渥肯建材 (VMC) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Vulcan Materials fourth quarter 2009 earnings conference call. My name is Yvette and I'll be your operator for today. At this time all participants are in a listen only mode. We will conduct a question and answer session towards the end of the conference. (Operator Instructions)

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

Good morning. Thank you for joining this conference call to discuss our fourth quarter and full year 2009 results and our outlook for 2010. I'm Don James, Chairman and Chief Executive Officer of Vulcan Materials. We appreciate your interest in Vulcan, and we hope our remarks and dialogue will be helpful to you. A replay of this conference call will be available later today at our website.

With me today is Dan Sansone, our Senior Vice President and Chief Financial Officer, and 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 discussing our fourth quarter and full year results, and then give some comments about why we think 2010 could be another year of solid cash generation. The fourth quarter of 2009 presented a very tough operating environment, due to a combination of the weak construction economy and significantly adverse weather in most of our markets. As a result, sales volumes in the fourth quarter were sharply lower than the prior year. Nevertheless, we achieved EBITDA of $99 million and cash earnings of $67 million in the quarter.

Fourth quarter net earnings from continuing operations were a loss of $13 million or $0.10 per diluted share. Aggregate shipments declined 23% compared to the prior year's fourth quarter, which reduced our EBITDA approximately $69 million from last year.

Extremely wet weather in the quarter contributed to lower shipments in key markets in the mid-Atlantic states, in the Southeast and the Midwest and in the Southwest. Ten of the 12 major metropolitan areas served by Vulcan experienced more than twice the number of wet work days of a year ago. The most notable effects were in Charlotte, Washington D.C., Chicago, Atlanta, Birmingham, and San Antonio.

Additionally, aggregate shipments were negatively affected by the uncertainty regarding the timing and duration of an extension of the Federal Highway Program, which expired September 30, 2009. Construction activity on stimulus funded highway projects varied widely in 2009 across the country, and in certain key Vulcan states stimulus spending lagged the rest of the country. The average unit sales price for aggregates increased 5% in the fourth quarter, reflecting price improvement in most of the Vulcan served markets.

Markets on the lower end of the range of price increases were California, where the average selling price improved 1%, and Texas and Florida, where pricing declined 1% and 3% respectively. The price improvement from the prior year's fourth quarter benefited somewhat from a more favorable product mix, reflecting proportionately greater levels of aggregates used for highway construction, particularly pavement improvement.

Our Managers continued to mitigate some of the cost pressures caused by these significantly lower volumes. They maintained production efficiency and reduced cash fixed cost an additional 8% below last year's fourth quarter.

Shipments in asphalt and ready mix concrete declined 12% and 31% respectively from the prior year's fourth quarter, due to the same economic factors affecting aggregates. Fourth quarter segment earnings were lower than the prior year due to lower volumes and to lower material margins in both products.

Selling, administrative and general expenses in the fourth quarter declined $6 million from the prior year. This year-over-year decline in overhead cost is due primarily to reductions in employee related expenses, which more than offset a year-over-year increase in project cost of $2.6 million related to the replacement of our Legacy IT systems. Additionally the current year's fourth quarter included expenses of $8.5 million for the fair market value of donated real estate.

The prior year's fourth quarter results included $5.1 million for similar transactions. Excluding the effects of donated real estate, SAG expenses declined 11% versus the prior year's fourth quarter. The difference between the fair value of the donated real estate and the carrying value, which was $7.6 million in the fourth quarter of 2009 and $5.1 million in the fourth quarter of the prior year, are recorded as a gain on sale of property, plant, and equipment.

Employment levels across the Company at the end of the fourth quarter are down 11% from the prior year. 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 as well as to the early effects associated with the rollout of our new shared services IT platform.

Before making some comments on our outlook for 2010, let me highlight some aspects of our full year results that may be of interest. In 2009, our efforts to tightly manage cost and to maintain price discipline offset some of the earnings effect from lower sales volumes. Full year net earnings were $30 million, while cash earnings were $369 million from continuing operations, and an additional $12 million from discontinued operations. The decrease in aggregates' shipments reduced full year earnings by $334 million. Aggregates' pricing increased 3% in 2009, reflecting the attractive fundamentals of our businesses in most of our markets, even in this difficult economic environment.

Finally, let me highlight our cash generation during 2009. Free cash flow in 2009 was $343 million, a significant increase from the $82 million realized last year. This increase in cash was due to our sharp focus on effectively managing those aspects of cash flow that we can control or influence. Additionally, we reduced total debt in 2009 by $810 million, reflecting cash generation from operations, augmented by proceeds from the June equity offering.

Overall, the factors contributing to a challenging outlook for construction activity are principally the continued weakness in private non-residential construction activity and the uncertainty surrounding the timing and amount of continued funding for the Federal Multi-Year Highway Program. Highway funds from the American Recovery and Reinvestment Act were apportioned in the first week of March 2009. Since May, stimulus related funding has increased highway construction awards significantly.

For the 12 months ending December 2009, awards for new highway projects in the US were up 7% versus the prior year. Record setting awards from May to August, when contract awards exceeded $6 billion each month, reflected good initial progress by the state transportation agencies in starting shovel ready projects intended to stimulate construction activity and create jobs. As a result, during the second half of 2009, Aggregates shipments in some Vulcan served states, such as Illinois and Tennessee, were relatively stronger than in other states, due in part to more rapid spending of stimulus related funding.

