渥肯建材 (VMC) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Vulcan Materials fourth quarter 2006 and year-end earnings conference call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS).

And now I would like to turn our presentation over to your host for today, Mr. Don James, Chairman and CEO.

Good morning. Thank you for participating in our fourth quarter and 2006 year-end conference call. I'm Don James, Chairman and Chief Executive Officer of Vulcan Materials.

Before I begin, let me remind you that certain matters discussed in this conference 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.

Joining me today is our Senior Vice President and Chief Financial Officer, Dan Sansone, and Mac Badgett, our Senior Vice President of Construction Materials.

Our excellent earnings growth in the fourth quarter punctuated what we view as another outstanding year for Vulcan, and I'm pleased to report to our shareholders that we again achieved record sales and earnings. Our coast to coast footprint positions us to supply aggregates to a diverse group of end-users in the fastest-growing U.S. markets. This provides us a platform for sustainable earnings growth.

In 2006, our shareholders were rewarded with a total return of approximately 35%, far outpacing the S&P 500's 16% total return for the year. The use of aggregates in a broad range of construction and uses, and the growing recognition of the underlying economic value of aggregate reserves are both positive factors for our strong and consistent earnings growth.

For full-year 2006, earnings per share from continuing operations increased 45% to a record $4.79 per diluted share has improved pricing more than offset the earnings effect from somewhat lower shipments. In the fourth quarter, net sales increased 9% to a record $743 million, while earnings per share from continuing operations increased 34% from the prior year's fourth quarter.

Sales and earnings growth in the fourth quarter was driven primarily by double-digit price improvements in all three major product lines. Gross profit as a percent of sales increased from 26.2% in last year's fourth quarter to 32% this year, as higher unit costs for key raw materials, parts, supplies, electricity, and the effects of lower production volumes was more than offset by improved pricing.

The average price for aggregates including freight to remote distribution sites increased 16.5% from the prior year's fourth quarter and drove earnings and margins higher than last year. Aggregate shipments in the fourth quarter were 6% lower than the prior year's record level. Softening in residential construction, as well as some temporary deferrals of highway projects earlier in the year, were the primary drivers for lower volumes in most of our markets in the fourth quarter.

In our view, it was a sharply higher cost for liquid asphalt that resulted in some highway bids exceeding engineering estimates, which then resulted in those projects being deferred or updated estimates and new bids. Fortunately, we have seen cost for liquid asphalt falling in many markets over the fourth quarter.

After almost three years of rising diesel fuel cost, we experienced some relief in the fourth quarter. The cost per gallon of diesel fuel was favorable to earnings of approximately $2 million versus the prior year's fourth quarter. For the full-year, the unit cost of diesel fuel increased approximately 13% and reduced earnings approximately $14 million from the prior year.

Asphalt earnings increased sharply in the fourth quarter as a result of higher selling prices and falling liquid asphalts costs. Asphalt pricing increased 29% from the prior year's fourth quarter, more than offsetting a 24% increase in the unit cost for liquid asphalt and higher aggregates prices versus the prior year. While the average unit cost for liquid asphalt was up from the prior year's fourth quarter, unit costs declined on a monthly basis each month from October to December.

Concrete earnings decreased slightly in the fourth quarter as higher pricing was more than offset by lower volumes as well as higher cost for cement and aggregates supplied internally from our quarries. Concrete pricing increased 14%, indicating some resiliency despite the slowdown in residential construction in southern California and Arizona. In Texas, concrete volumes remained steady in the quarter as a result of stronger demands in private nonresidential construction.

Other income increased $11 million from the prior year's -- or decreased, excuse me, $11 million from the prior year's fourth quarter, due primarily to a smaller increase in the carrying value of the ECU earn-out. As you may recall, the terms of the ECU earn-out agreement from the sale of our Chemicals business provided for a maximum payment of $150 million. Through December 31, 2006, we have recorded $148 million of this earn-out. Table E in our press release illustrates the effect of the earn-out on our earnings.

Thus far, we have received cash payments of $128 million. We believe it is likely that the remaining $22 million potential under the contract will be received in the third quarter of 2007, which possibly could result in $2 million of additional pretax earnings in 2007.

As I mentioned in my introduction, our full-year operating results for 2006 were very strong. All three major product lines realized significant earnings growth from the prior year, as higher price more than offset somewhat lower shipments.

Aggregate pricing increased 14.7% from the prior year as most markets realized double-digit price increases. Aggregate shipments were down 2% for the year. We realized year-over-year growth in aggregate shipments in a number of states, including North Carolina, Georgia, South Carolina, Alabama, Mississippi, Texas, and Arizona, New Mexico despite slowing residential construction.

Asphalt pricing increased 36% while unit shipments remained relatively flat for the year. Asphalt earnings were particularly strong in the second half of 2006, when liquid asphalt prices began to moderate in September and selling prices for asphalt mix held up. Concrete pricing increased 16% for a full-year, more than offsetting the effects of lower volumes and higher cost for cement and for aggregates.

