渥肯建材 (VMC) 2008 Q3 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the third quarter 2008 Vulcan Materials earnings conference call.

My name is Gina, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS). As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Don James, Chairman and CEO. Please proceed.

Good morning. Thanks for joining this conference call to discuss our third quarter results, and our outlook for the remainder of 2008. I am Don James, Chairman and Chief Executive Officer of Vulcan Materials. We appreciate your interest in Vulcan, and we hope our remarks and dialogue and Q&A 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, Ron McAbee, Senior Vice President West, and Danny Shepherd, Senior Vice President East.

Before I begin let me remind you that certain matters discussed in this conference call contain forward-looking statements which are subject to risks and uncertainties, descriptions of these risks and uncertainties are detailed in the Company's SEC reports, including our most recent report on Form 10-K.

During the third quarter we experienced reduced demand for our products, due to a variety of factors. Construction activity weakened further as a result of economic uncertainty, turmoil in the financial markets, tighter credit standards, and higher energy related construction costs. Adverse weather from major Hurricanes and Tropical Storms slowed shipments in August and September in markets along the central Gulf coast, in Texas and in Florida, and then those storms moved up through the upper Midwest, and through the Atlantic and mid-Atlantic markets.

As a result aggregate shipments declined 13% versus the prior year. Higher energy related input costs accounted for approximately $0.38 per share of the total year-over-year decrease in earnings. Increased costs for liquid asphalt, used to make asphalt mix, and diesel fuel, used to operate our large mobile equipment fleet, accounted for most of this year-over-year decrease in earnings per share. Our average price paid for liquid asphalt increased 106% from the prior year third quarter, reducing earnings $0.25 per share. The average price paid for diesel fuel in the third quarter increased 51% compared with the prior year, lowering earnings another $0.08 per share.

Our management teams are running their businesses well in an extremely tough economic environment. In particular I want to emphasize their effectiveness at managing controllable costs, while continuing to gain price improvements, despite lower shipments. To underscore this point, a ton of Vulcan aggregates today generates more cash earnings for us than it did last year at this same time, and significantly more than at the peak of the construction cycle in 2005.

This fact highlights the solid fundamentals of Vulcan's aggregate business, capabilities of our organization, and the attractiveness of the markets we serve. The average freight adjusted unit sales price for aggregates increased approximately 6% from the prior year's third quarter. The current downturn in demand for aggregates began in the second quarter of 2006. We have since recorded 10 consecutive quarters of lower shipments, and 10 consecutive quarterly increases in the average selling price of aggregates.

We approach pricing for aggregates product by product, customer by customer, in every market we serve. This is why we do not make across the board price increases. The 6% increase in aggregates prices in the third quarter was achieved, despite declines in shipments in several of our higher priced markets, that were proportionally greater than the overall decline.

Changes in product mix such as relatively more base materials for large industrial projects, as opposed to clean stone ready mix concrete and asphalt, negatively affected our average selling prices. Average selling price was also affected by the unfavorable shift in geographic market mix, due to relatively lower sales volumes in higher priced markets, such as California, and up and down the East Coast, and relatively higher volumes and lower priced markets, such as Texas, and along the Gulf Coast.

During the quarter, we continued to adjust production levels to match a lower level of demand. Our plant managers did an excellent job of managing cost in the quarter, despite the outward pressures caused by higher energy prices and lower volumes. Key operating parameters that measure labor efficiency at our production sites, showed that we made improvements over last year's third quarter. This contributed to higher cash earnings per ton of aggregates compared to a year ago. Excluding energy related costs, such as diesel fuel and electricity, our unit variable production cost and legacy Vulcan aggregates operations, were actually down slightly from the prior year third quarter.

Additionally cash fixed cost at legacy Vulcan aggregate operations were approximately 10% lower than the prior year third quarter. The effectiveness of these cost control measures demonstrates the greater production flexibility of an aggregates plant, versus continuous process manufacturing facilities used in many other industries. Earnings for our asphalt and concrete segment were lower than the prior year's third quarter, due to lower earnings from our asphalt mix business.

Asphalt mix prices increased approximately 18% from the prior year's third quarter, however we were not able to increase prices fast enough to offset the sharp increase in the prices we pay for liquid asphalt. The average unit price we paid for liquid asphalt at the end of the third quarter was 106% higher than the prior year's third quarter. And approximately 38% higher than the average unit price we paid at the end of the second quarter of this year. The rapid escalation of liquid asphalt prices during the second and third quarters, made it difficult for us to increase our selling prices for asphalt mix fast enough to cover these costs.

We expect some of this timing difference to dissipate in the fourth quarter of this year, if liquid asphalt prices remain at current levels, or continue to decline. Selling administrative & general expenses in the current year's third quarter were approximately $76 million, versus 66 million in the prior year. Legacy Vulcan SAG expenses declined 11% versus the prior year. The overall increase was due to the inclusion of Florida Rock operations.

Turning to our outlook for 2008, we expect demand for our products to remain weak through the end of the year. The prolonged downturn in residential construction continued in the third quarter, and that end market should remain weak for the rest of the year. New construction contract awards for many non-housing related end markets have also slowed, due to weakness in the economy and volatility in the financial markets. Large industrial and transportation projects continue to be a bright spot in a number of our markets.

