter as it otherwise would. But we do expect, for the first time in a very long time, that diesel fuel prices on a quarter over quarter basis will be going down instead of up.

And just finally on California, if the general obligation bonds that are on the ballot now get approved on, how would that impact spending in '07 and '08 versus that $5 billion number, which is already in the budget?

Jack, there's a lot of categories of projects, state projects as well as local projects that are identified in -- for funding in the $37 billion. Other than about one project, which is 400 miles of highway improvements right up through the middle of the Central Valley, which is a wonderful project for us, the rest of them will through Cal Trans consideration and probably a lot of local government consideration. So it's very difficult at this point for us to say whether or how much of that $37 billion would actually be spent in 2007. We will have far better insight into that once this passes and then Cal Trans and the state and local governments, which will be beneficiaries of some of this money identify the projects and the timing of the projects. But we will certainly keep you updated on that. But at this point, we don't have enough visibility to predict anything in '07.

Thank you.

Your next question comes from the line of David Macgregor with Longbow Research. Please proceed.

Yes, good morning gentlemen.

Good morning David.

I wonder if you could help me, first of all, on the 6.6% decline in volume, how much of the volume decline was attributable to weakness in your various end markets versus weather and other more normal sort of uncertainties associated with operating the business?

That is an imprecise calculation or judgment. We saw very sharp drops in volume when -- right at the end of August and into September when we had huge rains in Chicago and in North Carolina and Virginia. We attribute a portion of the volume drop to that sharp increase in rainfall in those key markets and that's traceable through our shipping reports. How much of -- the other drop attributable to residential was largely nationwide. It was a portion of it but probably less than 50%. And then there were some delay in highway projects that we thought would actually be awarded and get underway that were deferred. So, I think all three issues contributed. And for me to give you a precise portion of that volume decline attributable to weather, to residential and to delay in highway projects would be a little bit speculative on our part because it's hard to tell. But all three contributed and all three were significant contributors.

Okay, thank you. And then just to build on the line of questioning regarding 2007 guidance. You talked a little bit about your aggregate volume and the pricing assumptions. Can you help us understand some of your assumptions regarding housing, private non-res and the public infrastructures activity? What are you assuming in each of those three end market sectors.

I can give you to you directionally David. I think we want to have a little more visibility before we actually start putting percentages on those numbers. We expect highway spending and aggregate shipments in the highways to be up nicely in 2007. We expect private nonresidential construction to continue to improve. We expect residential construction to be weak, certainly in the first half. Hopefully, by the second half, the excess supply in those markets where excess supply of houses exists will start to diminish. But we are not expecting any kind of collapse in housing. But we do see it probably down year over year in '07 versus '06. And we will give you more guidance on that in the fourth quarter.

Okay, good. And then just finally, what are your assumption regarding asphalt pricing and volume for 2007.

We expect asphalt pricing to be up and volumes to probably be flat. It certainly depends on the timing of when states and local governments decide it's time to rebid some contracts that were deferred. But we're optimistic that liquid asphalt prices falling will certainly pull some projects back off the shelf and get them bid, if those prices continue to fall or don't go back up.

Okay, thank you very much.

Your next question comes from the line of Jack Kasprzak with BB&T Capital Markets, please proceed.

Thanks, good morning, Don.

Hi Jack.

I wanted to ask a couple of modeling questions, maybe more for Dan. But for the tax rate, what should we be modelling going forward? And do you have any initial projection on '07 Cap Ex? And what about interest expense run rate on a quarterly basis?

On the tax rate Jack, I think we would be in the mid 32 to 32.5 for the full year '06, probably in that same ballpark for '07. We have not yet finalized our numbers on Cap Ex outlook for 2007. We will give you guidance on that in three months. Regarding the run rate for quarterly interest expense, let me kind of do some scribbling here and come back to you later in the call.

Okay. And then also shares outstanding at the end of the quarter.

Yes.

Do you have a guesstimate on that?

At the end of which quarter?

September. I assumed since you were buying back stock throughout the quarter --?

Yes, the average shares outstanding in the third quarter fully diluted were $97.7 million. And the average shares outstanding as a point of reference in the second quarter was $101.6 million.

Okay. And the average for the quarter but at the end of the quarter, at the end of September in terms of what the average for the fourth quarter assuming no more share buyback?

All right. Okay. The actual point estimate.

Right.

In terms of -- these are undiluted shares, but the absolute number outstanding at the quarter end was $94.4 million.

Great. And then Don, I just wanted to ask, do you think given what you know today, how you have detailed the current construction environment, do you think Q3 of this year will be the low ebb for volumes? Do you think down 6.6% will be -- I know there's some weather in there, but do you think that will be about as bad as it will get given what we know about construction activity?

