渥肯建材 (VMC) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the third quarter 2007 Vulcan Materials earnings conference call. My name is Shimika, and I will be your operator for today. At this time, all participants are on a listen-only mode. We will conduct a question and answer session towards the end of this conference. If at any time throughout the call you require assistance, please press star 0 and an operator will be happy to assist you. I would now like to turn the call over to Mr. Don James, Chairman and CEO. Please proceed.

Good morning. Thank you for joining this conference call to discuss our third quarter results. As the operator said, I'm Don James, Chairman and Chief Executive Officer of Vulcan Materials. We appreciate your interest in Vulcan and we hope our remarks and dialogue in the Q & A will be helpful to you. A replay of this conference call will be available later today at our web site. Joining me today is Dan Sansone, our Senior Vice President and Chief Financial Officer and Mac Badgett, our Senior Vice President. Mac leads our Florida Rock transition team.

Before I begin, let me remind that you 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 including the pending acquisition of Florida Rock Industries. Descriptions of these risks and uncertainties are detailed in the company's SEC reports, including our most recent report on form 10k. Forward-looking statements speak only as of the date here of and the company assume no obligation to update such statements. As you know last night after the market closed, we reported record third quarter 2007 earnings from continuing operations of $144 million or $1.47 per diluted share.

Year-to-date 2007, earnings from continuing operations are a record $3.85 per diluted share, and we remain on track to report record earnings for the full year. Current year third-quarter earnings include $0.02 per diluted share of expenses referable to the pending acquisition of Florida Rock. Increased aggregates in asphalt revenues on the third quarter offset lower concrete revenues, consolidated net sales approximated last year's levels. Pricing increased versus last year's third quarter levels more than offset in the earnings effect from lower volumes. Gross profit as a percent of net sales increase from 32% last year to 33% this year. Our ability to expand margins despite lower volumes demonstrates the resilience of our business.

In this period of continuing uncertainty for residential construction activity, we believe it's important to recount key attributes of our aggregates focused business and how this strategy benefits Vulcan and its shareholders. Specifically, our third quarter results benefited from the following, a diversified original exposure, the increasing value of permeated reserves and fast-growing Metropolitan areas and the broad use for aggregates and downstrain products and diverse-end markets including relatively stable demand from public funding.

As a result of these attributes, we have improved our overall gross profit as a percent of sales in each of the last six quarters even as aggregate shipments in each of these quarters have been lower due to declining residential activity. This decline in residential construction has lowered our total aggregate shipments through the nine months ended September 30, 2007 to levels approximating shipments during the comparable nine-month period four years ago in 2003. It's important to note that on the same volume, our operating earnings have more than doubled versus the comparable period four years ago in 2003. Driven higher mostly by improvements and the profitability of our aggregates business.

During this period, our margin as a percent of sales increased over 500 basis points. Third quarter 2007 sales and earnings for aggregates increased from prior year levels due to higher pricing. The average price for aggregates including sites increased 12% from the prior year's third quarter. Aggregate shipments in the third quarter decreased 8% from last year's third quarter levels. Aggregate's unit cost of sales were higher than in the third quarter 2006 due mostly to lower production volumes as well as increased costs for energy and parts and supplies. Compared to other industries that operate with large continuous process plants aggregates facilities had the flexibility to increase or decrease production relatively efficiently.

In response to lower demand, we reduced aggregate production levels 12% compared to last year's third quarter. This action negatively impacted third quarter unit costs, it reduced our inventory levels in the quarter and provides us greater flexibility to respond effectively to changes in demand as we move forward. Unit costs for diesel fuel in the third quarter increased 6% from last year's third quarter reducing earnings approximately $2 million. Third quarter asphalt sales and earnings increased in the prior year's third quarter as a result of higher selling prices. Asphalt prices increased 8% from the prior year's third quarter more than offsetting it 5%, decline in sales volume and higher transfer prices for internally supplying aggregates. Third quarter asphalt turnings also benefited from lower unit cost for liquid asphalt. Concrete sales decreased 24 million from the prior year's third quarter due to sharply lower sales volumes. Concrete earnings also decreased. Concrete pricing increased 4% demonstrating some resiliency to weaker demand from residential construction in Southern California and Arizona.

Higher pricing was more than offset by the sharply lower volumes as well as higher costs for cement and for aggregates supplied internally from our quarries. High earnings and asphalt aggregates more than offset the lower concrete earnings. Third quarter operating earnings were reduced approximately $5 million or $0.03 per diluted share but a cost associated with a closure of two former production sites and provisions for legal matters at two facilities. This is in addition to the $0.02 per share I mentioned earlier for cost in the quarter associated with the Florida Rock acquisition. We continue to generate strong cash flows. Net cash provided by operations for the nine months ended September 30 with a record 421 million, an increase of 58 million or 16% over the prior year's comparable period.

