渥肯建材 (VMC) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the second quarter 2009 Vulcan Materials earnings conference call. I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of the conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purses.

I would now like to turn the call over to Mr. Don James, Chairman and CEO. Please proceed, sir.

Good morning. Thank you for joining this conference call to discuss our second quarter results and the outlook for the remainder of tape. I'm Don James, Chairman and Chief Executive Officer of Vulcan Materials. We hope our remarks and dialogue will be helpful to you. A replay of the conference call will be available later today at our website. Joining me today is Daniel Sansone, our Senior Vice President and Chief Financial Officer.

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 the most recent report on Form 10-K.

Let me begin my prepared remarks by saying I believe our management teams are running their businesses well in an extremely tough economic environment. The challenges presented by the extraordinary weakness in the economy generally and then the private construction sectors specifically have provided opportunities for us to position the company well for the eventual economic recovery. The difficult and necessary cost management actions we have taken today to date along with our disciplined approach to pricing will enable us to generate solid cash flows in 2009 and participate fully in the overall economic recovery. Through the first six months of 2009, our operating cash flows were $169 million. Up from $134 million in the prior year.

In addition, our completed equity offering and the related dividend reduction have strengthened our balance sheet, realigned our capital structure and improved related dividend reduction have strengthened our balance our financial flexibility. Our second quarter net averages were $22 million or $0.20 per diluted share, including earnings from continuing operations of $0.14 per diluted share. Aggregate shipments declined 31% compared with the prior-year second quarter reducing EBITDA approximately $112 million from last year.

In the second quarter, the average freight adjusted unit sales price for aggregates increased 3% from the prior year second quarter reflecting wide variations across markets. In many markets, we realized price improvement from the prior year well above the 3% average while markets in California and Florida reported year-over-year declines in average selling prices of approximately 5% on a comparable basis with the prior year. Our plant managers continue to mitigate some of the cost pressures caused by significantly lower volumes. As a result of their actions, they reduced cash fixed costs 17% from the prior year second quarter. These costs control measures demonstrate the greater production flexibility of an aggregate's plant that's contrasted with continuous process manufacturing facilities used in many other industries.

In the second quarter, the average unit costs for diesel fuel decreased 54% from the prior-year and increased operating earnings approximately $23 million. Asphalt and ready-mix concrete volumes declined to 30 and 35% respectively from the prior-year second quarter due to the same economic factors affecting aggregates. Second quarter asphalt earnings improved from the prior year, despite lower volumes. Due to improved selling prices and a decline in the average costs for liquid asphalt. Concrete earnings in the second quarter were lower due mostly to the earnings impact of lower sales volumes. Selling, administrative and general expenses in the second quarter of 2009 decreased $5 million from the prior-year's level. Employment levels across the Company are down 14% from the prior year. These cost reductions most of them offset $4 million of project costs related to the replacement of legacy IT systems and the related consolidation of certain administrative support functions.

In summary, our efforts in the second quarter to continue to tightly manage costs and maintain price discipline were affected. Excluding the earnings affect of lower aggregates volumes and the $74 million pretax gain referable to last year's sale of assets, EBITDA in the second quarter for all other elements of the Company compared favorably with the prior year. We're updating our outlook for the full year to reflect lower demand for aggregates from private non-residential and private infrastructure construction. Our lower expectations result from analysis of various macro level data, including leading indicators such as published contract awards reported in the past two months for a new private construction projects in the U.S. Specifically, published contracts awards in May and June for private non-residential buildings and private infrastructure in Vulcan-served states were significantly weaker than expected. Contract awards for private non-residential projects in the second quarter declined 63% from the prior year. Led by sharp declines in stores and office buildings.

A year ago, these two categories comprised over 50% of total square footage awarded for all non-residential buildings in the second quarter. In the current year second quarter, they accounted for approximately one-third of the total while manufacturing institutional and public buildings accounted for the rest. Contract awards for private infrastructure principally utility-related projects declined 81% in the second quarter from the prior year and 71% from the first quarter in Vulcan-served states. In contrast, the value of U.S. contract awards for highways, our most significant in use market increased significantly from the prior-year second quarter due in large part to a record $6.8 billion of contracts awarded in June which followed of $6 billion awarded in May. This level of awards in June represented the largest single month for contract awards in history. Vulcan-served markets accounted for $4 billion or 59% of the June total.

We believe this record-level of contracts awarded for highway construction reflects the good progress made by state transportation departments as they obligate, advertise and then bid stimulus-funded transportation projects. Our outlook for stimulus-related demand remains unchanged for the second half of 2009 and beyond. We expect bid activity to remain at elevated levels versus historical trends as state transportation agencies, work diligently to turn obligated stimulus funds into actual construction activity. In fact, federal highway administration recently reported that 64% of the $26.8 billion of stimulus-related highway funds has been obligated by the states as of mid-July indicating brisk bidding activity during the second half of 2009. Reports indicate that approximately 70% of the funds obligated will be directed toward aggregates intensive uses like highway paving, including improvements, widening and lane editions.

