渥肯建材 (VMC) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the third quarter 2009 Vulcan Materials earnings conference call. I will be your coordinator for today's conference. (Operator Instructions) At this time, I would like to turn the call over to your host for today's conference, Mr. Don James, Chairman and CEO. Please proceed, sir.

Good morning. Thank you for joining this conference call to discuss Vulcan's third quarter results and our outlook for the remainder of 2009. I am Don James, Chairman and Chief Executive Officer of Vulcan Materials Company. We certainly appreciate your interest in our Company, and we hope our remarks and our dialogue will be helpful to you. A replay of this conference call will be available later today at our Web site. Joining me today is Dan Sansone, our Senior Vice President and Chief Financial Officer, as well as Ron McAbee and Danny Shepherd, our Senior Vice Presidents in our construction materials group. 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.

I'd like to begin my remarks by repeating a statement many of you have heard in prior quarters of this downturn. That is, we continue to enhance our position for significant earnings growth in an economic recovery because our employees continue to run our business in a disciplined and cost-efficient manner. Throughout the recession, the Company has rationalized production, reduced operating hours, streamlined the workforce, and effectively managed spending. Thereby offsetting some of the cost impact related to lower volumes. Since aggregates demand peeked in 2005, sales volumes have declined almost 45%. Yet our cash earnings today on every ton of aggregate sold is over 48% greater than it was at the year of our peak demand. Looking specifically at the third quarter, net earnings were $54 million or $0.43 per diluted share, including $0.38 from continuing operations.

Although sales volumes in the third quarter were 19% to 29% lower than the prior year for our key product lines, overall gross profit margin was 20.9% matching last year's third quarter. The average freight adjusted unit price for aggregates increased 2.4% in the third quarter, reflecting wide variations across our markets. Aggregate shipments declined 20% compared with the prior year's third quarter reducing EBITDA approximately $69 million from last year. Extremely wet weather in the quarter contributed to lower shipments in key markets in the Southeast and Mid-Atlantic states. Our plant managers continued to mitigate some of the cost pressures caused by significantly lower volumes. They maintained production efficiency, and reduced cash fixed cost 12% below last year's third quarter.

Shipments in the asphalt and ready-mix concrete business declined 19% and 29% respectively, from the prior year's third quarter due to the same economic factors affecting aggregates. Third quarter asphalt earnings improved, despite lower volumes, due to a decline in the cost for liquid asphalt and a return to more typical unit margins.

Selling, administrative, and general expenses in the third quarter of 2009 increased $4 million from the prior year's level. The year-over-year increase was due to project costs related to the replacement of our legacy IT system, and costs associated with reducing employment levels. Employment levels across the Company at the end of the third quarter are down 19% from a year ago. This reduction in employment across the Company is a result of a continued focus on adjusting our production levels and our cost structure to match the weak demand environment.

Through the first nine months of 2009, construction activity continued to weaken, resulting in a 27% decline in our aggregates volume. This volume decline has reduced EBITDA approximately $265 million year-to-date, more than offsetting the effective cost management and a disciplined approach to pricing. Despite the earnings effect from lower volumes, year-to-date, operating cash flows were $355 million, up from $278 million in the prior year. Additionally, by the end of the third quarter, we had reduced our total debt by about $700 million.

In summary, our efforts to continue to tightly manage cost and maintain price discipline have offset some of the earnings effect due to lower sales volumes, and we will continue to take the actions necessary to respond to a challenging construction environment. The factors contributing to a challenging outlook for construction activity are principally the continued weakness in private construction, both residential and non-residential, and the uncertainty surrounding the timing and the amount of a new federal multi-year highway program. Year-to-date, data for highway construction activity as well as new contract awards, have been buoyed by the last months of SAFETEA-LU and the beginning of stimulus-related funding. As of the end of August, the value of construction put in place for streets and highways in the US was up 3% from the prior year. Awards for new highway projects through September were up 5% versus the prior year. Record-setting awards from May to August, when contract awards exceeded $6 billion each month, reflected good progress made by state transportation agencies in starting shovel-ready projects intended to stimulate construction activity and create jobs.

Through the end of September, the Federal Highway Administration reported that 73% of the $27 billion of funds apportioned to the states in March had been obligated for specific projects. Furthermore, approximately 4,000 stimulus-funded projects were under construction across the US involving $11 billion of stimulus funds. Generally, these projects are being awarded at levels below engineers' estimates due in part to lower cost of construction input such as diesel fuel, liquid asphalt and steel, and to a more competitive bid environment. This should benefit the industry as additional projects can now be funded and built.

The spending patterns for stimulus projects vary greatly depending on several factors. Including the number of projects that were shovel-ready soon after funds were apportioned, the types of construction, and the projects being obligated, and whether the projects are in large urban areas where project planning and execution can be more complicated and time-consuming. These factors have contributed to Vulcan-served states generally lagging the rest of the country when it comes to starting construction on stimulus projects. At the end of September, Vulcan-served states have spent less than 7% of stimulus funds apportioned to them versus 12% for the rest of the country. These spending patterns have affected aggregate demands in Vulcan-served states the same way. In Illinois for example, by the end of the third quarter, payments to contractors for work performed on stimulus-related projects reached 27% of the total apportioned to the state, easily exceeding the US average of 9%. Correspondingly, our shipments in Illinois were much stronger than most of our other markets, declining less than 10% from the prior year's third quarter.

