渥肯建材 (VMC) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Vulcan Materials earnings conference call. My name is Shenelle, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). As a reminder, this call is being recorded for replay purposes. I would now like the turn the presentation over to your host for today's conference, Mr. Don James, Chairman and CEO, President, Chief Financial Officer. Please proceed.

Good morning. Thank you for joining this conference call to discuss our second quarter results and our outlook for the remainder of 2008. 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 today will be helpful to you. A replay of this conference call will be available later today at our website. Joining me today is Dan Sansone, our Senior Vice President and Chief Financial Officer, Mac Badgett and Ron McAbee, our Senior Vice Presidents in our Construction Materials business. Before I begin, let me remind you that certain matters discussed in this conference call will 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. Forward-looking statements speak only as of the date hereof and the Company assumes no obligation to update such statements.

Moving now to the quarterly results, we reported our second quarter financial results yesterday after the market closed. Those results included net sales of $966 million and EBITDA of 339 million. Our net sales increased 20% from the prior year's second quarter and our EBITDA increased 21% despite lower aggregate sales volumes. Earnings per diluted share were $1.27 versus $1.45 in the prior year second quarter. Higher energy related input costs accounted for approximately $0.25 (corrected by company after the call) of the total year-over-year decrease in earnings per share. Liquid asphalt, which is produced from a barrel of oil and used to make asphalt mix which we sell, and diesel fuel used to operate our large mobile equipment accounted for most of this year-over-year decrease in earnings per share. The average unit price for liquid asphalt increased 60% from the prior year's second quarter, and reduced our Company earnings approximately $0.12 per diluted share. The unit average price paid for diesel fuel in our legacy operations increased 70% from the prior year's second quarter and reduced earnings approximately $0.09 per diluted share.

Additionally, the current year's second quarter results include $0.34 per share referable to the gain on sale of quarry sites divested as part of the Florida Rock acquisition. While the economic environment in which these results were achieved is challenging, we remain focused on positioning our business to benefit from a recovery in demand by effectively managing our cost structure and capturing the operational cost synergies from integrating the Florida Rock assets into Vulcan. Before I will move into specific comments regarding consolidated second quarter results, let me remind everyone that current year's second quarter results include Florida Rock, while the prior year results do not. Historical comparisons for Vulcan's and Florida Rock's legacy businesses are difficult because we have rapidly integrated and restructured the combined businesses into five of Vulcan's operating divisions. However, we will continue to provide legacy comparisons throughout the current year where possible if those comparisons will help you understand our results. Generally, our businesses performed well in the second quarter, notwithstanding difficult economic conditions in many key markets.

Higher pricing, the inclusion of Florida Rock and our cost control initiatives partially offset the earnings impact due to lower aggregate volumes and higher energy related costs. Aggregates EBITDA decreased approximately 16 million versus the prior year's second quarter. The average freight (inaudible) and unit sales price for aggregates increased 8% from the prior year's second quarter. Total aggregate shipments declined 6% compared to the second quarter of 2007. Aggregate shipments in most legacy Vulcan served markets saw double digit volume declines when compared with the prior year second quarter, except for markets in Texas and along the Central Gulf Coast, where volumes increased year-over-year. These markets in Texas and along the Gulf Coast are benefiting from large industrial and energy construction projects, which are contributing to growing demand. During the quarter, we drove production levels down to match the lower level of demand. Our plant managers did an excellent job of managing costs in the quarter, despite the upward pressures due to higher energy prices and lower volumes. The results of their efforts will benefit our earnings when volumes begin to recover.

Excluding energy related costs such as diesel fuel and electric utilities, unit variable production costs in legacy Vulcan aggregates operations were relatively flat when compared to the prior year's second quarter. Additionally, cash fixed costs at Vulcan's legacy aggregate operations were approximately 14% lower than the prior year's second quarter. These cost control results demonstrate the relatively greater production flexibility our aggregate plant managers are able to achieve compared with most other continuous prospect type manufacturing facilities. Earnings for the asphalt and concrete segment were equal the prior year's second quarter. Concrete earnings increased from the prior year's second quarter due the addition of Florida Rock's concrete operations. But asphalt earnings were lower versus the prior year due principally to the higher unit cost for liquid asphalt.

One of the bright spots in this quarter is our 4% increase in asphalt volumes. Asphalt prices increased approximately 8% from the prior year's second quarter. However, we were not able to move prices up fast enough in the quarter to offset the sharp increase in liquid asphalt costs. The average unit price paid for liquid asphalt at the end of the second quarter was 60% higher than the prior year's second quarter and was 42% -- I'm sorry, 26% higher than the unit price at the end of the first quarter of 2008. The rapid rate at which liquid asphalt prices escalated during the second quarter has created a timing difference that appropriate increases in average unit sales price for asphalt mix. We expect some of this timing difference to dissipate in the second half of 2008 if liquid asphalt prices remain at current levels. The average concrete selling price, including Florida Rock's operations, increased approximately 2% from the prior year's second quarter. The inclusion of Florida Rock's operations more than offset the earnings effect of lower volumes from our legacy operations.