The key determinant of highway constructions spending for years to come is, of course, the 6-year federal highway bill, which represents a substantial growth opportunity for Vulcan. Last week, the House and Senate approved a $7 billion cash infusion for the highway trust fund to keep it solvent through September 2009. The expiration of the current highway bill safety loop. The House Transportation and Infrastructure committee released a draft of its new multiyear bill on June 22. The bill calls for $450 billion of funding for highways and public transportation infrastructure improvements in the six-year period, 2010 to 2015 an increase of more than 57% over the current law. The House bill also provides an additional 50 billion for high-speed rail projects for a total transportation bill of $500 billion.

The Senate leadership and the administration have suggested an 18-month extension at an annual funding level of $41 billion. The highest annual funding level in the history of federal highway bills. Of course, this spending, of course, the spending on stimulus projects will be, in addition, to this $41 billion. After the August recess, key members of the U.S. House will be working out differences with the Senate leaders and the administration regarding timing for a multiyear bill and a likely extension of funding levels until the new multiyear bill is passed. We, along with many business and industry groups urging congress to act promptly to sustain momentum started by the $27 billion provided for highways and bridges with the economic stimulus plan.

States are at the heart of the federal stimulus plans intent to create and sustain jobs by investing stimulus funds into infrastructure projects and by utilizing the more than $400 billion in state aid provided by the Federal Government. Illinois, a critical hub for transportation in the U.S. is an example of state leadership stepping up to invest in jobs and infrastructure. In mid-July, governor Quinn signed into law a series of bills calling for a $32 billion infrastructure and building program over the next five years. The largest in the state's history and the first such program in over 10 years. Overall, we expect that further weakness in private construction in the second half of 2009 will be offset somewhat by highway construction activity, primarily related economic stimulus projects. As a result, we expect full-year 2009 aggregate shipments to decline 21 to 24% from 2008 levels, inclusive of shipments referable to the economic stimulus plan. We expect average selling prices from aggregates to increase 3 to 4% in 2009 and to help offset the earnings effect of lower volumes.

Our outlook continues to be for increased earnings in 2009 from our asphalt and concrete segment in spite of significantly lower volumes compared to 2008. This growth in segment earnings is due to a recovery and material margins in our asphalt business where higher selling prices reflect the prior year's increase and calls for liquid asphalt and internally-supplied aggregates. We expect full-year SAG expense to be slightly lower in 2009 as the effects are cost reduction efforts more than offset costs related to the replacement of our legacy IT systems. The IT project's implementation schedule and total cost of proceeding as planned. The total cost for this project will peak in 2009 as implementation begins this week.

Along with legacy system replacement, we're also redesigning related administrative support functions to reduce costs and improve service. After thorough project design and implementation planning phase, the Vulcan team is now focused on rolling -- on a rolling implementation at our business units, beginning that -- will roll out over the next two years or so beginning, as I said, this week. We expect to incur additional incremental costs this year and in 2010, but should start to see cost reduction benefits thereafter. Incrementally, we expect $8 million of SAG costs related to the ERP project in 2009 as compared to 2008. Interest expense in 2009 is expected to be approximately $175 million based on the current level of interest rates. We now expect our effective tax rate to be 6.4% for the full-year due primarily to the relative benefit from statutory depletion allowances. As a result, we now expect second-half earnings of $0.60 to $0.85 per diluted share, including $0.55 to $0.80 from continuing operations.

In the second half of 2008, earnings were $0.63 per share, excluding the non-cash charge for impairment of the goodwill allocated to the cement segment. Full-year earnings are expected to be $0.51 to $0.76 per diluted share, including $0.40 to $0.65 from continuing operations.

Our plants 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 rolling equipment. As a result, we now expect capital spending to be approximately $175 million down sharply from 2008. In early June, we improved our liquidity through a successful public offering. Net proceeds of $520 million from the offering were used to reduce short-term bank borrowings. As a result of this action, total debt to total capital at the end of the second quarter was 543% down from 50% at the end of 2008 and modestly above our stated long-term target of 35 to 40%.

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 continue strengthening our aggregate's focused business which has a compelling advantage of great locations and major U.S. markets that are expected to experience above-average growth in aggregates demand for many years into the future. The current economy is weak but the economic stimulus plan will help drive earnings growth at Vulcan over the next few years as a result of 50 billion to $60 billion of infrastructure-related construction funding and its role in creating momentum to fund highway programs and support highway construction beginning in the second half of 2009. We are the clear leader in the U.S. aggregates industry and are well-positioned for significant participation in the coming recovery. Again, let me thank you for your interest in Vulcan. Now, if our operator will give the required instructions, we'll be happy to respond to your questions.

(Operator Instructions) Your first question comes from the line of Chris Manuel with KeyBanc. Please proceed.

Good morning, this is Jason Brown on for Chris.

Hey, Jason.

My question is on the non-residential decline you're seeing now and how that progressed through the second quarter. In your volume shift, did you see a hard stop or was it a steady decline through the quarter and then on a sequential basis, how much deterioration do you see going into the second half of the year?