For the full-year, higher pricing in each major product line led to a 16% increase in net sales and a 32% increase in gross profit. Gross profit as a percent of net sales increased 350 basis points for the year to 30.6%. The effective tax rate for 2006 was 32.1% compared to 28.4% for 2005. The 2005 tax rate included a reduction in estimated income tax liabilities for prior years and a favorable settlement of federal income tax claim refunds representing approximately $0.12 per diluted share. In 2006, those favorable adjustments totaled only $0.01 per diluted share. Net cash provided by operating activities increased 22% from the year to $579 million.

Putting our significant cash flows to work to enhance our business and increase shareholder value remains a priority for us. We continue to move aggressively to capitalize on the opportunities presented by continuing economic growth and depletion of aggregate reserves in a number of markets. As a result, we reinvested approximately $435 million in our business in 2006. Much of the increase in spending over the prior year's level was for high return projects, the lower operating costs in our existing plants, for the acquisition of new reserves and for additional production in distribution assets in [key] markets.

Also, during 2006, we returned $667 million to our shareholders in the form of dividends and share repurchases of our common stock. For the year, we repurchased 6.8 million shares at an average cost of $77.37 per share for a total cost of $523 million. A dividend paid to shareholders during 2006 represented a 28% increase from the prior year and marked the 14th consecutive year that Vulcan has increased its dividend to shareholders.

In total, over $1 billion of cash was reinvested to improve and expand our business and position it for future growth or return to shareholders in the form of dividends and share repurchases. This level of investment demonstrates our commitment and confidence and the future demand for aggregates and our ability to leverage our operational footprint to continue to grow earnings and cash flows for our shareholders.

Looking ahead now to 2007, we remain confident in our ability to continue strong earnings growth. The pricing momentum established in 2005 and 2006 should continue in 2007, and as a result, we expect aggregate pricing to improve 10% to 11% in 2007 versus the 2006 levels. Overall, we expect 2007 earnings from continuing operations to be in the range of $5.51 to $5.91 per diluted share. This guidance assumes 98 million diluted shares outstanding for 2007.

In January of this year, we closed a real estate sales transaction in California that resulted in a net after-tax gain of $0.26 per diluted share and its earnings effect for the year is included in our guidance. Our 2007 guidance assumes no further land gains for the year. Excluding this gain on real estate from our 2007 guidance and excluding comparable gains of 32% per share reparable to ECU adjustments and gains on sale of contractual rights in 2006, we are projecting approximately a 22% earnings growth in 2007 over 2006.

We are forecasting a decrease in average unit cost for diesel fuel in 2007 compared to full-year '06. This decrease should benefit earnings approximately $0.05 per diluted share for the year. Our earnings sensitivity to changes in the cost of diesel fuel can be calibrated as a $0.10 per gallon change in diesel fuel prices affecting pretax earnings approximately 6% or $6 million annually.

We currently expect the overall demand for aggregates in our markets to remain relatively stable and our shipments for 2007 should be in line with 2006 levels. Even though the residential construction downturn in the U.S. continued in the fourth quarter of 2006, and contributed to lower aggregate shipments for the year, residential construction we believe has the potential to stabilize by the second half of 2007.

Mortgage interest rates are still relatively low by historical standards and household formations are increasing in many of our higher growth markets. We believe most categories of private nonresidential construction will continue to improve in 2007. Our geographic footprint positions us well in the regions expected to show the most growth in 2007. This construction end market includes a wide array of project types and generally is more aggregates intensive than private nonresidential construction.

Economic factors such as job growth, vacancy rates, private infrastructure needs and demographic trends helped drive overall demand for nonresidential construction. Aggregates demand from highway construction in Vulcan-served markets should increase in 2007, primarily as a result of higher state spending levels and moderating liquid asphalt cost. 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 those markets where projects were deferred earlier in 2006.

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. We are well-positioned to benefit from growth and demand in these end markets.

Let me take a few minutes and provide you with updates on several key matters that are occurring in California, our largest state in terms of revenues that we believe will have a major positive impact on our operations there in the future. About 60% of Californians view traffic congestion as a major problem according to a January 2007 Legislative Analyst office report in California.

The report goes on to say that even with the funding provided by the Traffic Congestion Relief Act in 2007 and Proposition 42 in 2002, many feel that the state's transportation system suffers from underinvestment and has not kept pace with growth in population and travel demand. Additionally, in a report released last October, TRIP, a national transportation research group, found that five of the ten urban areas in the United States with the poorest highway conditions were located in California.

That said, the outlook is very encouraging because Governor Schwarzenegger, the state legislature, and the voters of California appear to making headway in addressing the state's transportation problems. In November of 2006, California voters approved five statewide bond measures totaling approximately $42.7 billion that will help improve the state's infrastructure, including transportation. Four of these bond measures, totaling $37.3 billion, are part of the Governor's 10-year strategic growth plan presented last January and approved by the California legislature in May.

Implementation plans for each bond program are currently being submitted for approval through a collaborative effort of state, regional and local authorities. At this time, we estimate that approximately $7.5 billion of the $19.9 billion approved by voters under proposition 1B has been submitted to the implementing agencies for approval. The implementing agency in many cases, the California Transportation Commission, will then make final determination as early as March of this year for many of the proposed projects.