Selling, administrative and general expenses in the current year's second quarter were approximately $85 million versus $71 million last year. Legacy Vulcan SAG expenses were approximately $11 million lower than the prior year, but were more than offset by the inclusion of the new Florida Rock operations. Also included in our second quarter SAG expenses is 6 million of expense referable to the fair market value of donated real estate. This donated real estate had virtually no earnings impact because the differences between the fair value of the properties and the carrying value of the properties are recorded as a gain on sale of property plant and equipment. Interest expense increased approximately 30 million from the prior year's second quarter, due primarily to the financing related to the acquisition of Florida Rock. In June, we completed the planned issuance of long-term debt financing related to the Florida Rock transaction. As a result, we added approximately 950 million of new long term debt and reduced our short term debt by a commensurate amount. Our business generates very good cash flows throughout the business cycle. Debt reduction and achieving target debt ratios remain a priority use of these cash flows.

In summary, we achieved good second quarter results during this time of rapidly rising energy related costs and weaker demand for our products. The aspects of the business which we can control, such as production and overhead costs, were lower versus the prior year if energy related costs are excluded. Our effectiveness at managing controlled costs, coupled with price improvement despite lower sales volumes, gives me confidence that we are executing well in a tough economic environment. Turning to our earnings outlook for the full year, we now forecast EBITDA of approximately 1 to $1.1 billion in 2008. This guidance reflects a slight increase in EBITDA in the second half of 2008 compared to the second half of 2007. Our outlook assumes diesel fuel and liquid asphalt remaining at the high levels existing at the end of the second quarter. Our sensitivity of $0.10 per gallon change in diesel fuel is about $6 million pretax for the year.

Fortunately, crude oil prices have fallen since the end of the quarter, and if that trend continues we have some upside to our projected earnings. Additionally, our guidance reflects a prolonged downturn in residential construction and weakness in nonresidential and highway construction activity. Through June, private nonresidential construction spending in the U.S. as measured by the seasonally adjusted value of construction put in place shows growth versus the same period in the prior year. However, the leading indicators, such as contract awards, are down double digits year-to-date through June, pointing to some future weakness in this end market. Public construction spending, including highways, has also increased versus the prior year in nominal terms. However, the cost of construction input such as liquid asphalt, diesel fuel and steel are consuming a larger proportion of highway and infrastructure construction, dollars resulting in fewer new construction projects.

In Vulcan served markets, contract awards through June are lower when compared with the same period in the prior year. The exception to this trend is the large industrial and energy projects in Texas and along the Gulf Coast. We now expect residential aggregates demand in 2008 to decrease over 30% from 2007 levels. This decrease is indicative of further weakness that materialized in the second quarter of 2008. Our aggregates demand forecast for nonresidential and highway construction also compares unfavorably to the relatively flat demand forecast at the end of 2007. As a result, we now estimate full-year aggregate shipments, including former Florida Rock operations, for the full year to decrease from 2 to 5% versus last year. This forecast reflects total aggregate shipments in the second half of 2008 to be slightly lower than in the second half of 2007.

A market environment that recognizes the high cost of replacing reserves has been instrumental in helping us achieve price improvement despite nine consecutive quarters of lower volumes. Additionally, aggregate production continues to be burdened by increasing costs for energy related and steel-based materials. The pricing momentum we achieved in 2005 and 2006 continued in 2007. In 2008, we believe this momentum will continue, resulting in price improvement for the year of approximately 8%. We expect to achieve this price improvement in spite of lower shipments in our higher priced markets, particularly Florida and California. Consolidated earnings from continuing operations should be in the range of $2.85 to $3.25 per diluted share. Our 2008 earnings outlook includes 74 million of EBITDA and $0.34 per diluted share referable to gains related to the two divested properties that were owned by Vulcan prior to the acquisition of Florida Rock. The integration of Florida Rock is proceeding as planned and will certainly help make Vulcan a stronger organization for the future. We continue to expect an annual synergies level of 50 million to be achieved by the end of 2008. These savings are being realized both operationally and through overhead reductions.

During the first half of 2008, we completed several transactions that when combined added approximately 210 million tons of aggregate reserves net of the Justice Department required divestitures. These new quarries will enhance our ability to serve our customers effectively. These transactions include four quarries in California, including a rail connected quarry to serve the Greater Sacramento market. The California Geological Survey estimates that total industry-permitted reserves to serve Sacramento County will be depleted in less than ten years. We also acquired two quarries in Virginia that compliment our existing operations and that serve attractive markets in the Shenandoah Valley along the Interstate 81 corridor. We also acquired a quarry in a growth corridor west of Chicago. Finally, in Texas and North Carolina, we acquired land with valuable permitted reserves that are adjacent to our existing quarries; those reserves will extend the reserve life at both of these quarries. Each of these transactions enabled us to defer income taxes arising from the sale of quarry sites required by the Justice Department as part of the Florida Rock acquisition. The cash benefit from these tax deferrals is being used in large part to fund strategic capital spending projects that would have otherwise been funded with debt, thereby allowing us to reduce our borrowing requirements.