Well, the data I gave had to do with contra macrocontract awards and they started dropping sharply in May and June compared to a year ago, so, the impact of that will be felt in the second half and then well into 2010 as that is concentrated in stores and office buildings rom the -- from our sales organization there are a lot more projects out there than are being financed and I think that is there are two things working here. One is there is clearly a reduction in demand for stores and office buildings, but even where there is an apparent demand getting financing to those projects in the current climate is extraordinarily difficult, and the combination of those two things, I think, has caused the sharp drop in contract awards, which will be felt for at least the next 12 months or so. Until that, until that rolls over. Private non-res is going to be the last of our demand segments to recover. Highways and public infrastructure will be doing very well. There is even a glimmer in housing, but private non-res is the area that has gotten weakest most recently and will probably remain the weakest longest.

Okay. And then to kind of further break that down, I know at least in the consensus numbers chose that the manufacturing part of that non residential piece has stayed up more than I would have thought so for. Can you give color as to what is driving that and if there is any risk of seeing that market fall?

If you look at construction put in place numbers, you see that institutional buildings and manufacturing have remained relatively strong. When you look at the contract awards, you see that buildings and stores have dropped from 50% of the total a year ago to 33% which means manufacturing and institutional buildings are relatively stronger. The manufacturing tends to be long, long-lived contracts, for example, the ThyssenKrupp steel plant in Mobile, the Volkswagen plant in Chattanooga are facilities, that are continuing with construction. The question becomes how many other significant manufacturing projects are behind them. The data we gave on contract awards, of course, includes all forms of private non-res and private infrastructure construction, which would include those, so, I don't think you should double count the downturn there. There is significant weakness.

That is helpful. Thank you.

Your next question comes from the line of Garik Shmois with Longbow Research. Please proceed.

Good morning, gentlemen.

Good morning.

Just, first off, could you break out your volume guidance that you updated this morning by end-market meaning what you're expecting now for 2009 for housing non-res and infrastructure demand?

Yes. Let me get my colleagues to give me the specific data on that. And I will give that to you. For the second half specifically, from a market guidance. Okay. They're go having to do a calculation to get it for the second half. I'll have that for you in a second.

Okay. Let me move on to my next question then.

Okay.

Just on the stimulus projects that you're seeing come through, can you talk a little bit about the pricing on aggregates that you seeing, understand it's early on, but is this a pricing on the stimulus projects up for bid?

Yes, I think there is a great deal of confusion. I think about aggregates pricing on stimulus projects given the total bids compared to the estimates that are coming in and let me give you some examples. California stimulus projects that were bid as of mid-July of this year, there have been 54 projects awarded and on average, they have been 24% below engineering estimates. In Tennessee, there have been 6 projects recently awarded. They came in 23% below engineering estimates. Various other states have been anywhere from the teens up to almost 50% below engineering estimates. But what is going on is if you look at the percentage change in prices for construction materials and services, diesel fuel is down 55%. Steel is down over 40%, liquid asphalt is down 16.5%. Aggregates are up 5%.

So, aggregates are not where, are not the basis of the significant drop in actual bids over engineering estimates. It's in diesel fuel, liquid asphalt and steel primarily and I think that says that aggregate prices going into these stimulus projects are bearing sort of the same level of price increase in the 3 to 4% range that we and others in the industry are reporting.

Let me go back to your first question for 2009 in our markets, aggregate demand for highways we expect to be down 3% for infrastructure both public and private down about 10%. For single-family housing, down 41%. For multifamily, down 35%. For offices and hotels down 36%. Stores and warehouses down 40%. Manufacturing down 14. Other private buildings down 15. Public buildings down 4. So, those are the end markets for '09 and Vulcan served and this is a roll-up of all the counties we served state-by-state. That is the basis of our projection for 2009 aggregate volumes.

Great, thank you for the detail there and just real quick, switching gears a little bit on your cost structure, just wondering how much incremental demand when market conditions turn around can you absorb before having to increase the cost structure of your Company?

We on a pro forma basis combined Vulcan and Florida Rock. We were producing almost 300 million tons of aggregates in the 2006 -- 2005,2006 era. We can go back to that level of production. In fact, we can go higher than that level of production without adding any capacity. We will obviously, as we grow volume, we'll tend to spend more on capital than we're currently spending, but not to add capacity but simply to maintain the efficiency and productivity of our plant. So, the bottom line is that we can add tremendous incremental volume in the range of 40 to 45% or, I guess that is the drop. So going the other way, it's probably 90% volume increase without adding capacity. So, we have a lot of upside on our earnings and cash flow from incremental volume.

And we have indicated previously that incremental tonnage added to the existing base of business should probably generate 60% incremental contribution margins dropping to the bottom line. And I think that is an illustration of the underlying attractiveness and profitability of the industry and the business as it stands today. And embedded in that, we would certainly add back some of the cash fixed costs that have come out of the cost structure during this downturn as we have mothballed plans and cut back operating rates and reduced shifts. So there will be some fixed costs to add back but it will be insignificant relative to the variable contribution margin of the additional tonnage.

Okay.

We have seen about 13 quarters of declining volume. Our projection through year-end will probably take it to about 15 quarters. We, as I have said in my prepared remarks, have done a lot of really good things on our cost structure and certainly, we believe we are well-poised to see substantial cutback in earnings with a little bit of recovery in volume and hopefully we will see that beginning in 2010. If you analyze our second-half projections, we actually have the possibility based on our current outlook, of exceeding last year's second-half earnings in 2009, which would be a welcome change from the trend over the last three years or so.

