渥肯建材 (VMC) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2010 Vulcan Materials earnings conference call. My name is Eric; I will be your audio coordinator for today.

At this time, all participants are in a listen-only mode and we will facilitate a question-and-answer session at the end of the presentation. (Operator Instructions) As a reminder, the conference is being recorded for replay purposes.

I would now like to turn your presentation over to Mr. Don James, Chairman and Chief Executive Officer. Please proceed.

Good morning. Thank you for joining this conference to discuss Vulcan's first quarter results and our outlook for the remainder of 2010. I am Don James, Chairman and Chief Executive Officer of Vulcan Materials. Joining me today is Dan Sansone, our Senior Vice President and Chief Financial Officer; and Ron McAbee and Danny Shepherd, our two Senior Vice Presidents in our Construction Materials Group.

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

To start our conference call, I will make some brief comments related to the general economy and the effects of the economy on our business prospects as well as our first quarter results and outlooks, and then we will be happy to take your questions.

Economic measures that broadly track the US economy indicate that the economy is stabilizing and beginning to grow. GDP and industrial production have been improving since the second quarter of 2009. Additionally, every Vulcan-served state but one reported growth in gross state product in the third quarter of 2009, a marked improvement from the first quarter of 2009 when each of these states reported declines from the previous quarter.

In the most recent data for the fourth quarter of 2009, every Vulcan-served state reported growth in gross state product. Virginia and California, both important states for Vulcan, reported some of the largest percentage improvements in gross state product.

In past economic cycles, demand for aggregates has improved as GDP has grown during the initial years of economic recovery. As a result of these historical trends and current measures showing economic improvement, our confidence is growing that many of our markets have stabilized and that aggregate shipments will improve for the remainder of 2010.

Having said this, our first quarter results masked this economic improvement because of the extremely wet weather and record snowfall in January and February across many of our markets. Overall, first quarter aggregate shipments declined 14% from the prior year. However, the monthly trends within the quarter were quite different.

In January and February, construction activity and demand for our products was slowed by extremely cold and wet weather and record snowfalls. In those two months, shipments of aggregates declined 25% as compared to the first two months of 2009. 11 of the 23 major metropolitan areas served by Vulcan experienced at least twice the number of wet weather days compared to a year ago.

The most notable effects were in Charlotte, Baltimore, Washington DC, Orlando, Houston and San Antonio. However, measuring wet weather days alone does not fully capture the effects of the record cold and snowfall experienced in several key markets. Accumulation of snow can have a lingering effect on construction activity if temperatures remain cold, delaying the return of dry conditions.

In March, we experienced more normal weather patterns and demand for our products recovered. Aggregate shipments in March increased 4% compared to March of last year, the first year-over-year monthly increase we have seen in four years. This pattern continued in April, as total aggregate shipments were 9% higher than the prior year's level, reflecting increased shipments in most markets.

The average unit sales price for aggregates increased 1% in the first quarter, reflecting wide variations across Vulcan-served markets. Segment earnings in asphalt were lower than the prior year, due mostly to lower selling prices and a 27% increase in the unit cost for liquid asphalt.

Last year's first quarter average unit cost of liquid asphalt was a cyclical low point following the sharp spike up in the fall of 2008 driven by higher energy prices. Our selling prices for asphalt mix were 10% lower than the prior year. Selling prices for asphalt mix generally lag increasing liquid asphalt cost and further were held in check due to competitive pressures.

Segment earnings in concrete declined due to lower selling prices and lower volumes. Cement earnings were higher than the prior year's first quarter due to lower production costs and a 4% increase in sales volumes.

Our employees have effectively managed the business during this downturn to maximize cash flows. These efforts have not only included minimizing costs, but have also included aggressive management of working capital. The total inventory of aggregates at the end of the first quarter was reduced $32 million, or 9% below the prior year's levels.

While this action negatively affected GAAP earnings and margins because of the reduced production levels, it increased cash generation and better positions us to benefit from increased production and earnings as demand increases.

My opening remarks included some comments about the macroeconomic indicators that point toward general improvement in the economy and more importantly in the states where we operate. Now turning to our outlook, I want to build on that general trend of economic improvement by reviewing contract award data, a leading indicator of demand for our products.

Contract awards for highway construction have been strongest among the four major end markets. In the three months ending March 31, 2010, contract awards for highways in Vulcan-served states were up 37% from the prior year.

The momentum on stimulus-related funding for highways helped support the sharp growth in contract awards for highways in our states. We expect that momentum to continue through the remainder of 2010 and all of 2011. As of the end of March 2010, the Federal Highway Administration reported that approximately 74% of the total stimulus funds obligated for highways remains unspent.

Regular federal funding for highways and contract authority was restored through the HIRE Act signed into law in March. This law extends authorized funding for federal highway programs through the end of 2010 to an annualized level consistent with fiscal year 2009.

The combination of stimulus funding and authorized highway funding puts funds available for key highway projects around the country at record levels and helps set the stage for a healthy baseline of ongoing highway funding when the highway bill is ultimately reauthorized.

The large backlog of highway construction that is building, whether measured broadly by total contract awards for highways or more narrowly by the percent of stimulus-related work yet to be completed, bodes well for aggregates demand from highways in 2010 and 2011.

Contract awards for residential construction have also increased sharply in recent months, albeit from a low base. In the three months ending March 31, 2010, contract awards for single-family housing increased 41% from the prior year.

In Florida and California, where residential construction experienced some of the deepest declines, single-family starts were up 65% and 35% respectively in the three months ending March 31. For nonresidential 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, only 16%, reflecting some impact from stimulus funding.