In closing, I'd like to reiterate our confidence in future sales and earnings growth for Vulcan. Our Construction Materials business has generated good results during times of weaker demand for our products and much better results as demand improves. The foundation of our confidence is the strategy we have employed to establish an aggregates focused business that has the great advantage of strategic locations in major U.S. markets expected to experience above average growth in aggregates demand for many years into the future. Summarizing the key attributes of our aggregates-focused business and how this strategy benefits Vulcan and our shareholders, our 2008 results should benefit from the following attributes: Aggressive management of controllable costs; a diversified regional exposure; increasing value of permitted reserves in fast growing metropolitan markets; and a broad use of aggregates and downstream products in diverse end markets, including relatively stable demand from public funding, where multi-year construction projects are typical. Again, I thank you for your interest in Vulcan. Now if our operator will give you the required instructions, we'll be pleased to respond to your questions.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Ajay Kejriwal of Goldman Sachs.

Good morning, gentlemen.

Morning.

Just wanted to start by asking a question on guidance, you have got 2008 guidance with 1Q early May, 19%. Now three months later, cutting guidance again by 26.10% -- so my question I guess is what changed in the last couple of months that you did not anticipate in May? I know diesel is part of the answer, but, you know, is demand a lot worse than what you thought in May or is it that some of the pricing surcharges you that thought you will be able to push through did not come in?

No. The change is virtually all in the new outlook on contract awards, which are down, which caused us to reduce our aggregate volume forecast. That is the vast majority of the basis of the change, is in aggregates volume based on new information about contract awards, obviously the Forward-looking information. Secondly, a significant amount but by a large majority less, is the huge increase in diesel fuel cost and liquid asphalt costs which we have projected through the end of '08, as I indicated in my remarks. Since the end of the quarter there has been some relief in -- certainly in crude oil pricing. We do have some upside there, but between aggregate volume based on contract award data and higher energy costs, those account for virtually all of the change in guidance from the end of Q1 to the end of Q2.

So now as we look at your full-year guidance, just to get a sense of what is, and good color you provided on demand for res -- I thought you said down 30%, but maybe if you could provide numbers for non-res and highways.

Yes. Our full year of projection now for demand in our markets -- res is -- the actual number is about 33%. We see highway -- these are aggregate units, not dollars -- we see highway as down about 10%, other infrastructure down about 8% and buildings -- essentially private non-res -- down about 7% for a total of '08 market demand for aggregates in our markets down about 14% from last year. Our legacy volumes we project to be down about 13% for the full year.

And how does that compare with volume in the quarter? How much was highway and the non-res portion down in 2Q?

I don't have that data in front of me. I'm sorry. We will be happy to give that to you.

Okay. Good. Maybe just a question on EBITDA guidance. You know, if you could provide some more color on what to expect in terms of free cash flow for the year, and if there are any debt covenants that are at risk around dividend payments?

(inaudible) respond to that.

At the time of the last call, we indicated we thought we would be able to reduce debt by approximately $200 million during 2008. Our current view is that we will still be able to reduce debt by approximately 175 to $180 million during the year. Obviously, the magnitude of the decline in EBITDA, even net of taxes, is greater than the decline in our debt reduction guidance, and that is explained by a couple of factors. First, we do think our capital expenditures for 2008 will come in lower than prior guidance. We had previously indicated about $485 million, and we think that will be 30 to $40 million lower at this point in time. Also, the tax benefits to which Don referred earlier growing out of the deferred like exchanges from the divestiture of the assets pursuant to the DOJ requirements, the tax savings associated with those deferred like kind of changes is going be greater than what we had contemplated in the previous guidance. So while the EBITDA numbers are down quite a bit more, we still believe that we will make a meaningful debt in the debt reduction for this year. Also, working capital requirements, which tend to be very seasonal, will be less, obviously because of the lower level of business. We are not in anywhere near risk of touching any of our debt covenants. The only covenant that we have in our credit facilities is one that requires debt to total capital to be 65% or less, and we are currently at about 49 -- 48 to 50% depending on how you calculate it. So we're no where near bumping up against any debt covenants.

Got it. Thanks.

Your next question comes from the line of John Fox of Fenimore Asset. Please proceed.

Hi, good morning, everyone. A number of questions.

John, how are you?

Doing fine. Thank you. First one, is the interest expense in the quarter -- is that a good quarterly run rate?

Yes.

Okay.

We will be somewhere around 180 this year net interest.

Okay. Great. And Don, did you give shipments in the quarter same on same without the effect of Florida Rock?

Yes, I think legacy volumes are down about 16%.

Okay. Thank you. And do you anticipate any further price increases this year, any mid-year -- I guess we're already past mid-year, but any into the fall?

Well, as we have said before, there will be some price increases as we move forward in various projects in various markets, but we expect to end the year up about 8% over last year.

Okay.

And most of that is probably already in place, but there will be some projects that will warrant price increases.

Then I have two kind of bigger picture questions. I will ask both of them. One, could you just comment on California and their budget situation and where that stands for their funding? And number two, given fewer miles driven and gas tax reduction, that type of thing, can you talk about funding for highway nationally?