Vulcan is currently supplying a number of such projects throughout the Sunbelt states, and in the upper Midwest. We expect an echo effect on aggregates demand to continue for many years as a result of these projects, which will result in major additional economic growth in the affected areas.

Some examples of these projects include the automobile manufacturing plants for Volkswagen and Kia in Tennessee and Georgia. A large new greenfield steel plant, a new railcar manufacturing plant, and a refinery expansion here in Alabama. An LNG energy project and a Port expansion in Mississippi, a Tank terminal in Louisiana, and a major intermodal railyard in Illinois. These types of projects typically require large quantities of aggregates to be shipped over several years.

In recent weeks a second economic stimulus package has been gaining momentum in Washington. Infrastructure spending is being increasingly viewed by policymakers in Congress, by Governors, by Mayors and state DOTs, as an important element of any proposed financial stimulus program.

Industry associations are actively engaged in these discussions, and are working with other stakeholders, to emphasize how investing in infrastructure projects will help bring meaningful and long lasting positive changes in employment, and to the economy. The American Association of State Highway and Transportation Officials, has identified some 18 billion in ready to go highway and bridge projects around the country, that could be in construction within 90 to 120 days of enactment of stimulus legislation.

A letter from a group of prominent economists to the Federal Reserve Chairman and the Treasury Secretary on October 24th, estimated that there are 15 to 20 billion worth of transportation projects which could be put out to bid in the next 30 days, leading to contractors on site in the next 60 to 90 days.

You are aware of House Bill 7110 which passed the House, which included 36 billion in infrastructure projects, US Conference of Mayors has recently proposed a $150 billion stimulus package, with about 90 billion of infrastructure spending. Last week the Transportation and Infrastructure Committee held a public hearing, to examine a proposal of about 175 to 200 billion of stimulus, including about 75 billion of infrastructure spending.

Vulcan strongly supports efforts to promote infrastructure spending as the near term economic stimulus, and as a means of putting capital to work in America. Aggressive infrastructure investments will improve our economic productivity, and our competitive position in the global economy. While infrastructure funding is part of a second stimulus package is of vital importance, and we support it's quick passage, implementation of such a package would not benefit aggregates demand, obviously for the remainder of 2008.

Full year aggregate shipments including the Florida Rock operation for the full year, are expected to decline by 9 to 10% compared to last year. Aggregate pricing is expected to increase 7% from last year's levels. We expect to achieve this price improvement in spite of lower shipments in our higher priced markets, particularly Florida and California.

A market environment that recognizes the high cost of replacing reserves, has been a key factor in helping us achieve price improvement, despite the 10 consecutive quarters of lower volumes. Our outlook assumes that the reduction in diesel fuel prices that began in the third quarter, will continue in the fourth quarter. Even though liquid asphalt prices did not decline in the third quarter, October pricing is showing some evidence of price relief, and we expect our asphalt earnings to benefit from a modest price decline for liquid asphalt in the fourth quarter.

Overall, we now expect consolidated earnings from continuing operations to be in the range of $2.25 to $2.45 per diluted share, and we expect EBITDA of 900 to 940 million for the year. In the fourth quarter we expect to reduce total debt by 150 million. This will be achieved through the use of approximately 100 million of cash that we had on our balance sheet on September 30, and through operating cash flows in the fourth quarter.

Our plant and equipment are in very good condition. Reinvestment in these assets over the last few years has increased production efficiency and capacity, and reduced the average age of our mobile equipment. As a result we are evaluating every capital project, whether underway, or not yet started, for opportunities to reduce cash spending. These efforts have lowered our projected capital spending for 2008 to approximately 425 million, and our capital budget for 2009 is approximately 200 million.

In closing I would like to reiterate our confidence in future sales and earnings growth for Vulcan. This confidence comes from our successful strategy to establish an aggregates focused business, that has the compelling advantage of great locations in major US markets, that are expected to experience above average growth in aggregates demand, for many years into the future.

It is certainly true that these are challenging economic times. But our organization is meeting the challenge, and preserving our profitability in our businesses, by staying focused on pricing our products to reflect their great value in the attractive markets we serve, and by aggressively managing costs we continue to create value for our shareholders.

We thank you for your continuing interest in Vulcan, now if our operator will give the required instructions, we will be happy to respond to your questions.

Thank you. Ladies and gentlemen, (OPERATOR INSTRUCTIONS). And please stand by for your first question. Your first question is from the line of Kathryn Thompson with Avondale Partners, please proceed.

Hi, thank you.

Hey Kathryn.

I just had a couple of pricing questions related to your aggregate side. What was the pricing at the end of the quarter, if you can give that, and were there any changes versus the average price for the quarter? And also point out a little bit further, we also saw double-digit price increases in the Southeast, could you also talk about a little bit more about regional pricing differences in some of your key states?

Kathryn, before I answer your question, I want to commend you on the write up you did on infrastructure programs that are pending in Congress now. I commend that anyone who is interested in following the various proposals that are out there, it I think is very well done.