Well, Jack we have said that we think volumes for the full year of '06 will be flat with '05 or slightly down. Year-to-date, we are essentially flat with '05. So we think fourth quarter will approximate last year's fourth quarter or be slightly down. Then for full year '07 we are, we believe, at least what we have got built into our projection, is flat volume. So logically, what you're saying is correct, that we do not foresee another 6.6% volume drop going forward.

Okay, great, thanks a lot.

Your next question comes from the line of Barry Vogel with Vogel and Associates, please proceed.

Good morning, gentlemen.

Hi Barry.

You're doing a great job.

Thank you.

First question for you Don, I think you have taken out your baseball bat here, let's call it an Adirondack, and you're really swinging from your heels with your purchase of 6.7 million shares. Does part of your optimism relate to the possibilities that California, which is your most important state in terms of revenues, is going to have a period of time here, assuming the polls are right, where there's going to be a very big increase consistently in infrastructure spending in California?

Well, if you will let me delete those two things, I will say that we are very optimistic about potential in California. California is performing beautifully for us now. It has really, really improved since we bought CalMet, and the improvement is continuing. The real upside for California and literally for the Company, is in public infrastructure spending in California. So, we are very optimistic about that. We are certainly sensitive to the fact that the voters have to approve the $37 billion bond issue on November 6. But as you know, the polls are tracking and that is leading by 10 or 12 percentage points in the polls.

Now, assuming that things continue well, should we be looking for you to continue your share repurchase program into the future.

Barry, as you know, you have been following us a very long time. We don't signal that in advance. But I would say that the conditions that have encouraged us to buy the shares back that we bought so far this year do not appear to have changed. But we will give you further guidance on what we do in the fourth quarter after the fourth quarter.

Thank you. Dan, I have a couple questions for you.

Okay.

I'm assuming that the land sale you're talking about for the fourth quarter is a CalMet piece of property.

That's correct.

Let's assume you sell that in the fourth quarter, how much -- at the end of December, assuming that would be sold, how much CalMet land assets might you have on the books at the end of December?

Well, let us answer it it this way, Barry, how much have we identified as surplus, reclaimed, ready to sell. That's a far better --

Okay.

That's far better way to look at it, if that's what you're getting at, than what our reserve base is on the books for, which we're not selling of course. Dan, do you have that?

Not handy. I'll try to work something up.

Bob Wason looks after that for us and he is here today.

The sale that we're talking about closing would bring our total sales of CalMet land land to about $300 million. The amount we have available is somewhat of a moving target, but it is in excess of $100 million at this point.

Were you able to hear that, Barry?

Yes, over $100 hundred million might be left.

Yes. And that moves around. We -- pieces go in and out depending upon circumstances.

Okay. And I have another question for Dan about capital expenditures. Obviously you're doing -- you're stepping up significantly your capital expenditures this year. And I applaud you for that, because I believe the rate of return on your capital investments in your current quarries is extremely high. Is it probable that that $450 million, or whatever it is, is going to be a peak or should we see capital expenditures continue at those very high levels next year?

I think Barry, while we're still trying to finalize the guidance for '07 CapEx, I think it would be safe to say we do not expect to see 2007 Cap Ex drop off dramatically at all from the levels we're at this year. The exact range is premature for us to lock it down, but I think it will continue to run at a higher than trend line rate.

That's great. Keep up the good work.

Thank you.

Your next question comes from the line of Mike Betts with J.P. Morgan. Please proceed.

Yes, good morning. I had two or three questions if I could. The first one, Don, you've indicated that there was quite a fall off in September. Could you go some indication if possible of what actually happened in October? Has that proved to be very much a one month fall off with those big negative numbers? Have you seen any improvement in October? Is October still a bad month.

Mike, it's never been our practice to give volume guidance into a quarter and I don't want to start that now. I think we're not into reporting same store sales every week like Wal-Mart, so I don't want to get into that. I'm not trying to be difficult but I just -- once we do it then it's, then we've got to do it publicly and put out another press release and I don't want to do that.

Okay. My second question, and obviously the California performance was very good, up 40%. Was there any sort of one off-items or anything that was not normal in that, either in terms of the base comparison of that quarter or is that a pretty good number? I'm sure it was an exceptional quarter but is that a reasonable number or was it distorted by exceptionals?

There were no exceptionals that distorted that result. It was driven by price increase, margin improvement and good cost control. And good cost control is a new description of California.

Okay. And the final question for me, in terms of the January price increases, which I guess you have been -- or you haven't been talking to customers about, but you'll inform them relatively shortly. Has the outlook changed at all given the weaker demand picture? Or has generally the comments that we have had previously, would they still very much apply in terms of what you're thinking in terms of January price increases?

I don't think we said there's a weakening demand picture. And there's been no change in the outlook for pricing.

Okay, thank you very much.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Clyde Lewis with Citigroup. Please proceed.