Yes. And I think those are both very key questions. The leader of the California Senate put out a published statement on July 30th saying that rating any of the California transportation funds will absolutely not happen on his watch. He says, "One thing we have done right in California is to work together to build our long neglected infrastructure. Thanks to our efforts, we are building roads, schools" et cetera. He goes on to say," I see prop 42 and prop 1A as key components in these efforts. Rating these funds now would break faith with voters who joined us in supporting the plan to rebuild California and slow down one of the state's best engines for economic growth." I think when you have a democratic leader of the Senate and Republican governor align to go say we have got to keep this program intact, that gives us great confidence that California will deal with its budget problems in some way other than what the leader of the Senate refers to as "shortsighted thinking." So we are optimistic about that. We are actually booking a lot of work now under the California infrastructure program that will shift -- probably most of it beginning in '09, but perhaps some of it in '08.

Okay.

Related to that, you see that our asphalt shipments are actually up 4% in the quarter --

Right.

-- which is -- which is remarkable given the slow down in other end markets that asphalt is actually up. That is coming -- a lot of that is from Texas, but also shipments have been relatively good in California and Arizona. So we are optimistic about that. Now, moving to the Federal level, as you probably know, depending upon their various estimates, that is the '09 Highway Trust Fund shortfall because of fewer vehicle miles being driven is in the range of 3 to perhaps $4 billion. And iff that is not plugged, that could result under the (inaudible) adjustment and a drop in spending of probably 13 -- 12 to $13 billion, which would be literally hundreds and thousands of jobs that would be lost. The House, about a week ago or ten days ago -- two weeks ago -- passed a bill refunding $8 billion to the Highway Trust Fund that was taken out or borrowed back in 1998. Well over 70 senators have indicated their support for that bill. It has not yet passed the Senate because it has been attached a couple of times to controversial bills that haven't made it through the hopper, but we are cautiously optimistic that the Senate will take that back up in their three week session when they come back in September. But I think in this -- particularly in this economic climate, the prospects of losing hundreds of thousands of jobs by failing to repay this $8 billion to the Highway Trust Fund is one that not many people are going to want to have to deal with.

Right, sure.

We are cautiously optimistic that that will occur. As we look to the reauthorization of the Highway Trust Fund -- Highway Bill -- which will begin in September of '09, there's a lot of work being done, a lot of discussion. Many people are looking at various options. I think the price of gasoline and the price of oil will have a lot to do with that debate; and we have no -- I have no great insight as to what is going the happen to gasoline prices, but that will be a factor -- a significant factor -- in that debate. One other item which we are certainly not baking into any kind of outlook at this point, but which I think is generating a great deal of discussion in Washington is infrastructure as a stimulus -- additional infrastructure spending.

Right.

And Senator Byrd from West Virginia has introduced a bill to add money to infrastructure spending as part of a stimulus package. So we are hopeful there will be some legs to that discussion as well.

Okay. Thank you. And just a clarification, Dan. You said 180 for interest expense. You are at 80 year-to-date. What am I missing there?

Let me think. Well, what you are missing is we now have rolled $950 million out of short term debt for which we were paying very low rates in the 270, 275 range into a long term debt where we are paying considerably higher rates on it. That's really the main reason -- and there's also a seasonal working capital bill that's typically greater in the second half of the year.

Right, okay, thank you.

Your next question comes from the line of Clyde Lewis of Citi.

Morning. I think I've got four questions, if I may, so I'll probably reel them straight off if you like. In terms of Florida Rock, Don, if your legacy volumes are down 16% in Q2, it looks then as if the Florida Rock volumes were probably down 25 to 30. Would that be fair?

Yes, I think that's a good estimate.

Okay, thank you. Secondly on asphalt prices, I mean, you sort of flanked up there, but you don't really expect to get much in the way of extra aggregate price increases for the second half of the year. Would that also apply to asphalt?

No, we expect to get asphalt price increases. The liquid has increased so much, and we are not alone. Everybody who produces asphalt mix is feeling that same pressure. So asphalt volumes are up for us in the quarter. You know, I would expect some upside there, but it will be offset probably by the high cost of liquid. You know, it remains to be seen whether falling crude prices will affect liquid asphalt prices substantially or not. There's a lot of refinery issues that go into that, but we do expect that. And I don't think it is a fair conclusion to say we don't expect much in the way of aggregate price increase in the second half. In order for us to achieve our 8% guidance, you know we will continue to get some price increases. You know, they won't, -- we don't, as you know, price in nationwide statements about aggregate pricing. We do it on a job by job, market by market basis. But we are continuing to get price increases.

Okay. But maintaining that sort of same 8% rate, yes?

Yes. Yes.

Okay, okay. I mean, sticking on the subject of pricing, I mean, are you seeing in the weaker volumes some of the smaller independent players maybe being less aggressive than the majors on pricing now?

Well, that is -- yes. I think that always happens. But in large metropolitan markets where we tend to be focused, you know, we have some insulation (inaudible), and that tends to be a bigger factor in smaller markets.

Okay. Thank you. Just briefly, the acquisitions you made, the quarries you have bought in the second quarter, can you just give an annual run rate in terms of volumes there?

Let me come back to that one. I can estimate them, but I will probably be wrong.

Okay. All right.