Pricing for the quarter is right at

$9.96.

$9.96, right at $10 a ton.

$9.43.

And that is up from about $9.43 or so last year.

Were there any changes in the quarter, one trend we have been watching is that in certain markets there have been some price slippage as the quarter progressed, I am just trying to get a better sense, were you seeing --

As I mentioned, our overall price increase is about 6%. Now, that has affected not only by the price of individual products, and individual markets, but it is also our average price is affected by the product mix, that is whether it is base stone or clean stone, or railroad ballast, and it also affected by geographic mix. As you know, we have the highest prices, we have relatively higher prices on the markets on the East Coast, particularly Florida, and in California. And then in the middle of the country, our prices tend to be lower. In Texas, the Gulf Coast, and up in the Midwest.

So as volume, as relative volume moves around that has an impact on pricing and as we bring, as you know, we have brought several new operations into Vulcan, primarily in the West, and generally when we buy a quarry, their pricing is not as good as our own legacy pricing, and we have brought in three new operating quarries, we have had them really for the first full quarter in the third quarter, all in California, and those have led their pricing is lower than ours.

Kathryn, I would also add, if you look at our prices for the month of September--

Okay.

Across the whole system they were slightly higher than what the average price was for the third quarter.

Okay.

If you start looking at individual business units, there are a couple that had a September average price that was a little bit lower than the quarter, than we had obviously more of the posted September numbers that were actually higher than the quarter average. But across the whole Company the month of September standalone was about $0.09 or $0.10 higher than the third quarter average.

Now certainly there are markets and pockets where an individual producer decides that they need to try to build volume by cutting price, that happens, it is happening today, we see it, we respond to it.

But so far those are certainly there, but that is not the general trend in the industry that we see and we monitor other public companies reporting statements about price changes, and we are encouraged by what we see.

Okay. Touching on your comments on assuming that nothing changes, there is not a stimulus package that has passed, where do you see pricing trends going into the next fiscal year? And then where would you see pricing if there were an infrastructure heavy stimulus package that passed?

We have not built our model for how we see pricing yet in 2009. So I can't give you any specifics on that. Generally we believe the environment of limited reserves, and very high cost of replacement reserves will not change going into 2009. We would expect to continue to get price increases in 2009, I can't quantify that today, I will quantify that for you when we give our '09 guidance.

A stimulus package will certainly help pricing, although I don't think it would dramatically change average pricing in the near term. I think that is driven more by other factors than demand. Now one of the things, if the stimulus money goes into areas of infrastructure with tighter specifications like federal highways and airports, that will change product mix. And when you change product mix, and move to higher priced products, you will see the average price go up, but it is a product mix change, more than anything else.

Sure.

If that makes sense to you.

Yes, it does, it does. Just a final question for you, switching gears to volume. Kind of on the same line as pricing, what type of trends were you seeing with volume as the quarter progressed, and since the end of the quarter, and any type of color on your visibility for volume?

Well, volume in the third quarter as I indicated in my remarks, was negatively affected by a number of things. I think certainly the economic conditions of the turmoil in the financial markets, and the availability of credit are all negatives for our volume.

But we also had some really tough weather conditions in some of the markets where we were having our larger relatively larger volume shipments, that is Texas, the Gulf Coast, and then we had a lot of, a lot more rain days in this year's third quarter in the vast majority of our markets than we did a year ago. And while we don't like to make weather excuses for volume, I think on the margin that certainly had an impact in the third quarter, although the basic problem is economic conditions and the credit market.

Okay. Great, thank you very much, I will jump back in the queue.

Okay.

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

Hi, good morning.

Hey, Timna, how are you?

Good, thanks. Wanted to ask along the lines of the finance in a little bit more detail. If you could give us an update on the status of the bank borrowings, and also with regard to the April 250 million, and the 50 million that was supposed to be due the fourth quarter, yes, the 150 million will pay down a good chunk of that in the fourth quarter, but first quarter is not usually a very good quarter seasonally for cash flows. If you could give us a little more detail on plans there?

Dan Sansone will do that, Timna.

Thanks.

Timna, as you know, as you pointed out, we have some maturities that come due in the fourth quarter, about $48 million worth. We have very small maturity due in the first quarter of next year of only $15 million. And then in the second quarter of 2009, we have maturities totaling $265 million.

As of right now our short-term borrowings are just at $1 billion, give or take, that number changes slightly every day. We have currently in place a five year syndicated bank facility, that has four years of life remaining on it. That facility is $1.5 billion.

So we think we have, with the debt reductions that we expect to generate in the fourth quarter, in fact we have already paid down since the quarter end about $123 million of debt since September 30th. With that pay down and the additional amount we expect to pay down between now and December 31st, as well as the capacity that we have on the five year facility, we think we have ample liquidity to meet those maturities without any difficulty.

In addition, we have a 364 day syndicated bank facility that will expire in the middle of November of this year, and we are currently in the process of renewing that with our bank group. We are confident that the facility will be renewed, although it will not be renewed for $500 million, it probably will be at an amount somewhere in the neighborhood of 250 to $300 million. So when you put that on top of the $1.5 billion of borrowing capacity that we have, we have more than ample room to meet these obligations.