During the third quarter, we received 22 million as part of our E.C.U. earn out from the sale of our chemicals business. We have now received a full amount from the 150 million due under the contract for the E.C.U. portion of the earn out. Looking ahead to the fourth quarter, we expect to close the pending acquisition of Florida Rock Industries during this current quarter. That is the fourth quarter of 2007. We continue to work constructively with the Department of Justice to obtain the regulatory approval for this transaction. It has taken longer than we anticipated, we have made significant progress with the D.O.J. We believe we will soon conclude this phase of the transaction. We expect to provide a public update of our financial expectations for the combined businesses when fourth quarter earnings are reported in February after we have had the opportunity to verify the financial and operational benefits to the combined organization.

Additionally, this period of time will allow to us determine the financial effect of potential asset, exchanges and disposals that may be required by the Department of Justice. We look forward to the long-term value this acquisition provides our shareholders. We remain focused on successfully and effectively integrating the two companies while continuing to drive solid returns. To put some her perspective on our outlook for Vulcan's legacy business with the remainder of 2007, I think it's helpful to recap our year-to-date earnings performance. Spending for private nonres and public infrastructure has continued to grow for us in the first nine months of 2007, somewhat mitigating the steep decline in residential construction that began back in 2006. Year-to-date, our margins and earnings have continued to grow when compared to the prior year. Year-to-date earnings from continuing operations is a record $3.85 per diluted share. And our gross profit as a percent of net sales has expanded from 30% in 2006 to 32% this year. The pricing momentum we achieved in 2005 and 2006 continues in 2007. Aggregate's pricing has remained strong despite lower volumes.

For the full year, we project aggregate pricing to improve 12% to 13% compared to last year. We believe aggregate's volumes in the fourth quarter of 2007 will continue to be hampered by weak residential construction activity resulting in a full-year decline of approximately 9% to 10% from last year's level of 255.4 million tons. Construction spending in most categories in private nonresidential construction continues to grow in 2007 and will help mitigate some of the weakness in residential construction. These construction-end markets include a wide array of project types which generally are more aggregates intensive than residential construction. Economic factors such as job growth, vacancy rates, private infrastructure needs including growth and energy manufacturing and distribution related projects and demographic trends help drive overall demand for private nonresidential construction. Aggregates demand from highway construction in Vulcan's serve markets has continued to increase in 2007 primarily as a result of higher federal and state spending levels and moderating liquid asphalt cost. Stable liquid asphalt prices had helped bring highway back in line with project budgets and increased highway construction activity in markets where projects have been deferred.

In California, our largest state by revenue, the governor signed into law a 2008 budget that includes a significant number of transportation projects including some associated with its 10 years strategic growth plan which contemplates over 200 billion in spending for infrastructure. The total capital outlay for transportation projects contemplated by the budget and subsequently recommended by the California Department of Transportation is approximately 5.5 billion. A substantial increase in funding from the record 4.9 billion allocated for fiscal year 2007 and a substantial increase from the 900 million allocated in FY 2005.

California's transportation spending for fiscal year 2008 and 2009 is projected to include at least 3 billion of funding from proposition 1-b bonds approved in November 2006 by California voters. This funding will benefit construction activity of both the state and local level in California. We reported to you in the second quarter that approval by the regional transportation authorities in Virginia is well underway to provide an additional 1 billion annually over the next five to six years. Last month, Virginia's Department of Transportation announced an agreement in principal had been reached with private investors to design and construct additional toll lanes on the capital beltway around Washington, D.C. This additional toll lanes will also be operated and maintained by the private investors. Construction will begin in the spring of 2008 and the lanes will be opened in 2013. These new projects should benefit the aggregates and concrete operations of Vulcan and Florida Rock in Northern Virginia, Maryland and the District of Columbia.

In closing, I would like to reiterate our conference -- our confidence about future sales and earnings growth for Vulcan. Earnings from our construction materials businesses have grown every year now for more than ten years through various economic conditions and we expect the business to surpass the record earnings we reported in 2006. The foundation of our confidence is an aggregates-focused business, advantaged by location and the fastest growing U.S. market where's aggregate reserves are limited. A pending acquisition of Florida Rock's industries is a continuation of that strategy and we believe it will create long-term value per a shareholder's by increasing our geographic exposure and adding valuable aggregate reserves in high-growth market where's reserves are extremely limited.

We thank you for your interest in Vulcan. I will ask our operator to give you the required instructions and we will be happy to respond your questions.

(OPERATOR INSTRUCTIONS) You have a question from the line of David Macgregor. Please proceed.

Good morning, Don.Good morning, Dan.

Good morning.

A couple of questions, first of all, the 8% decline in volumes, can you break that down across residential, commercial and infrastructure?