Morning gentlemen. Can I maybe follow on with one on prices as well? Can you maybe just sort of say where current prices are today against what the average is likely to be, so trying to get some sort of momentum increase? I know you're talking about the momentum being the same in '07 or very similar to what you saw in 2006. But without any other price rises posted at the start of 2007, I'm trying to get some sort of idea as to what the average would be in 2007 against where it was and where it's likely to be in 2006?

Well, we have said that we expect the 2006 price increase full year over 2005 full year to be 14%. I have already declined to put a number on '07's increase. And if that's what you're asking, I will give you that information in the Q4 conference call. But we're not prepared to do that today, Clyde.

But the 14% average for the year is obviously sort of different to where the spot is now compared to that average. That's what I'm trying to get at. I'm trying to get at, that's sort of where the spot is compared to that average. So without changing anything at all at the start of '07, not making any judgments and I'm not asking you to say anything on that. But what would the increase be, would it be 3% or 4% or would it be 5% or 6% or 7%?

I'm sorry, Clyde, we don't look at it that way, I don't calculate it that way. One -- certainly, if you're asking about momentum, if you look at the rate of price increases in each quarter as we have gone through 2006, I think it will show you that prices have continued to increase throughout the year.

Yes.

But I can't -- we don't have the data in the form, at least if I understand your question, we don't have data in that form.

Okay, thank you. I have a couple other questions, if I may. Your large player for North Carolina sort of mentioned that they might be able to get to an operating margin of 30% in 2010. Is that something that you would like to comment about or are you happy for Steve to make his comments and you to keep your own counsel on that?

I don't have any visibility in our operating margin in 2010 at this point.

Okay. The other one I had was on Illinois. There's been a fair bit of change in the ownership structure in Illinois. Have you seen any improving trend in pricing relative to where that market has been historically because of fewer competitors?

Absolutely. And it's not because of fewer competitors, it's because of, they are.

Okay. All right, thank you very much.

Your next question comes from the line of [Steven Prince] with Pivot Capital. Please proceed.

Good morning guys. Quick question for you. I'm a little concerned about your volume guidance for next year given how bullish you are on highway spending and commercial spending. And just given the mix, 75% being towards that and 25% being towards housing, it would imply that your assumption on housing would be for it to be down in the 30% range or something like that. It just seems like with more reasonable assumptions, your volume should be up next year.

Well, we certainly hope it will be. The wildcard is when the excess supply of houses in some markets works its way through the system. Some people are saying that will be by mid-'07. Some markets it will probably be longer. Some there's not any excess supply today or there's very little excess supply. So, that's going to be market by market. I think we have far more visibility into what will happen with public infrastructure spending and with private nonresidential spending than we do what's going to happen with residential spending. But we hope that we will see growing volumes in 2007. At this point, we have concluded that we shouldn't put volume in our earnings forecast for 2007 and hopefully that will change. But today we don't see it.

Let me ask you this. Is your '07 volume assumption predicated on housing getting worse than it is now.

We think 2007 housing will be not as strong as 2006 housing for the full year. Now, that's going to change. Housing was relatively strong for us in the first half. It got -- began to show up being weak. Now, of course, you know that we're on the front end of houses. Our material goes into the front end of housing developments, so we expect to see the infrastructure for new housing developments begin to recover a little ahead of the actual construction of new houses. And it will decline in advance of the finishing up of houses and subdivisions.

But -- and we have spent a lot of time trying to understand housing. And essentially our conclusion, it is a very, very market specific issue. It is worse in slow growth markets, by growth, I mean population and job growth markets. It is more severe. The exceptions being there's been a lot of overbuilding in parts of Florida. And in some markets in the Southwest. Those will take some additional time to work out. But with population growing at almost 2% per year plus or minus and job growth and interest rates relatively stable, those houses will get consumed in due course and we expect housing then to stabilize. We probably won't get back to the very high levels of starts in '05 and maybe even early '06. But we will certainly stabilize, we believe, at a very high level based on history just not at those peak levels.

And lastly, is your guidance for the public part of your business, is that predicated on the November 6 bond issue going through or --?

No.

It's not, okay. Okay, that's all I have, thanks.

I want to come back for a minute and answer the remaining question that Jack Kasprzak asked about interest expense. The number in the $28 million plus or minus a little bit would probably be a reasonable point for full year 2007. And that's interest expense net of any interest income. And somewhere between $6 and $7 million for the fourth quarter of 2006. But in both of those cases, I should point out that the numbers are -- those numbers are developed on the assumption that there's no further share buyback. We never comment on what our share buyback activity will be. And obviously, to the extent that we do buy back shares those interest numbers will fluctuate.

Your next question comes from the line of David Macgregor with Longbow Research. Please proceed.

Yes, guys just as a follow up, I thought given that California is such a pivotal part of the story maybe you could just remind us of your competitive position in that market? What is your share of the aggregate market or what's it ranking in aggregates and also in asphalt? And if you could give us a sense of what your piece of the California market looks like?