In addition, the good news that we have seen in the last few days is a thawing of the commercial paper market for A2P2 issuers, such as Vulcan. Ten days ago that market was either not open, or was extraordinarily expensive, starting at the end of last week we began to see commercial paper rates for Tier 2 issuers get back in-line, and we currently have actually issued about $230 million of commercial paper, replacing bank borrowings on the bank lines at attractive rates of about 3%. So I think we are in good shape for being able to meet the maturities that are coming in the next two quarters.

Okay. And can you remind us about your status relative to the covenants? I didn't think they were terribly restrictive?

There is only one covenant in our bank agreements, and that covenant is that debt to total capitalization cannot exceed 65%.

Yes.

We were at about 48% at the end of the third quarter. We think there is a very, very, very limited chance that we would ever breech that covenant, we are not at all worried about that.

That makes sense, okay. The question I wanted to ask about is can you help me understand how the economists, and I think it was [Asto], that was talking about how quickly financing could be put to work with available construction within 90 to 120 days, how do things move that quickly, can you talk to us a little bit about how conceptually how that could happen?

Sure. Several months ago I think the State DOTs were all told by the Federal Highway Administration, to ask what projects do you have that are engineered, ready to go out to bids, that will put people to work very quickly. And these are jobs that would be resurfacing, and to some extent lane additions, not big engineering projects with dirt moving necessarily, or bridges, but things that would be labor intensive like resurfacing, and the DOTs responded, that is where you get the $18 billion of projects that are ready to go.

So the process would be putting those up for bids, getting a bid, awarding the contract, and having the contract and mobilization schedule, and starting work within a relatively short period of time. And there are plenty of highway contractors who can mobilize very quickly today, because of the relatively low volume out there. We certainly can mobilize to supply the materials very quickly.

So this is a very job rich, part of a proposed stimulus package, that not only generates something of benefit to the economy once it's finished, but will really put a lot of people to work in a hurry, which I think everybody, all the economists that have looked at this, and State and local officials are all in complete agreement, that this will generate a lot of jobs, for people who probably need jobs because of the downturn in construction and residential construction, and certainly in aggregate plants, and concrete plants and asphalt plants. And truck drivers.

So we believe that the case is made for quick hit infrastructure spending, as part of the next stimulus package. I think the person that has got to be convinced of that probably lives in the White House.

Okay, great, thank you. Just to clarify finally is when you are talking about the stimulus package spending, we are not just talking about Federal spending, of the half of your sales that usually go to infrastructure or public works, you are talking about both Federal and state influence then, not just the Federal side?

The stimulus package that is getting the most press right now is the one in Washington for Federal dollars. But as you know, Governor Crist in Florida, came out recently and said they have got 1.4 billion of quick hit highway projects in Florida that they are about to kick off. And he earlier said that there was about 25 billion of infrastructure projects in Florida, that he had ordered his administration to accelerate, and cut the red tape, and get them out for bids and get them going.

So we have got that one in Florida as you are well aware of the big infrastructure spending program in California, that was not initially envisioned as a stimulus package, but it certainly is going to stimulate the construction economy in California. It is very large, the voters added to that Tuesday, by approving maybe 10 billion more in bonds for school and college building construction.

So there is a tremendous amount of support both at the Federal level, and the state level for infrastructure generally, and as a stimulus package, and we believe, we are cautiously optimistic that certainly by the time Congress comes back after the Inauguration, that those things will move forward very quickly, whether they can get it done in a meaningful way between now and the meeting of the new Congress and new President is a tougher question.

Okay, great, thanks very much.

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

Hello Jack Kasprzak, how are you?

Thank you Don, I was going to say it myself, but you did a better job than I could even. My first question is, can you remind us how many gallons of diesel fuel that you guys use per year?

I am going to get one of my colleagues to write that down for me.

About 45 million gallons at current operating rates.

We would love for that to go up.

Sure, sure. And the price to come down. And on that note, I mean, obviously oil prices are down, and these various energy costs are coming down.

Another large aggregate supplier indicated last week when they reported earnings, that they thought it could be down diesel $0.50 to $1.00 a gallon in '09. Obviously it has been very volatile, but would you care to quantify, give us any projection about the price of diesel in '09?

We didn't prepare our remarks for '09. We certainly have in our procurement group people who study that, and have a lot of data. I don't know what it is. Certainly it has come down significantly so far in '08. And depending on whatever starting point you want, but I think it is a lot more than $0.50 in '08.

We are looking at about, if everything holds together Jack, it could be a $0.75 decline based on what we are seeing today. But as you know it's a very volatile, unpredictable market.

Yes.

You are talking about '09.

If it stayed where it is, and the comp going through '09?

Yes.

And then --

That is not a guidance number, that is really looking at the futures markets.

Understood. Okay. With regard to your cement plant, have you guys taken that down for any extended period of time, or do you plan to?

We took it down twice in the third quarter, and we will do that as necessary going forward, to match production and demand.

And Cemex had announced a big concrete price increase, $25 a yard. Are you seeing that in Florida, what impact if any has that had in your Florida market?