Other key Vulcan served states such as Florida, Virginia, California, and Georgia lagged other states in awarding and starting stimulus related highway construction in 2009, and as a result, aggregates shipments in these states have yet to benefit as much from stimulus funding. The varied spending patterns for stimulus projects in individual states depend on several factors, including the number of projects each state had that were shovel ready soon after the funds were appropriated, the types of construction projects that each state has elected to pursue, and whether the projects are in large urban areas involving metropolitan planning organizations, where project planning and execution can be more complicated and time consuming.

In the fourth quarter, however, contract awards for highway construction in Vulcan-served states increased 13% from the prior year, compared to a 2% increase in other states. We are optimistic by the increased award activity, and are encouraged that stimulus related highway projects in Vulcan-served states, after a slow start, are now moving forward and will benefit demand for our products in 2010. As a result, we continue to believe that 2010 will be the biggest year for stimulus related highway construction, followed by another solid year in 2011.

Overall, our 2010 outlook for aggregates shipments reflects a 10% to 15% increase in aggregates going into highway and other infrastructure related construction activity, due primarily to stimulus related funding, and assuming that the FY 2010 budgeted levels for the regular highway spending are approved by Congress within the next few weeks. While we have assumed that regular highway funding for highways will remain at an annualized level consistent with FY 2009 under SAFETEA-LU, Congress will need to act quickly to restore fiscal year 2010 funding levels and contract authority prior to the start of the construction season this Spring.

Senate leadership is working to introduce its first Jobs bill of this session, which in its most recent draft includes restoration of FY 2010 authorized highway funding at $42 billion, as previously budgeted, and which provides for an extension of that funding until December 31, 2010. As part of the package, Senate Leadership is working with key Republicans on the Finance and the Environmental and Public Works Committees to also return some $20 billion to the Highway Trust Fund in the form of interest previously owed to the Fund.

We are cautiously optimistic that this bill can pass the Senate. This would be a very important step to put the nation on the path to long term highway funding stability that will occur with the ultimate passage of a Multi-Year Highway Bill. The Senate has already passed the Jobs Bill in December, containing similar provisions as they relate to the Highway Trust Fund.

Residential construction activity should increase year-over-year in 2010, albeit from very low levels. Starting in November, single family housing starts broke a string of 43 consecutive months of year-over-year declines. While this is only two months of data, it is encouraging, and coupled with improving affordability numbers which we see across all of our markets, declining inventory levels, and attractive interest rate levels, we believe there's room for some optimism in single family housing construction in 2010 and beyond.

For 2010, we expect aggregate shipments into residential construction to increase 15% to 20% from 2009 levels. For non-residential buildings, we expect construction activity to remain weak in 2010. US contract awards for stores and office buildings declined 62% and 63% respectively in 2009, while public buildings declined more modestly, down only 16%, reflecting some impact from stimulus funding.

In Vulcan-served states, the decline in contract awards in 2009 was similar to the US as a whole. As a result the year-over-year percentage decline in Vulcan aggregates shipments from non-residential construction, including both privately financed and publicly financed sources, is expected to be down 15% to 20% in 2010. As a result, Vulcan's total aggregates shipments are expected to be flat to up 5% from 2009 levels, due mostly to an increase in aggregates used in highway construction and some improvement in housing.

For the full year 2010, we expect aggregate pricing to improve 2% to 3%. Higher aggregate volumes and pricing in 2010 should more than offset a projected 20% increase in costs for diesel fuel. In 2009 our average cost for diesel fuel was $1.94 per gallon. In 2010 we expect to consume approximately 40 million gallons of diesel fuel. At this level of diesel fuel consumption, a $0.10 per gallon change in the average cost of diesel fuel impacts operating earnings by $4 million per year.

In our asphalt business, we expect sales volumes to increase approximately 5% from 2009 levels. Pricing for asphalt mix is expected to increase from 2009 levels but not enough to offset projected higher prices for liquid asphalt and aggregates. As a result, we expect lower materials margins in asphalt, when compared with 2009.

In concrete, we expect sales volumes to remain flat with the prior year and pricing to decline modestly, reflecting continued weakness in private non-residential construction. We expect full year SAG expense in 2010 to be slightly lower than 2009 due to continuing cost reduction efforts, as well as lower costs related to the replacement of Legacy IT systems.

As discussed previously, we have a major project under way to implement new integrated systems and processes to replace our Legacy IT systems. Along with Legacy system replacement, we are also redesigning related administrative support functions to reduce cost and improve service. The project is proceeding as planned. To date we have successfully installed our new financial systems at the corporate office and in three of our nine operating divisions.

Total cost for this project peaked in 2009, as most of the design and development work was completed. Implementation will continue into 2010. We expect 2010 to be the final year of significant spending, with net expense reductions occurring thereafter. We expect SAG costs related to the ERP project to be approximately $3 million less in 2010 than they were in 2009.

Cash interest expense for the full year is expected to be approximately $175 million, based on the current level of interest rates and a reduced level of capitalized interest on capital projects. We will continue to tightly manage capital spending, and as a result expect to spend approximately $125 million in 2010, up slightly from the $110 million we spent in 2009, but down sharply from the $353 million in 2008.

Discontinued operations earnings will benefit from a projected $10 million of cash proceeds in 2010 as part of the 5CP earn-out. This earn-out was included as part of the divestiture of our Chemicals business several years ago and will end in 2012.