Certainly. And just last question, Dan, in the guidance for the year, the EPS guidance, just to be clear, what tax rate are you assuming? Is it the effective tax rate that you have outlined?

Yes, that is correct.

So the 6.4%?

That's correct.

Okay, thank you. That's all I have.

Okay.

Your next question comes from the line of Kathryn Thompson with Thompson Research Group. Please proceed.

Hi. Thank you very much.

Morning, Kathryn.

Morning. How are you doing? First question is on, just on the pricing side from the volume, are you still seeing negative pricing trends in California and Florida and to that end how much has product mix played in the pricing differences by region?

We are seeing price pressure in California and Florida. Those, as I have side before, are two of our highest-priced markets and two markets that have seen well above average price appreciation during the up portion of the cycle. So some of that is certainly being moderated. I don't see that trend in California and Florida continuing beyond 2010. I think some stability and demand coming from the stimulus money given the terrific shortage of reserves in both of those states ought to stabilize pricing, but at this point, certainly in the second quarter, we saw pricing down in those markets and, there is a geographic shift in demand that has a significant impact in our overall announced price increases. I think ours were about, we announced 3% in the press release, about 3.3% overall. Some markets got substantially greater price increases, obviously, if we offset the about 5% decline in the two states of California and Florida. There is more geographic mix shift in the second quarter than product mix shift in the metrics I had given you. The thing that we're looking forward to, Kathryn, is the demand in those two states in the second half of '09 and into 2010 is going to come from highways and other public infrastructure which ought to be beneficial to pricing private non-res, and housing of course, are as weak in those two states as they are anywhere else and are weaker than as they are anywhere than they as they are anywhere else in the country, other than maybe some of the industrial states and the upper midwest, but we, a little bit of recovery and demand in Florida and California will have a significant effect on pricing in those two states as well as the average reported prices that we will have, we believe, in going forward, certainly beginning in 2010.

Okay. Great, moving to volume, could you give additional color on how much stimulus dollars play into your fiscal '09 guidance? In your opinion, what percentage of the stimulus dollars for infrastructure-related projects will flow in 2009 versus 2010?

We heave tried to be cautious in projecting much of the stimulus affect in 2009 because so much of it has to do with the timing of when our customers mobilize and certainly as we go into the latter part of the third and fourth quarter, what happens to weather. Our projection was that the stimulus dollars would result in about 35 million to 45 million tons of aggregates for Vulcan. We have about 10% of that built into our '09 projection and a large portion would be in 2010 and 2011 with some carry-over in 2012. That is on the highway piece. On the other stimulus construction, which would be largely water sewer projects, those are going to come along slower, more slowly and probably that is '10, '11 continuing into '12 phenomena, probably with maybe a six- to 9-month lag on the rollout of the highway work just simply because the contracting agencies aren't as well-developed and efficient as the state DOTs are.

Okay, great. That is helpful. Finally, in looking at your guidance from June 10, and the guidance you gave today, what did the market caused you to lower your volume and price expectations and given, as we're heading into the back half of the year, do you think that this is sufficient for the year and I know you commented some on 2010 but if you could provide additional color into 2010 about your overall volume and pricing trends? Thank you.

Well, the principal thing, Kathryn that changed our volume outlook for the full year '09, including the second half of '09 is the macrocontract award data for stores and '09 is the macrocontract award data for stores and office buildings and private infrastructure. Those as I have indicated in my prepared remarks, the contract awards for those that came in for the months of May and June were sharply lower than we had projected. Part of that in hindsight is that some of the projects that were in the pipeline didn't get financed and as a result, no contracts were awarded. That is part of the issue. Another part of the issue on the private infrastructure side, which I said in my prepared marks, has a lot to do with utility projects with the uncertainty in Washington on the energy bill about what form of energy projects are going to be viable going forward. Private utility companies are certainly not building any coal plants. They're certainly not adding to their coal plants and there is uncertainty about natural gas. I think what we're seeing is a -- and demand from commercial and industrial demand for electricity is certainly down across the country, so, there was not a whole lot of current need to add capacity.

Once I think the energy bill gets settled and there is some need to add capacity to replace coal plants that may not be viable going forward because of environmental reasons, we will see that return to normalized levels. Energy demand in the U.S. is not going go down as we go forward. The capacity editions and replacements will have to be put in place. What we're seeing I believe there is a temporary hiatus waiting on the outcome of carbon tax and whatever else might be in the final energy bill.

Okay, and a final housekeeping question. Could you remind me what the percentage of fixed versus your variable cost is for a Company as a whole?

For aggregates, Kathryn, and that is probably the best way to think about it.

Sure.

Depreciation is around the high types as a percentage of total costs producing a ton of aggregates and our cash fixed cost are probably another 10 percentage points on top of that. As volume recovers, that shift splits of course. Of course.

Fixed as a percent of the total drops and variable goes up.

Yes.

So we're absorbing all of our depreciation charge, which we do on a period basis on a much lower volume. As our volume recovers, the fixed-cost piece gets spread.

Okay, great. That is very helpful. Thank you very much.

Thank you.

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

Good morning.

Hey, Trey.