I think those prices in many markets are sticking. Now there are individual markets where there is an independent producer, that may decide to not follow that, but certainly that has had an impact.

Right. Okay. And lastly, just more of a general question on the subject of housing, but are you seeing any indication anywhere in your markets that housing has bottomed?

Well, it is interesting, when you look at our concrete shipments, the legacy Vulcan concrete shipments are down only 1% from a year ago. Florida they are down certainly low-double digits. But I can't really tell you we have seen anything that looks like a bottom in housing from a macro standpoint, and from a data standpoint. But it does appear that among product lines concrete is holding up very well.

Yes.

Which had some impact. Our northern concrete business in Virginia and Maryland is doing very well. A lot of that is commercial industrial and transportation, as opposed to housing.

Okay. Okay, great, thank you Don.

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

Hi, it is Garik Shmois in for David. First question is on commercial construction, Don you said you are seeing some stability still in the heavy manufacturing and industrial work. Is it possible to parcel out how much of your commercial business is tied to this heavy stable demand, and how much is tied to more cyclical I guess office and retail?

Well, that mix is shifting greatly. Coming from the period from the collapse of the tech sector, and the 9/11, industrial construction tanked, office building construction tanked, retail was the only part of that that was strong. That has now rolled over, and industrial is very strong, at least in our markets, retail has certainly weakened sharply. And we expect, while office buildings have, are not nearly as sensitive as retail to the overall economic environment they are very sensitive to the financial crisis.

So we think that generally office buildings and retail will continue to be weak, and you can look at contract awards and see that happening. The industrial projects though are large, already financed, really based on energy, and automotive, and transportation in our markets. And those are all, those are helping, and they have as we said they have a substantial echo effect. But overall we expect, we expect the private non-res area to be down full year '08, but the strongest part for us of these large projects. Which we can reach efficiently through our series of quarries and transportation assets.

Okay, thank you for that. And switching gears to asphalt, you are expecting to see higher prices in the fourth quarter relative to the third, but we are seeing liquid asphalt costs come down.

Right.

How sustainable is asphalt pricing just beyond the fourth quarter?

Well, there is always a lag between the pricing of asphalt mix, and the pricing of liquid asphalt. We got caught on the wrong side of the lag in the third quarter , where while our prices were up 18% for mix, our prices for liquid which is 5% of the basic, the weight of asphalt mix was up 106%.

Generally where we do best in asphalt mix is when there has been a period of rising liquid and then it peaks and it starts down, and then our lower price contracts get worked off, and our higher priced contracts start rolling forward. So we think we will get a benefit certainly in the fourth quarter from that lag effect. And hopefully it will continue into

Okay. Thanks. And just my last question is on goodwill. Dan, I was just wondering if you could talk about the process that you use to review it, and maybe the timing of when you are usually testing this impairment?

Give you the short answer, we have taken a real hard work at the goodwill we have on our books flowing out of the Florida Rock transaction. And are as confident as we can be at this point in time that we are not facing a goodwill impairment. We typically do that early in the first quarter of each year. We have historically used a discounted cash flow model, to evaluate the value of the underlying business units that are carrying goodwill.

And we have about eight or nine distinct reporting units that are carrying various amounts of goodwill that we test. And as you would imagine, we are in the final stages right now of finalizing our purchase accounting adjustments for the Florida Rock transaction. You have 12 months from the date of closing to finalize those numbers. So we have some pretty real-time estimates of what the values of the underlying business units are. As of right now we feel pretty good that we do not have an impairment.

Okay, thanks. Actually just one more quick question if I can.

Sure.

Just going back to the potential infrastructure stimulus package, Don, real quick the 18 billion that you cited in quick start projects, how much of that money could actually be aggregates?

I don't have an estimate of that. I am sure we can come up with one. It certainly depends on the nature of the projects, but the quick start projects will all be aggregate intensive, that is almost by definition.

It won't be right away acquisition, it won't be a lot of dirt moving, it won't be a lot of engineering, so it will be aggregate intensive, but I think of the 18 billion, this doesn't answer your question, but it is another data point, about 12 billion of that is in our market. 6 billion is not. So two-thirds of that 18 billion, we have got the list from every state DOT about the quick hit projects they have proposed to the Federal Highway Administration.

So we are in good shape there. And there is some aggregate intensity factors we use for various kinds of infrastructure spending, but we haven't run that through these models yet. But it will be a significant benefit to the aggregates business. It will also be a significant benefit to our asphalt business, and to a lesser extent to our concrete business. So all of those will benefit from infrastructure spending, not just aggregates.

Great, thank you very much.

Your next question comes from the line of Ajay Kejriwal, Goldman Sachs, please proceed.

Thank you. And good morning, gentlemen. Just following up on that 18 billion stimulus spending, I mean, could you talk about the nature of those projects, are they SAFETEA-LU funded many if this spending were not to come about would those projects still be funded under SAFETEA-LU, or are these additional projects that have been identified?

These are projects that would ultimately be funded out of the regular, to the extent they are highway projects, they would be ultimately funded through the regular funding sources. This stimulus would accelerate those, and then those projects that get built under the stimulus package, would then be replaced by the backlog of projects.