Finally, I'd like to provide an update regarding recent permitting activity in the Lake Belt in South Florida. Last week, the US Army Corps of Engineers issued its record of decision in support of mining in the Lake Belt region. Simultaneously, the Corps of Engineers began moving ahead with issuing (technical difficulty). Vulcan should receive its new permit within the next two weeks. Based on the record of decision, the Company expects that its permits will be for a period of 20 years, will cover 940 acres, and will allow mining in excess of 80 million tons of limestone.

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 a compelling advantage of great locations in major US markets that are expected to experience above average growth in aggregates demand for many years into the future.

The current construction economy is weak, but the economic stimulus plan will help drive earnings growth at Vulcan over the next two to three years. Our available production capacity and ongoing efforts to improve cash margins position Vulcan to participate efficiently and effectively in the $50 billion to $60 billion of stimulus related construction, including significant remaining portions of the $27 billion for highways and bridges in Vulcan-served states.

The key determinant on highway construction spending for years to come is of course the Multi-Year Federal Highway Program, which represents a substantial growth opportunity for Vulcan. We, along with many business, industry, and labor groups, are urging Congress to act promptly to sustain the momentum from the $27.5 billion provided for highways and bridges by the economic stimulus plan. In order to add and save construction jobs in 2010, this broad coalition is currently urging Congress for a formal extension of baseline highway funding at the FY 2010 budgeted level of $42 billion.

We're also urging Congress to do this in time to impact the 2010 construction season. Such legislation will then set the stage later in the year for the development and enactment of the next Multi-Year Surface Transportation Program.

We're the clear leader in the US aggregates industry and are well positioned for significant participation in the economic recovery and in public infrastructure programs. We 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 Jack Kasprzak with BB&T Capital Markets. Please proceed, sir.

Thanks. Good morning, Don.

Good morning, Jack. How are you?

I'm well, how are you?

How's the snow?

We're about to get some more today, so I'm afraid the bad weather is not quite over.

That's great for business.

I'm sorry about that. I'd like to do my part. I wanted to ask with regard to volumes in 2010, I know you guys aren't giving quarterly guidance, but your guidance of flat to up 5%, given that it seems like most of that improvement is expected to come from stimulus money that's flowing through to your states, would you expect any improvement in volume would be more skewed than usual to maybe Q2 and Q3? I'm trying to get a gauge in particular of how you might think the first quarter bad weather, shut downs, not a lot of private construction is going to look versus the fourth quarter even.

Well, Jack, I think that's absolutely correct. Highway contractors are not loaded up with a large backlog, and they are going to try to do their work in the most favorable weather environment that's available, and we didn't see that in the fourth quarter and I don't expect we'll see it in the first quarter.

So they will, unlike some prior years in which they had large backlogs and needed to get started early, I don't expect that to happen this year, so I think Q2 and Q3 will be the heaviest part of the construction year for us and our customers. And as you point out, the weather in the fourth quarter was awful, and it looks like the weather in the first quarter is even going to be worse on a comparable basis, so I would expect to see that Q2 and Q3 will be major quarters for us for 2010.

And with regard to pricing guidance of up 2% to 3% for 2010, I mean, are there markets where you're going to get a fresh price increase in calendar 2010, where you've implemented a price increase and that's why you expect overall you're going to get a modest improvement?

And I think modest is the right word, but yes. Another factor which we pointed out is the mix shift, as a larger proportion of our work is going into stimulus funded highway projects. Those are users of the hardest to make, most expensive aggregate sizes we produce, and just that mix shift has a positive impact on the reported average selling price.

Okay, and with regard to the fact that the Federal Highway Program has been under this series of continuing resolutions to this point, have you guys seen disruption in flow of work for -- I know we're in Winter -- but contractor, customers flow of work that that's been coming out, versus maybe expectations just because the regular highway program as you point out has been a bit disrupted.

Well, I would say it's been more than a bit disrupted, and certainly the flow of bid lettings and contract awards has been severely impacted by the expiration of the regular Multi-Year Highway Program on September 30, 2009, and the, shall I say, distraction of Congress over other matters, including in particular health care, they've just not gotten to it. The result is, and this period has been worse than prior periods, the funding extensions are only at a level of about $2 billion a month, whereas the regular -- the budget is for something like $3.6 billion a month, spread equally across the year, so there are two big impacts. Number one, the amount of money being appropriated has been substantially reduced, and there are a lot of technical reasons for that, all of which would be fixed by the bill now pending in the Senate, and the one that has been passed in the House.

And secondly, the DOTs have just said we're going to build an awards stimulus project but until there's some clarity in Washington about whether the US is going to have a highway program, a regular multi-year program, it makes absolutely no sense for us to have bid lettings and award new contracts, and that's been going on since mid year 2009. That's why it's so important that Congress address that issue now, before we lose the 2010 construction season.

Okay, thanks, and sorry last one. SG&A - -

Call your Congressman.

I've been calling him for other reasons, but I guess I'll call him for that too. SG&A, 2010 versus 2009, looks like 2009 you had donated real estate, that inflated the reported number, you expect IT expenses to be down 2010 versus 2009, but for modeling purposes do you think SG&A dollars should be down 2010 versus 2009?

Absolutely.

Okay, thanks very much.

Your next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed.

Good morning.

Hi, Jerry.

Can you please talk about your aggregates cost structure heading into 2010, if you hit the low end of your volume on pricing guidance can you expand your margins in that type of environment?

I think the issue is going to be around diesel fuel cost. I mean we've got a number in our model which is pretty high. We don't obviously know what the final costs are going to be, but in terms of labor productivity, efficiency, cash cost at our plants, all of those things, our folks continue to manage aggressively, but the real uncertainty about aggregate production cost in 2010 is all about diesel fuel prices.