The transportation bonds authorized by the November elections would become available to the implementing agency upon appropriation in the annual budget act. The Governor's proposed 2008 budget submitted last month includes $5.8 billion of funding for transportation projects, of which $1.5 billion is part of the $19.9 billion approved by Proposition 1B in November.

The 2008 proposed funding level is an increase of $1.2 billion from the record $4.6 billion allocated in FY 07 and is a substantial increase from the $900 million allocated in FY 05. The additional funding approved by voters in November is very promising for addressing California's infrastructure deficiencies. However, the Governor believes additional funding is necessary to go beyond meeting existing needs for transportation capacity and to begin meeting future transportation and infrastructure needs. To that end, he has proposed an additional $43 billion of infrastructure bonds to be put to the voters between 2008 and 2010. We strongly support Governor Schwarzenegger's leadership in addressing transportation and infrastructure needs that have long been ignored in California.

With respect to federal highway funding, the last Congress enacted a short-term continuing resolution that included funding federal highways at the FY 06 level until February 15 of 2007. This week, the House Appropriations Committee leadership issued a joint resolution co-written with the Senate appropriations leadership which calls for full funding of the Federal Highway Program at the level guaranteed in the six year authorization bill known as SAFETEA-LU. This joint resolution provides for $39.1 billion for the current fiscal year, a $3.5 billion increase above the fiscal '06 levels.

Yesterday, the full house overwhelmingly by 286 to 140 vote passed the joint resolution. We have very clear indications that the Senate will follow suit next week in passing an identical measure and that the U.S. Congress will approve the previously agreed-upon level of funding, increasing the Federal Highway appropriation for 2007 about 10% above the 2006 level.

We are proceeding on a number of capital projects that will add capacity, increase efficiency and boost aggregate reserves at existing operations over the next few years. We are 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 for highways and other infrastructure projects in California.

We are also investing in projects to increase the supply of aggregates to attractive U.S. Gulf Coast markets. In both California and the Gulf Coast, the industry reserve base for aggregate is shrinking due to depletion, regulation and litigation. We have significant reserves available to serve these high growth markets and are further developing our production, transportation and distribution capacity to grow our presence in these markets.

As a result, our estimate for capital spending on property plant and equipment for 2007 is estimated to be in the range of $475 million to $550 million, exclusive of acquisitions. ED&A for 2006 was $225 million, and that approximates a level of replacement capital spending we anticipate in 2007, which is a part of the $475 million to $550 million.

Capital investment opportunities contemplated in this estimate provide attractive returns that will help us serve our customers and markets more effectively going forward. It will also help us reduce our production costs as well as add additional reserves.

Turning now to our outlook for the first quarter of 2007, you will recall that weather in the first quarter of 2006 was extraordinarily favorable for construction. As a result, earnings in the first quarter of 2006 far exceeded usual seasonal trends. Typically for us, the first quarter contributes about 10% of operating earnings for the full year and we expect the first quarter of 2007 to be more in line with this historical performance.

Consequently, including the sale of real estate in California, we expect to earn $0.75 to $0.90 per diluted share in the first quarter of 2007. Additionally, our first quarter and full-year earnings guidance for continuing operations in 2007 did not assume any potential adjustment in the carrying value of the ECU.

In closing, I would like to reiterate some of the points that support our optimism about future sales and earnings growth for Vulcan. Construction spending remains at high levels. Relative in market demand is returning to historical norms that match very well with our geographic footprint and strategic focus. Pent-up demand for improved transportation infrastructure is finally moving toward funding for construction in key Vulcan states such as California.

The cost of its broad use in construction aggregates demand is well-balanced between end markets, with public construction growing and strengthened 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 75% of our aggregate shipments serve public infrastructure and private nonresidential construction.

As a result of the solid demand in our markets and the high cost and great difficulty of securing new reserves in many markets, we believe the momentum underlying the price improvement achieved in 2005 and 2006 will continue into 2007.

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.

(OPERATOR INSTRUCTIONS). David MacGregor, Longbow Research.

With respect to the aggregate prices, can you talk a little bit about how much carryover benefit we're getting from increases in '06 that are just going to be implemented now?

We'll certainly get a carryover effect. We don't calculate that way. In fact, it's probably not possible for us to say how much of the 10% to 11% is carryover; some will be, but we don't -- we have looked at it the way you and others often ask that question and we simply, the way we set prices, we can't calculate that number.

Is there a way to thinking about it in terms of incremental revenues from price increases announced in '06 that you'll collect in '07?

I think that's the same question.

Yes, it is. I'm just trying to think of how you might be looking at it, but --

Well, we look at what our prices were quarter by quarter in '06 and what we project them to be quarter by quarter in '07 and --

David, as we've said, that's done at the market level across 250 quarries and it's rolled up and there's different pricing actions and different job bids being led at each one of those operations and it's just not something that's practical and it's not like other industries where you have a single structured price that applies nationwide.

I appreciate that. I appreciate you trying to address that for us.

And David, let me -- even though you didn't ask this question, my colleagues point out that I misspoke in my text when I was talking about our projection for first quarter earnings. The correct range is $0.75 to $0.95 per diluted share and I probably said $0.75 to $0.90, which was an error on my part.