There's a similar story in Tennessee. Payments to contractors through the end of the third quarter were 15% of the total apportioned, and our shipments declined less than 15% despite significant wet weather. Both Illinois and Tennessee have obligated the majority of their funds for pavement improvement-type projects, which require less planning and time to execute.

In contrast, our aggregates volumes in Florida were down approximately 23%, excluding the Panhandle where stimulus-related projects have been easier to get underway due to project types and less congestion. A government report issued in September cited that lane additions accounted for 40% of the funds to Florida as compared to the national average of 16%. Generally, these widening projects require more lead time prior to construction. As a result, Florida has spent less than 1% of stimulus funds apportioned for highways, despite having already obligated 73% through the end of the third quarter.

The varied pace of progress made by individual states makes it challenging to predict the overall timing of the demand the stimulus funding will provide. I say, will provide, because the stimulus dollars are 100% federal funds with no requirement for states to provide matching funds. Stimulus dollars for highways will get spent. It is just a matter of timing. This varied timing of spending of stimulus funds, along with the uncertainty created by the failure of Congress to pass an extension of SAFETEA-LU by September 30 for the traditional, multi-year highway programs. And very wet weather in a number of our markets in October have caused significant uncertainty in our outlook for highway construction activity in the fourth quarter. Despite this challenging construction demand environment, we believe the cost management actions taken, along with our disciplined approach to pricing and the improved liquidity and financial flexibility we have achieved, will enable us to participate fully in the economic recovery.

Plant operating cost and overhead expenses are being tightly managed as we continue to adjust our cost structure to match the weak demand environment. As we have throughout this downturn, we continue to manage controllable cost aggressively and to focus on cash margins and cash earnings. Additionally, we expect higher selling prices for aggregates in 2009 to partially offset the earnings effect of lower volumes. Through the first nine months of this year, aggregate pricing is up approximately 3%, and we do not expect the rest of the year to deviate much from those results. We still expect full-year SAG expense to be lower in 2009 as the earnings effect of our cost reduction efforts more than offset cost related to the replacement of legacy IT systems.

As discussed previously, we have a major project underway to implement new integrated systems and processes to replace our legacy systems. Along with the legacy system replacement, we are also redesigning a related administrative support functions to reduce cost and improve service. After a thorough project design and implementation planning stage, the Vulcan team is now focused on rolling implementation at our business units over the next two years or so. During the third quarter, we installed our new system at the corporate office and in the first of our nine operating divisions. The most significant spending will occur in 2009 and 2010 with net expense reductions occurring thereafter. We expect $10 million of additional SAG costs related to this project in 2009 as compared to 2008. $6.5 million of which has been expensed through the end of the third quarter. As I said, the project is proceeding as planned. Total cost of this project will peak in 2009, as design and development work is completed, and implementation will continue in 2010. Interest expense for the full year is expected to be approximately $175 million, based on the current level of interest rates. And finally, we now expect capital spending to be about $140 million in 2009.

In closing, I'd like to reiterate our confidence in future sales and earnings growth for Vulcan. This confidence comes from our successful strategy to continue strengthening our aggregates-focused business, which has the compelling advantage of great locations in major US markets that are expected to experience above average growth in aggregates demand for years into the future. The current economy is weak, but the economic stimulus plan will help drive earnings growth at Vulcan over the next several quarters. Approximately $50 billion to $60 billion of stimulus-related construction projects has been identified that could use our products, including the $27 billion for highways we have talked about. The key determinant of highway construction spending for years to come is, of course, the multi-year federal highway bill which represents a substantial growth opportunity for Vulcan. Given the failure of Congress in late September, and again in October, to pass a fully funded extension of SAFETEA-LU, the timing and amount of transportation construction activity from the regular multi-year federal highway program is uncertain. Unemployment in the construction industry was 17.1% at the end of September, compared to 9.8% in the general economy.

Construction industry unemployment is higher than any other industry in the United States. The delay in dealing with the next multi-year highway bill can only add to unemployment in the construction industry. Unfortunately, the focus of leadership in both Houses and the Administration is currently on other priorities. The pressure of very high and rising unemployment in the construction industry is a message Congress needs to hear and to feel. We along with many businesses, industry, and labor groups are urging Congress to act promptly to sustain momentum started by the $27 billion provided for highways and bridges with the economic stimulus plan by dealing efficiently with the next multi-year surface transportation program.

We are the clear leader in the US aggregates industry and are well positioned for significant participation in the economic recovery and in increased public infrastructure programs. We certainly thank you again for your interest in Vulcan. Now if our operator will give the required instructions, we will be happy to respond to your questions.

(Operator Instructions). Our first question comes from the line of Timna Tanners with UBS.

Good morning.

Hello, Timna.

Was wondering if you could please give us some more color on what you are seeing state-wide with regard to the state budgets? And specifically, the outlook that you might be seeing a little further out for those states -- California, Florida, Texas, mostly.

I think the news is very good in both California and Texas at the state level. Both have initiated large infrastructure programs, state-funded infrastructure programs. Illinois certainly is doing the same thing. In all cases, I think they're being financed, in part at least, by bond issues. But those have been underway. Florida has -- the governor of Florida has talked about from time to time state-level infrastructure programs in Florida as an employment boost for the construction industry. That has not yet turned into a formal program, but we don't -- we are encouraged, I think, by what is happening in several key states. Overall, of course state tax revenues are weak. There's no question about that. However, many of our key states seem to be very focused on providing additional incremental funding for public infrastructure projects including highways as a means to shore up their local economies and build something that is going to be -- add to economic efficiency for the long-term.