Certainly, they will certainly add -- we had to give up capacity as a result of the required divestitures by the Justice Department. I think the important point is that we were able -- both through swaps and through additional acquisitions, we were able to actually increase our reserve base. You know, we gave up probably in the neighborhood of 300 million tons of reserves. We are picking up a net of 210. So basically, we have picked up about 500 million tons of reserve in these acquisitions. And all -- the California operations are all productive quarries. The Virginia operations are productive quarries, and the Texas and North Carolina -- and the Illinois acquisition is a productive quarry. The two reserves -- the land in Texas and North Carolina won't necessarily increase our production. They just strengthen our longer term reserve positions.

Okay. Thanks. And the last one I had really was on the sort of level of operational activity, if you like, in quarries across the group now. I mean, if you are talking volumes down again, they are coming down, I mean, are you going get to a point where you will actually start maybe to mothball some of the smaller quarries because simply the volumes are not high enough in some areas?

Well, we -- in some small quarries, particularly in nonurban areas, we have already been doing that in terms of moving crews from one plant and running plants on a -- sort of a campaign basis to build some inventory and then move our crews around. That is -- you know, that is not new for Vulcan. That's part of our culture, is to be able to operate plants at low volumes efficiently as well as high volumes; and across you know, 300 sites, there are always markets that are booming while other markets are slow. So it is -- you know, we have a lot of operational know-how to be able to adjust production levels sufficiently to meet demand. So yes, we are doing that and have been doing it for most of the year.

Okay. One last one, I think probably more Dan's path, but the $28.5 million worth of proceeds from loan and life insurance policies in the cash flow -- that was a new one on me. Can you just sort of explain what is behind that?

Sure. Florida Rock had a portfolio of life insurance policies on certain members of their senior management team, and we have monetized the cash surrender value of those policies and effectively liquidated them.

Okay, so it was pretty much a one off --

One off.

Don't have to give the money back at any point?

No.

Okay. Thanks so much, gentlemen.

Your next call comes from the line of Mike Betts of J.P. Morgan.

Yes.

Hello, Mike.

Hi, Don. I had a number of small questions as well, although the first one is probably a bigger one. The first one is just on cost cutting. You have obviously talked about the $50 million of synergies, you have talked about the 11 million of SG&A savings; but obviously you must be doing much more cost savings than that, given the big volume reductions. I'm not sure how best you could describe it, to me but maybe my question is, what is the employment level at Vulcan versus a year ago? You know, trying to do pro forma for Florida Rock, because both of the businesses have probably lost the best part of 30% volume. So can you kind of help me on what you have done operationally on the cost side?

Well, we have cut operating hours in many operations. We have reduced employment in many operations, both hourly and salary. I don't have any specific numbers to give you. Some of my colleagues are looking at those. We are on the other side of the ledger, however, upgrading substantially our infrastructure in our technology, and so we are adding people to get that rolled out, but there's still a very substantial net decrease in employment. Probably the bigger factor is the net increase in operating hours -- I mean decrease, excuse me -- in operating hours. That's really place that within a broad range we can ramp up and ramp down production, is in operating hours.

Okay. Thank you very that. Then two questions, if I could, on cement. The maintenance time that the cement kiln was down in Q2, I mean could you quantify what the impact of that was? Is that -- did that occur in -- I mean, is that normally in Q2 or was that kind of a one off, or is that its normal seasonal?

Well, that's a normal, annual maintenance outage. It probably impacted earnings something like $2.5 million in the quarter negative.

Okay.

And that's -- you know, don't have to do that in Q3.

Okay. And the other thing I noticed on cement was that the selling price declined. Was that a mix factor or you have you actually seen prices in Florida actually decline? (inaudible)

There's a mix in that. Prices in Florida are relatively stable. The cement production and demand in Florida are relatively stable. That's because imports essentially ceased and the domestic production is currently matching the demand. There is some cement being exported domestically, but exported out of Florida; and the transportation costs when you net the sales price against the transportation cost, that causes some decline, as you have seen in the net selling price back at the plant.

Okay. And then another question, just on the asphalt, what sort of proportion of your sales is actually indexed? Because obviously you then recoup that automatically -- or is the majority of it contract-based and therefore you have to wait for contract renewals?

I don't have a percentage in California for Caltran's projects; asphalt is indexed. But that's a portion of your business, but not all of it. A lot of our work is private as well. And that is, of course, not indexed per se. But those projects generally are shorter term so -- and the big period is much tighter. So we have some ability to adjust pricing to reflect the higher asphalt. But clearly in the quarter, we got caught with much higher liquid asphalt in relation to our committed selling prices, even though our prices were up 8% and our volume was up 4, our earnings were down, and it all had to do with the big spike up in liquid asphalt.

Okay, and final question just related to that, Don. I mean, I think you said earlier that your guidance for the year was based on end June pricing leverages -- so things like diesel and other things.

Yes.

Has the cost of asphalt actually gone up, though, since since the end of June? I was -- you know, I don't look at particularly good series, I guess, but I was under the impression that actually the big increase there was in July. Or maybe that was just the series (inaudible).

Asphalt is still moving up, and I think an explanation for that in light of lower crude oil prices is that refiners like producing diesel fuel because they get higher margins, and when you produce more diesel fuel versus gasoline you end up with less liquid asphalt at the end of the cycle. And so liquid asphalt is continuing to increase.

Okay. That's great. Thank you very much.