We think virtually all of it is coming from residential. You know, we tracked the shipments at our plants and I would not tell you it is 100% accurate, but we believe we have continued to see modest growth in public infrastructure and private nonres spending, but the residential shipments have been very weak.

Okay. With respect to the commercial side, one of your competitors also today with results indicating that they're seeing emerging softness in the office and retail segment of the commercial construction market. Are you seeing something similar to that? Do you corroborate that?

Well, I hear that from various in Sundry Sources. We really are not seeing that. The industrial part of private nonres for us is really strong and a large backlog of projects out there as we move forward in 2008. So, we remain very optimistic about private nonres.

And that industrial construction versus the office in retail. What percentage does that represent of your commercial reconstruction?

It moves around. I don't have a number handy to tell you, but it will certainly be larger, we believe, in 2008 than it was, you know, over the past several years.

Okay. With respect to the production cutbacks, can you see which regions of the country those occurred in?

Everywhere.

So that was across the model?

Well, it's -- we certainly decided that it makes economic sense to match our production to current market conditions. Texas, as you know, has continued to be extraordinarily robust, so we have not curtailed production in Texas because shipments there have been really strong. Shipments have been really strong in the midwest, but of course, the midwest is, you know, cold weather's approaching and we have to adjust there, but I think with the exception of those markets, we have reduced production.

Okay. Thank you for that. Just finally, with respect to Florida Rock, could you just talk about the nature of the delays with the Justice Department reviews and any kind of color you can provide there?

Well, the discussion is around which assets would need to be the best and that's essentially what the issues have been, and a tremendous amount of exchange of information and discussion. As I've said, we think that's been very constructive and productive, and but that's been the questions. It's really an information-sharing process.

Is there an outcome in sight at this point, or is this still subject to negotiation with justice?

Yes to both of those.

Okay. I'm not sure if this is a fair question but I will ask you anyway, would you care do assess a probability of this deal closing at this point?

I would not.

Okay. Thanks very much.

We're reasonably confident it's going to close in the fourth quarter.

Okay.

But I don't mean to imply to you we think it's not, but we can't. We don't, we can't tell you the date nor the particular circumstances or conditions of the justice department.

I just wonder if you feel the risk of the required divestitures puts the whole transactions at risk.

We believe that would be resolved.

Okay. Thanks very much, Don.

Your next question comes from the line of Ajay Kejriwal. Please proceed.

Good morning, gentlemen.

Good morning, Ajay. How are you?

Very good, thank you you. Pricing was solid in the quarter 12% and was wondering if you could provide some color on pricing by geography. Especially if you could find area where's pricing was much higher than the 12% average and areas where it was noticeably bigger?

Overall, we were able to get significant price improvements and all of our markets. There's not a dramatic regional disparity there.

But would you characterize California as about that average and maybe the midwest, you know, significantly below?

You're talking about now for the third quarter?

Right. Yes. Third quarter pricing of 12%.

You know, there's really not any material variation from region to region in the third quarter.

Interesting. One your competitors report this morning and, you know, reported pricing in the midwest, midwest region of 3%, I know --

We're not in the same portions of the midwest. There's a big difference between the urban midwest and the rural midwest.

Right, so you're saying in your markets pricing has remained in the midwest markets as get around (cut)?

Yes. And you know, we're in Chicago and Milwaukee and we're not in rural parts of the midwest.

Great. Just so I understand that 8% volume decline number and you mention it does primarily residential related. So residential for you, and this is from the annual last at about 20, 25% of volume. So, would that imply using about 30% decline in that bucket? or (cut)

If that's demand, yes.

I guess about 30% decline in that bucket and nonres?

Probably a shade higher.

Shade higher than that.

Yes and you are right it was last year 25, 26% of our demand so that's why we say we believe the decline in residential is basically accounting fully for the decline in shipments. But the variation perhaps and what other companies made have been reporting is residential and Southern California and Arizona is very different than residential in Texas and North Carolina, for example, or in other states. It's, you know, the higher growth markets tend to have the steeper decline in residential construction.

And would that imply nonres infrastructure growth of low single digits or --

Yes.

Great and lastly and again--

That's in units.

Right.

And dollars but units, yes.

And pardon me for making this comparison again, but the competitor for this morning volume was down 4% and while the pricing was also much lower, and I know your geographic footprint is slightly different, but to the extent that you compete in similar markets was wondering if you could comment if some of the volume decline that you saw was it due to your more aggressive stance on pricing or --

We don't see any share loss in the markets where we operate if that's your question.

Right, yes.

I think my read is that there is a -- the difference is accounted for primarily by the differing geographic footprint (inaudible).

Great. Thank you.

Your next question comes from Mike Betts. Please proceed.

Yes, good morning to all.

How are you?