In the three months ending March 31, 2010, the rate of decline in contract awards slowed. This end market remains weak, however, and will continue to be a drag on full-year aggregate shipments. Due mostly to the level of contract awards for highway construction in our states, we expect aggregate shipments in the remaining three quarters of 2010 to be 4% to 10% higher than the prior year.

Overall, Vulcan's total aggregate shipments are expected to be flat to up 5% from 2009 levels. Our 2010 outlook for aggregate shipments reflects a 10% to 15% increase in aggregate shipments going into highway and other infrastructure-related construction activity, due primarily to stimulus-related funding. We expect aggregate shipments into residential construction to increase 10% to 15% from 2009 levels.

For the full year 2010, we now expect aggregate pricing to be flat to up 2% reflecting pressure on pricing in certain markets. Higher aggregate volumes and pricing in 2010 should offset the earnings impact of a projected increase in cost for diesel fuel.

In 2009, our average cost for diesel fuel was $1.94 per gallon. For the full year we now expect the unit cost for diesel fuel to increase approximately 36%. In 2010, we expect to consume approximately 40 million gallons of diesel fuel. At this level of consumption, a $0.10 per gallon change in the average cost of diesel fuel impacts operating earnings by about $4 million per year.

In our asphalt business, we expect sales volumes in the remaining nine months of 2010 to increase from the prior year, offsetting the 9% decline reported in the first quarter. As a result, full-year asphalt volumes in 2010 are expected to be flat with the prior year.

Pricing for asphalt mix is expected to be flat compared with 2009 levels while unit cost for liquid asphalt are projected to continue to increase from current levels. As a result, we expect lower material margins for the full year in asphalt when compared with the prior year.

In concrete, we expect sales volume to remain flat with the prior year and pricing to decline modestly, reflecting continued weakness in private nonresidential construction. In our cement business, we expect earnings to improve modestly from the prior year on slightly higher shipments.

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 our legacy IT systems. Cash interest expense for the full year is expected to be approximately $175 million based on 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 $210 million we spent in 2009, and down sharply from the $353 million in 2008.

Finally, I would like to provide an update regarding permitting activity in the Lake Belt in Florida. In late January, 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 new permits.

Vulcan received its new permit in March of this year. Our permit is for a period of 20 years. It covers 940 acres and allows us to mine in excess of 80 million tons of limestone.

In closing, I would like to reiterate our confidence in future sales and earnings growth for Vulcan. This confidence comes from our successful strategy to continue strengthening our 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 many years into the future.

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 $27.5 billion for highways and bridges.

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 us the required instructions, we will be happy to respond to your questions.

Thank you. (Operator Instructions) Your first question comes from the line of Jerry Revich with Goldman Sachs. Please proceed.

Can you please talk about the variance in volume?

I'm sorry, Jerry, could you repeat that?

Can you hear me now?

Yes.

Okay, sorry about that. Can you please talk about the variance in the volume recovery that you saw in April? Which regions are you seeing shipment increases stronger than average, which regions are weaker? Thank you.

Jerry, it's across the board. We're seeing it in virtually every market, California is probably behind the rest of the country in terms of improving volumes, but pricing in California improved in the quarter.

But it is pretty widespread. And I think it is just an indicator of principally highway contract awards and principally the stimulus work.

Thank you, and can you please talk about the Virginia quarries that you sold in the quarter. Do you see other opportunities to cull your footprint? Or was this just a particularly attractive price that you received? And are you looking for any opportunities to redeploy that capital?

Jerry, we constantly look at our portfolio of businesses, to identify those where we think we have less opportunity for growth. These three quarries were identified about two years ago, and we have gone through a long process and finally closed that transaction in the first quarter.

We did receive an attractive price. We took the immediate proceeds and reduced debt. But that strengthens our balance sheet. And certainly we continue to look for other acquisition opportunities both reserves, greenfields and existing quarries in markets where we believe we have a bigger upside.

We do have a few other quarries around the country that are not in areas that would exhibit better than average growth, and we will continue to look for opportunities to withdraw capital from those assets and redeploy it in areas where we think we have greater opportunities for growth.

Okay, thank you. And lastly, you were kind enough to provide a pricing update for your asphalt businesses. I am wondering if you can talk about your customers' pricing outlook in areas where you're not vertically integrated. Are they able to pick up pricing as these new contract awards come in? Thank you.

We have to, as you know, partner with our construction customers to work together to achieve DOT contracts. And, the -- certainly there is pressure on both construction contracts which backs up into asphalt mix prices.

I think the wild card is the timing of liquid asphalt cost compared to the ability to pass those through. In the first quarter of 2009, we had a period of declining liquid asphalt cost, but contract pricing that reflected much higher costs. So, we were in a sweet spot on the asphalt margin.

We're not in such a sweet spot now because we have got business contracted at basically fixed rates and we're receiving rising liquid asphalt costs. That will flip, it's just a matter of time, but we're in a -- probably a trough in terms of asphalt margins compared to being at a relatively high peak in the quarter a year ago.

Thank you very much.

Next question comes from the line of Trey Grooms. Please proceed.

Good morning.

Hey, Trey.

Just a couple of questions real quick. Don, first off, on the price guidance, the source of the reduction there, did mix play a role in that at all? Or is this true pricing pressure that you're seeing? I know you mentioned it in certain markets but I'm just trying to get a feel if product or geographic mix played any role in that at all.