A couple of quick questions. One with the price pressure you see in California and Florida, 5% year-over-year or so, is most of this pressure coming from smaller independents or is it the larger players in the market? Is it widespread? Can you give us a little detail on that?

I think it's more from smaller producers. Or, let me say privately-owned producers. There is, there are a lot of different items running through that but by and large there is price pressure coming from some public companies that apparently need cash flows, current cash flow. So there is a little bit of pressure there and there is probably smaller privately-owned operators who decide it's better to get volume and not worry about the price is also a source of price pressure.

Okay, do you think in these couple of markets here, I know you said you don't expect it to go through 2010, the price pressure. To go through 2010, with the hopeful uptick in volume and so forth, but do you think we could see additional pressure as '09 progresses, so could down 5% turn into down 10% in these markets or do you think we have hit a spot where we can continue to stay for the remainder of the year?

Well, it's hard to predict what others are going to do about pricing. In fact, it's impossible to predict.

Sure.

I think what we see happening, though, is that as these, as the demand driver in these markets is coming from federal highway projects, the ability of small independent producers to produce DOT spec material in quantities is limited and as demand is focused on federal projects, our ability to serve those markets at higher prices or at recovering prices, I should say, ought to be better because our relative competitive advantage in being able to serve those projects with large quantities of in spec material on a timely basis that's our real strength. So the upcoming demand in Florida and California plays to our strength where as in housing, in contrast, that isn't where our relative strength is. Because producing aggregates that goes into housing construction is not nearly as difficult with tough specifications as federal highway projects. So, I think and I think we're seeing, Vulcan's sweet spot among the various demand sectors is coming up. Our weak spot has been in the past and as we look forward, we think that will help not only with our volume but also with our pricing in those two markets.

Okay, and we spent some time on the call talking about these California and Florida weakness. There is obviously markets that are outperforming the average. Can you talk a little bit about those? In regards to price?

Well, the Gulf Coast has been a area of strength for us. The Mid-Atlantic states have been an area of relative strength for us. And even the Middle America has been an area of relative price strength. It's been the markets that have been the hottest in the past with the largest percentage price increases, i.e. California, Florida, have been the one that have been, that have adjusted most other markets that were more stable in their growth trends have certainly remained more stable in their pricing trends.

Okay. And just one final question. You guys, you hit kind of high-level, I guess, on 2010, but you haven't really come out specifically and reiterated, I guess, the guidance that you guys gave or expectation for volume being up about 15% and pricing up about 6 to 7%. Is that still kind of what you guys are expecting and kind of how we should be thinking about, 2010, at least from where we look at it today?

Trey, our current view is that we need better visibility and more information about 2010 price and volume before we either reiterate our prior guidance or give new guidance. We're going to be looking at that and we'll give our '10 updated guidance probably in our fourth quarter conference call as we have done historically. There are a lot of moving parts here. The timing of the stimulus spending, the depth of the private non-res and probably the level of recovery in housing that many are predicting for 2010, but at this point, we're going to reserve our specific 2010 guidance to probably early 2010.

Okay, Don. That is all I have. Thank you.

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

Hi, this is Paul Betts for Jack. Is the Florida and California market still about 40% of your business?

Probably in revenue 36 to 37, 38%. Something like that. That includes all product lines. It's less than that for aggregates.

I couldn't find in my notes. An update on the late belt ruling was that resolved? And I know you said you were still shipping some product there. Are you guys still doing that?

We're shipping, we're not mining. We're processing and shipping some material from our quarry in Miami. Nobody is mining any of the late belt quarries at this point. The issue is on appeal to the United States Court of Appeals for the 11th Circuit in Atlanta. I think it is scheduled for argument in October of this year. Also of relevance is the Corps of Engineers permitting process, which is probably not going to be concluded until some time after the 11th Circuit case is argued, whether the Corps releases its new permit situation before after the ruling by the 11th Circuit is certainly unknown at this point.

So, in summary, there has been no change in the last month or so in the status of the late belt but it -- most producers had stock piles of either finished product or raw material on the ground at the time of the last injunction of mining. Those stockpiles are being depleted. They're certainly not yet depleted but at some point, there will be a resolution to this. I can't tell you when it will be. Certainly, we're focused on moving material into Florida from Mexico and from our quarries in Georgia and Alabama by rail. In addition to looking forward to hopefully with some recovery and demand in Florida in the near-term increasing our output from our Florida aggregate operations.

Okay. Do you have a guesstimate of when your stock piles could be depleted?

Every producer is in a little different situation. Some are probably very close to depletion. Others have several months of supply on the ground and we're somewhere in the middle.

And the added complexity is several of the producers also have modest quantities of reserves that are zoned and permitted pursuant to a different permitting regime that is not subject to the lake belt restrictions. Not large quantities but that is going to allow various producers, Vulcan included, to continue to mine at a modest level for some period of time upon the exhaustion of the existing stockpiles.

Right, and that is a good point. When I said all the producers in the lake belt were shut down, I meant all producers who operated pursuant to the lake belt permit and as Dan correctly stated, we have some reserves in Miami outside of that and, of course, our reserves in Fort Myers are in a different permit.

Okay. Great. Thank you.