I'm fine, thank you. How are you? I had two to three questions. Maybe I could start. You talked about the cut backs in industry. Cut back production in 12% and overseas that it had an impact on unit costs. Unless in I'm mistake, I don't think you quantified the impact on costs. You have any estimates of what that might have been?

No, we have -- that's -- there's a huge amount of judgment in that calculation. Given all the other things that run through that, we have not calculated anything that we think is enough quality that, you know, to put out publicly.

Okay.

But certainly, the, you know, if you simply look at the fixed costs portion of it where we depreciate our plant equipment on a period basis as opposed to unit and production basis, there will be some issue there. The variable cost piece is certainly more flexible in the sense that as I mentioned in my comments with an aggregate plan it's easier to adjust production in the face of lower demand than it is in, you know, cement plants or chemical plants or other large continuous process plants. But there nevertheless is always some impact on variable costs as well.

Okay. My second question, Don was the and I know it's not a big part of the business, but it's a huge fall, the ready-mix concrete,it that just the housing market in California, that's (cut)--

Oh, yes, we had Southern California and Arizona.

Okay.

That's where most of our concrete is. Flip side of that, you know, Texas concrete is relatively much stronger. I also mentioned that aggregate shipments are stronger actually in our Texas markets aggregate shipments were up double digits in the quarter.

Okay. And my final question was I mean the competitor we're all not naming, but as comment to the that statement today that, the mid-year price increase which we already knew were a bit less than a year ago. My question that is, you know, in terms of what you're thinking for a January price increase, so you thinking at this stage something similar to what we saw in January '07 or in reality will that also needs to reflect what's turning out to be more difficult volume so I think it's just too early to comment at this stage?

We'll give you our outlook pricing for '08 in February at that point. As you know, Mike there have been some price increases now in Florida taking effect in the current period or certainly beginning of '08. I think in reflection of limited reserves in Florida even in the face of reduced demand but the announced price increases by most of the large producers in Florida of which we're not currently one, have been in the $5 a ton range, which is a significant number. So, for us to give full-year guidance, we've got to roll all of that together including the impact of Florida Rock and the late belt litigation and those sorts of things and at this point, there are too many moving pieces for us to be projecting price increase percentages for '08.

Okay, I checked one more (inaudible) may be for your colleagues who's involved in that Florida Rock transaction just to clarify for me in the documentation there is that number of $18.5 million in 2006 EBITDA. My question is it's not just where you have to sell assets or would assets would count against that number in terms of that number's in the documentation?

That's will count as (inaudible) that. In other words, the 18 1/2 would be the net loss of EBITDA, and we certainly at this point do not expect that to be an issue.

Okay. That's great. Thank you.

Your next question comes from Jack [Kasprzak]. Please proceed.

Good morning, Don.

Good morning, Jack.

You mentioned volumes are back to 2003 levels. Obviously, that's a time before, you know, the housing boom kicks in. Is there a point before too long where residential's been so better down so long that just on the basis of comparisons volumes will start to even out just because there's nowhere else to go?

I think the answer to that absolutely yes. and it may be sooner than a lot of people expect. The, you know, the issue is, I think, what are current housing starts versus what is the economist's view of the level necessary to support the, you know, the U.S. population growth and household formation and it seems to us that we are today at levels substantially lower than that necessary to sustain the population growth in household formation. So it is an absorption of excess inventory that is needing to occur. You know, we hear of falling housing prices, which for us is which is good news because that will allow the market to clear itself sooner rather than later.

You guys are more levered to the development of subdivisions.

Absolutely.

In terms of aggregate's usage and that. Isn't that more on the leading end of the cycle? So that's been down for a while.

Yes. It's been down for probably six or seven quarters.

Right. So by that math, we should be even if housing prices are sentimental or whatever gauge you want to use continues to weaken, your housing related business has already been down, been falling down for quite sometime?

That's absolutely correct. We wish we had a publicly available statistic for developed lots in inventory. We don't. But that's really a far more significant statistic for our business than unsold houses.

Right. Okay. I also wanted to ask about the inventory issue in terms of the quarter you reduced inventory, slow production to reduce inventory. Do you see that being a factor again here in the fourth quarter?

Probably. We will, you know, we are going to -- the key is the efficiency with which you can or we can reduce production and inventories and our division Presidents and operating teams are very focused with cold weather and the holiday season coming up managing our businesses to keep our productivity high while reducing production and inventories. We would not expect to see quite as large a production reduction in the fourth quarter as we do in the third but, you know that is monitored on a real-time basis. So we'll make the ultimate decisions about when to close plants and operating hours as we see how, and it's really a plant by plant basis as inventory levels and demand levels that haven't flow.

Okay. Also, in previous, you changed the reporting a little bit in terms of the different product lines and in previous press releases, you reported freight, a sales number, the dollar number freight to remote distribution yards. This quarter you gave an average price number. But I was just wondering if you had that freight to remote yards number in the quarter?