And so if you get the two points of price you're looking for, doesn't that more than offset the diesel fuel costs, or are there some other moving pieces?

Yes. If we get a little volume growth, then our current outlook is it will be flat to up five, so if we get a little volume growth we get the price improvement, our cash margins will certainly continue to improve - -

Jerry, this is Dan. In addition, as we've noted, the cash fixed costs have been coming down in almost every quarter, but they have not been declining as fast as the volume growth -- volume has declined. I would expect on the uptick likewise that those cash fixed costs will not grow as fast as volume grows going out of this as well.

Okay.

And as we've said to you and others before, we're in great shape with respect to cash margin. If we can just get a little bump in volume, we will see the results very sharply. It's all about volume for us at this point.

Okay, and can you talk about what kind of price increases are you seeing your ready mix customers putting through in areas where you're not vertically integrated? Can they absorb the two to three points of price increases that you're targeting for next year or this year?

Well, we haven't said that the 2% to 3% price increase will be to ready mix customers.

But I guess there's a substantial enough part of the equation where it would be pretty -- ?

We have said our own ready mix prices are likely to be down in 2010 compared to 2009. I think the focus of overall reported price improvement for 2010 will be in highway construction markets.

And lastly, can you talk about what kind of price increases you saw in January year-over-year, now that that month's on the books?

No. And you know I don't need to expand on why I'm not telling you that. We just don't give monthly pricing.

Okay. Thank you.

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

Hi, good morning.

Hi, Timna.

Just wanted to follow-up with some of the other questions. If we look at the government spending, which sounds like it's going to be critical for 2010, how important do you think it is for a longer term extension to the SAFETEA-LU successor to have a resolution to the Highway Trust Fund, meaning do we need to have a solution to how we're going to pay for roads to actually get this extension any longer than (multiple speakers)?

I think the extension can be fully funded, the extension through 2010 that's part of the Jobs Bill that passed the House and is part of the pending legislation in the Senate. Through 2010, the Highway Trust Fund can be fully funded by credit in the interest that was pulled out of the Highway Trust Fund and used in other portions of government, so that part is okay.

I think to actually get a fully funded new six-year Federal Highway Bill, there will need to be some revenue streams, the existing revenue streams will have to grow as a result of economic recovery, and in all likelihood, there will need to be some incremental revenue streams dedicated to the Highway Trust Fund. I think that the practical reality is until the economy begins to recover, it is very unlikely that Congress or the administration is going to advocate any higher fuel tax or other incremental revenue streams on the Highway Trust Fund. But that's why we think getting the extension through the end of 2010 is the important first step, and then hopefully, beginning later this year, perhaps in the fourth quarter, the conversation about the next six-year bill and funding that bill will become a key topic.

Okay, that's helpful. And then you talked about, it was really interesting the $2 billion a month that is being funded in the extensions, whereas the budget would be for a higher value. The difference between those two numbers, if I understood you right, what happens to those dollars, are those still being saved somewhere or they go away?

Well part of the problem is the recission that occurred with the expiration of the SAFETEA-LU on September 30; that had an impact on contract authority, so there are a lot of technicalities, but the reality is twofold. One is without a formal extension, the DOTs are sitting; and secondly, the amount of money currently available for reimbursement to the states is reduced as a result of the -- even though it's in the budget for 2010, because of the technical problems that need to be solved by Congress, that 2010 budgeted number is simply not available to the State DOTs except in a substantially reduced level. So it is a legislative problem that normally gets fixed.

I think health care, as I've said earlier, has diverted the attention and has obviously polarized Congress, and so we are hopeful that this Senate portion of the Jobs Bill, which they are breaking into individual pieces we think, the piece that will contain the restoration and the correction of the Highway Trust Fund hopefully will be the first significant piece of bipartisan legislation that gets passed. But the snowstorms in Washington have slowed that activity somewhat, but it's on the agenda and hopefully stay tuned over the next two to three weeks and see how that moves.

Okay, unfortunately I've got to keep watching Washington. Sounds good. On the Lake Belt discussion that you had, does it sound like we should be thinking about that as a longer term story now still, given the situation in Florida? Can you talk a little bit more about that?

Well, I think, as I indicated, the Corps has moved forward with new permits. They are being -- some have already been issued, others are being issued even as we speak to the producers in the Lake Belt. We obviously can't control what, if anything, will happen with respect to any new challenge to those permits, but the core did an extraordinarily good job researching the issues, addressing the issues raised in the prior litigation, but that doesn't mean that there won't be some further judicial proceedings there.

One of the other aspects -- one of the things the Corps did to address some of the concerns raised in the prior litigation was to take larger setbacks between the areas to be mined in the Lake Belt and the Everglades, and that has taken some slice of the reserve from the long term Lake Belt mining out of the picture. That will all become clearer I think once the remaining permits get issued. But at this point, mining will be able to resume under the new permits in the Lake Belt -- as you know it's been shut down for most of 2009 -- and we'll go from there.

Demand of course remains very weak, so there's not a huge incentive to crank production up to high levels by any of the producers we don't believe, but we'll monitor that. But at this point, I would expect as the construction season moves forward, we will all see a resumption of production in the Lake Belt quarries.

Okay, thanks. And then finally from me on the goodwill impairment question that people always seem to ask every quarter, is there anything new to think about there of how you're looking at the Florida Rock assets?