And that includes the $0.26 real estate gain, right?

Yes, it does.

Second question, the $435 million that you spent in 2006, you indicated you expected to be some cost benefit in '07. Is there any way you can quantify that for us?

Well, in these days of substantially rising input costs, cost benefit often comes in the form of less of an increase in operating costs. We certainly aren't projecting that our operating costs will go down in '07, but certainly these projects help us reduce the rate of increase.

Is there a shift in the profitability mix from business segment to business segment this quarter that you can at least discuss conceptually? I know you don't report the segments, but if there was a shift in that mix, it would be helpful if you could talk about that.

Aggregates earnings were up very nicely. Asphalt earnings were up very nicely, and concrete earnings were not up as much.

In terms of proportionality, we saw a shift away from concrete towards a little more asphalt in aggregate?

Yes, and I think that's understandable because concrete is much more residential focused than overall aggregate and asphalt, demand which goes more into public infrastructure and private non-res.

In your prepared remarks it was very helpful to hear you present some sensitivity to diesel prices. Is there any way you can give us a similar metric on liquid asphalt prices?

We probably can. We have not prepared that. The issue with liquid asphalt and asphalt mix is that while we don't buy diesel and put it with something and resell it, we do with liquid asphalt, so there are two moving pieces to the liquid asphalt and asphalt mix. There's the cost of the liquid asphalt and the price of the mix. As a result of that, the sensitivity is not nearly as straightforward as it is with diesel fuel.

In your first quarter guidance --

Let me make sure I made this clear. Our ready-mix earnings along with aggregates and asphalt were up for the full-year. It was in the fourth quarter that concrete earnings were lower than fourth quarter concrete earnings a year ago; but for the other product lines, earnings were up for the full-year and for the quarter.

That's good, my question was regarding the fourth quarter so I appreciate that. In your guidance for the first quarter, can you talk a little bit about your volume assumptions for each of these businesses?

Predicting first quarter volumes is -- we're not smart enough to do that and if you can tell us what the weather is going to be in 52 different markets, we can come closer, but we just, we can't -- giving first quarter volume guidance is -- we're bound to be wrong.

Last question just deals with the priority of the share repurchase program in your 2007 use of cash and also, if you could just remind us of the existing authorization balance, that would be helpful.

We have ample authorization.

We have 3.5 million shares remaining under the current authorization.

3.5?

Yes, sir.

The last refresh or the last load was for how much?

It took us back up to 10 million.

That's right.

Okay, so 10 million increments is typically what you think of when you reload?

Right. And we have in the last two years, '05 and '06, we bought back 10.2 million shares. We spent $742 million doing that.

Is that still a high priority for 2007 use of cash? Or do you think it slides a little further down the priority list in '07?

It's always a high priority use of cash. I think I'm encouraged by the opportunities we see for growth in our business in states like California, Texas, Florida and other states, and we think we can pencil in returns on many of those projects that are very attractive, and we think [are] provide a better long-term value for shareholders than repurchasing shares. However, we still believe in share repurchases and we have the capacity for share repurchases. We have not built share repurchases into our '07 projection simply because we make those decisions periodically through the year and we're not suggesting that we will not repurchase shares in '07, but we just haven't built into our numbers.

No, understood. Thanks very much. Really nice quarter.

Aynsley Lammin, Citigroup.

Just wondering if you could comment on the kind of environment for acquisitions at the moment in terms of availability, price expectations, et cetera, and what's your kind of view on making acquisitions at the moment?

And then secondly, if you could just also give your view of how robust you think the commercial side is, is there any kind of weakness feeding through from the residential weakness? Thanks.

One way to think about acquisitions is you have to do them one at a time. And some acquisitions may be available and they may make a lot of sense for one acquiring company and not much sense for another. We continue to work very hard and focus on trying to be a good buyer and a prudent buyer of acquisitions. It's very difficult for us to project in advance how much money we will be able to reinvest in acquisitions, but we don't believe that we ought to be out of the acquisition market.

We continue to look for those opportunities. As you may have seen, we closed on two acquisitions, one in North Carolina and one in Illinois earlier this month in January, and that remains an important part of our strategy.

The second half of your question, if you could repeat that, please?

Just if you could comment on kind of how robust you think the commercial side is and is the weakness in the residential field?

We think overall private non-res will continue to improve in '07 as it did in '06. Within private non-res, there's a very broad array of projects. Probably while retail had been strong over the last two or three years, and industrial and other commercial not as strong, we see industrial and other commercial really leading the way in '07 and retail probably not as strong relatively as those other end uses.

There are, if you pay attention to the U.S. Gulf Coast, you will see that there are a number of refineries and other large industrial projects on the drawing board and beginning construction and those are wonderful projects for us.

Mike Betts, JPMorgan.

I've got a few questions, if I could. First one is maybe just a follow-up on your comments about cost because we've just come off a conference call from one of your competitors further south who is indicating that he thought the maximum cost increase in 2007 would be 3% and it maybe would be less. Would yours just be a conservative comment or am I missing something, the cost pressures that maybe you weren't impacted by in '06 that you would be in '07. Maybe you could just explore that a bit more first, please.