I'm looking at Ajay (inaudible), who is shaking his head who does not have it right now. I didn't focus on the fact that we were changing the way we were reporting that.

Okay. Fair enough. Maybe I can follow up to see if that's helpful or not.

Okay. Thanks very much.

Thanks.

Your next question comes from Todd Vencil. Please proceed.

Hi, guys. To follow up on Jack's question maybe ask it a little bit of a different way, the way you guys reported this quarter, it was 943 as an average price for aggregates on a fair bases including internal sales. You have the comparable number for the second quarter,that $9.43?

Yes. We should have that. Do you have another question, why don't you go ahead while my colleagues are --

Sure, absolutely. You know, I want to come back around to a couple of the questions some of the other guys have asked maybe just try, you know, try to either ask them a slightly different way or just beat you down a little bit and get to you answer them. This is the most obvious, I guess. With regard to price increases. I mean, just on the legacy Vulcan business without specific regard to specifically when you plan to increase prices or anything having to do with Florida Rock, you know, do you believe that price increases are in the offing next year?

Yes.

Okay.

That one's easy.

I see. There you go. I like to try to make them easy anyway. On the deal, are you guys still planning to make an announcement when you reach agreement with the Justice Department?

Yes.

And, you know, I think I remember that the guidance was that we were looking at about four to six weeks post agreement to document and close. Is that still valid?

I don't -- I don't have a view on that right now. I would not think it would take that long.

Okay. And then my recollection from reading the document's you got a termination date coming up next month. Do you have any view on whether that is, you know, potentially extendible and whether you would be inclined to do that if necessary?

We don't think that will present a problem.

Okay. Can you remind me what that date is?

November the 19th.

Okay. And then with regard, you know, the other thing that I believe Mike mentioned is the cap listed in terms of EBITDA to be divested. You know, is that a bonding cap or is that something, you know, if it was you felt in your interest just decide to weigh the requirement on and go ahead and close?

It is a matter that we don't think will be an issue in the closing because of a combination of the required divestitures and the properties we anticipate getting in exchange for those properties.

Okay. I appreciate all that. And then general question again you talked a little about this with Mike, I think, but you know, how should we be thinking about marginal, you know, the marginal ton of production or put another way, the incremental impact on margin from, you know, reductions in production volumes? Do you have a rule of them or kind of a number we can think about in interprets of that?

No. We don't. I think generally we are able to pull production down without dramatic increases in unit calls. Although there is some obviously because of the fixed cost absorption. The flip side of that is on the upside, while we would get very large earnings gains from incremental margin, it comes about not because of a substantial decreases in cost of production for more volume other than through the fixed cost absorption peace. So compared to let's say steel or cement or chemicals, you're not going to see the large cost increase from reduced production or the large cost decrease from increased production in the aggregates business like you would see in those big continuous process, you know, where it takes days to bring them down and days to start them up. We're a -- we're able to flex our production much more quickly and efficiently in response to demand which is one of the reasons the aggregates business has the pricing strength it has. Let me go back to your earlier question. Our second quarter, second quarter 2007 selling price was $9.24, comparable number for Q3 is $9.43. That's a 2.1% increase in sequential quarters. So, you know, if you multiplied that by four, you would -- you could get to an annual number.

Right. Okay. One final kind of angle on that same question and I'll let you go but.

But the, you know, but the caution in looking at sequential quarterly pricing like that is it can be distorted and it probably is distorted by geographic mix, seasonality, you know, between Florida and Wisconsin there's a whole lot of difference and you know, there's a big job going on in a market that's got a high price or lower price. That you don't get distorted. So, that's one reason that we think looking at sequential quarterly pricing is not nearly as reliable as looking at it over a longer term. But anyway, that's the number you ask for.

No, that makes sense and I appreciate that. And just one final question on that margin if I can and that's do you have an estimate for, you know, you mentioned a couple of things that affected cogs in the quarter. You know, one of which was lower production volumes. And the other which were higher cost items. Do you have a sense for, you know, what the impact just from production was?

We don't.

Okay. Thanks a lot.

One thing I'd point out on the higher cost of sales. If you look at the cash flow schedule, you'll see that our depreciation, the (inaudible) and amortization was up sharply. And we have talked at length in prior calls about the higher levels of capital expenditures over the last couple years, a lot of which has gone to rebuild plans, improving productivity at existing plants as well as operating our mobile equipment fleet. Even though we're drawn our production rates down in the third quarter, the absolute dollars of depreciation expense are higher as a byproduct of that ramp up level of CapEx over the last year or so. So you're not seeing in cost of sales necessarily the same leverage effect you would expect to see on reduced production just because the, you know, the dollars of depreciation are going up.

Makes sense. Thanks a lot for that.

Your next question comes from the line of [Bernard Lysette]. Please proceed.