I don't think that at this point we can point to any product or geographic mix with respect to our pricing outlook for 2010. After the fact, we can tell you that.

But at this point, we're going to get price increases wherever we can. In some places we have to respond to competitive pressures to keep our customers competitive. And that's a moving target and it continues to ebb and flow from day-to-day. But we're reasonably optimistic that we can continue to gain price, but at a very modest level through 2010, but it is very market specific.

Okay. And you talked about your expectations for increases in highway and residential and kind of quantified those. Could you give us kind of what your thought is on the nonres piece?

In the press release you said you expected continued weakness there, but we didn't -- at least, unless I missed it -- didn't get as much color on the specifics there.

Trey, we think our shipments into nonres construction in 2010 will be down 15% to 20% compared to a year ago.

Okay. All right. Thanks, that's helpful, and then my last question is on margins.

In the quarter, obviously, the lower volume in the quarter and diesel, et cetera, played a role. But you guys have talked about incremental margins in aggregates many times in the past and now that it looks like volume is starting to improve, given where costs are currently and diesel, et cetera, could you give us an update where you see those incremental margins currently since we are starting to see these volumes start to move in the right direction finally?

Trey, we think the 60% margin is a good number in quarters in which we are both producing and shipping at comparable levels. I think one of the really important things for analysts to understand about Q1 is that we cut way back on production in Q1 partly because weather made production terribly difficult and expensive.

But secondly, we made a conscious decision to reduce production and ship out of inventories, and if you follow accounting, that hurts GAAP earnings. But it certainly positions us as we move forward to get the benefit, the GAAP earnings benefit of increased production along with increased shipments.

So if you look at our inventory numbers, particularly in aggregates, you see we have reduced our inventory of aggregates. We will get to replace that by production in the second quarter and the third quarter, which will greatly improve our earnings.

So shipping out of inventory hurts GAAP earnings, but as you produce and ship at comparable rates it really does improve earnings. So, hopefully, you all understand that, but that is a real factor in the quarter, as we pulled inventories down.

Okay. Thanks, Don, that was very helpful.

Next question comes from the line of Timna Tanners. Please proceed.

Hi, good morning.

Hey, Timna.

You were kind enough to give us the trends so far in volume in April which was really helpful, but can you talk to us about the trend you're seeing maybe in prices?

I don't have any good data on prices in the second quarter. I don't see any reason it is any change from what we were seeing in the first quarter, but certainly volumes have picked up. And as you know we normally don't talk about shipments in the quarter, but we thought change between January and February on one hand and March and April on the other were significant enough that we felt like it was important to indicate that, and apparently others are doing the same thing.

Yes, absolutely.

And, Timna, this is Dan. I do have the pricing for the month of March. And the increase in the month of March was essentially comparable to the increase for the first quarter. I do not have anything for April in front of me right now.

Okay. And then within that pricing you have talked in the past a little bit about whether it was mom and pops that are providing that competitive pressure you referred to or whether that is more the established players. Can you just give us a little more color on characterizing where that competitive pressure might be coming from?

It depends on what market but there's competition everywhere, and it is coming from both mom and pops and larger publicly traded companies. So, that is -- there's not a particular point for price competition that is different from the general competitive landscape.

Okay. And then just wanted to take a step back and ask you about your high level conversations regarding the gas tax and what your government contacts are saying there, and as we look forward to the end of the year, and next year's federal government spending outlook.

Well, we clearly prefer a multiyear highway bill funded by gasoline tax. As you know, there have been, I guess, now three supplemental appropriations in the Highway Trust Fund to offset the effects of declining fuel consumption. Economic recovery will help with the volume, but still we think there has got to be an additional revenue stream to get the Highway Trust Fund at a level that most observers think is necessary just to maintain the conditions of the US highway infrastructure.

I don't envision there being any movement in Congress until perhaps the lame duck session after the November elections to address a funding source for the next multiyear highway bill. There has been some discussion -- I think it is maybe off the table now -- about a carbon tax which would be collected as a motor fuel tax, but I think that's all dead at this point.

So anyway the discussion continues. We don't see a near-term resolution, and, again, we will continue to work hard with our industry associations to try to make the case after the elections that by that time hopefully the economy will continue to be improving. Unemployment rates will fall and maybe there will be a case at that point to fund the highway program.

Okay, thank you.

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

Thank you. Good morning. First question is on pricing. I was wondering if you could dig in a little bit more on what regions you're seeing some of this price competition? In the past, it seemed like it was confined to Florida and California. Are you seeing, I guess, an expansion in where your pricing is under pressure?

Well, California prices are actually up for the second quarter in a row so that has stabilized. Florida remains -- has a fair amount of price pressure, and between those two, most markets there's significant variation, but I think the Florida market is probably the one that has the greatest amount of price pressure at the current time.

Okay. And I was wondering if you could talk about aggregates' volumes as you look out for the rest of the year. You have provided the 4% to 10% guidance for the next three quarters, but you've certainly pointed out some pretty attractive macro data points with highway contract awards being up significantly, and we also track rail car shipments on a weekly basis.

Do you think -- I understand that visibility might not be quite there yet, but is there a potential upside, perhaps, to your volume guidance at this point?

Well, we hope so, but I can't change my internal guidance at this point. But we think, for example, if you're tracking rail car shipments, much of the material that moves by rail goes into our distribution yards and then is sold off those yards to our customers. So there is a lead time or lag time, depending on which way you look at it, between the time a rail car is loaded and the shipment is reported by the railroads and when it shows up into aggregates sales for us.