Well, I don't have any cost forecast to share with you for '07. I'm not suggesting by my comments that we expect costs to be spiraling up in '07. That's certainly not what our intention is, but we continue to focus on cost. I suspect that part of what you are seeing from other companies, particularly those heavily focused in Florida and focused on concrete and concrete block, is that they are reducing employment, shrinking operations to match the decline in market demand, and that's really not the case in our markets. So we are continuing to try to build capacity and we expect our -- the rate of increase in our cost in '07 to be lower than it was in '06. I can't tell you whether that's 3% or 2% or 4%, however, at this point.

No, that's fine. My second question was just on the pricing which clearly was very impressive. I mean, the rate of price increase seems to have accelerated as we've gone through the second half of the year. I think it was 13% in Q2 up to 15% in Q3 and then 16.5% in Q4. Was that just the greater success of the July price increase or is there anything regional that's going on there, is it a bigger proportion of California for example? I was just wondering if there's anything I'm missing as to that accelerating growth rate.

Well, generally, price increases are more robust in higher growth markets that have reserve limitations, and certainly Florida and California would fall into that category. The price increases we have enjoyed, as Dan Sansone mentioned earlier in the call, were the result of thousands of individual decisions in a lot of different markets and our price decisions are ultimately made as close to the customer and as close to the marketplace as we can make them. We've set expectations and guidelines and philosophies and strategies at the corporate level and hopefully they get implemented and we are very happy with the manner in which our employees have addressed these issues in their local markets.

A final question for me, I don't think the share buybacks were very significant in Q4. Was that any particular reason for that? Obviously the share price was a lot higher for one reason, but was there anything I should read into that?

No. There's nothing to read into that. I guess we had bought back over 6 million shares and spent over $500 million and we just elected in the fourth quarter to take a breather, but you shouldn't read anything into that.

And just very finally, can you just remind me what sort of level of leverage you are prepared to have on the balance sheet. Where do you start to become uncomfortable?

Well, we have historically said that 35% debt to total cap would be a reasonable ongoing sustainable target for us. We have not achieved that level in a number of years. We don't have a problem taking our leverage up above that as necessary for strategic reasons. Our cash flows, as you know, are strong and our earnings visibility we think is very good going forward. So we are not -- would not be concerned about levering up substantially higher than 35% for the right opportunity.

John Fox, Fenimore Asset Management, Inc.

I have a number of questions.

John, if you'll ask them one at a time, I can retain them better.

Okay, I'll do that. The first one is probably for Dan. What is the gross amount of cash proceeds you will collect on the California real estate sale?

Growth pretax was about $45 million plus or minus the change.

Okay, 45, we'll work with that. Let me ask a pricing question in a different way. For 2007, that will obviously include carryover from '06. And then did you take a January 1st price increase?

Yes, in some markets.

And I guess is the industry term -- has that price increase gotten contraction?

Yes.

I was wondering for the full-year your aggregate volume, unit volume guidance, I guess, is flat. If you could talk about your assumptions for the three major markets. Obviously housing, non-res and then highway for fiscal year '07?

Yes, we think highways and private non-res will both be up in '07 over '06, probably low to mid single digits. In terms of aggregate tonnage, we think housing will be down again in '07 for the full-year compared to '06, probably mid single digits.

And then, do you have -- not by market, but just volume assumptions for the year for asphalt and concrete, just overall?

Yes. We think the concrete will probably be down some in '07 over '06, and asphalt -- I want to verify this with my colleagues here. We have asphalt mix being down slightly in '07 compared to '06, but that one could go either way.

Could you give me a sense for liquid asphalt prices? What were they at the peak? What were they at the end of the quarter and what are they now? Just [have] a sense of how much they changed?

One of the best ways to look at that, there is a PPI number for liquid asphalt. It shows that the PPI for liquid asphalt went up 55% in 2006, and a 2007 projection here is that it will fall 14%. I believe liquid asphalt was down significantly in the fourth quarter of 2000 --

It was down in the fourth quarter as compared to the third quarter. It was still higher than the fourth quarter of last year.

And liquid asphalt prices, John, are all over the board, largely dependent upon region and transportation and storage capacity. I think the way to think about this is that liquid asphalt costs peaked in Q2 and Q3 and have been coming down essentially since -- probably since September and hopefully will continue to moderate.

Just one last question on aggregates and housing, you talk about units down mid single digits. That seems like not a very large drop for me when I look at the homebuilder [owed] orders which are down 15, 20, 25, 30 or more in some markets. Am I looking at it the wrong way? Look at the order rates or --?

Well, it depends on -- we look at it in our markets. Now, I'm not saying that demand for aggregates and housing nationwide is going to be down mid single digits. I don't really know the answer to that, but in our markets, we are thinking mid single digits. We are cautiously optimistic that by the second half of '07, housing will have stabilized.

Now, if you look at individual markets, you get very different variations. And certainly, some of our southeastern markets outside of Florida and Washington, D.C. have remained strong. Texas housing markets have remained strong. So it's a very different analysis depending on what regional housing market one focuses on.

Okay, thank you.