Your next question comes from the line of Todd Vencil with Davenport & Co. Please proceed.

Hey, guys, most of my questions have been answered. One question, though, when you're facing this price competition in certain Florida and Western markets, how are you guys responding? What is sort of the arithmetic and the taxable response that you guys have decided to take?

Well, our strategy, Todd is if we have to respond to price pressure in order to keep our customers competitive in the market then we will do that. We're not believers in cutting price to chase volume or cutting price to go after other customers that don't make economic sense for us to be serving. So, when we say we try to exercise price discipline, it is first and foremost to keep our customers competitive but also, to realize that particularly in Florida and California, everybody has got very limited reserves and so to cut price, let's say for the second half of '09 when we know that there is a lot of work coming, a lot of work is being bid, a lot of work has been bid and chewing up very limited reserves at low prices when we can sell those same reserves at higher prices in the next couple of three years, just doesn't make a lot of sense from a long-term standpoint. So that is where we come from. And at the end of the day if we cut price, our competitors are going to cut price and by the time the sun sets, everybody's price has gone down and everybody's volume will go back to being the same percentage and so we're just not, we're not into that except as we have to be to meet competition of which there is plenty.

Okay, thanks.

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

Yes, good morning. I've got three questions. I'll start with the financial one to Dan. I think you said, Dan, the interest cost was expected to be about $175 million this year. That's kind of about double what it was in the first half. But obviously you've had the $520 million raise. Can you just explain what's happened there? Is it that you've taken out more longer term debt or what is behind that please?

Well, as we -- what we've done with the proceeds from the equity offering, Mike, the $520 million, went to reduct short-term borrowing, which was a combination of bank debt and commercial paper. All of that borrowing was costing us something in the neighborhood of 75 basis points to 80 basis points. So that is really the magnitude of the interest reduction that we would see in the second half of the year. I haven't actually parsed the data first half versus second half. We kind of roll the, we roll-up to get to that $175 million by looks at the full-year numbers and I will back into that and try to give you a better answer for the second half. I think the real point is the, while the equity offering did a lot to reduce the total debt, because the, on the margin the debt that was retired through the equity offering was very, very inexpensive debt, you're not seeing a dramatic movement in the total interest expense.

Okay understood. My second question, sorry, another financial one. I'm trying to understand this tax situation a little bit better and I guess two ways of looking at it. What I'm trying to find out is what sort of level of profitability you need to get back up to before you're likely to pay a more normal tax rate again? I mean I guess I'm not totally understanding why it's dropped so much between Q1 and Q2 in terms of the expectations. Has it always declined in profit or has something else happened here?

The real -- there are a lot of moving parts on the tax equation, Mike, but I'm going to focus on the one that is the most significant and influences these kind of strange movements the greatest and that is the effect of statutory depletion which is a unique feature to the U.S. tax code that applies to mining operations. And it allows you to take a tax deduction based on a percentage of the revenues for activities that are tied to mining so our aggregate's operations generate a depletion deduction. Every time you sell rock in overly simplified terms, 5% of the average selling price of that rock subject to a few adjustments, generates a depletion deduction. Which then reduces the amount of tax liability.

As our earnings have declined, our earnings in product lines that do not generate statutory depletion have declined more dramatically than have our aggregates earnings, specifically the earnings from our concrete operations, ready mix concrete and our cement have dropped more than our aggregate's earnings have dropped, so we're still generating a fairly hefty amount of statutory depletion that lowers your tax liability and lowers your effective tax rate, so, that is really the working dynamic and so we're sitting here today with looking at a full-year rate of 6.4% and embedded in that is over $20 million of deduction for statutory depletion. That really is what tends to influence our rate movements more than almost anything else. And what will happen as we come out of this downturn, as we generate more earnings from ready mix concrete and asphalt and cement. And I have to really qualify cement a little bit because you do get depletion on the input for your cement plants, but it's relatively small compared to our total. As earnings recover in concrete, for example, they'll be taxed essentially at the full rate without any depletion benefit and when that happens, you will see our average effective tax rate for the Company begin to rise again.

And, Mike, one of the things that is happening here is, of course, under the accounting rules as they relate to taxes including FIN 48. Every quarter we have to adjust our affective tax rate to get it to what the projected rate is for the full year. There is no smoothing there. I guess the accounting profession believes that helps shareholders and analysts to understand our business better but the reality is the second quarter and the third quarter of every year tax rates are going to bounce around like ping-pong balls unless there is absolutely no variability in earnings projections from the beginning of the year to the end of the year, which is not reality in this market. So, how do you go from a 38% tax rate in the second quarter to a 6.4% in the third and the fourth quarter is a product of modern accounting. And has nothing to do with the way taxes are actually obligated, I think, to the government. But, anyway--.

Mike, let me come back to your interest question. By my quick calculations, our interest expense in the second half is projected to be down about $1 million from what it was in the first half. If do you a quick calculation of the interest savings referable to the reduction in long-term debt, excuse me, short-term debt, by the equity offering that is under $2 million I would say basically it's just, within the errors of the estimates.

Okay, that is fine. Just before we move off the tax, can you give us any guidance on what we should assume for 2010 as a tax rate?

No. If you know, tell me.