Okay. Great. Usually you give a fourth quarter guidance, or there's a little more quantifiable. I mean I get the sense of what you are saying in terms of price, but I missed the volume side. Also on 2010, I know you have talked about that in the past. Do you have any more detail on the outlook that you can provide?

For the fourth quarter, the combination of the fact that it is the fourth quarter -- that we don't have a viable extension of the multi-year federal highway bill. That the stimulus spending is spotty. And in our states, is behind the rest of the country for the reasons I tried to outline.

Right.

Trying to quantify the fourth quarter volume is, we concluded -- the range that we would have to give you to be comfortable with it would be virtually meaningless, and we decided that you could estimate that as well as we could. So, that is the reason you don't have an explicit fourth quarter volume guidance. It all depends on weather, and whether the stimulus projects go -- begin to move in '09 or carry over to 2010. So it is a -- and obviously, there is no bright news on non-residential construction. Residential construction, we see improving in 2010. Whether there's any improvement in the fourth quarter is speculation at this point. As we look at 2010 to get to the second part of your question, we think residential will improve. It is coming off a very low base. We think private, non-residential, particularly retail, has got some more pain. If we get a new -- an extension -- a workable extension of the multi-year highway bill or even more optimistically were we able to get the multi-year bill in time for the 2010 construction season. It would be very positive. The stimulus projects -- 2010 will be a very big year for stimulus projects.

So there are different pieces moving in different directions. But without being able to quantify it, we are cautiously optimistic for some volume growth and earnings growth in 2010. If you look back at long-term highway construction or public infrastructure construction activity in the US, it is a very stable, upward growth. There are a few slight dips. And if you look at the timing of those dips, they correspond to the limbo that has inevitably occurred in the reauthorization of the six year highway bills. So, there's a dip in contract awards and ultimate construction put in place, and then strong recovery. Even though the overall trend is very stable, the little dips occur every five or six years depending on the timing of the highway bill. And I think we are, obviously, seeing that same thing today. So 2010 outlook and public infrastructure and highways will be a larger share of our total shipments in 2010 than certainly they have been in the recent past. But we think we will get the stimulus spending. And if we get some resolution of the multi-year highway bill, we will get hopefully a boost from that. If we don't get that, then there's a lot of uncertainty as to certainly the first part of 2010.

Okay. Great. Thank you very much.

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

Thanks. Good morning, Don.

Hello, Jack.

I was just going to ask on the subject of public works construction. You have this stimulus issue, which you have done I think a good job of outlining what you are seeing in how the money is flowing through the pipeline. Or at least, not flowing through as the case may be. But is what's happening -- in the last few months with the highway bill expiring, and more uncertainty over what's going to happen with the new bill. Have you basically just seen states continue to pull back, in effect, so the net impact of the stimulus is just far more muted than it otherwise would have been?

I think that's generally correct. The timing of the stimulus, I think, is understandable. And the relationship of states that have spent a fair proportion of that to our aggregate shipments is pretty tight correlation there. And states that hadn't spent it, you don't see it in states that have begun to spend it, like Illinois and Texas. You do see it showing up in our shipments. So that's moving along. I think it is the uncertainty about the six-year highway bill that is causing some states -- perhaps many states, some being more vocal than others -- to say hey, we can't go out with new contract awards until the visibility of funding is clear. And we are on hold, other than to roll out the stimulus projects. There's some interesting -- we have some wonderful allies in this fight.

You may know about a group called Building America's Future, that's headed by Ed Rendell, the governor of Pennsylvania, Arnold Schwarzenegger, the governor of California, and Michael Bloomberg, the mayor of New York, who are pushing Congress to get on with it. In a press release we saw the last day are two, Governor Rendell is quoted as saying to Senator Dick Durbin from Illinois -- 'Let's go. Let's move. Let's get this thing going. We are -- we need to do it now. And let's front-load the highway trust fund, and get projects out. Because we are losing jobs faster than we are creating or saving them'. I note with some degree of optimism, whether it will happen or not, that for the first time, Senator [Reid] is actually talking about scheduling floor time for the formal extension of the federal highway bill. That has been the problem. They have gotten down to the end of the expiration periods and tried to do things by unanimous consent. And given the range of politics in the Senate in particular, it is hard to get 100 senators to sign on because you have got a few on the far right who don't want to spend any money. And you have got a few on the far left who don't want to build roads. But there's a huge block in the center of both houses that is strongly in favor of a new robust highway bill. The problem is with the other priorities that have gone on in Congress, getting to the floor to get a vote has not happened.

So with people like Governor Rendell, who a Democrat, Governor Schwarzenegger, who is a Republican, and Mayor Bloomberg, who's in the middle, I guess. There are some significant voices trying to make the same case that we and our trade associations and organized labor are trying to make is, you know, get it done and in the words of Governor Rendell -- let's go. Let's move. We are losing jobs by this partisan bickering that's really focused on the extremes on both ends of the political spectrum. So I have vented my frustration. Sorry.