Well, we have done our impairment testing, and we have concluded that we don't have any impairment issues for 2010. Of course that process goes on every quarter, but the big impairment testing is as of the end of the year, and we've completed that and believe there is no impairment.

Thank you very much.

I think one of the things, Timna, is a recognition that a substantial portion of the Florida Rock aggregates and assets were not in Florida. So while Florida has been extraordinarily weak, Florida was a portion of Florida Rock's assets and operations, but it was certainly a very large portion outside of Florida in Georgia, Virginia, Maryland, Alabama, so it's not all about Florida.

Okay, great. Thanks.

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

Hi, thank you so much.

Good morning Katherine. It's even snowing in Nashville, I understand.

It is, unbelievably, but it's pretty, but it's definitely not helping your business I suppose. I think the big question that everyone has today is how were you able to achieve 5% pricing when some of your peers were not able to achieve that? And I was going to see if to some extent, could you discuss how much your in-market mix, geography, and other items played into pricing that's above and beyond the highway mix that you talked about in your prepared comments.

Well, I think reported pricing, as we've said in previous quarters, is a function of not only prices of individual products and individual markets, it's also a function of geographic mix shift and product mix shift, so I think your question is right on point. We were very happy to see our pricing in California be up 1%, which was good news after some periods of declining pricing. California, you know, has very good, in absolute terms, pricing for aggregates and that helped. I think as we indicated, the mix going into stimulus projects and shovel ready projects is highly focused on federally-specced asphalt stone, as opposed to a lot of base material, and also relatively lower specced material that would be going into housing and things like that.

So there was a mix shift in 2009 compared to our historical; there will be a mix shift in 2010 compared to 2009 and to our historical. And I think the mix shift is moving toward highway construction, which is our sweet spot, and for companies that are more focused on concrete, it's a tougher environment for pricing, as I tried to indicate in our earlier -- . We have to keep our concrete customers competitive, and so it's a market by market, product by product, customer by customer challenge, and our guys have done a really good job looking for places where we can still get modest price increases, and I think that's reflected in our numbers in the quarter and for the full

And speaking of your end market break out, it's obviously shifted a great deal between res, non-res, and public, since the peak of the market. Looking into 2010, what is your estimation for the break out of res, non-res, and public as a percentage of your total revenue?

We have not done a precise attempt at calculating that. I would say generally, highways and other public infrastructure will be well north of 50% of our projected demand in 2010.

Housing will move up, but from a very low base, probably in the mid teens. Private non-res will move down, probably in the 20% plus or minus range. Public buildings have certainly much more strength than the private buildings. So that's a very rough estimate, but I would expect that we will see more than our historical average going into publicly funded projects in 2010, which is a positive for us I think.

Okay, great. And turning to -- wanted a follow-up question on the impact of pricing. How much is -- I know there's been some talk about managing inventories and base inventories and the overall impact on pricing. Are you running into any issues in managing overall inventories? I know you haven't said that in prepared comments, but it seems to be you guys are doing a good job on that. Could you talk a little bit about your inventory management, particularly managing that base inventory?

Well, our guys have been aggressively managing inventory levels for at least the last 18 months and setting up their plants to maximize the production of the products that are currently in demand and minimizing the production of products that are not in strong demand. And the ability to do that from quarry to quarry depends in part on the geologic formation, and depends in part on the plant design and construction, and it depends in part on the operating expertise of the plant folks, the plant Manager and the area Manager and the people who work in the plants.

So it is clear to us that we need to focus our efforts on managing our production processes to maximize the production of what's currently in demand and minimize the production of what's not. And at this point, we don't see any material impact on our financial results from the shift in demand, but that just hasn't happened automatically. That's been the result of a hell of a lot of focus of people who know how to run plants different ways, and I can assure you I'm not very helpful in that regard, but thank goodness there are a lot of people in our organization who are.

Absolutely -- and.

Kathryn, the overriding inventory guidance throughout the Company has been if in doubt manage the facility for cash generation. So we have at every turn opted to wherever possible not spend the cash, to keep the dollars invested in inventory low, even though to put some inventory on the ground would boost short-term GAAP reported earnings.

And that's a real focus, and I want to reiterate what Dan said, and that's an excellent point. Building excess inventories doesn't generate cash. It consumes cash. It does help your GAAP earnings, so we're really focused on cash, and we do that historically, but we have really focused on that issue in this downturn.

Okay, great point. And final question relates to volume. First, are you seeing any improvement in volumes in certain markets, certain geographies, and how much did weather impact your overall margins -- volumes and therefore margins in the previous quarter?

Well, the fourth quarter was terrible, from a weather standpoint. I guess it could be worse, but it was -- we were really wet for extended periods of time in most of our large key markets, as I've indicated. Weather hadn't improved quarter to date in the first quarter. I think in response to Jack Kasprzak's question, we certainly would expect volumes that didn't get shipped in the fourth quarter, we don't expect them to get shipped in the first either. So those will likely -- we will hopefully see the results of those beginning in Q2, when a lot of this stimulus work that was slow coming out of the box in a lot of our key states begins to happen.

It's really interesting to look at the level of stimulus spending state by state as a percentage of the total, and look at what happened to our aggregates volumes in those states. And two of our strongest markets in the second half of 2009 were Tennessee and Illinois, and when you look at the stimulus spending as a percent of the total in those two states, they were among the highest in the country. There were some other northern states, like in New England and the upper midwest, that also had high spend out numbers. But the warm weather states, who were for various and sundry reasons doing different kinds of work or doing more work in cities rather than rural areas, Florida and California in particular, but also as we pointed out Georgia and Virginia, the vast majority of their spending is in front of them, and so that whole -- the different spend out patterns is certainly showing up in our markets, both plus and minus.