That is going to be a byproduct of so many other inputs, Mike, it would be -- it would be almost futile to try to guess that until we have all the other product line projections firmed up.

We will certainly give that to you after the fourth quarter but it will be wrong.

And then a final question, if I could, which is more sort of business-related, and it relates to Florida. We were at the presentation here in Europe last week with one of the Century European companies. He was talking about aggregate prices in Florida that doubled after the first lake belts, closures and then he was talking about them having dropped by a third. Do those kind of numbers that you recognize at all, they don't seem to tally with the sort of price declines that you're talking about and then also in Florida, Don, maybe you could talk a little bit about the 50% decline in cement? Is that because you have consciously given up some market share on pricing, I mean I only see the statewide numbers. But they didn't seem to be quite that bad but obviously you're in only one location. Maybe a bit more color on that if you would, please?

Well, on aggregate pricing, I don't know, I don't have access to the presentation that you saw or heard, but pricing in the south Florida has been far more volatile than in the rest of the state. And we are relatively stronger outside of southeast Florida than -- than we are in Southeast Florida so we're immunized to some extent from the wide swings in pricing for aggregates that you may have heard about in South Florida. We're stronger in the Jacksonville, Tampa, Orlando and the Panhandle of Florida than we are, certainly, in Southeast Florida. Although we are relatively strong in Southwest Florida as well. That, I think it's Southern Florida where the impact of pricing has been significant and I think the flipside is hopefully likely to happen, is depending on how the lake belt comes out and once people start on a clear path of who has what reserves available over what time period and what projects are out there and when there is likely to be some stability in housing in Florida, there is likely to be a lot of price movement in Florida, significant volatility until the supply-demand equation becomes clearer than it is today. That makes That makes sense.

On cement, Don?

Cement, our plant is up in North Florida, we are moving some cement out of state North, obviously, But the cement situation in Florida is that the capacity within the state is now sufficient or more than sufficient to meet the current level of demand, which is extraordinarily weak, we aren't chasing volume with low price in cement anymore than we do it in aggregate's. We're trying to be responsible and to be in a position when there is some recovery in demand. Not to have to make up large price erosion and it doesn't, at the end of the day make a lot of sense to try to move cement huge distances so that you're basically not operating at any positive cash margin. So, we look at that very carefully. But, obviously, the key to cement in Florida is going to be some recovery and demand in Florida.

Okay. Thank you.

Also, the energy bill is likely to accelerate the closure of old cement plants not only in Florida but elsewhere as it already has in Europe, as you know. Because cement plants do have CO2 emissions from fuel and from driving CO2 out of the limestone in the cement-making process, so they're, I think we will see accelerated obsolescence of older cement plants throughout the U.S. including some in Florida.

Okay, that is great. Thank you for your answers.

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

Thank you, morning, Don, Dan.

Hi, Clyde.

Two questions, if I may. One on industry capacity and aggregates. Now, it's pretty rare obviously of a particular quarries being closed before the rock runs out. What is your best feeling for the amount of sort of labor that has been taken out, and effectively taking out capacity from the quarries of your competitors? Have you got any feeling for what is going on in your major markets on that front?

I don't think there have been any permanent closures of aggregate facilities that are significant producers that I'm aware of. There have been a number of, in fact everybody and this is one of the attributes of aggregates industry is that everybody just reduces operating hours and reduces production in order to meet, sort of existing levels of demand and that is done largely through operating hours as opposed to closing facilities. The reason for that, of course, is transportation costs are a huge component of the delivered costs of aggregates to a job site. Unlike other industries where transportation costs is not a big, such a large piece of delivered cost, it doesn't make sense to close a large number of production facilities in order to ramp up the production capacity of those remaining. We're very different in that regard, for example, from an automobile plant.

So, I think what you see, the pattern in aggregates industry is most plants continue to operate but at a reduced, number of hours per week or month. Reserves are sufficiently limited in our urban markets. Nobody is going to walk away and permanently close plants that have remaining available reserves, in our view, so we don't, we don't see a reduction in the number of quarries because it's, you just can't replace them. If you have permitted reserves in the metro area in the U.S. you certainly can't replace them and so you're not going to walk away from them either and we certainly haven't seen that.

Okay, thank you. Going back on Mike's question on tax. I must admit I was busy scratching my head trying to work out what was going on--?

Join the club.

Yes.

Maybe another way I could still ask a question. If there were, the current prices, is there a volume point of the aggregate operations whereby, you would be back to a normal tax rate? Is that a good way to think about it?

Yes. Yes.

Yes.

Yes. I think the way to think about it is as we see recovery in volumes for asphalt and concrete, particularly concrete because our, our earnings and asphalt are still pretty good on low volumes, but we get -- if we get recovery in asphalt volumes, recovery in cement volumes in particular, our tax rate will move up and as we recover in aggregate volumes, our tax rate will move up as well and we will, the -- there is a tremendous -- if you want to understand the second quarter it's volume, volume and volume and it has to do with both taxes as well as earnings from operations.

Thank you. And the last one I had was on sort of the safety louvre replacement plans, I appreciate it's still early days and it's a draft and t's probably not going to come through for another 18 months, but can you say a little bit about what the discussions on how to fund the incomes that you mentioned and also, whether the next 18 months is likely to be a smooth pattern of funding coming through or again, is that likely to be maybe a little bit lumpier?