No. I think a lot of us probably share that frustration. I was going to ask, too, about pricing. You mentioned in the West, they were down. In Florida, they were down. Other markets, still up. But from here, how can we be confident that aggregates pricing in general won't come under additional pressure. Given that obviously commercial construction weakens from here. The uncertainty -- what is today an uncertain situation over the highway bill. Other than just that aggregates prices have never gone down in the past?

Well, I can't give you absolute confidence because it is a competitive market, and we work very hard to -- as I said in my script -- be disciplined about pricing. Clearly, Florida and California are under the most pressure. Prices there are down mid-single digits compared to last year. Other parts of the country -- other divisions, which are multi-state operations -- the pricing there ranges from 10% year-over-year. Some in the 5%, 6%, and 7% increase. Some in the 2% to 3% increase. So it is a different story from market to market. And I think part of what's happening is the markets where the stimulus money -- both highways and other forms of stimulus like Corps of Engineer work. Where that's rolling out, you see better pricing than where -- like in Florida, where the stimulus money basically not a dollar of it was spent through September 30. So a little bit of of backlog and a little bit of visibility of demand in the future will certainly help with pricing. But, we haven't -- when I said I thought the fourth quarter pricing would probably remain consistent with the year-to-date pricing, that's just because of what's in the pipeline.

Fair enough. Okay. Thanks very much, Don.

And our next question comes from the line of John Baugh with Stifel Nicolaus. Please proceed.

Good morning. I was following up on the SAFETEA-LU extension issue. I'm curious as to whether there's any way for you all -- October is in the books. To look at, say the incoming rate of state projects in the month of October, which I think is the first month of the month-to-month extension versus September or August when we were under the old bill still. Can you quantify, in other words, any impact that you're seeing from this limbo state?

I can't put a -- any kind of precise percentages or dollars on it. Directionally, we know that at September 30, without a workable extension of the highway bill, many states became very cautious. And highway contractors became very cautious. So if you have some stimulus work in your backlog, trying to do it in cold, wet weather at higher cost versus letting it roll over to the spring construction season becomes a more attractive option when you don't see the visibility of any work coming behind it from the new multi-year highway build or an extension of that. So I think a point we are trying to make here is that the delay in the highway bill is pushing demand into 2010. Not only for projects that will be funded by the multi-year highway bill, but also perhaps some of the stimulus projects will get pushed into 2010 unless we have just very good weather in the fourth quarter, which we haven't had in October as you know if you have followed the rains, particularly in this part of the country.

You mentioned that [Reid] has talked about scheduling floor time.

And that's realtime. We are monitoring this on an hour by hour, because it is important.

Did he mention a date or a time or -- ?

He said this week.

This week, okay. Well, we will stay tuned. Thank you very much.

I think that's an important point that watch the status of this federal highway bill because it will certainly influence long-term demand. But it will, on the margin, influence near-term demand as well through just the psychological aspects of visibility of future demand.

But what is, realistically, the best that we can expect out of this? And we are not expecting to get a six year bill, I think, until after the mid-term elections.

No, no. I don't think -- the current continuing resolution lasts through December the 18th. If Congress actually does a formal extension, and there's -- without bogging you down into mind-numbing detail about the recision numbers and putting that back in the bill and all of that. If we get a formal extension, whether it is six months or whatever time period between now and December the 18th. Then, it will be retroactive. And it will provide the state DOTs, therefore, with not only more visibility but also an absolute higher level of funding and contract authority. So, that is where the positive kick comes in. I think -- and who knows -- but, as I tried to say in my remarks, the pressure of unemployment will be a factor here, as well as just the consensus in both houses of Congress who are strongly in favor of a robust transportation program -- both highways and transit. It is just a matter of getting it in front of them. And like you point out, it is probably going be another relatively short-term extension. But if we solve all of the recision issues in this extension, then it will greatly enhance the ability of the states to go ahead and put projects out for bid.

Great. Thank you.

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

Yes. Hello, Don. Hello, Dan.

Hello, Mike. How are you?

I'm good thanks. How are you?

Great.

I had three questions. Two which are probably very short answers. Probably the longer one is, if I could just return to this pricing issue and ask -- when you are talking about the mid-single digit decline in Florida and California. Is any of that mix? Or is that your estimate of underlying? And maybe you could talk a bit more about what's causing it, and whether -- I think, there was some appeal in the Lake Belt that was due to be resolved in October. Did that get postponed again? Where are we with that?

Let me start with the latter one. The Lake Belt case was argued in the United States Court of Appeals to the 11th Circuit which sits in Atlanta -- or is headquartered in Atlanta. Late last month, late October. It is now within the jurisdiction of the Court, the Appeals Court, to affirm or overrule or modify the lower court ruling, which as you know, has basically stopped mining in the Lake Belt. The Army Corps -- the second track is that the Army Corps of Engineers is past, I think, its stated date for issuing the new mining permits, which would be different than the permits -- the old permits that are under attack and are the subject of the litigation. So the things to watch will be the new Army Corps permit and the ultimate ruling of the Appellate Court. Some people have suggested that if the Corps issues new permits, then the existing litigation becomes moot. And we may never get an opinion out of the 11th Circuit. I think when you get out of the legal technicalities and look at the reality, that this is likely to still be an issue months from now in one form or another. Either on the permitting side or with the federal court. But, at this point, that's where we are. We are waiting on the Corps for a new permit, and we are waiting on the Court of Appeals for a decision. Pricing in Florida and California. They're both down in the 4% to 5% range. Some of that is mix. Some is absolute price levels on some products. Some is result -- our pricing guidance is freight-adjusted.