So that is a great leading indicator, but it doesn't -- it's not an overnight conversion from a rail car shipment into aggregates sales. But over -- within a quarter it ought to show up. So you have to look at the timing of those rail shipments compared to when the quarter ends and when the sales are actually reported.

We see -- and another factor, of course, will be the regular federal highway program got reinstated in March and there was no benefit of that in the first quarter in terms of new contract awards because there was just no time.

Hopefully, in the second and third and fourth quarters of 2010 we will see the benefit of the reestablishment, if you will, of the regular federal highway program at a $42 billion annual funding level. And that will be on top of the stimulus.

And as I said in my prepared remarks, for the next couple of years at least we're going to see record highway funding in the United States. The downside, of course, is in nonres construction where we're seeing significant continued difficulty.

And housing, while it's up sharply, is coming off a very low base. So the real story here is highway funding on the upside versus nonres on the downside.

Sure, and I guess my last question is on asphalt with your volume guidance of flat for the year. Just trying to reconcile that with your aggregates shipment forecast being up. I guess what is the disconnect between the asphalt volume guidance and aggregates?

Well, we're in asphalt, really, in any significant way in only three states or a total of four, California, Texas, Arizona and New Mexico. And as we've said, volume in California is lagging the rest of the country, aggregate volume.

So there is not a -- I think you can -- there is not a correlation between our asphalt shipments and our aggregates shipments because of the diversity of geography, plus we supply a lot of asphalt producers, as customers and, in different parts of the parts of the country.

Okay.

So those aren't tightly correlated.

Just a follow-up question in California. Spending has lagged the rest of the country. Are you seeing, as we move through March and April, and weather seems to have improved, are you seeing any realization of volumes from pent-up demand?

Well, certainly we thought that March had some impact of pent-up demand from January and February. One reason we gave you our shipments for April was because we thought that it probably was -- while it probably had some pent-up demand from January and February as well, it nevertheless was more indicative of some recovery in volumes for two months in a row; again, some of that is going to come from volume that was not able to be shipped earlier in the year.

But we do see improving shipment opportunities primarily in publicly funded highways and other infrastructure.

Okay, great, thank you very much.

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

Thank you. Good morning.

Hey, John.

Couple of quick ones here. When we look at the 75% odd of the stimulus highway left or about $20 billion, and then the $30 billion on the non-highway, what's your best guess on 2010 versus 2011 in terms of how much we get done in 2010 of each of those numbers and then how much spills over into 2011 or beyond?

Our estimate overall is that probably 45% to 65% of the total will be spent by the end of 2010. That includes the 20% or so that was spent in 2009 and then probably a third of the total will be spent in 2011, and then a little bit of -- the tail of it will go over into 2012.

What is significant, though -- and these numbers are available, and you should get them -- is it is a very different story when you look at individual states. For example, California has spent less than 15% of its money. Florida has spent less than 15% of its money. Georgia has spent less than 12% of its money. Virginia less than 8%. So, there are several large states for us, Louisiana, less than 9%.

So there are several large states for us where there is a lot more spending of stimulus money for highways still available than in the overall country. On the flip side, if you look at states like, Illinois is well ahead of the game at about 46% has been spent. Tennessee, which is another key state for us, about 43% has been spent. North Carolina, about 27% has been spent.

So it is a -- it is a very different scenario across individual states. And so as we look at our states, we're really in better shape going forward because there has been a much lower percent on average in our key states than in the overall US.

Yes, I reside in Virginia, I think we're in last place and our whole DOT needs to go. But anyway --

It will get spent. We're frustrated as you are about Virginia but the money is there and it will get spent.

Is there a way to relate that $50-odd billion sort of left to spend to an aggregate shipment number in tons, Don?

We have done estimates. It is easier to estimate on the highway piece than on the other infrastructure piece, which are water and sewer projects; and there is less data available and there is less aggregate intensity on many of those projects than on highway projects.

The good news about the highway projects in the stimulus is, because of the time frame in which contracts had to be awarded and projects completed, it is very aggregate intensive. And we have given some metrics on that in the past, I don't have them in front of me. But it is relatively more aggregate intensive than general highway dollars because less of this money is going to right-of-way acquisition and earth moving and much more to resurfacing and lane additions.

Right.

But I -- we have given that data and I just don't have it in front of me.

Okay, I will follow up. And then just quickly, I know it is way out, but do you have any insights into 2011 for nonres volumes? Thank you.

We don't. We watch contract awards and that will drive our analysis of 2011, and, obviously, for 2011 to be a recovery year, we will have to see nonres contract awards pick up in 2010. We're not seeing that yet.

Okay, thank you.

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

Hi. Thank you so much for taking our call today.

Hey, Kathryn.

I just want to circle back on some of your commentary on the margin weakness, and it appears that the higher diesel and also the inventories had an overall -- was the greatest impact on margins. Of those two, how much did the higher diesel impact impact the quarter? And what are you doing to offset those in Q2 and beyond? And what was the relative impact of your inventory reduction that you discussed earlier on margins?

Diesel cost us about $6 million pre-tax incremental costs in the quarter. The inventory drawdown probably cost us, yes, $14 million in the quarter, which we'll recapture when we produce that material in the second quarter.

And what -- along the same line with inventory management, and by the way, Don, we had a little steeper decline for inventory as --- it's under 9% that you commented in the prepared comments based on the release you had today.

But you basically have had, at least according to our calculations, two consecutive quarters where you've had double-digit year-over-year declines in inventory. What are your targets for inventories for fiscal 2010, and how should we think about this as the year progresses?