I'm sorry, our phone seems to have gone dead. Is the operator still on the line?

Barry Vogel, Barry Vogel and Associates.

Congratulations, guys. Terrific job.

Thanks, Barry. I kept waiting on somebody to say that. I appreciate it.

Good. I have one question for you, Don, and a few small questions for Dan because you've covered a lot of good stuff on your commentary. California, as I recall, over the last few years or quarters has had very strong price improvements. Can you give us some idea of what the price increases for '06 were for California relative to your price increases you've talked about for the Company as a whole?

Well, they're higher in California.

Higher than last year's?

Yes.

Can you give us some idea of how much higher they were over that 14.8% increase?

No. We try to avoid giving those with that much [specificity], but suffice it to say that California was getting double-digit price increases long before the rest of the country was, in our market.

Have you announced price increases for California in January?

Yes.

Can you tell us how much?

No.

All right. I'll shift over to Dan, maybe I'll get some help.

Probably not.

The tax rate for last year I think was 32.1%. Can you give us your tax rate for '07?

Use 32%.

And how much real estate do you have left to sell at CalMat?

It depends on what your timeframe is. Probably in the original package, we've sold about 308 million and we may have 80 to 100 million left from the original package and certainly over time, as we reclaim land, there will be additional land, but that's got a longer timeframe on it.

And that sale in the first quarter was CalMat, I presume?

Yes.

And Dan, do have a DD&A number for '07?

Yes, use something around 264, 265 million.

As far as your stock purchase program, I must remark that your discipline was right on, and so I hope that you continue to have that discipline, and I think you will, because you've proven that you can do that, and so I want to congratulate you on that.

Thank you.

Thank you very much and I'm looking forward to the next few years of tremendous profitability for the Company and for the shareholders.

We'll try not to let you down.

Jack Kasprzak, BB&T Capital Markets.

I'm following up on a couple of Barry's, I guess, modeling questions. Dan, I was wondering if you could help us with what you think interest expense for '07 might be?

Probably in the neighborhood of $30 million.

Don, in your comments, I think you mentioned FY 08 transportation budget, California was $5.8 billion, but then you gave another number that's a component of that related to what they expect bonds to be issued. Do I have that correct? And what number was that?

There's still a lot of uncertainty as to the timing of when the projects will be identified and then when the bond revenues will be allocated to those projects. The number I gave you of -- is really the next year's budget, which really has very little of the bond money in it. I think their -- the Governor is proposing $5.8 billion for transportation, and only $1.5 billion of the $19.9 billion in Prop 1B is in that number, so the rest of it will be for future fiscal years unless they go ahead and roll out some additional projects that they're currently being -- that they're looking at now.

That compares with about 4.6 in the current fiscal year and then, as I said, about $900 million in FY 05. So there is a very modest portion in the current budget coming from this $19.9 billion. In addition to the $19.9 billion, there are a number of other infrastructure projects that include dams and levies and schools and some housing, all of which will use our materials and we're -- so I think the benefit from this bond issue is not limited to the transportation piece, and I'm only -- this 5.8 is just for the transportation projects.

And it seems like --

But to try to answer your question, Prop 1B, which is just transportation, is $19.9 billion; $1.5 billion of that is in the '08 budget of $5.8 billion, if that answers your question. And these numbers will probably be evolving significantly in a relatively short timeframe and we will continue to monitor that and continue to give you guidance on that.

And it seems like, and please correct me if this is incorrect, but the money out in California is being put to work pretty fast. There's already been a ramp in funding as you have illustrated. Does that imply that we will basically see a lot of paving work, a lot of maintenance which, of course, is aggregate intensive, probably sort of the best, easiest part of the business for you guys.

Lane additions, resurfacing are our bread and butter. It comes quickly. It's aggregate intensive. It's asphalt intensive. We are a very large asphalt supplier, as you know, in California. So those things are clearly important. I think Governor Schwarzenegger said some time back, what southern California in particular needs are more lanes on the freeways instead of mass transit. And that's where he's headed, we believe.

And I was going to also ask a little longer term, it seems like you've got a lot of visibility in the business. The price increases are rolling through and you're getting good traction on new price increases. The balance sheet is very solid, to say the least. There's tremendous cash flows. All of this is right in front of us with good predictability. What, if anything, wakes you up in the middle of the night these days in terms of the risks of 2007, even out into 2008 for the business?

Well, that's a question I'm frequently asked and I don't really have a very good answer for that. I think if we have another major terrorist event, that focuses the attention and the resources of the Company and greatly restricts consumer optimism. I think that could certainly have a downside to our business, but we aren't unique in that arena.

I really -- one of the challenges that we will have as an industry is finding ways at the federal and state government levels of continuing to fund the growing need for infrastructure. As you know, there is a commission authorized in the SAFETEA-LU federal legislation that is currently impaneled and is studying sources of additional revenue to fund the growing infrastructure needs of the country. I can't anticipate what that group will come back with, but I'm encouraged by what I see in the whole private equity arena.

There is a great deal of liquidity looking for opportunities. Many states are talking about selling existing infrastructure to raise money for more infrastructure, and I think that bodes well for Vulcan and the industry, that that could be a very large source of new revenues. Those, of course, are essentially tied to revenue producing infrastructure like toll roads and public utilities.