So, if we happen to move materials longer distances, then that higher freight cost will be an adjustment downward in our reported freight-adjusted prices. But, we -- so it is a combination of a lot of factors. But competition is significant in those markets because volumes there have been hit hardest, longest. Primarily related to the drop in residential construction, and now related particularly to retail. But there is as we said earlier in the call, there's a lot of public infrastructure rolling out in all of those -- in California and Florida. Very little of it has appeared so far. Some in California, almost none in Florida. And in addition, California has got its own state level infrastructure program. So infrastructure is taking up the slack from the private sector construction. But, both of those states are certainly subject to the six year -- the issues with the six-year highway bill because they are huge recipients of those dollars. California being the largest recipient, not only of stimulus dollars but also of six-year highway dollars, and Florida is third out of the 50 states. So I think you need to watch what happens with infrastructure spending and its potential impact on price and volume in those markets as well as all of our others.

Okay. Thanks for that, Don. Just one follow-up, the cement companies are talking about maybe to try to delay any price increase in 2010. That's in mid-year when they hope the volumes may be picking up. Is there any talk of the aggregates industry doing the same?

I don't have any -- I think we're -- our pricing, as you know, is job specific, market specific, and we will price each job separately. When we report to you, it is a roll-up of a lot of different pricing decisions and not some generalized across the board price increase for aggregates.

Thank you for that. Two very quick questions, hopefully, for Dan. Dan? Could you on the tax situation, I am sure it probably will explain it pretty clearly -- or more detail in the 10-Q. But when we are looking at the fourth quarter, what sort of -- I know it is a very small quarter. But what sort of tax -- are we going to see a credit for the year? Should we assume the credit is pretty similar to what it is after nine months?

That is correct. That's the way to think about it.

Thank you for that. And then the last question from me. In the P&L, Dan, the other income line which was positive. Was there anything specific in there, the [2.756]?

There were two transactions. One was a leftover from the divestiture of some of the assets that were required in the Florida Rock transaction. On one of those divestitures, there was a dispute with the purchaser over certain issues. That dispute was resolved to our favor. That was about $3 million of the year-over-year increase. And then we had a -- with the Florida Rock acquisition, we acquired a very small coal handling business up on the Mississippi River, and we sold that operation as well and had a $2 million-$2.5 million gain on that. A couple of small things. Everything else, exclusive of those two items, is small items in the ordinary course of business.

That's great. Thank you very much to both of you.

Our next question comes from line of Katherine Thompson with Thompson Research Group. Please proceed.

Hello. Thank you for taking my questions. You noted in the quarter-end release that you underproduced demand in the quarter. Is this something that we can expect going forward? And how should we think about that? And part in parcel with that question, do you have any target inventory reduction goals over the next six to 12 months?

Katherine, our goal is to match our production and inventory levels to demand. We are -- obviously, from a GAAP standpoint, when we are producing inventory and building inventory, it is more positive to GAAP earnings but less positive to cash earnings. So as I tried to say, we believe that you manage your business for cash and not so much for GAAP earnings. The point I think is that when we start seeing demand recovering, we will be in a position to start producing heavily, which will certainly improve our GAAP earnings. So we aren't -- we don't have an artificial inventory level because -- and I know you all are sick of hearing me say this. It is very -- it is a quarry by quarry, product by product decision as to what inventories we need and need to produce and not produce.

So if I sat here and talked to our Division Presidents and Senior Vice Presidents and said, I want everybody to reduce inventories by 7.3% in the quarter. They would all think I had lost my mind because I would have. So, there is -- it is a function of management at the division and local level to say, we need this many tons of asphalt, stone over the next X number of months, and we don't need anymore base. And so they are adjusting their operating hours, their plant set-up in order to achieve that. And with the exercise of what I think is very good judgment with the combination of the sales and operating people working together on a plant by plant basis, the inventory reduction you see is a roll-up of hundreds of individual decisions. And they all know what -- this is not news to our sales and operations group. This is something that we do all the time. It is just now with demand being as weak as it has been, we are -- the net effect of this is that we are reducing inventory rather than building it at this point.

Hopefully, as we see some more visibility of these projects in 2010, we will start producing at higher rates than we are shipping in the short-term. And we will see the benefit of that in our GAAP earnings. But that's the process, which is probably not terribly helpful to you all who are building models and need to deal with the overall inventory levels. But it is a lot of different decisions.

Sure, that makes sense. Just to summarize, you are managing around a base inventory which understandably is built somewhat because of the type of mix of projects and stimulus. But that said with any recovery of demand and volume, it is going to be just another boost to GAAP earnings.

Yes, absolutely. Absolutely. And you do the math in your models. But our strongest earnings performance is when we are running hard and building inventories. From a cash standpoint, we aren't doing that just to boost GAAP earnings. We are looking for the longer term cash management and cash earnings management.

Great. Then I was wondering if you could give a little bit more color on overall volume trends by region since the quarter-end? Just relatively speaking. No specifics. Just what are you seeing overall from a trend basis regionally?