Well, in our view, from our operating standpoint, the fourth quarter and the first quarter are the toughest quarters to produce material because of weather. So that is the most efficient time to cut back production and ship out of inventory. So that's what we have done.

Q2, Q3 we typically have better weather, better conditions, we're more efficient. So we will -- we have shipped out of inventory for two reasons, one is because of production efficiency and the other is to conserve cash and not have cash tied up in piles of inventory. Now that we expect shipments to improve for the remainder of the year, we can then run our plants at efficient levels in decent weather.

So, this is what we have been planning for over the last six months, and fortunately we're well positioned now to get the benefit of improving GAAP earnings and margins from both increased shipments, but also higher production levels.

And so do you have an internal target for a dollar level of inventories you would like to be at the end of the fiscal year?

It really is a function of sales projections, by size and by market, and I don't think we have a -- we don't put a dollar figure on that. That's really a plant by plant sales and marketing operating decision.

Okay. Generally, what I am trying to get an understanding of is given your stated volume guidance for the year, how much more are you looking to draw down inventories further, assuming that your current volume guidance is --

We don't expect to draw inventories down. We expect to resume production and if anything, inventory levels will go up both from a seasonal standpoint and from a cyclical standpoint. So we will see the benefit in our GAAP earnings and margins of higher production levels.

Okay.

And that's our whole plan.

Kathryn, throughout this downturn, we have tried sequentially through the quarters the best we could to match our production levels with our demand levels and obviously you're not going to match them perfectly in a given quarter. But if you look at that data over a four to eight-quarter period of time the guys have done a great job of doing just that. They have tried to match what they produce to what they are selling.

And if you look at the days sales of inventory we have on the ground today, it is a little bit higher than where it was a year ago based on the current run rate of sales activity. So it is another metric that just supports Don's comment that the inventory levels themselves are really not a problem for us. They are in pretty darn good shape. And as the demand profile recovers, we have a lot of flexibility to, again, match our production levels, to our future demand levels.

Perfect. That helps. I just wanted to clarify that inventory drawdown cost that we experienced in Q1 won't necessarily be carried through in the remainder of the year.

Moving on, over to your pricing, we're in the field getting some good feedback with pricing guidance, particularly over the past 30 to 45 days, but still I think you get --- I need a little bit of hand holding on why the difference in pricing for the full-year? And what is really driving that, particularly if you believe that they are potentially going to be the upside to volumes and assuming once again that pricing generally follows volume trends?

Well, we got about 1% price improvement, in the first quarter. That was lower than our full-year guidance. So, we have got to make up some sales price through the year, where we have the opportunity.

I don't think you should -- within the range of our ability to predict selling prices for the full year, at the end of the first quarter, don't put too much significance on what we are projecting as average selling price. That can change a lot, depending upon product and geographies and volumes, and changes in demand. So I wouldn't -- we're not trying to signal anything about pricing changes in the year in our guidance other than our best guess as to how it is going to come out. And that's a roll up of a lot of different projections around the country.

Okay, that's helpful. And then finally, I know that you talked about this a little bit earlier, but given you have outperformed at least our expectations for Q1 volumes but left your full year unchanged, any other additional clarity? And particularly, if there would be any upside to the volumes, what areas would it be?

I know you said that the downside would be in your nonres commercial. But between residential and your public, which would be the greater pull, in your opinion, for potential upside with volumes for the year?

I think there are probably two places where there may be upside. One is we're seeing robust increase in housing starts, albeit from low levels. A lot of those houses are being built on already developed lots. If the home builders start developing new lots, in advance of construction projections at the latter part of 2010 and 2011, we have been very conservative in projecting volume going into housing because of this developed lot phenomenon.

But there is an upside. If housing continues to strengthen, particularly in our markets, and there is new infrastructure development around lots, I believe that is an upside. The second upside is how quickly the state DOTs get the $42 billion that was reinstated in mid-March, in the regular federal highway program, out to bid and construction.

And if that moves faster than we have projected, then it could show up in 2010 volume. Certainly it will show up in 2011 volume, probably carrying over well into 2012, given the normal spend-out level of the regular federal highway program.

But, I think one telling anecdotal piece that was on the front page of the Birmingham News about a week ago, which is consistent with everything we tell our friends in Congress, the Alabama DOT announced that it was moving forward with a contract award for the interchange of new Interstate I-22, otherwise called Corridor X, that connects Birmingham and Memphis with I-65 which connects Birmingham and Nashville.

And the director of the state DOT said with this month-to-month funding extension from Congress we couldn't award the contract for that interchange. Now that the $42 billion has been reinstated, we're going to award the contract to build the interchange; and it is tens of millions of dollars of construction.

And that's one small example of what we hope we will see with the reauthorization at least through the end of 2010 of the federal highway bill. And as projects like that get bid and let and construction starts then there is an upside we think to volume in 2010.

Okay great and my final question, just wrapping up with your Lake Belt, is there anything we should think about with the Lake Belt that would impact the pricing situation in Florida? Or any other thing we should take into consideration surrounding Lake Belt?

I think the, virtually everybody in the Lake Belt is now back into production. But so much of that material moves relatively long distance by rail up the east coast of Florida and up the rail to central Florida, I don't expect that to really have a tremendous impact on pricing in Florida. The issue in Florida right now is demand.

Okay. All right. I just wanted to clarify that. Thank you so much for answering my questions.

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

Yes, good morning, Don.

Hi, Jack.