I think this would not be accelerated spending which would reduce infrastructure spending down the road, because we would run out of projects if you look at all of the state backlogs, and you look at all the data, we are so far behind on infrastructure spending, particularly highways, that there is a never ending supply of very significant projects out there to fund, we just haven't funded them for the last 10 or 12 years. So we are very optimistic that these are all good projects, they are projects that would be built anyway, it is just accelerating the spending on these particular projects. These projects would all be replaced by new projects coming down the pipeline.

And there is some conversation in Washington, which I think is very positive, that these projects would be reviewed at some level for their efficiency and their need, current need, as opposed to being things that have gotten flack for being earmarked. We don't see, none of these projects would be things that are unnecessary spending, which I think is critical, a critical point in this environment.

Basically the point there is that if these projects were to be funded, they would not cannibalize on your existing funding that would come through the SAFETEA-LU channels?

That is certainly our view, which we think is well founded and well recognized throughout the infrastructure funding community.

Got it. Just trying to frame how much this could result in additional aggregate demand, maybe if you could help us with how much of the cost of a resurfacing project is aggregate, is it in the 5 to 10% ballpark, or is it a different number?

I think that is a good number, probably 8 or 9% is an estimate. It will vary from project to project, but there is a fair amount of aggregate.

The flip side of that we always say there is no price elasticity of demand, you are not going to build a highway project or not build a highway project, because of the price of aggregate, which is absolutely true. But aggregates are a modest portion, but nevertheless for us a significant portion of the stimulus.

Moving to CapEx, the cut in CapEx budget for next year, maybe if you could talk about how much is maintenance, in the past you had characterized maintenance CapEx as in-line with DD&A

Right.

That 200 million would be substantially below DD&A. Is there any postponement of maintenance to 2010, or what are we seeing there?

Well, we have the advantage as I indicated in my remarks that we have, as you know, we have spent a lot of CapEx over the last three or four years. And as a result of that our plant and equipment is in really good shape, particularly coming out of a period of relatively low volume. Our plant and equipment depreciates, not on the basis of days or months, but really on the basis of the number of tons we run through it. So we are in very good shape there. Some of the 200 million are actually for strategic projects, meaning not all of it is just replacement capital. And we are able to do that again, because our equipment is in really good shape.

And also don't forget there is a significant step-up in DD&A growing out of purchase accounting. If you think about a historic run rate of DD&A for the life cycle of a piece of equipment, we are marking a lot of that up on the Florida Rock assets, so you are getting a little bit of disconnect in the historical trend lines.

Got it. So the maintenance CapEx is probably lower on a run rate basis?

That is right,

Yes.

Your cash fixed costs were down 10% which is a positive. And you have been reducing costs for several quarters now. Maybe if you could talk a little bit about what are the other areas where you could cut further, I mean given you have been doing this for several quarters, is there a lot more room left, or is this kind of a trough, in terms of cost cutting?

Well, we have had a significant drop in operating hours at our plants, as we have matched production to demand, that hurts accounting earnings in the short term, because we are actually producing less in many places than we are shipping. But it does improve cash flows.

We have probably 7.5 to 8% fewer employees today, than we had at the beginning of the year. We have our labor productivity has actually improved, that is our tons per man hour is up. This year's third quarter versus last year's third quarter. Our plant managers and the people responsible for running our plants have done a very good job of working on efficiency and productivity, which will benefit us greatly when recovery comes. I think we probably as an organization benefit from downturns, in the sense that we really have to look hard at everything we do, and tighten our belt when sometimes when markets are blowing and going, it is easy to not do that.

So I think this has been good for us, and much of the benefit we have achieved will be available to us going forward. Obviously we will continue to match production to demand, and if demand continues to weaken in '09, we are not saying that, but if it does we will continue to adjust our cost structure. We have really no other choice but to do that.

Great. In terms of your guidance for fourth quarter, implied guidance for fourth quarter, what are you assuming for legacy volume?

Well, full year legacy volume will probably be down 20%.

And what was it in the third quarter, please?

It was about the same, down about 20%.

Good. Thank you.

Your next question comes from the line of John Fox with Fenimore Asset Management, please proceed.

Thank you, good morning everyone.

Hey John.

I just wanted to try and get some more details on the asphalt business. And I mean you said from the press release it costs you $0.25 in earnings, which I guess is around $38 million pretax, which is a lot. So maybe if you could talk about the average price of liquid asphalt third quarter this year versus last year? Don, you mentioned the 5% by weight, but how much liquid asphalt do you actually have to buy, given your I guess about 3 million tons of asphalt that you sold? So just can you give us a little bit more so we can work on the economics of that business?

Okay. I think liquid asphalt tonnage, we paid something like $695 a ton. Now we are in Texas, New Mexico, Arizona, California with asphalt, so the prices in all of those markets are very different.

Okay.

But if you look at our total, Third quarter we paid less than that because it continued to rise through the quarter.

But I saw September was the highest month?

Right, September was the highest month. The average for the quarter was about $675 a ton.

Okay, that is fine. What was that in the year ago quarter?

About 325.

Yes. Okay. So you shipped 2.8 million tons of asphalt, can we just take the 5% of that number and say that is how much liquid or--?