I think as I tried to point out, the extremes on both ends are where stimulus dollars have been flowing and where stimulus dollars have not been flowing. And as I indicated in my remarks, we are down on both ends, but we are relatively stronger in the states where the stimulus dollars have started flowing, and we are relatively weaker in the states where they have not. But overall, I think I am mildly encouraged by the following statistic, which has at least a couple of explanations. Our volumes in Q1 were down about 30%. Our volumes in Q2 were down about 30%. Our volumes in Q3 are down 20%. Now, should we be feeling good by the fact that our volumes are only down 20%? No, but I think it is some -- obviously, the comparisons are getting easier, which is part of it as we started down pretty hard last year in the second half after the whole Lehman Brothers and the collapse of the credit markets. But, clearly, we think we have bottomed out in the housing market. And there's upside there. Private nonresidence, as I said, particularly retail has more pain to go. Things like railroad ballast is good. [Blue gas, stone] is good, but those are relatively small percentages of our total shipments. The thing that is going to drive demand is going to be in the -- for the next 12 months at least, in addition to some recovery in housing, which is coming off a low base -- is going to be public infrastructure. The stimulus dollars are going to be spent. So that's not a mystery. The real question is are we going to get some resolution of the multi-year highway bill that allows DOTs to move forward with their planned construction projects. That is really the most important factor right now in longer term demand.

Great. A final question just to clarify that mix of your residential, non-residential, and public spending historically. Your public spending had been about 50% of your end market sales. I would imagine in today's market that's closer just approaching 60%. I wanted to see if -- do you agree with that assessment? And could you see that number maintaining or even going higher into fiscal 2010?

I think it will go higher in fiscal 2010, or calendar 2010 for us.

Okay.

Clearly, it is increasing. There has probably been a 5% to 10% shift year-to-date from the private to public funding. We are publicly funded projects. Certainly historically, we are in the 52% to 53% range over a relatively long period of time. The private side spiked up in 2004-2005. We will see a spike in 2010 in the public side. I can't tell you whether that's going to be 60% at this point or not. But it is certainly moving in that direction.

Thank you very much.

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

Thanks. Good morning. A couple of questions. First one is, if you could talk about transportation costs? What we have seen, of course, there's a natural competitive barrier given that aggregates are expensive to ship longer distances. But with such little demand outside of stimulus, can you talk about how you anticipate your transportation costs to change with stimulus projects? Meaning, are you looking to ship longer distances to win incremental volumes?

I think, point one is that in the vast majority of our markets, we aren't doing the transportation. Our customers do it. But that doesn't mean it is not a significant element of delivered cost, as you know. We do provide -- we have ships that we move material from our offshore quarries to the US. We have an extensive fleet of rail cars and rail distribution. And we have boats and barges that move on the inland waterways. Plus or minus 15% of our volume moves through these longer term transportation things. Most of which we do provide the transportation. But the other 85% -- most of that is transportation -- is handled by truck, by our customers. That being said, I think in this environment you would be correct that there -- that people are willing to move material longer distances in order to compete for projects.

We have seen some customers that is have historically bought aggregate from us because we are the most cost-efficient source given transportation cost in order to keep their own plants busy are hauling aggregate much longer distances to supply their own downstream plants, asphalt and concrete. As opposed to buying it from us. And that's sort of going back and forth. Anecdotally, we hear that once they realize what the start seeing the impact of these higher transportation cost on their P&L, sometimes they're coming back. There's a lot of things moving around. But clearly the length of distances people are willing to move material is greater today than it was at the time when demand was much stronger.

Great. Thanks. One more question. I know we are getting toward the end of the call. Can you, Don, provide your average cost for liquid asphalt during the quarter?

I think we paid about a little over $400 a ton. Maybe $405, $406. Something in that range. That's a blend of a lot of different prices in a lot of different markets from a lot of different sources. So it is I think our average is about $406 for the quarter.

Okay. And the trend that you are seeing as you move through the quarter -- maybe after the quarter -- liquid asphalt, is it staying pretty steady?

Yes. Yes.

It has been steady through the quarter, around -- just by a couple bucks.

Okay.

That compares to about $673 third quarter of last year. So when we say that we have made more money on lower volumes in asphalt, part of it is the input cost of liquid asphalt.

Right. Thanks. Good luck.

Our next question comes from the line of Keith Johnson with Morgan Keegan. Please proceed.

Good morning.

Morning, Keith.

One quick question on pricing. I appreciate the information on the color around the range you are seeing in the market either down 5% or up 10% in some markets. As we go back three months ago mid-summer, coming through the early part of the summer. What kind of ranges were you seeing then? And just trying to get an idea of how much they may have widened or may not have widened as we work our way to the end of the year?

Since mid-summer?

Yes.

I don't think there's -- I don't think you would see any material difference in those ranges.

That was, as well, California, Florida down about 5% as we were year-over-year, mid-summer?

On a mix-adjusted basis that would be about right.

Okay. Okay. That's really all I had. Thanks for the color.

Our next question comes from the line of Ted Grace with Avondale Partners. Please proceed.

Don, would you be willing to take a stab at weather impact on 3Q volumes? And furthermore, take a stab at how weather is impacting 4Q volumes, to date? Would you be willing to quantify that? Or try to quantify it?

No. So the question was the weather impact on Q3 and quarter-to-date Q4.

You have talked a lot about how wet it was, and you can look at all the data to Noah. But any willingness to take a stab at what that is.