I wanted to make sure I heard you correctly, in your prepared remarks, where I thought I heard you say that the increase in diesel fuel you guys expect for the year will basically be offset by the price increase that you think you will get for the year. I.e., the two will offset, it's a push. Is that what you were saying?

Yes.

So any profit improvement that you might get in 2010 versus 2009 would be due to volume?

Yes.

The --

And general production efficiency outside of diesel fuel.

Just --

The more we produce, the more efficient we get.

Right. Moving up the curve to that --

Right.

To that 50% or 60% incremental.

Right.

Your comment too on ready mix concrete, where I think you said that for the year you expect a modest decline, it was down 12% in the first quarter. I think you just said demand in Florida was weak, it seems particularly weak there and across your various markets.

Why a little more optimistic view of ready mix given that it is down double-digits and that's mostly in Florida, and that's among your weakest if not weakest market?

I -- actually our concrete volume in Florida was stronger than it was in the rest of the country. We had relatively less of a decline in Florida concrete than we had in our markets. So concrete in Florida is not particularly weak. It is weak compared to historical, but relative to other markets in the country it is not.

I think the -- Florida was also, had terrible weather in January and February, and that certainly didn't help concrete sales. So I wouldn't look at the concrete volume in the first quarter as indicative of the market for the full year. I would certainly factor in the terrible weather.

And as we indicated, we have a large concrete business up in Washington, DC and Baltimore and Virginia. And it is really our largest market and that market was hammered with snow. So trying to pour concrete, even days and days and days after those big snows was impossible.

So I think concrete is not as bad as first quarter volumes would indicate.

Okay. Fair enough. Also, too, on pricing for the year, where I think you were just referencing it's kind of your best guess, but we will get later in the year and have a little more certainty, which makes some sense. But given that most of the volume seems to be coming from infrastructure work right now, highway work which is generally contracted ahead of time, wouldn't you have more certainty as to your pricing for this year given the mix versus an average year?

Yes, I think that is a correct statement. A lot of the projects have been bid. We have contracts for a lot of the projects, but there is still a fair amount in front of us. And so we're trying not to be too aggressive on our pricing outlook. But, again, this is -- I hate to keep saying this but it is job-by-job, market-by-market, day-by-day.

What we report to you at the end of a quarter is a roll-up of thousands of pricing decisions and we're just giving you our best guess at this point about what full-year pricing is going to look like. So, again, I would not put great significance at the end of the first quarter on what we're saying or not saying or changes we have made in full-year pricing metrics.

How much of the competition that is evident in the pricing environment is due to the inventory imbalances that seem to exist for a lot of producers?

I don't have a feel for that. We have worked very hard not to have inventory imbalances, as you know.

Right.

So from our standpoint, we got rid of our surplus material several quarters back in most markets, so we're really not out of balance. We actually had almost no change in off-the-books inventory in the quarter. So I -- as you say, most of the demand is for material going into highway projects and that's not surplus in most markets.

Okay, great, thanks a lot, Don.

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

Hi, good morning.

Hi, Brent.

Just a question on, I guess, some of the other segments, but just with respect to concrete, do you think you can recover for the full year just from that pretty significant first quarter loss?

In terms of volume, we certainly hope to improve the volume over the first quarter number. If you're talking about earnings, we're not projecting concrete earnings to be up for the year.

Sure. And then I guess just with respect to concrete pricing and you mentioned obviously some modest declines there, I mean, are you starting to see some improvement in pricing in the backlog for that business?

It is a challenge at this point. So I think the answer is, no, we're not seeing pricing improve in the backlog, although, there are price increase announcements by some companies out in various markets. A little visibility of improving demand will help. But at this point, I wouldn't anticipate price improvement in concrete for the full year.

Okay. And then -- I do appreciate the breakdown of the two businesses, it does help, but I guess just with respect to asphalt and without having much historical context, what is sort of a normalized level of profitability for that business on sort of an annualized basis?

It is a function of liquid asphalt prices, volume, and the timing of our ability to get higher liquid asphalt costs into our contracted selling price for the mix. I don't have -- we can certainly go back and look at what that business has generated historically over a business cycle. I don't have a number I can give you today.

That's, fair I will follow up later. I appreciate it, thank you.

Your next question comes from the line of Ted Grace with Avondale, please proceed.

Thank you, Don.

Hey, Ted.

How are you doing, sir?

Great.

Good. First question I was hoping to run by you, you gave us a lot of great color, kind of how to think about pricing geographically. But from a product standpoint, just wondering if you could speak to mix shift in the quarter from a, on the aggregate side a crushed rock, gravel and sand perspective?

What that mix would be in first quarter of 2010 versus 2009? And then how to think about pricing year-over-year change by product category?

I don't have any data. The first quarter shipments are so low and so affected by weather that I don't believe you should draw a collection of mix shift in the first quarter.

As we go look forward, the stronger demand is going to come from over asphalt overlays in stimulus projects which is a higher spec, tougher to make, generally more expensive product and we will use less base material, which tends to be a lower priced product.

But, Ted, if you look, this is Dan. If you look at the first quarter data, I do have some break downs on broad product categories and our year-over-year change in the price for base material was essentially the same as the year-over-year change in the price that we got for our [clean] stone sizes for asphalt and concrete.

The absolute dollar levels are quite different as Don just pointed out, but in trying to dissect the 1% increase for quarter there was no difference in the behavior of those two broad categories. It was really some of the more specialty sizes like rip-rap and some of our fines and screenings that had, that were a little bit weaker than the mainstream kind of products.