Your next question comes from the line of Timna Tanners of UBS.

Hi, good morning. And thanks for all the great detail. Don, Dan, I was wondering actually if you could give me a little bit more detail specifically on the balance sheet and any risk maybe from downgrades from the rating agencies? If you can give us a little bit of color maybe of your conversations with them or what they might -- anything you can provide there. And then along the same lines, talking to us and reminding us a little bit about the time frame for any short term debt issues that you might have.

Timna, we have a practice of communicating with the agencies routinely as we approach our quarter end. We have briefed both of the agencies that rate our debt on our second quarter numbers. I think it would be inappropriate for me to speculate as to what actions, if any, they may choose to take; if they're going to take an action, we will read about it. If they don't, we won't. And I -- but I think I can say that we are firmly committed to keeping the agencies fully informed as to how our business is evolving and what our free cash flow estimates are likely to be and what we intend to do with that. So they know more than you know, and we will just have to wait and see what conclusions they reach. Your second question about short-term debt financing, we have termed out into the long term debt markets what we currently intend to have termed out -- or put differently, we have no immediate plans for any additional long term debt offerings. We have, at this point in time, approximately $750 million of unused borrowing capacity under our lines of credit. And those lines of credit are used either as a backstop for issuing commercial paper or for borrowing directly. And so right now, we believe that we have more than adequate liquidity to meet our needs. Is that getting to the question or not?

Yes, definitely. I mean, just trying to get a flavor for what the time frame might be for any -- you know, if you need to approach markets it sounds like you are saying you might not need to. When you talk about your top priority being paying down debt, I'm just trying to understand the magnitude of what kind of different avenues you are considering -- if you're considering further reductions to CapEx, like how much of your CapEx right now is maintenance, how much of it is kind of more optional? Your dividends seemed fine, you are not buying back shares it seems like for now. But anything else you can provide for us on your --

Well, if you look at our debt maturity schedule, we have about 45 to $50 million of debt that matures in the fourth quarter of 2008. We have a large maturity in April of 2009 of $250 million. Our current -- and then we have an additional run of $15 million a quarter of maturity on our term loan, and our current view is that on all of that we'll issue commercial paper. When we get to the large maturity in April, we will just evaluate the Company's liquidity and the condition of the capital markets at that time and decide if we are going to finance that with commercial paper or whether we want to go back out for another long term issuance. But April of 2009 in these capital markets is too far into the future to speculate on how we will actually make that funding.

Okay. Thank you.

We have gotten to the debt structure and balance sheet that was our target. So we are basically finished with any long term debt financing -- certainly we don't have any plans for any equity issuance or share repurchases on the other side. So we are pleased with where we are. We think it is certainly adequate for us as we go forward. We will -- while we haven't given guidance and aren't yet prepared to give guidance on '09 capital spending, we think it will be substantially less than '08 for a lot of reasons, and that will be a source of cash. So we are very pleased with our balance sheet now.

Okay. That's really helpful. The only other question I had was, if you have any comments on (inaudible), talked about some surcharge on aggregates, and I know they're a small player. But is there a potential for a surcharge September time\frame? How would the market respond to that? Any thoughts?

Well, we have never believed that surcharges -- energy surcharges -- for our products was an appropriate way to price. We price on a whole different kind of concept of just what's happening in the marketplace, and both from the customer standpoint and the competitor standpoint. Some companies have surcharges. I guess we noted Monday that one large producer of concrete came out saying they were going to eliminate surcharges and put in a 25% nationwide price increase for concrete beginning October 1. I mean $25 -- excuse me -- $25 a yard price increase for concrete to replace any surcharges or -- and also deal with the sort of cost pressures that are going on. Some people will have them, some people won't. We will not have them -- we will deal with that in our pricing of our product.

Okay. Thank you.

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

Thanks. Good morning.

Hi, Jack.

Hi. I wanted to ask about the cement plant expansion project. Can you update us there? Is it still on its original schedule?

Yes, probably end of first quarter, maybe end of second quarter it will be complete and in production.

Of '09?

Yes.

And it is about -- it doubles the size of the plant; right, about another 850,000 tons?

That's correct.

Okay. And then secondly I want today ask on the subject of aggregates.

Jack, I think an important point is that our total cement consumption will exceed our total cement production as a Company. So that is important to us.

Sure. The plant will make then about 1.7 million tons and you will be -- you buy more than that right now.

Right. We consume more than that.

Consume, right. I'm sorry.

We supply. Yes. The current production, we consume partially internally and we sell for (inaudible).

And then on the subject of aggregates pricing, have you guys gotten any price increases in aggregates in either California or Florida in calendar 2008?

Absolutely. I am surprised you would ask that question.

I ask that question because there's some other competitors saying they're not getting price increases in the market, so I need to figure out.

Well, we are -- we certainly are. Particularly -- I mean, Florida has been the strongest pricing market in the country in '08. Now, you know, you can get mix shifts. As I said in our prepared comments, our volumes are down more in California and Florida than they are in some other markets, and California and Florida are our two highest priced markets. So when we tell you we have gotten an 8% price increase, that means we can get a larger percentage price increase in every market. But if our -- but if our higher price markets are down more than our little lower priced markets, then that rolls up to 8%. So maybe that's what people are saying. I don't have any idea, but we are getting -- you know, same product, same market, we are getting price increases across the board.