Yes, and you know that we well know that, particularly with our DOT work and seeing some significant upside in those states into 2010. I guess my final question, parting question, I know that the appellate courts ruled in favor of the Florida judge. What does this really mean for Lake Belt, especially in light of the Corps of Engineers issuing permits?

Well I'm going to take off my lawyer's hat, which is old and tired now and probably completely irrelevant, and put on my practical hat. I think practically, the judge's opinion was taken into account and fully addressed by the Corps of Engineer Record of Decision. So at this point, we think it is the new Corps permits that are relevant, and that the litigation is essentially behind us, so at this point the focus is on the new permits, and the issues with the old permits are over.

Okay. Well, that's very helpful. I appreciate it.

Your next question comes from the line of Adam Rudiger with Wells Fargo. Please proceed.

Good morning.

Hi Adam.

I was wondering if you could share your thoughts a little bit about how you view the asphalt and concrete and the cement businesses right now, and particularly in light of your comments that the margins could be lower next year? And if I look at it, it looks like the asphalt concrete gross margin was just 6% this year, so there's not a ton of room for it to go much lower. Just wondering what the remedy could be, is there a point where you just decide to shut down production more, or really just how you view those businesses?

Well, I think asphalt is a different story than concrete in 2010. I think asphalt markets will be improved. The issue with asphalt is what liquid asphalt prices are going to do. It's very much the same as with diesel fuel, and that is affected so much by the global economy and by demand for co-products.

So at this point, we're projecting -- at least in our outlook, we're projecting much higher or significantly higher liquid asphalt cost in 2010. Hopefully that is somehow mitigated during the course of the year, but at this point we're looking to higher numbers. But demand for asphalt is expected to be up. It's just the relationship between the cost of liquid asphalt and our ability to pass that through in pricing, and the timing differential between those two areas. Basically we have to buy liquid asphalt now almost on a spot basis, and we price our material on a contract basis, and so there's often a lag between our ability to pass through increases, and when liquid asphalt falls it improves our margins, because we have priced at higher numbers, and the actual spot price goes down. So that's really the story on asphalt.

Concrete and cement is a function of demand, and demand for both those products are low because private non-res construction is down. Hopefully some strength in housing in 2010 will help demand for concrete and therefore cement. But until we start seeing significant recovery in housing and see a bottoming of private non-res construction, concrete markets are tough, and there's no way around that.

Let me add one other point, that the tail end of your question asked whether or not we would be shutting some of those operations down because of low margins. Let me remind you that virtually every asphalt and concrete operation that we have is tied to a Vulcan aggregate plant, and we're selling Vulcan aggregate through those operations. So the decision to operate or shut down one of those downstream facilities have to include the impact it has back on our aggregates business.

And just to put it in perspective, in 2009, the asphalt and concrete segment numbers had an EBITDA margin of around 14%, but embedded in that is the aggregates that are used to produce that product that we also produced, and our aggregates segment had an EBITDA margin of around 38% or 39%, so there's a significant pull through of aggregates profitability tied to those operations. So the decision to operate or shut down a plant is not solely based on the reported margin for asphalt or concrete.

That's helpful, thank you. And then just one quick modeling question. Can you provide any guidance on tax rate 2010?

I guess the first guidance I would give you is do not think about it as a percentage, because when you get down to the relatively small numbers that we're reporting right now and you consider some of the permanent differences that this industry enjoys, specifically statutory depletion, thinking about a tax rate in percentage terms is pretty difficult. The way I would advise you to think about it is more in dollar terms, and let me just try to give you a little color on 2009. I'll talk here about the full year numbers, not the fourth quarter. But we reported a pre-tax loss of $19 million for the full year, and we reported tax benefit of $38 million.

The reason for that is that our aggregates business is still profitable and still handsomely profitable, and still generates significant statutory depletion benefit, which is a permanent difference. It's essentially a tax credit that can be applied back against previous tax payments or carried forward against future tax payments, so we still record that. That was a $20 million benefit that we enjoyed in 2009.

And then in 2009 there was about another $5 million of tax benefit that's ongoing, if you will, referable to accounting for our foreign operations, and another $5 million or $6 million of a couple of other items that again are generally ongoing. So what will happen in the future is, assuming our aggregates business rebounds, we'll get some incremental margin from that. Obviously we'll generate some incremental tax on that at the normal 38%, 39% kind of a rate. But we will also get a sizeable amount of additional depletion benefit to offset some of that regular tax.

So I think the way to model it is kind of roll forward from where we were in 2009, and almost do a line by line kind of an estimate of the big components, and the really big components that are going to drive the tax provision in dollars year-over-year will be depletion benefit and tax at the marginal rate kind of offsetting each other. When volume comes back a little bit we'll get back into a more steady state world, where the tax rate in percentage terms is more meaningful, but right now in percentage terms, it doesn't tell you much.

Okay, thank you.

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

Hi, thanks. Just quickly, I know you've provided it in the past, could you offer the average cost for liquid asphalt during the quarter?

You mean in the fourth quarter?

That's correct.

Somewhere in a little over $400.00 a ton, maybe between $400.00 and $410.00.

Actually it was just a shade under $400.00.

Okay, so -- ?

I'm sorry, you're right, Don. It was just -- $400.00 to $410.00 is the right number.

So relatively flat compared to the third quarter, if I remember correctly?

Right, right, and much lower than a year ago.