Okay, that's helpful. So just to clarify that first point that Don made, if the mix shift is going to increasingly consist of cleaner stone used in asphalt work then presumably that is an offsetting drag on other mix shift, presumably geographic, right, because we're getting more clean stone that comes at higher price point? So when you blend that in there's got to be an offset to only get you to up 1%?

Yes, and the offset is -- is the rock that into relatively high specification concrete and private nonresidential construction. We're not -- that's a really weak market. We're not not pouring high rise condos or building baseball stadiums right now because that sector is just so week. So that's a high spec, high price material that we're not able to have a great deal of volume in.

Okay, that's helpful. On the margin side, certainly appreciate the incremental color on the under absorption that we saw in 1Q. Just wondering if you could give us a sense for how the quarter progressed?

You spoke to how January and February, obviously, were challenged both from a demand standpoint and a production standpoint by weather, but did you see the gross margins within aggregates improve January to February to March and then April? So that as you've seen volumes pick up as you talked about, the margin pull through is hitting the bottom line?

I think, certainly in looking at numbers myself, the 80% decrementals were well below what I thought you would put up. And talking to people, I think people may have miscalibrated on that under absorption. So to understand how you're progressing would be helpful?

My colleagues are feverishly looking through their reports. I have an answer but I will let them make sure I'm right before I give it to you.

While they are looking, do you have any other questions, and, Ted, in the interest of everybody's time, I will come back and pick this up and give it to you -- if you -- Here we go, go ahead.

There was a substantial increase in the unit margin of aggregates in the month of March as compared to the number for the full quarter average. The month of March, these are measured in dollars per ton, but in the month of March, the margin per ton was about all, two-and-a-half to three times greater than what the average was for the entire quarter. So, yes, it did rebound in March.

And my answer --

And I don't have April data in front of me yet.

My answer, which is based on just reality, is that given the fact that volumes recovered in March, our volumes just -- I mean, our margins just follow volume, so that's not any mystery.

So the implication there is that April should progress sequentially as well?

Absolutely, absolutely.

Okay. The last question I would ask is could you just walks through the math on estimating the stimulus spending for 2010 and 2011, how you arrived at 25% to 45% in total spending in 2010 and then 33% for 2011 and that would be my last question? Thank you.

I think the -- it is 20% in 2010, a total of 45% to 65% through the end of -- I mean 20% in 2009, about 40% plus or minus in 2010. And we did that based on a roll-up of the kinds of projects in which state and when contracts were let. There isn't a simple -- there is not a simple way to do that. It is just a roll-up of all the stimulus projects, and the nature of the project, and when it was let.

I don't know whether there is a macro, whether any of the trade associations have done similar studies or not. That would be available. But, we think it is proving to be relatively accurate and so, we haven't changed our estimate of the timing of the spending of the stimulus on the highway part.

Okay, super, thank you. Best of luck for the second quarter.

Thank you.

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

Good morning. Most of my questions have been answered, but I did want to ask you one more question on gross margin. If the expansion you talk about from shipping from production in the next couple of quarters, rather than from inventory, is that enough in the aggregate business to offset weakness in some of the downstream operations so that the year-over-year margin on kind of a consolidated basis could be higher?

I, certainly we have -- We hope so.

Because I don't -- I think that is correct because I don't expect a dramatic change in the margin through the year of the other products, so if we get margin recovery in aggregates, that should pull it through to the total Company. That is right.

Okay so that's -- the -- there is that much power you think in the aggregate's volume increase. Let's say you hit the 10% top end of your range, do you think that's enough to really drive margins higher year-over-year, despite the weakness in the other segments?

Absolutely. There is so much leverage in that aggregate volume, it can move the needle substantially.

Okay. That's all I had thank you.

Thank you.

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

All my questions have been answered. Thank you.

Thank you.

Your next question comes are the line of Chris Manuel with KeyBanc Capital Markets. Please proceed.

Good morning, gentlemen.

Hey, Chris.

A couple of questions for you. First, hopefully, this is an easy one. What percent of your shipments go via rail, go via boat, barge, or via truck? Do you have a rough break out on an annual basis of that?

Historically, and I don't think this year will be any different, about 85% of our shipments go by truck. About 7.5% go by rail, and another 7%, 7.5%, 8% go by either ship or barge. So it is about 85% truck, 7% to 8% rail, 7% to 8% ship or barge.

Okay, so that kind of leads into my next question. I think a lot of what you're bringing via barge comes out of [Caliche] or out of Mexico --

No, that comes by ship.

Comes by ship, I apologize. So ship comes out of there. So any potential -- there is a little oil spill, we understand, down there in the Gulf. And wondering if there is any potential for impact or how you think about that, what you might have embedded in your volume numbers, if there is any disruption you would anticipate?

The only place right now that there is any concern about taking our ships into would be Gulfport, Mississippi, New Orleans and Mobile. We have diverted our ships to other markets to avoid going through the oil slick because we can't then go into the harbors without having our ship washed down and with an 800-foot ship, that's a pretty sizeable project.

We can serve each of those markets adequately by barge or rail or both. So we don't envision any real impact on our ability to ship into those markets. So that's one of the advantages of having multiple means of supplying material into those coastal markets, it does give us a lot of flexibility.

That's helpful. And then with respect to the Virginia quarries that you guys had sold, if I pulled the number right from the cash flow statement it is about $51 million of proceeds. Were those mostly leased or were those owned facilities or could you give us a little more color there?

Your number is too high because also in that is the fair market value of donated real estate.

No.

It's not? Okay, it is the 5CP. It is the earnout from the sale of our chemical business. What was your second question, Chris?