Well, there was a big price increase in Florida in aggregates in October of '07.

Correct.

And then I think at that time, the feeling was there might be another one to begin '08 -- and this is kind of all tied into the Lake Belt issue -- but then the quarries were -- you know, I guess remained in operation -- they weren't really ever taken off line, more or less. So maybe the second price increase was not effective. But I guess in calendar '08 you are saying you still have got some incremental pricing?

Yes. I think the -- basically, there was a $5 a ton announced price increase by some producers, and I think all producers to a greater/lesser degree had some sort of comparable price increase. And those are still in effect and in place. I don't think you will see another $5 a ton price increase in '08 in Florida. But --

Right.

But as you know, our quarry in Miami has now resumed production as a result of the Appellate Court overruling the Trial Court, but we are -- I don't know how to put this in the context of a baseball game. You are a baseball player, but we are probably in the third inning before it is over. So a lot more litigation to go and a lot more core engineer work and permitting reports to go before we know what ultimate outcome is going to be in the Lake Belt.

Well, you guys have a pretty good bull pen. So I like your chances there.

Well, we do have a good bull pen. That's a really good analogy. We can bring relievers from all around.

Great. Thanks a lot.

Your next question comes from the line of Rob Norfleet of Diamond Bank.

Good morning, gentlemen. Dan, I had a question quick for you. When you look at interest expense -- and I know you have addressed this in a couple of ways during the call -- it altitude was down sequentially versus the first quarter. You mentioned converting the bridge in the short term financing to long term debt. Yet I guess when I am looking at your average interest rate on your debt, you know, it looks to be north of 6.5%. Yet the 38 million interest expense implies an average blended rate of about 4%. So I guess I am trying to figure out the discrepancy here -- clearly, interest expense should be trending higher than what we saw. Can you kind of walk through -- are you capitalizing interest? Is there something -- some reason for why interest expense was lower the first quarter, and what should we expect the third and fourth quarter in terms of a run rate?

I think what is -- let me rephrase it. The only thing that's probably distorting that analysis is the amortization through interest expense of hedging loss activity that grew out of interest rate hedges we put on soon after the announcement of the Florida Rock deal. If you recall, the timing of rates -- we announced the deal in February. We put some hedges on in the months immediately following, at which time rates this been pretty stable. And then treasuries dropped dramatically by the time we got the clearance from the DOJ to close the deal and ultimately fund it. And we had some fairly hefty losses on those interest rate hedges. I don't have the exact number in front of me, but -- it is in our 10-Q, but this this will be closed. I think cumulatively between the debt issuances in December and the issuances in June of this year, I think we had probably some $70 million -- 70 to $80 million of losses on the interest rate hedges, which -- and the way the accounting for those work is they were hedges. So we cash settled those hedge losses at the time of debt issuance. But the 70 to $80 million in losses is amortization interest expense over the corresponding -- the term of the corresponding debt.

So that's one piece of the equation that's probably distorting your analysis; and having settled out another 30 to 35 million of those hedge losses in June, none of that amortization was in the first half of the year. And you will have that amortization in the second half of the year, and those were all five and ten year notes, so it will be amortizing off pretty quickly. My guess is that is what is probably is distorting your number. Also, I have said that the net interest expense would be about 180, but if you look at just the interest expense line itself, that's probably is closer to 189 or 190 million; and we did have some interest income netting against that this year, and you ask why would you have interest income if you were so heavily invested in the short term debt markets? The reason is the cash proceeds that we got from divesting the assets were used in a tax deferred exchange. The cash -- those cash proceeds, which exceeded $200 million, were -- are effectively being held in escrow accounts until the corresponding exchange properties are acquired. So we actually had a considerable amount of cash that was sitting on the balance sheet in those escrow accounts generating interest income. So I think that's probably influencing your number as well. And there is some capitalized interest coming through on capital expenditures -- I don't have an exact number for that -- as well. But we can get that.

Okay. That helps a lot. Thanks so much.

Your next question comes from the line of Todd Vencil of Davenport.

Hey, guys, thanks for taking my call.

Good morning.

Can you break out the impact that layering on -- just given the difference in maybe the average price between the Florida Rock legacy and the Vulcan legacy aggregates had, what is impact on '08 just from bringing Florida Rock on? Is there a way to break that out?

Well, actually, the way our financing accounting staff calculates, that the 8% is price increases legacy bulk.

Okay.

If we put Florida Rock impact in there, it is going to push that up some; but the 8% is legacy. If you put in Florida Rock, I don't have the number, but it is going to be higher than 8%.

Right. Okay. And I mean how -- you know, U.S. Concrete was talking earlier about the concept that they feel like aggregates pricing power, just given what's going on everywhere, is probably diminishing. We have seen the year-over-year changes for you guys come down, although 8% still a very healthy number. You know, are you prepared to talk at all about the trend, or maybe what that looks like going into next year?

No. We have not done our work yet to project price increases for '09. Clearly, on the cost side, with energy, there is a everybody who produces aggregates is feeling the effects of much higher diesel fuel. And if for no other reason, that ought to have an impact on aggregate prices in the industry going forward.