The problem in a weak demand environment -- it is really tough to -- we count rain days and wet days. We monitor shipments on wet days, and we know that shipments are much, much, much lower on wet days and days following substantial rainfall than they are in better weather. So, the fact that there is a correlation of shipments to rain days, and of course, there are rain days particularly in the Southeast and Mid-Atlantic states every year. But I don't believe we have ever seen a September or October like the ones we have had in this part of the world, and I think you're in Nashville. So you know what I am talking about.

We're feeling it.

Flooding, all sorts of things. But at the end of the day, overall demand is weak. But I can't -- I don't have a reliable way to tell you. I guess we could go back and say the normal number of rain days in Nashville, for example, is in a month would be six. And this year, we've had 15 or 18, and therefore, shipments. But to get into that kind of detail, there's a lot of speculation. And I think from our standpoint, we know it hurts. We can see it. We can see it on a daily shipping basis. Sometimes you make it up in the quarter. Sometimes you don't. So, it is just hard to -- and sometimes it shifts volume from one quarter to another. It rarely extinguishes the volume. It just moves it. Whatever volume is out there is determined by the economy and the publicly funded infrastructure. Wet weather is just a timing issue.

Say if you were coming at it a little differently, and without quantifying it. How much of that volume would you expect to get captured in the fourth quarter? Definitely, you have seen a lot of reports that states are trying to sustain their construction beyond the normal seasonality. And assuming it was transient weather, is it reasonable to assume that you are going to at least capture a substantial amount of that volume in the fourth quarter that we lost in the third quarter?

Ted, it all depends on the weather. If we have a warm October and a warm December like we have in some years, we will capture some of it. If the sun is shining today, and it is beautiful. And I am sure people are on construction jobs. But, directionally, whether we capture some of the delayed shipments from bad weather will be determined on what the weather is over the next two months, and I don't have a clue.

Okay. My next question would follow on Jack's question on public spending. If you look at the numbers out of [Artbun Ashto], it would suggest that at the end of September there was about $8 billion of remaining authorized contract authority outstanding. We probably had $2.8 billion in October, which is net of the [recisions]. And another $4.2 billion that's through the December 18th timeframe.

Right.

While we appreciate that states don't have great visibility on the next highway bill, the fact of the matter is that they probably have the better part of $15 billion plus or minus that has been authorized, which would equate when you factor in seasonality -- probably, six plus months of activity. Why do you think in light of that locked-in funding, states are reluctant to spend?

I will paraphrase to you the statements made by the director of the Alabama DOT on or about October the 1st, which appeared on the front page of the Birmingham News. Saying that -- and as you know, the way highway funding works, you have got contract authority, but at the end of the day, if you build something -- if the state builds something and spends its money, it has got to be reimbursed by the Federal Highway Administration. And given the other issues with cash flows in state budgets, DOT directors are very cautious about going ahead -- even though they have got contract authority and spending the money now and applying for reimbursement if they aren't sure that there's going to be enough money in the highway trust fund to reimburse them promptly when they submit the bill. That is the psychological problem with what's going on right now with the multi-year highway bill, is that while one can make the analysis you have made, which at the end of the day may be rational. The last thing a DOT director wants to do is have to walk into the governor's office and say, whoops, we have overspent, and there's no money in the highway trust fund to reimburse us at this time. So there is a big psychological factor that runs through these hiatus periods when we don't have a multi-year highway authorization, and we don't even have a viable extension of a multi-year. So I think it's a challenged until one of those two things gets resolved.

Okay. That's very helpful.

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

Good morning, Don.

Morning, Trey.

A couple of quick questions on -- well, one on asphalt and concrete. So the margins look like they're stabilizing in this 8% to 9% range. Is this a level that we can expect over the near-term? And then also, if we do see demand improve in 2010 -- or when it does improve, where could you see these margins going once we do get some demand return.

As you noted, while our -- the cost of liquid asphalt is down. Our average selling price per ton of asphalt mix is also down. But our margin per ton is up having recovered back to more normalized levels. So that's the way to think about the asphalt mix business. Is the movement in selling price of mix, input costs of liquid asphalt? And so what we have done is to move from very depressed margins when liquid asphalt spiked up to get back to more normalized margins. If demand, and certainly, our overall earnings in asphalt will respond very nicely to recovery in demand from the infrastructure. And infrastructure is, obviously, a much larger component of the demand for asphalt than it is for concrete.

So we will certainly see asphalt shipments respond very directly to the highway piece of public infrastructure -- both the stimulus as well as the normal highway program. And margins will fluctuate around -- it depends on what happens with liquid asphalt. If we get any period in which we have got growing demand for asphalt mix and stable or declining liquid asphalt prices, that margin -- we've had periods in which we've had very, very robust margins. So the answer is, yes. It is the margin per ton is better with higher volumes just because we spread our fixed cost, and we are more efficient on the production side. But the margin per ton, while it is influenced by total demand, is also heavily influenced by the cost of liquid asphalt.

Sure. And the demand part of it was more what I was trying to get at. I know you have talked about incremental margin on aggregates as demand returns. And just trying to get a feel for that. Understanding movements in liquid asphalt that you can't control, et cetera.

I would say there is a lot more upside in our margin recovery with volume in aggregates. And of course, we run our own aggregates at market prices through our asphalt. So, whenever we sell a ton of asphalt, we have just sol about 0.95 tons of aggregate at market price. So we get the benefit of that. So the double effect. But we have got tremendous leverage on aggregate volume, which I think is far greater than our leverage on asphalt volume. Assuming a constant liquid asphalt price, but the beauty of the asphalt, again, is that we get the leverage of the aggregates as running through that plus some incremental leverage just on the asphalt business itself.