Well, if the Senate Environmental and Public Works committee and the administration move forward with their 18-month extinction it proposal, we don't think it will be lumpy at all. The Barber Boxer -- Senator Boxer who is Chair of that committee and Senator Inhofe, who is the ranking republican on the committee, both are very committed to stability and predictability and funding for the federal highway program. We have been specifically asked the question do you prefer a series of short-term extensions or a longer-term extension and our answer and I think the industry's answer including the state DOTs is if we have to have an attention, make it a longer one rather than a series of shorter ones. So we don't have the the stop-start issue with the state DOTs and there is good visibility out, at least 18 months as to the ability of the states to get reimbursed for the projects that they constructing.

Now with respect to funding, there is certainly no appetite anywhere in the administration of the senate for increasing fuel taxes in the current economy. I think it's important to note that the $9 billion that was put into the highway trust fund to shore it up for FY '08 and the $7 billion that has come just in the last week to shore up the highway trust fund for fiscal year '09 are both transfers from the general fund.

To get to the 450 billion or $500 billion that the House has proposed, it will probably take a combination of special general fund appropriations to fund the high-speed rail piece of that, which would be based on what the administration said, something that they would be prepared to do to get the $450 billion level of sort of normalized projects. Obviously it will take either additional substantial additional general funds sources or an increase in the fuel tax or more likely some combination of the above, I think it's instructive that both the US Chamber of Commerce and US Trucking Association is saying now probably for the first time we will pay higher fuel taxes if you will commit them to congestion relief in urban areas because that is costing us tremendous amounts of money with the congestion of trying to get trucks through Metropolitan areas on the existing interstate systems. So, there is a lot of moving parts here.

Unfortunately, our current view is that they will likely be an extension but as I said in my prepared remarks, take a $41 billion annual extension and overlay 27 billion, $28 billion of stimulus money over the next three years or so on top of that. We will have the most robust federal highway spending program that we have ever seen and that gives us a lot of optimism for, under either scenario for certainly the next few years on the federal highway program in the US.

Okay, thank you so much, Don.

Your next question comes from the line of Brent Thielman with D.A. Davidson. Please proceed.

Good morning. Just thinking about your guidance for the second half do you still expect to see the normal seasonality of, I guess, the heavier weight of Q3 versus Q4? Could you guys see a situation where we start seeing more of a sequential ramp in volumes into Q4 as some of this estimates related work ramps up?

The reason for that is weather. And if we, if we have a, I think we can't assume there is going to be anything different about the weather patterns. What is, could well be different is is that the construction award, the highway construction awards that came out in May and June and those that will perceive with heavy bid lettings in July and August, if we have decent weather in the fourth quarter and there is a lot of work on the table for our customers, we could certainly see a disproportionately high number of shipments in the fourth quarter from that timing that stimulus work but it always takes good weather in order to do much past October in highway construction. We are in -- on average -- much warmer climates than many other companies in our industry. So from that standpoint in Texas, Florida, California, Arizona and even in like Georgia and Alabama, we could see a longer construction season if it's based on temperature but then we also start getting rainfall in the fourth quarter and it takes it longer to dry out. So, there is a chance that we could see higher-than-normal distribution of aggregate demand in the fourth quarter but in order to predict that, you got to know what the weather's going to be and stay tuned.

Sure. Understood. And then secondarily, I guess you guys are, obviously, taking down debt levels. Are you opening up more to acquisitions at this stage?

Well, we strategically, we want to be in a position to opportunistically make bolt on acquisitions if they make strategic sense for the long-term and financial sense for both the short-term and the long-term. So, we're, -- that was one of the things that we wanted to do with our equity offering was to give us more financial flexibility but that will be more on an opportunistic basis than on any kind of desire to go out and gin up an aggressive acquisition program at this point.

Okay. Sure. And then second to, that are you seeing anymore sellers out there given the severity of the environment?

Well, there are some. There have probably been a number of things put on the market that haven't sold because the buyers expectations and the sellers desires haven't lined up, but there is a fair amount of -- there is a fair amount available, I think, but, again, there aren't too many desperate sellers and so we're, we'll continue to look at things that make sense for us and if we can make a deal at a reasonable number, for a strategically important bolt on acquisition, we'll certainly continue to look at those. We're not out of the market.

Okay, thanks, guys.

That concludes the Q&A portion, I would now like to turn the call back over to Don James for any closing remarks.

Thank you very much for joining us. We are looking forward to the second half of 2009 and we're really looking forward to 2010, 2011. We hope to be able to achieve our expectation of somewhat higher earnings in the second half of 2009 compared to 2008. We believe the stimulus money is going to be significant. We also recognize that private non-res construction is going to be much weaker going forward than it has been in the past, but the combination of how we have positioned our businesses, how we have managed our cost structure and the opportunity for getting into the sweet spot of our demand sectors, that is publicly-funded highways and infrastructure give us some optimism. So, we hope that it pans out in the near-term as well as the long-term but we look forward to reporting to you at the end of the third quarter. Thank you very much.

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