Good morning, gentleman. I'm Bernard Lysette from (inaudible). I had a question regarding for direct and indirect acquisition. I was wondering when will the payment start and will your net debt be impacted in 2007?

If we close in the fourth quarter of this year as we expect, the payment to Florida Rock shareholders will occur then very quickly following closing, and, you know, the interest charges associated with the borrowing to fund of acquisition will begin at whatever date in the fourth quarter we close. If that's your question.

Okay. I had another question regarding pricing because after you went from (inaudible) I was wondering if the current weakness of concrete producer could give you more difficulty to pass pricing freeze next year?

I think we'll give you guidance on that in February.

Yes.

I think the weakness in concrete volumes are -- have been in existence now for probably six to seven quarters, and aggregate pricing has continued to increase.

Okay. So do you think that we can --

Lowering the price of aggregates going into concrete and lowering the price of concrete is not going to increase the demand for concrete.

Okay.

I think that's a fundamental economic factor that we think about.

Okay. Just the last question. What kind of tax rate do you expect for year '07, and would it decrease from last year?

It's about 31% is our estimate from full year '07. I think that's slightly lower than our full year '06 tax rate.

But if the deal with further (inaudible) before the end of the year it will be higher?

It won't move it that much because border rock will be in the consolidated results for such a short period of time.

Okay. Thank you very much.

You have a question from the line of Clyde Lewis. Please proceed.

Good morning, Don. It is Clyde Lewis from Citigroup. Two questions if I may. One on the sort of pricing environment amongst competitors and spoken obviously about your own pricing. Who said a little bit about what you're seeing from the other competitors, in particular from the smaller ones? And that the another major one is that we see (inaudible). Could you say what their reaction has been in the marketplace over the last three to six months in light of the weaker volumes?

I think it's been relatively stable and consistent.

It hasn't changed at all in the total of last three months?

Well, you know, you're asking a hundred different competitors, but over all, I think pricing is, you know, there's not been a change in pricing strategies or philosophies generally among our competitors including the smaller ones.

Okay. Great. The same question I had was on sort of your employee level. I mean, as you've said you've highlighted the reduction in production and you've highlighted the sort of flexibility, the cost basis to that. Have you actually taken staff numbers down or has it just been sort of flexing the amount of hours that each of the guys in the quarry have been working?

Reducing in some cases overtime hours.

Okay. So, the number of staff basically hasn't changed a much. You've just been able to move around the number of hours?

That's correct.

All right. Thanks so much.

Your next question comes from the line of Barry Vogel. Please proceed.

Good morning, gentlemen.

Good morning, Barry.

Don, I have a couple of questions to you and a couple for Dan. The discussion or the comments you made about California were a little confusing to me. I just want to tell you what I wrote down. Maybe you can explain it to me. I think you said that the California legislature for the fiscal '08 budget has budgeted $5.5 billion for infrastructure spending versus last year's 4.9 billion. Then you made a comment about another $3 billion for proposition 1b. That's what I wrote down. Could you explain of these two separate items and if we added them up, if in fact, proposition 1b. I use the word if because we don't know when this money's spend has a fiscal await the possibility of $3 billion. If we added them together that would give us $8.5 billion if they were able to spend it in that year and that could you quantify that and tell us what you know about fiscal '09 for the proposition?

Barry, my understanding is that the current budget capital outlay budget for transportation projects for the fiscal year that we're now in which just started is 5.5. The spending from the proposition 1b bonds of at least 3 billion, there may be some portion of that but certainly not all of that in the 5.5 budget. I don't have any more detail in front of me on that, but I think there is a significant upside to the 5.5 as projects get approved and rolled out, but I will certainly give some more detail on that later offline.

You know, people in California tell you that the bonds have been sold or when will they be sold to finance the 1b?

I don't know the current status of that. I know they are very close in the process to selling those bonds. Certainly they won't all be sold in one tranch. They'll be multiple tranches of bonds that will be sold because this is a long-term ten-year project.

Okay and the next question goes back to pricing. What price increase are you inferring for the fourth quarter based on your inference for the year?

Roughly the same.

So we're talking about a 12 to 13% increase in the fourth quarter?

Double digits but it's, you know, the fourth quarter is certainly a smaller quarter. So, the impact on the fourth quarter is less on a weighted- average basis but it's, you know, probably ten plus percent.

Okay and Dan I have a question to you, If we look at the volume, unit volumes in the third quarter versus the second quarter, aggregate volume was up. Asphalt mix was up, concrete was down and other products were down. And of course your revenues went from $808 million, $845 million, yet your gross margin quarter to quarter went from 35.3% to 32.8%. Could you give us the major culprit maybe the top three of four as to that decline in gross margin quarter to quarter despite gains and revenues in volume.?

You're talking sequential quarters?

Yes.