For modeling purposes, would you anticipate the increase in liquid asphalt to occur also in the second and third quarters, as seasonally (multiple speakers)?

I can't, I'm not that clever to be able to do it. I think for the full year, we are looking at a 20%, 25% increase in liquid asphalt. Hopefully that won't occur, but that's what we've got built into our numbers.

Okay, that's helpful. And just lastly, can you just talk about the impact of diesel on the competitive environment, with your expectations it will be up 20% this year. Would you anticipate that it might price out competitors who have been moving into some of your markets, who had been more willing to travel longer distances because diesel was low in 2009? Do you think it could maybe reverse it and make the playing field a little bit (multiple speakers)?

Well, I think on the margin it matters, but it is only on the margin. And I think we believe that higher diesel prices, while they increase our cost, also increase our opportunity to get somewhat higher pricing, and there's a pass through effect and then there's a delivery cost effect. So I think on the margin that may have an impact, but certainly we haven't built anything into our outlook for 2010 other than the cost impact. We haven't built any volume or price impact from higher diesel fuel prices in our model.

Okay, thank you very much.

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

Thank you. Just as a follow-up on the cost side of things, hoping you can provide some more color on margins. Specifically if you look at fourth quarter aggregate decrementals kind of a marked sequential degradation. On a reported basis they went from 40% decrementals to 48%.

If you were to back out the sequential improvement in pricing, you're probably looking at 55% decrementals just in the aggregate piece of the business. So wondering if there's an explanation that you could share, whether it was some one-time items that were -- kind of hit the quarter, if there's a notable step up, just walk through the puts and takes. And similarly going through that same math on the asphalt and concrete side, where you saw something similar.

I would say it's hazardous to try to compare Q3 costs to Q4 costs. I think it's much better to compare Q4 to Q4, because, as we have said, we not only -- everything we sell is consumed outside, but everything we produce is produced outside, and the fourth quarter is a tough production quarter as well as a tough shipment quarter. I think when you -- it's much better to look at costs over the course of a year than from quarter to quarter, or certainly when you start comparing first quarters and fourth quarters you can get distortions. I think on -- go ahead, Dan.

I was going to maybe try to come at it a slightly different way. If you look at what we call our variable margin, which is the difference between average selling price and our variable cost -- and again the variable cost in our definition is all cash cost -- whether you're looking at the fourth quarter or the full year in comparison to the same periods in 2008, what you see is our variable margin is basically flat.

If you go a little deeper into the income statement and look at our cash margin -- and this is for aggregates -- look at our cash margin for aggregates, and the difference there is it's the selling price less our total cash cost, so you're factoring in now the effect of what we would characterize as cash fixed costs, you see that for the full year we had a 1.5 to 2 percentage point margin shrink. And I mentioned earlier the phenomenon is that for the year, our unit shipments were down 26%, and our cash fixed costs were down about 14%. So you have that adverse leverage effect that's really volume-driven, that's offsetting the full effect of the average pricing increase. And then of course if you go down to the gross profit as we reported it just now, the big effect on margin change there is going to be just much less absorption of the non-cash depreciation expense.

Sure. Okay, that is helpful. And then just in terms of the M&A landscape, any update on what you're seeing there in terms of packages coming on the market, any recent transactions that have anything notable on them, and what your expectations would be for kind of the first half of this year?

There seems to be a lot of noise about M&A, but almost no deals that are getting closed. There is one that I believe has closed. I'll wait on the people involved to announce it if they intend to, but -- so there is some activity. That was not something that we had an interest in. It overlapped several of our markets. And there is a little bit of noise floating around, but we don't see a whole lot of transactions that are likely to happen, at least in the first half of the year.

We have sold one small non-strategic asset, and may have one or two others that we will sell. We bought a couple of quarries in 2009 that were in key markets for us, so there is some activity, but it's not big. Now what happens going forward for the full year I don't know at this point, but I don't see a whole lot of big deals happening.

Sure. Based on what you have seen or even just chatter, any sense for kind of where multiples are these days?

I think for aggregates, they remain very high which is appropriate. I think depending on the magnitude of the downstream products and the markets they're in and that sort of thing, you can sort of get a different EBITDA multiple. But if you're looking at pure aggregates, you have an EBITDA multiple for transactions which is comparable to or better than the trading multiple of public companies that are aggregates focused.

So things are not getting cheaper, which would be silly for anybody to sell something that's got good long term reserves and a good market at a low price. This too will pass.

Sure, and then just the last thing on M&A. Are you seeing new entrants? I guess I've heard anecdotes of certainly a bunch of private equity backed companies, as well as some individuals, some of whom you probably know well, stepping in. Just wondering how you could shape the competitive landscape on --.

Well, I think that probably when the dust clears there will be a couple of acquisitions by private equity funded groups. They are buying existing facilities, so in that sense it doesn't change the competitive landscape. I would expect private equity funded operations to be very disciplined from the standpoint of pricing and cash flow, which I think on balance will be helpful. So I don't see it as a problem. I see it as probably on balance a plus.

I don't think you're seeing private equity funds trying to go out and drill Greenfield quarries. They're just buying ones that happen to be for sale for one reason or another.

Okay, and then just as a tag onto that, I guess I've heard discussions, the Bakers are out doing their own thing. And is it true they don't have a non-compete against Vulcan after selling Florida Rock?

Well, the individual members of the Baker family who do not work for Vulcan do not have a non-compete. I think that's correct. We actually sold the Bahamas quarry to a -- okay, that's one of the things that's floating around out there. But I don't know whether the Bakers have actually bought anything or not at this point. I'm not aware of it if they have.