Yes, that is a good number.

Yes.

So we could calculate your input costs that way?

We put rap in there, too, but use 5%.

Okay. So now in this quarter is the price of liquid asphalt coming down you said?

Yes.

And your increase--? So we are at the inflection point where the third quarter was the worst part of the curve so to speak?

We certainly hope so.

We are at the inflection point where your sales prices are going up, hopefully in the interest of coming down, it can reverse some of that lost profit?

Yes. And if you follow historically as I know you do because I know you, you see profitability of asphalt moves around a great deal, based on liquid asphalt costs.

Right.

And it is really the timing of increases and decreases.

And John, you actually saw that in the quarter. The way we look at it is tracking the material margin, which is the difference between the average selling price, and the cost of the material inputs to produce the product. And the material margin for the month of September, actually exceeded the average for the quarter. So we began to see that catchup, we haven't recovered all of it, but the pricing actions are beginning to catch up, and inch their way to where they ought to be, to recover that lost material margin.

Okay. Well, I will work on that, if I need more I will call you back. And then just in terms of the balance sheet, the new item medium term investments, is that just some type of cash with longer than a year or something?

The medium term investments is essentially a reclassification. We had some cash that was invested in a AAA-rated money market fund that was imagined by an outfit called The Reserve. You may have --

I am familiar with it.

Yes, well, we had some money in The Reserve, and when they broke the buck they were not able to make redemptions, and they are beginning to work through that. But because we cannot guarantee that we could get access to that money quickly, or overnight, we have classified it as a medium term investment

Okay, I understand. And I just want to make sure I understand this shipment guidance. What is the base number for 2007 that you are using to say you will be down whatever, down 10%, what is the base starting number?

We are pulling that up

Okay.

I think it is 231 million tons.

Okay. Thank you.

That is legacy. You understand.

No, it has got everything. It has the Florida Rock.

Right.

So Florida Rock from the middle of November is included in there?

That is right.

Okay, thank you.

Your next question comes from the line of Trey Grooms with Stephens Inc. Please proceed.

Good afternoon. Just a couple of real quick questions on the Newberry expansion, is that still on track for early to mid-'09?

Probably more like mid-'09.

Okay. And as far as the shutdowns there, how long did you have to shut it down in the quarter?

We shut it down about 11 days in the quarter of not running the plant.

Okay. And then I know you addressed the CapEx, some CapEx questions earlier, but you said that you were delaying some capital spending in the fourth quarter, and with the 200 million being at a much lower level, can you talk about what type of spending projects you are delaying or pushing back?

Well, generally they would be in two categories. One would be plant and equipment routine replacement, which we are not, that is not a big deal for us in 2009, because of the condition of our plant and equipment today. But primarily we are deferring what we would call strategic projects, projects where we would expand distribution facilities, transportation facilities, and to some extent production capacity, we have those things relatively ready to go.

We just want to see some stabilization and growth in demand before we commit the capital to do that. But they are projects that are good projects, and once we get back to a level of demand that we can be more confident in, we can pull those out and proceed very quickly. But that is basically what we are deferring.

Okay. And just one last question. On cement, can you kind of give us your thoughts on, how the cement industry is kind of shaping up here, the demand has fallen off significantly, but it sounds like most players at least at this point sound like they are trying to stay in their own lane.

Is this looking at the industry the way you see it now, do you see this continuing, most players trying to control capacity, and so forth, or do you see any type of risk for pricing on the cement side of the business?

Well, I think, I have never heard that expression, but it's a very good one, stay in your own lane. That applies to probably all of our products, but there is a very wide disparity between the efficiency of the US cement capacity, higher energy costs, certainly accentuate that. I think what we are seeing some competitors doing is mothballing or closing their older higher cost, less efficient cement production capacity, and going with their new capacity.

Fortunately all of our cement capacity is virtually brand new, and is very efficient, both from an environmental standpoint, and an energy standpoint. I think going forward we will probably see much more environmental pressure on cement capacity in the US, which will really put more and more pressure on the older plants. I think we are in for a short-term sort of excess domestic production of cement really for the first time in a very long time. But as you know from following other cement producers in the US, people are even though they are adding capacity, they are taking out their old capacity, which I think will ultimately be the saving grace here.

Okay, thanks for that Don. Good luck.

Your next question comes from the line of Mike Betts with JPMorgan, please proceed.

Yes, good morning.

Hello Mike.

Hi Don. I had two questions, maybe one for you and suspect the second one is for Dan. The one for you Don, a year ago or so, we had about a $5 price increase in Florida when the Lake belt quarries were closed. They have now reopened, I guess that price increase has progressively come off. Am I right? Did that have much of an impact in Q3, or was it more of a comparative, or more of an issue for Q4?

I think with the exception of one market that price increase has remained in effect. The one place that there has been some erosion has been in the Fort Myers area. Basically there, you have got an independent producer that didn't follow. But everywhere else in Florida it has held.

Okay. And then maybe just another one quickly, before I go on to Dan. How much of your asphalt work is fixed price? I guess I'm trying to figure out what the average lag is before you can recoup current pricing? Is 50% of it fixed price, with the lag sort of 3 months? Can you help me at all on that?