But I guess the place I think as an industry and as a company we have to continue to work is how do we raise the necessary funds to build the rebuild, I would say, the infrastructure that the United States really needs? And that's a challenge for us. We're going to continue to work there.

That's great. Thanks very much and truly a great quarter. Good work.

Tom Brinkman, Davenport & Company.

Just a couple of questions for you here. You were kind enough to name the states where aggregate shipments increased in 2006. I was wondering if you can give us the same specificity the markets where the highway projects were deferred early in '06 as you had touched upon?

Well, certainly, North Carolina was one. Let me -- I'm getting a little coaching here from my colleagues. And by deferred, we mean in some cases the projects went out for bid, the bids came in higher than the estimates, the jurisdiction, under law, by law, award it if the bid was above the estimate or above the range of the estimate, so they had to go back and re-estimate, in most cases using much higher liquid asphalt cost than the earlier estimate had been.

There's a sprinkling around the country, not any place where there is a massive change in that, but it does affect -- did affect demand, we believe, in the fourth quarter that some of these bids that were not let to contractors, our customers, back in the summer.

Regionally, do you have any feel for that? Or is there certain -- is it all state-by-state?

It's very state-by-state and even within states it's very project specific.

Another thing I was wondering about trend wise was have you seen a rising trend of acceptance of substitute products like blast furnace slag and recycled concrete as aggregate prices have risen?

No, we have not seen that, and those products have, in markets where they exist, they've been around for a very long time but they are very limited. The supply of those products are very limited. The transportation costs restrict where they are utilized. We have in the past been in the slag business. We remain in the recycled concrete business. Those are niche opportunities, but they really don't have much competitive impact on virgin aggregates in most markets.

You talk about the transportation costs. What about RAP, the recycled asphalt pavement? It's basically recycled on-site with some --

That's been in place for a very long time. I think the -- virtually all of states use RAP and allow asphalt producers to use RAP in different mixes and different percentages. We use RAP at our asphalt plants and it's a -- there again, is a finite quantity of RAP and it is, I think because of the high cost of liquid asphalt, RAP is a more desirable product today that it may have been several years back. But that's -- RAP usage has really been fully integrated into the whole highway contracting industry and there's no change there.

Just a last question just to clarify real quickly. You mentioned a 35% debt to capital ratio as your high comfort level. Did you mean net debt to capital?

I said that's our target. That's not our chokepoint. Our chokepoint is a little bit higher than that for some significant strategic reason.

Now did you mean net debt to total capital or total debt to total capital?

Realistically, net debt.

Net debt, yes.

If there's cash on our balance sheet, it's there because it's timing.

Well, congratulations on an excellent quarter, guys.

Clyde Lewis, Citigroup.

Again, I've got a number of questions, so I'll just ask them one at a time, if that's okay, Don. Just, California, I've got a figure of about 25, 26% of profits. I think that was for 2005. Presumably that figure would have risen a bit in 2006. Is that a fair statement?

We have said that California is about 25% of revenues. I don't think we have publicly given the percentage of our earnings that come from California.

But the revenue presumably would have risen a little bit faster in the group last year?

Yes.

In terms of the pricing assumptions, the sort of 10% to 12% that you've got penciled in for the year, is it fair to assume that you've got no expectation at this point that there may be a price rise?

I think we said 10% to 11%, and yes, we will have mid-year price increases.

Is it also possible to say which sort of states are struggling a little bit at the moment in terms of price rises? Maybe the sort of -- the toughest three, just to give some sort of idea as to where that's occurring.

Well, I said earlier that the higher growth coastal markets are getting above average increases. The lower growth interior states have lower -- generally lower opportunity for price increases. Let me -- if you have a city with an established number of quarries with long-term reserves and no growth, it is tougher to raise prices than it is in a growing city on the Gulf Coast with depleting reserves. And so, our strategy, if you have followed it over the last decade or so, has been to become a larger and larger player in high growth coastal markets where our ability to secure and develop long-term reserves gives us a strategic advantage. We are not in some parts of the country where population is stagnant or falling, and so that's -- and that's because it's just tougher to make money and grow earnings in those markets.

The last question I had was on volumes. I think in your outlook statement you're talking about sort of the market or markets that you're in sort of seeing flat volumes. Given the sort of the CapEx program you've got, would you expect to maybe do a little bit better than the market in terms of overall volume? Or is the CapEx very much all related to improving the operating efficiency of the business?

Well, many of these large projects will not necessarily bring additional aggregate capacity to market in '07. The expansion at CALICA, our large quarry on the Yucatan Peninsula, will come online in the second quarter as will our additional shipping capacity, so there will be an increase in production and sales from that operation, but many of the other large projects have a longer-term timeframe, and we are more likely to see them after '07 in terms of volume increases.

But at this point, you would expect to do a little bit better than the market overall in terms of volumes?

We are not about, at this point, growing our market share unless there is reserve depletion.

Leo Larkin, Standard and Poor's.

My questions have been answered. Thanks.

Alan Mitrani, Silverlake Asset Management.