Yes. I don't have that broken out sequentially (inaudible) but it worked a little bit off memory, but there were a number of items that we referenced in the press release that I think will represent a lot of that difference. You know, we talked about $0.03 per share repairable to charges associated with a couple of production sites and provisions for some outstanding matters, legal matters at a couple of sites. I think those kinds of adjustments number one will be part of it. And I'm pretty sure that the remainder of it is probably going to be inventory adjustments as well. And then the third piece of it is probably seasonal mix, seasonal activity, the midwest areas are pretty low in terms of activity levels in the second quarter and they ramp up considerably in the third quarter, and we've got differing profitability levels across some of those business units. So I think those are probably the three things that would account for it. But, we can do some more work on that.

I thought it was unusual that the gross margin would go down so sharply sequentially given the volume gains and revenue gains. That's why I ask the question.

We've also got that, you know, some of that cost in there that we refer to for Florida Rock, although that would be all below the gross profit lines.

Right. That would not be in gross margin. Okay, I have another question for you Dan, I know you're spending a lot of money on capital expenditures, and you talked about your increases in depreciation and amortization. Can you give us some idea of again, excluding Florida Rock, what the CapEx would be this year and some early insights to approximate levels for '08. Again, excluding Florida Rock?

For 2007, we think we'll be in the neighborhood of $500 million. We are not yet ready to provide any guidance on 2008.

And your depreciation amortization this year?

Hang on just a second. Let me look that up. About 260 million, give or take change.

All right. So as far as your comment about increases in depreciation affecting your gross margin, I would think with this heavy capital expenditures expenditures that you've been having less a year that that will continue and of course the offset would be, you know, higher volumes. And, you know, whatever.

Certainly, we could see the depreciation rising, however, what's happening is a lot of that money is being spent on productivity projects, but when you're running at lower volume level, you're not generating necessarily a level of cost reduction or cost improvement that offsets the ramp up in depreciation in the early years just because we're at lower production rates.

I understand. Thank you very much. Keep up the good work.

Your next question comes from the line of Chris Manuel. Please proceed.

Good morning, gentlemen.

Good morning, Chris.

A couple of question for you. First, I appreciate that you're not ready to give us full guidance for that sort of stuff for 2008, but you spent some time talking a little about price. Can we talk a little on the volume side of the equation? Given where you are in the earlier piece of the construction spin cycle putting the, you know, base material and such, do you think that given the trajectory we've had through the third quarter and looks like into the fourth quarter with a lot of weakness particularly on the residential side there would be any reason from what you're seeing today in your bidding activity that volumes couldn't continue to be in that low to mid-single digits and in particular I'm interested in the commercial side as opposed to public works?

While we don't have any numerical guidance to give you for '08, we certainly do not see volume declines in '08 like we have experienced in '06 and '07. And that's largely because while residential still may have some more correction to take from our standpoint, the other end markets seem to be positive.

Okay. And.

Directionally, we don't believe we will see the level of volume decline that we have seen the last couple of years as we move into '08. Whether that nets up or down we'll give you more guidance on, in February.

Okay. And have you seen any substantial -- you know, there's been discussion of a bit of a slowdown in the commercial side. Have you seen any adjustments in the bidding process or projects that you're looking at with respect to deferrals or things of that nature?

No.

Okay. Next question is around getting more rock into the Florida region. Last quarter, I think that it was right around the time of the announcement of the closure as some of the quarries down the lake belt region when you have your call. So you had about a quarter kind a start to or put the thought process together. Can you give us an update on how that process is coming with respect to possibly getting more rock through Tampa from your Calica quarry or coming down through rail from the north?

I would tell that you that process didn't begin last quarter. It began about three years ago. But we certainly are increasing the footprint and throughput of our Tampa yard, we have opened a distribution yard on the East Cost to Florida at port Canaveral. As you know we have built a third ship in China and it's now in service. We have expanded the output of our Calica quarry in Mexico by about 3 million tons a year, and we are improving the ability to serve Florida not only by ship but also by rail. So there are many things that are in the works. (inaudible) Sony had a discussion with Barry (inaudible) about capital spending and a nice chunk of the capital spending that we have had in '06 and '07 have been to increase our ability to produce and deliver higher volumes of aggregates into Florida. So that strategy is well developed at Vulcan and we are continuing to pursue it. As you know the lake belt litigation will be heard by the U.S Court of Appeals for the 11th circuit at the end of February. The Corp engineers is working through its processes -- I mean November. I misspoke I mean November. So, you know, there are a lot of movement parts here but we certainly anticipate being prepared to move effectively and efficiently to respond to any number of different outcomes at all to that process may in gender. I will say that our shipment's into the golf coast markets including Florida are one of the bright spots of volume. That has I mentioned Texas, which of course is part of the gulf coast market as well, but the entire gulf coast shipments are up substantially for us. and I think there are a lot of reasons for that including Florida but not limited to Florida. So, we're very, very optimistic about the opportunities for that part of the world for us.