Okay, that's helpful, thank you very much.

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

Thanks very much. Just a couple of follow-ups. One thing I did want to ask you about is on the price and the shift in mix, and the move to more highway construction, so Don, do I understand you right that the shift was more towards say asphalt stone as opposed to base material, both of which would be used in building a road, but one of which is more expensive and the other is pretty much not expensive, right?

Well, there is a difference in the price, because there's a difference in the production costs; there's certainly a difference in the competitive environment with respect to high spec surface mix let's say for overlays on highways compared to base material that go under the highways; so yes, that's part of it.

Okay, so as you're looking forward to 2010 and looking at additional highway work from the stimulus as a tail wind on price with regard to the way the mix goes, that would imply that you're looking for more overlay type stone and not a big increase in base. Is that a reasonable take away there?

It is to some extent, although if you look at the projects being built in some of the states that were slow to get started like Florida, Florida is doing less overlay and more lane additions, and lane additions use base, whereas overlays don't. So there are a lot of variations by project type, by state, and where they are in their spending, so it's not to say that every project that will be built in 2010 is an overlay project. There will be some other work, some of which will use base but I think your premise is largely correct, that asphalt stone will be in significantly greater demand relative to other types of material that we produce.

Got it. So just thinking a little bit longer term, not focused on 2010 but are we setting up at some point for a real sort of snapback in terms of base coming back as a larger part of the mix, whenever we get back to kind of a maybe a more normal highway market if such a thing can be considered to exist anymore? And when that happens, do you think that has the potential to really be a drag on reported prices?

I don't think so, and I refer you back to prior periods in which the economy has come back, or the renewal of a Multi-Year Federal Highway Program which gives the DOTs the opportunity to do bigger projects, which use more base as they drill either new lanes or new construction. And in those markets, we get much stronger price increases than we're projected to get in 2010. So while there's a mix shift, the overall growth in demand really helps our overall pricing opportunities.

And it helps our production cost as well, because a more normalized product mix of asphalt material, concrete, stone, and base material becomes more plant production friendly than the environment we're in right now, so it's easier to set up the plants and you'll enjoy better productivity.

So if you're concerned that a return to normalized highway construction (inaudible - microphone inaccessible) will result in declining pricing for Vulcan, I believe that concern is misplaced.

Okay, and I was sort of going to lead back around to the margin question that I think Dan just answered, which is that both in terms of productivity that's going to help, but to what extent do you feel like you have low cost inventory of base loaded in right now? Has there been kind of a perceptible shift downward in the cost per ton of the base in your inventory at this point?

I don't think so.

Okay.

I mean, we've been trying to produce less base.

Do you guys to stop capitalizing those costs at a certain point?

Well if there's a substantial excessive quantity of one particular size, yes, our procedures are such that we will not capitalize those costs, but at the end of the day, as Don mentioned earlier, we have not had a dramatic impact on our reported cost or earnings this year as a result of that.

Okay, fair enough.

And we do not cost individual sizes separately, so we cost all stone at the same unit value.

Okay, that's great, thank you. In the quarter, there was a gain on sale of PP&E. Can you tell me what was in there?

Well, we tend to fund our charitable foundation with contributions of appreciated real estate. That gives us a significant tax benefit to do it that way. I think we had about $8.5 million of fair market value of real estate contributed to our foundation in the fourth quarter, compared to about $5.1 million I think a year ago.

The way that works is that the fair market value of real estate becomes an SAG expense, and then the gain between the book value of the donated real estate and the fair market value becomes a gain on sale. So you've got both those things running through there which really essentially offset each other, so there's really not a net gain from those kinds of transactions, although - - .

If you strip out the donations that are recorded in the gain on sale line in the fourth quarter of 2009, there is only about $6 million or $7 million of other gains, and most of that is represented by a single property sale in one of our divisions. The rest are just miscellaneous items.

Got it. And then there's some - - ?

So I think the point is you shouldn't look at property gains and subtract those from earnings unless you also subtract the SAG expense associated with that contribution, so it's almost a wash.

Got it. That's fair. There was also some assets held for sale on the balance sheet. Is that the same theme?

Well, I mentioned we were looking at some non-strategic assets, and that's one of them.

Okay, fair enough. There was something else, but I forgot what it was so I'll just let it go. Thanks very much.

Okay.

Your next question comes from the line of Keith Hughes with SunTrust. Please proceed.

My question has been answered, thank you.

Okay, thanks, Keith.

I would now like to turn the call back over to Mr. Don James for closing remarks. You may proceed, sir.

Well thank you very much for joining us today. I think the message in the fourth quarter and for the full year is markets are weak. Vulcan's Management team is focused on doing what we can to generate cash and manage our business effectively, and position ourselves to be able to respond very positively when there is some increase in overall demand as we look forward to 2010. That is most likely to come from public infrastructure projects, particularly stimulus projects, with some kicker for hopefully improvement in housing construction.

Private non-res continues to be weak. Overall, I think we are well positioned to benefit significantly once we start seeing some overall volume growth. Hopefully we will see that when we report earnings at the end of 2010, but that's the real key to earnings recovery and earnings growth for Vulcan is some recovery in volumes in our markets. We're working hard to both manage our production operations, our sales and marketing strategy, and in this climate our government relations efforts to try to get some stability in federal highway funding.

So thank you very much for your interest in Vulcan and your attendance today in this conference call. Have a good day.

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