Well, some states index liquid asphalt pricing on jobs that go on DOT projects. But there is always a lag from the market price to the index price. So when you get the kind of movements we have had in liquid asphalt price, even though the ultimate price paid on the job is indexed, you still have the lag effect.

On non-DOT work, or in states that do not index liquid asphalt, typically we will quote a job of dollars per ton, we don't quote them these days, out six months or a year, but a month or 45 days or two months, or something about that. And if liquid moves like it did in the second and third quarter, we do get caught on those kinds of projects.

So we don't bid jobs that have a liquid asphalt rider in them basically. Because when you back up from the owner of the projects, to the contractor who puts the asphalt down, all of that is still a fixed contract business. Which means work that we have booked, over the last weeks and months, we will price on the basis of what we expect liquid to be, but liquid is certainly moving the other way fortunately, that is why we think we have some upside there.

Okay. Thanks for that. My question for you Dan, my basic question is, how much of your debt is LIBOR based? There was a big spike in LIBOR rates at the end of September. Do you have much debt that was rebased in terms of September LIBOR rates, or I mean maybe you can answer the general question, and then the specifics?

We do Mike. As I mentioned earlier we currently have approximately $1 billion of short-term debt outstanding. And virtually all of that debt is LIBOR based. Whether it is borrowed on the bank lines, that is a LIBOR based financing mechanism. It is LIBOR plus X number of basis points. Right now the bank borrowings on those lines are LIBOR plus 30 basis points. Commercial paper obviously when it gets back into normal territory, tends to follow LIBOR around, not precisely, but it tends to track it.

And the only other piece of our debt that is LIBOR based is the term loan, $300 million term loan that we entered into in June of this year through a syndicate of banks. That loan was fully funded at closing. That is also LIBOR based. I believe we are currently paying LIBOR plus 125 basis points, LIBOR plus 125 on that term loan. And that is the only portion of our debt structure that is tied to LIBOR.

Is most of it three months LIBOR, and was a lot of it therefore reset at the end of September for the next three months?

In the bank lines we are typically resetting for a month.

Okay. Okay, thank you for that. One final question for you Don that I missed earlier, apologies. Transport surcharges is that for most of your haulage and other stuff, is that a significant factor that those will come down, now they will automatically come down with lower diesel cost?

We don't have any transport surcharges.

You have none at all, okay.

The one place where we are using our own ships, when we give you our average price it is freight adjusted. So to the extent, and this is an issue that runs through the comments I made earlier about large projects on the Gulf Coast, as the fuel prices escalated, that left lower freight adjusted realized prices at the yard.

As ship fuel goes down, we will realize larger freight adjusted average prices at the yard. So yes in that sense, there is an impact, but it is not a surcharge, it is just our own cost of delivery and our own ships, if you follow that.

Yes, I do. Thank you for explaining that. Thank you very much.

Your next question comes from the line of Todd Vencil with Davenport, please proceed.

Hello.

Hey Todd.

Dan, a couple of quick sort of wrap-up questions for you. Given all that discussion on LIBOR and things like that, and what you guys are planning to do with the balance sheet, do you want to weigh in on what you think your interest expense line is going to look like for the year, then for next year, take a stab at next year maybe?

I will. I can tell you what I think it is going to look like for this year. We are not yet prepared to give you any guidance for next year, but I think interest expense net will be at about $170 million for 2008. That leaves about $47 million for the fourth quarter.

Okay. And then looking at DD&A, and thinking about the purchase accounting adjustments, how should we think about that? Just remind me, do those things roll off, or are they kind of in there for the life of the equipment?

First of all I think the full year 2008 DD&A number that I would go with is about $390 million.

Right.

And in the application of purchase amortizing to the acquired assets from Florida Rock, you will value those assets at estimated fair value, on the date of acquisition, and that will be amortized over the remaining useful life of those assets.

So that doesn't roll off, so we are probably at a reasonably good run rate now?

Yes, that is correct. They will roll off on processing equipment, that could be seven or eight years, ten years before all of that depreciation comes off

Got it, okay. Thanks a lot.

Mobile equipment obviously a lot shorter.

Yes, okay, thank you.

That concludes the Q&A session. I will now turn it over to Don James for a closing statement.

Well, thank you very much. In summary, I think we are doing as an organization, a good job of managing our controllable costs and managing our production, in relation to a period of relatively weak demand. I think to me a high point of the quarter is the fact that our cash margin per ton of aggregate, is significantly higher than it was at the peak of the cycle. That is a tribute to the quality of our management, and our plants, and in our divisions. With a little help on volume, we will have tremendous earnings leverage. As we look forward the greatest opportunity for help on volume will come in a stimulus package.

Large industrial and transportation projects are helping, but they are not offsetting obviously the decline in housing and other sectors, but I think if you follow what happens in Washington over the next two to three months, I think you will get a better sense of what our opportunities will be in 2009.

So thank you very much for your interest, and we look forward to talking to you again after the conclusion of the year. Have a good day.

Thank you for your participation in today's call. This concludes the presentation. You may now disconnect. Have a great day.