Fair enough. Thinking about volumes, and I mean, I don't -- I am not trying to get you to sort of speak prematurely on next year, but I think that's the question on a lot of people's minds. Portland Cement came out yesterday with their forecast looking for cement volumes in '09 being down about 6%. You know, broadly speaking, I mean, do you guys have any sort of expectation given your comments about what you have seen on contract awards and what that ought to be leading to for, in particular, commercial construction and highway construction? Do you have an outlook for what you think volumes might look like next year at all?

No. We haven't gone through our processes to begin to estimate that. I think the keys, though, in thinking about '09 has a lot to do with infrastructure. It has a lot to do with highways -- for us at least -- and today, there is a hole in the '09 Trust Fund -- deficit -- projected deficit -- of over $3 billion, which if not addressed will reduce spending in FY '09 by, you know, as I have said, about $13 billion. And that's what is hanging over the heads of the DOTs right now. If that gets fixed -- which as I said, we hope when the Senate gets back they will deal with that -- that could certainly change the outlook on contract awards for highways. But that is not done yet. And the other piece, as I said, to watch is whether highways and public infrastructure become the subject of a stimulus package. So until we get -- until those wild cards get answered, it is hard to know. But I think a part of the weakness we are seeing in highway contract awards has to do with the unremedied short fall in the Highway Trust Fund for '09. Obviously, there are a lot of other things, like high liquid asphalt costs and other things, but -- so if we see a resolution of the Highway Trust Fund for next year, I believe we will see some improvement and construction awards hopefully.

Fair enough. Thanks a lot.

If we get a stimulus package.

Right.

But right now, we don't have either one of those.

Okay. I appreciate it. Thanks a lot.

Your next question comes from the line of David MacGregor of Longbow Research.

Hi, Don. Hey Dan.

Hey, David. How are you?

I know we are over an hour here, so I will keep it short; but just what's the upside to the synergy number now? You talk in your press release about the fact that some of the Florida Rock operations still have relatively higher production costs. Is it possible that we could make substantial progress in the second half and these synergy numbers might actually be bigger?

Well, certainly we very are focused on that. I think we have spent a fair amount of money in the first half on some of the Florida Rock operations to try to improve production efficiency. Getting the true benefit of that is harder with lower production volumes than with higher production volumes. But at this point, we believe staying with our 50 million is the most appropriate number. I think you can conclude from that that given the lower production volumes today than we anticipated at the time we came up with that number, we are getting some improvements in other areas that we didn't have baked into it. But I think you will see the key to getting the higher than 50 million run rate will be two things. One is a function of time to get the improvements into Florida Rock plants fully operational; and second, when we start seeing the volume recovery, that's when we will start seeing the real benefit of those operating improvements.

Okay. Good. And then just last question has to do with the Texas and Gulf Coast, where you indicating you are seeing strength. Can you break out volume shipments in that region for us? And also, I guess, how sustainable is it? How much forward visibility do you have on that strength<

Well, a lot of the projects are just coming out of the ground. The big steel mill in Mobile is barely coming out of the ground. The Toyota plant in Mississippi is barely coming out of the ground at this point. Some of the refinery and L&G products are at various stages of completion; but I think we will see relatively robust demand along the Texas and Central Gulf Coast for industrial and energy projects well into the foreseeable future. You know, the weak dollar has a -- and high energy costs have very significant effects on the construction economy in those areas.

Right. And can you just say how strong those volumes were?

Well, Texas was up double digits and -- which is remarkable in this economy. And that's whole state of Texas.

Right.

Which, of course, includes the Gulf Coast. And the Central Gulf Coast was up -- I'm not -- I don't -- you know, we don't -- I don't have a number I feel confident -- here my colleagues are coming to my rescue. Well, I don't have it broken out by the region that we are talking about on the sheet in front of me, but it is up -- probably not double digits.

High single?

But Texas is up double digits.

Great. Thanks very much, guys.

Your final question comes from Chris Manuel of KeyBanc.

Good morning. This is Jason Brown on for Chris Manuel.

Hey, Jason.

Just one quick question. It appears that given the decline in second quarter legacy volumes in your outlook for the rest of the year, you are expecting some improvement or lessoning of the decline in volumes for the legacy piece. Do I have that right first of all?

Absolutely. And one reason is we have got a lot easier comps in the second half than we had first half; but we think -- you know, we think -- our outlook is based on -- the volumes decline in second half of '08 compared to second half of '07 will be substantially diminished versus what we have seen in the first half.

Okay. Just wanted to clear that up. That's all I had. Thank you.

Okay. Thank you very much for your interest. We appreciate your interest in Vulcan and our business. As I said in our earlier remarks, I think our plant, people and our management teams are doing what they can. We are managing our non-energy variable costs very well. We are managing our overhead costs very well. We are managing our fixed costs very well. We are continuing to get price increases. The issue for us in the quarter was obviously aggregate volume and liquid asphalt and diesel fuel costs. This too will pass. We are looking forward to the earnings leverage we have with a little bit of volume growth and a little bit of stability in energy costs.4 Hopefully before too many quarters, we will be able to share with you the benefits of that. Thank you so much.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have an excellent week.