Okay and then a question for you, Dan. Can you update us at this point. I think you gone back in (inaudible) four times on perspective alternatives for financing once the Florida Rock deal closes. Can you give us an update today how you would anticipate the debt piece to look like?

Yes, the best that I can given a fact that it's a moving target. We will anticipate closing the transaction which will require approximately 3.3 billion dollars of cash with a mixture of commercial paper and drawing on bridge loans and/or bank lines that are committed by a network of banks. We expect base on market conditions obviously to term out probably in the neighborhood of $2 billion of that 3.3 billion fairly quickly after closing, assuming market conditions remain similar to the way they are today. We would probably go to the long-term markets within a week or two of closing the transaction. And again, it's all subject to change, but at this point in time, we're contemplating a blend of probably five-year, ten-year, 30-year of long-term bonds.

Okay. Perfect. Thank you very much.

Your next question comes from [John Fox]. Please proceed.

Hello, everyone.

Hi, John.

Had a couple questions left. For Dan, approach is a little bit. Could you give us the breakout on the extra costs, the Florida Rock costs and the shutdown costs and what line items they're in?

They're predominantly in the selling admin general expense line and they're also in the other expense income net line. Probably maybe 50/50. It might be 60/40. I forgot the exact breakdown, but it's those are the two lines where they're going to show up. S.A.G. and other expense.

Okay. So that was the Florida Rock cost and the 5 million?

No. That was just the Florida Rock.

Okay and then the 5 million which is a closure to production site and the legal reserves?

Some of that is going to be in the other expense line. And some of that is going to be in cost of sales. Be the two places that I think that's probably going to be -- that's probably about a little over half of that will be in the other expense line and the remainder will be in cost of sales.

Okay, great. Thank you. I wanted to ask about energy prices. Dan, you mentioned a couple times about good liquid asphalt prices help and, you know, given what oil and diesel. I wonder if you could just talk about liquid asphalt for the fourth quarter and then diesel which was very low in the fourth quart quarter of last year and is very high today. How does that impact one-year costs and then two, it increases transportation costs. Does that help at all in the pricing equation?

The answer to the second part is yes it does. It certainly that along with highway congestion really are impacts on our general market strategy. Diesel obviously is moving up. I think we have given some sensitivity on that. I don't think that has changed. And that would be for every $0.10 a gallon of diesel fuel it affects our margin by about 6 million pretax. So that sensitivity is pretty good. Now, Liquid asphalt is a different creature. It's all made out of crude. But, it really doesn't necessarily follow crude oil prices or gasoline or diesel prices. The time where we saw liquid asphalt spike up so much is when gasoline prices were well over $3 and refineries were refining the heavy crudes that generally go into liquid asphalt into gasoline. So there's not a -- there's not a look at the graphs of liquid asphalt prices versus diesel fuel prices. There's not a whole lot of correlation.

Okay. So, you wouldn't at this point, see liquid asphalt (inaudible) working anything like that, going into a way?

We, certainly the D.O.T.s are more enlightened I guess about the price movements of liquid asphalt and perhaps some were 18 months ago, 24 months ago when we had the problems of highway bids coming in higher than expectations and the reestimating and rebidding process, but liquid asphalt prices have certainly been more stable in the last 12 months than diesel prices have had which helps greatly in the highly estimated in billing process..

Okay. Thank you.

You have a question from the line of Todd Vencil. Please proceed.

Hey, guys.

(inaudible) Todd.

Just a quick follow-up on something he said before. I was a little unclear on the answer probably my fault. But Don, when you were talking about volumes, did you say you do not anticipate volumes will be down next year or you do not anticipate they will be down as much as this year? Directionally, we don't believe we will see volume declines in '08 anywhere near the numbers that occurred in '06 and '07. Now, whether there's a net positive or net negative or no change we'll give you guidance on at least our view of that in February, but the simple answer, we do not even if we don't see volumes declining in '08 as much as they have in '07. Okay. Fair enough. Thank you.

That's not is a say we expect them to decline in '08. We'll give you guidance on that. We don't see this, we don't see anything like the level. We think the housing drop is already in place. And that's the largest component in change.

And we're thinking there primarily about aggregates?

Yes.

Okay. All right. Thank so you much.

That concludes our question and answer session for today. Would I now like to turn the call back over to Mr. Don James. Please proceed.

Thank you very much for being with us today. We look forward to talking with you in February. Hopefully we will have the opportunity to give you guidance for our full-year '08 incorporating the Florida Rock business along with Vulcan. We're excited about the prospects of getting that transaction closed and beginning the process of obtaining the synergies that would come with that combination. We will talk with you in substantial detail about all of that in February. Thank you so much for being with us today. Good day.

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