David, we believe we're the largest producer of aggregate and asphalt in California. What our share is, I don't have good data on. We obviously, don't operate in the entire state of California. We are well positioned in southern California in the LA Basin and in San Diego, we're well positioned in the Central Valley. We have significant operations up in the Sacramento and San Francisco Bay area. But in terms of statewide market share, I really don't have a good figure for that.

And what is residential as a percentage of your overall California business?

It is higher than in most of our other markets, primarily because historically, public infrastructure has been very low in California. Hopefully, we're about to see that change and public infrastructure will become an increasingly part of our California business. Private non-res is very strong in California. Housing in southern California has weakened. Housing in the San Francisco, San Jose area has been weak for years.

Okay. Good, thank you very much.

Your next question comes from the line of [Allen Metroni] with Silver Lake Asset Management. Please proceed.

Thank you. Just two questions. First, can you just remind us what your authorization is still for further share repurchases, how much is -- what the total authorization was and how much is left on that authorization?

I believe we have about 4 .5 million shares remaining. That's not a precise calculation, but we had about 10 million shares. We purchased about 6.6, so 4.4, something like that.

Okay.

We're not out.

Got you. And then also, can you just comment maybe on the Cemex hostile offer for Rinker? This past -- in the last month, you have seen a couple foreign companies trying to make bids for what are primarily domestic producers, or at least show some interest with regard to TXI as well as RIN. It seems as if the Americas, which has been insulated for many years, is starting to attract some foreign interest. Just give us your thought and whether you think you have any part, maybe talk about your part in consolidation over the next couple of years.

I would make these comments. As you look around the globe, virtually the only industrialized nation in the world that is growing in population is the United States. Now, India is growing in population and it is quickly industrializing, so it may be the other exception to that. But -- and as we look at what drives demand for our products we believe it is population growth and job growth. So, it is no surprise to us that international producers are very interested in the United States market. It is today the best market for our construction materials we think in the world. Beyond that, I don't have any comments. Both Cemex and Rinker are customers of ours in some markets and they're competitors of ours in some marks. They're both very well run companies and we don't believe the combination will have any impact on us one way or the other.

Okay. Have you had -- one thought if Cemex doesn't buy Rinker is possibly that Rinker could look to combine with another U.S. company to gain scale. Have you had any talks in recent weeks with Rinker or in recent months with Rinker with regard possibly expanding within Florida or teaming up?

Well, what my answer to that question is. And you can put any other combination of companies in there and I won't comment on it.

I figured I would ask anyway, though. Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of John [Mishikari] with Fidelity. Please proceed.

Yes, hi. Could you please tell us what the share count is embedded in the '07 guidance?

The assumption John, is that there's no share buy backs embedded in that. There's some minor issuances anticipated, it's not a dramatic change.

So 96.5 or so?

Yes, probably in that range.

Okay. And then also in terms of the outlook --?

That's actually pretty close.

Okay. Then in terms of the outlook for the different segments, I think you commend in terms of dollars, revenue, that is for '07. Could you tell us what the outlook looks like in terms of volumes for the three segments in '07?

Well directionally, we have said we expect public infrastructure to be up, private non-res to be up and residential to be down.

And that wouldn't change if you were to demarcate between revenue and volumes?

Hello? I'm sorry, could you repeat your question.

Sure. I'm wondering if the commentary would change at all if you were to demarcate between revenue and volumes?

Let me -- we would expect revenue clearly to be up in public infrastructure and private non-res, given the results in Q3 where volumes fell, we think we still had revenue increases coming from housing. And I would expect we will continue to see revenue increases coming from housing in '07, even on lower volumes.

Could you comment on your outlook for volumes in each of the three segments for '07?

Not in any way other than I've already commented and that is directionally. We will give some additional guidance on that at the end of Q4.

Okay. So volumes are expected to be positive for infrastructure, non-res. And volumes are expected to be flat for res -- or down for res, rather.

That was my -- those were my previous comments, yes.

Okay. I thought those were stated in terms of revenue. Thanks.

Your final question comes from the line of Andrew [Schaefer] with Farley Capital. Please proceed.

Yes, hi, what was your average price increase for aggregates say maybe year-to-date in California? And do you expect similar price increases in California next year?

For the total Company, year-to-date we are up about 14%. California is higher than that.

Okay. And do you expect it to be higher than nationwide in terms of price increases in California going forward in '07, anyway?

Yes.

Thank you.

I would now like to turn the call back over to Mr. Don James for closing remarks.

Well, thank you very much for joining us today for our earnings release and conference call. I'm sure we will meet many of you over the next few months in meetings. And we appreciate your interest in Vulcan and we will speak with you again following our fourth quarter and full year 2006 results. Thank you very much and have a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a good day.