Well, could you tell us what the -- I guess where I am going with this is approximately what were the reserves that were there that you sold? I was going to assume a buck a ton if you owned it and $0.35, $0.45 if it were leased. Maybe some a little color so we --

I don't have the reserve data in front of me. The issue in those markets was a change in the long-term economic outlook. Those markets were textile and furniture manufacturing and those have gone away forever.

If you don't have a whole lot of population and job growth in the aggregates business you don't have a lot of opportunity to grow volume. So that was the reason they were identified as being non-strategic.

That's helpful. I just wanted to get a sense of what kind of going transaction price, if there has been any change --

Well, you can -- on an EBITDA multiple basis, depending on what time period you look, it was within the high-single-digit, low-double-digit kind of range. Our view is, on an EBITDA basis, a quarry in a growth market ought to trade at a higher EBITDA multiple than a quarry in a low growth or declining growth market.

So I -- if you're trying to calibrate what an aggregate plant in a declining market ought to be, high-single-digit, low-double-digit. If you're looking at faster growing markets, it ought to be higher than that which is what you see in the trading multiple of most of the public companies.

All right, and that would be based off of, probably not off last year's levels, but off normalized kind of levels I would assume?

Okay. Another question I had was, to follow-up, I think it was on Ted's question earlier about how stimulus comes on and, I guess, where I'm going to go with it is kind of as it rolls off, 20% in 2009, [40-ish%] in 2010, so roughly flat then in 2011 as the balance rolls out.

As you move out to 2012, and I think about the -- at least this public side potentially falling off, how do you replace those tons, or how do you feel about highway spending being able to offset, or increased highway spending be able to maintain that level, I guess, as you go forward from there and that there isn't a drop-off?

Well, you have to go back and look. Highway spending is a roll up of the regular federal program, the regular state and local programs, plus the stimulus spending. So from September through March we virtually had almost no regular federal program.

We had a tremendously reduced program in terms of dollars, but the real impact was the DOTs sitting on their hands because they didn't have any visibility of funding out of the regular program. So 2010 and 2011, when you add up the stimulus spending and the formal extension of the regular federal highway program, will be record years in terms of the federal contribution to spending. We're seeing that in contract awards.

What we expect -- what will have to happen at the end of 2010 will be some reauthorization of the regular federal highway program, one way or the other, either through additional appropriations out of the general fund, or some other funding mechanism and as you say, there will be about a third of the stimulus dollars in 2011, with a little bit in 2012.

As we look forward, if the numbers that are being talked about from the need side for a federal highway program kick in, it will -- it will be large enough to offset the expiration of the stimulus spending. We're also optimistic, cautiously optimistic, that at some point banks will actually start lending to real estate developers and we will see private nonresidential construction coming out of the trough. Maybe by 2011, certainly by 2012.

So that is how we're sort of seeing the longer term demand trends. We don't -- we're not concerned that the world is going to come to an end when the stimulus dollars are finally spent because it is going to be 2012 before we see that drop off. And by that time, hopefully, we will have a regular federal highway program as well as a recovery in the private sector.

That's fair. I guess I'm not worried about the world coming to an end, but as I look back at kind of the last peak in the cycle say, 2005, 2006, when you did in the neighborhood of 240, 245 million tons and even layering on Florida rocks volumes on top of that I don't think would be inclusive of that.

What is the path, I guess, over the next two, three, four years, five years, to get where you think your volumes can get to, again, on a normalized basis? Is it you can see something back to that [40-ish] range?

Well, I certainly -- our pro forma volumes were about 293 million tons in 2005.

Right.

That was coming from a normal federal highway program. It was coming from an overheated housing market that was generating over two million starts. We -- we won't get back to -- we shouldn't get back to two million starts, and it was from a reasonably normalized private nonresidential level.

So as we go forward, we think longer term, housing will not get back to the 2005 levels. But federal highway spending ought to be better than 2005 levels if we get a multiyear program at the kind of numbers all the people say we need. And we can certainly get back, we believe, longer term to the level of private nonresidential spending that we saw in the 2004, 2005, 2006 timeframe.

So the down would be, from the peak, would be housing, the up from the peak would be public infrastructure and highways, and that would include recovery in private nonresidential. So that's how we sort of see the future.

The other side of it is the supply of aggregates in most markets is very hard to expand beyond the levels that people were producing in 2005 simply because everybody was pretty much running at capacity and there has not been any real capacity expansion. in fact, I expect we will see more reserve depletion as we move forward.

So that's in a very general sense how we see the future, Chris.

That's very helpful. Thank you and good luck in the quarter.

Thank you.

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

Hi, guys. Good morning.

Hey, Todd.

Most of my questions have been answered but just a couple of nits on your comments about the impact of diesel and the inventory drawdown. That $14 million inventory drawdown, I guess, that was year-over-year the impact?

No, that was the absorption effect on the P&L. That was not the dollar value of the drawdown.

Got it, understood. No, correct. Sorry about that. Was that primarily or entirely in the aggregate segment?

Yes.

Okay. And then on the diesel impact? What fraction of that was in the aggregates business versus the other businesses, rough numbers?

The vast majority is in the aggregates witness, I would have to dig a little bit to --

That's fine. That is what I was searching for. Thanks so much.

We're through with our Q&A session. I would like to turn the call over to Don James for closing remarks.

Thank you very much for your interest. We hope we can continue to see volume growth in our aggregates business as we move forward. That will certainly impact our results for the rest of the year. We look forward to sharing those with you at the end of quarter 2. Thank you so much, have a good day.

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