Thank you and nice job. I just want to be clear. Are you implying for your guidance for '07 that volumes you say will be in line with '06, but '06 volumes were down slightly. Are you expecting down volumes in '07 despite all this higher bid work and the likely back half of the year California jobs coming in?

No. Let me try to articulate that. Volumes in '06 were down 2% from '05. We currently expect '07 volumes to be very close to '06 volumes, not down another 2%. Does that clarify?

So, I mean right now, your estimate calls for flat volumes I guess given that you had such a good weather -- sorry, such good weather the first quarter of last year.

Yes, we had huge volumes in the first quarter of last year.

I assume you will update that throughout the year if the weather doesn't mess you up.

Absolutely. There are a number of factors that could change our volume outlook. If housing begins to recover in the second half, that could change our outlook. If the passage, as I said, of the 10% increase in the federal highway appropriation begins to flow through in projects, if some of the projects that were deferred earlier in '06 get rebid and lit in '07 and get started by the end of the construction season, all of those things could be upside for us in volume. But at this point, we don't believe it prudent to project any significant volume increase for '07.

Thank you. I appreciate that. And the share count, again, was it 98 million you expect for this coming year to use? Even though you had --

Yes, that's what we've used in our modeling. That assumes no share repurchases. And that, I guess, has in it a -- some proportion. We have option awards that will be expiring and people will have to exercise those and that will add some --

Some pro forma share upon a payout.

And other incentives payments that are share-based will add some shares outstanding.

And lastly, when do you consider a dividend to increase?

We normally review dividends with our Board at the February Board meeting, which will be a week from tomorrow.

And then in the past, at what price have you split your stock as well?

We have wonderful philosophical debates about share splits and I don't think there is a pattern that would make any sense for anyone to try to predict on that issue.

If you're asking for a shareholder input, I vote no share split. So, thank you.

You buy shares on a cents-per-share probably, and it doesn't matter how much the share costs.

I understand, but I'm sure your long-term shareholders benefit regardless of whether the stock is 100 or 50 or either way. Thank you very much.

[Nick Lamont], Halcyon.

Congratulations on a wonderful year. Just one question with regard to the litigation ongoing in the Miami Lake Belt area, and I know it doesn't directly affect you nor would you wish to speculate on any rulings, but could you perhaps comment on how it might affect your operations if, as the Department of Transportation predicts, there was an adverse ruling and the price of aggregates locally would increase 300% to 400%?

We have the ability to increase shipments to Florida, both by ship and by rail, and these would require capital and require some time, so we are monitoring that. We have no prediction. But certainly we're in a position with strategically located reserves that can serve the state of Florida to help in supplying aggregates to that state in the event some of the existing supplies are impacted by the litigation.

Wonderful. Sounds like a great opportunity. Thank you very much.

Fritz von Carp, Sage Asset Management.

You've given me enough information to figure this out, but if you don't mind helping me just a bit, on the diesel, you said that you're assuming a 5% per-share benefit from lower diesel prices in '07 versus '06. Could you just tell me what sort of diesel price is underlying that statement? How does it compare to -- I mean does that assume that diesel prices stay where they are currently, that they go back up, that they fall further or --?

That was a full year '07 comparison to full year '06.

Right.

My colleagues are handing me notes on that point, Fritz, if I can filibuster here for a minute until I figure out what they tell me on that point. We believe year-over-year diesel prices for us will be down $0.13 a gallon compared to '06 full year. That translates into the $0.05.

And how does that -- where are we now on diesel versus that average price?

Depends on where you are. It's very different all over the board. I think the better way to think about it is what the change is from the sort of the blended mix that we purchase all around the country.

I mean are we down $0.13 a gallon now?

As of -- in the month of December, the December cost for diesel was almost that much below the average for 2006. Not $0.13, but maybe two-thirds of the way down. So that was the month of December.

Okay, perfect. That's what I needed. Thank you.

Yes, diesel has been falling monthly through the fourth quarter.

Great. That's perfect. And on this pricing, you say you expect -- why exactly do you -- aggregates pricing down -- or up 10% to 11% versus 16.5% in the fourth quarter and still like in the midteens for a full year. Why is it decelerating? Is that because there's less cost push or --?

I wish I could give you a very analytical answer to that. I can't. It is a much more subjective process for us than that. We don't do cost based pricing. We try to anticipate literally from our field sales force in looking at their markets and looking at demand and trying to say what they can achieve in a particular year and meet the needs of our customer base. At this point, 10% to 11% is our best guess at that. We are probably wrong; it may be higher, may be lower, but we'll give you updated guidance on that as we move forward. It is not a mechanical process.

So now let's just, for the sake of argument, let's just assume that that forecast is wrong. Let's say I had a time machine and I've come back and I said your forecast for aggregates pricing was wrong. Now, would you guess that you were wrong on -- you were too low or you were too high in your forecast?

I think we're right in the middle of the range.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to return the floor to Mr. Don James for closing remarks.

Thank you very much for joining us today. We appreciate your questions and interest in Vulcan. We look forward to talking to you again at the end of the first quarter. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes our presentation. You may now disconnect. Good day.