That's helpful. Since we are on the subject of volume. I know there's a lot of uncertainty going into 2010 which is understandable. But the stimulus seems to be the most certain thing that you have going for you going into 2010 at this point.

Absolutely.

So you in the past have taken a stab at what you thought stimulus-related volume could look like. Where we stand right now and what has flowed through in '09. And what could have been delayed going into 2010? What are you -- can you give us an update on what your thoughts are as far as stimulus-related volume, and how that could look in 2010?

Given where many or most of our states are in the timing of stimulus spending through September 30, we are probably behind where we thought we would be. But marginally. A lot depends on whether some of these projects can really get going in the remainder of the fourth quarter. And as I said earlier, that's very heavily weather-dependent. I expect 2010 is going to be a -- by far the largest year of the stimulus spending because of the carryover of some of the '09. Plus just the timing that states are required to do in 2010. As well as some hiatus in other federally funded highway projects, and certainly in the near-term. We initially said 35 to 45 million tons from the total stimulus, including highways and the other infrastructure. We are seeing some of that other infrastructure going primarily Corps of Engineers work. But most of that other public infrastructure which is $30 billion, $32 billion, $33 billion, is probably going to be longer coming out second half of 2010, into 2011, maybe some even in early '12.

The highway will go faster. I guess if there's an upside to volume in 2010 from what we had previously indicated, it would be a deferral from '09. And it would be the fact that many of these projects are coming in at plus or minus 15% below the engineering estimates, which means there will ultimately be more projects bid out of the same package of stimulus money. And there may be more aggregate purchased. Our aggregate price, as we said, is up about 3%. Whereas liquid asphalt is way down. Diesel is down. Steel is down. So, we hopefully will get a larger -- slightly larger share of the total stimulus dollars today than we thought we would get back when it was originally passed. But to put a number on that at this point -- I can't do, Trey.

That's still helpful. One question on price. You said Florida down -- or California and Florida down 4% to 5%. Are those -- if I heard you right, those are the worst hit markets. You really don't have any that are down any more than that at this point?

That's correct.

On the upside though, you said that there are some markets with pricing up 10%. Some 7%. Can you talk a little bit more about those markets that are seeing relative strength, and what markets are those specifically?

Well, the Gulf Coast has been strong -- remains strong. Some of the Mid- and South Atlantic states are strong. Though -- .

Not much [chiming], that's basically what you've been seeing, I guess.

Yes. Yes. There's not a whole lot of change here in pricing. It is places where pricing has been relatively strong or remained relatively stronger. The places where it has been relatively weak -- the pricing issues for example, in Florida and California, aren't new. They've been there all year. They continue. And the flip side, the places we've had good pricing continue. So there's not really a story here in Q3 about relative price changes, if that makes any sense.

Sure. Absolutely. And then just to touch -- this is my last question. Just to touch on the cement business just for a second, it looks like you made a little bit of money there in the quarter, despite pricing being down. Can you talk about what you've got going on there? What's behind that improvement? And then also give us an update on the Newberry plant expansion?

We will have the expansion completed and in service fully in the first quarter. We will probably run that plant on what we will call a campaign basis that instead of, as you know if you follow large continuous process plants, often times what you do is run them hard, and then you take them down for a maintenance outage. And you bring in a whole bunch of outside contractors, and they work 24-7. And your cost goes spiraling up, and you get it fixed. And you bring up back on line. The addition of the second line will allow us to do our maintenance work with our internal employees. So we can do it far less expensively and hopefully far more efficiently and manage our cost structure that way until there is enough recovery in demand to go back to the normal operating mode. We, of course, wouldn't be able to do that without the second line.

At some point, we are continuing to look for what the best strategy is for our cement business in terms of markets that we can reasonably serve. And what we need to be doing there. That process continues. Certainly, we are not satisfied as you could well imagine with our cement business at this point. But it is a function of really weak market demand right now. The issue with your second question about cement was pricing?

No, I initially just asked you -- pricing was down in the quarter. I was really just asking more on -- you made a little bit of money in that business in the quarter despite the fact that pricing was down. Whereas last several quarters, you have lost money in that business. So I was wondering -- .

Probably the biggest change, Trey, is the energy cost. Coal is down. Other energy costs are down. So that is really -- it is our energy cost input and a very healthy focus on managing our controllable cost at the plant. But if you had to identify the largest single component of the earnings improvement it would be lower energy cost.

Okay. Thanks, Don. That's all I have got.

That concludes our call. I would like to turn the call over to Don for closing remarks.

Well, thank you very much for being with us today. These are tough times. Those of my colleagues who have been in this industry for a very long time repeatedly say they have never seen anything like this in terms of the volume drop. I reiterate my appreciation to our employees for working very hard to make the best of a difficult situation, and I think our numbers reflect that they're doing a very good job.

As we have said a number of times before, a little volume recovery in our business is going to go a long way. The chief issue for us is to identify -- and to the extent we have some ability to influence that volume recovery, we are actively pursuing that. Thank you. We look forward to talking with you again at the conclusion of 2009 in our fourth quarter earnings conference call. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and everyone have a wonderful day.