渥肯建材 (VMC) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the second quarter 2010 Vulcan Materials earnings conference call. My name is Eric, I'll be your audio coordinator for today. At this time, all participants are in a listen only mode and 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 call to discuss our second quarter results and our outlook for the second half of 2010. I'm Don James, Chairman and Chief Executive Officer of Vulcan Materials. Joining me today is Dan Sansone, our Senior Vice President and Chief Financial Officer.

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 risks and uncertainties are detailed in the company's SEC reports including our most recent report on form 10-K. Our second quarter volume growth is encouraging as we look ahead to the second half of 2010 and continuing recovery in demand.

The outward trend in aggregate shipments that started in March and continue through the second quarter led to the first year-over-year quarterly increase in shipments in four years. Improvement in the overall economy as well as higher levels of contract awards for highway construction and for single family housing starts provided the catalyst for growth and demand for our products in the second quarter. The earnings effective higher volumes in each major product line was more than offset by the settlement of the lawsuit in Illinois, the flooding in Nashville as well as higher energy related costs and lower pricing.

In May, we reached a final settlement in a lawsuit filed in 2001 against Vulcan by the Illinois Department of Transportation. As a result, a $41 million charge was recorded in the second quarter. The suit alleged damage to a .9-mile section of a road that by bisects our large quarry in McCook, Illinois, a Chicago suburb.

Excluding this charge and related legal expenses in the second quarter, EBITDA in the second quarter was approximately $138 million versus $168 million in the prior year's quarter. Second quarter segment earnings and aggregates were $122 million compared to $127 million in the prior year. The earnings effects from higher aggregates shipments was more than offset by the effects of a 2% decline in aggregate pricing, a 38% increase in unit costs for diesel fuel and charges associated with record rainfall and flooding in the Nashville area. Over a three-day period in early May, more than 12 inches of rainfall was reported. Most of that total occurring in the first 12-hour period. Aggregate pricing continues to reflect wide variations across well conserved markets.

Some major markets realized price improvements from the prior year second quarter. Other markets such as Florida and to some extent the far west have remained challenging due to reduced demand as well as continued competitive pressures. In a number of long hall markets served by rail, barge and ship, increased transportation costs due to higher energy costs resulted in lower freight adjusted selling prices as these costs were not recovered in the second quarter selling prices to customers. Aggregate shipments increased 6% from the prior year second quarter, due primarily to stronger demand from public highway projects and improvement in single family housing starts. Many Vulcan served markets realized solid increase in shipments versus the prior year second quarter.

In markets where increased competitive pressures have persisted due to weak demand such Florida and to some extent the far west and in long haul markets where competitive pressures have inhibited our ability to recover recent increases in transportation costs due to higher fuel prices. Aggregate net sales approximated the prior year's second quarter while gross profit declined. As a result, the earnings leverage for higher volumes was not realized in these markets.

However, in all other Vulcan served markets representing about 73% of our aggregates volume in the quarter, the higher sales volume resulted in incremental margins of 65% on the incremental sales dollars. Across most markets, key operating measurements of labor productivity improved from the prior year. In the Nashville, Tennessee area severe flooding in May closed several of our coring operations, reducing aggregate segment earnings by $3 million. We expect to recover a portion of this from our insurance carriers. The average unit costs for diesel fuel increased 38% in the quarter reducing pretax earnings $8 million.

Excluding the impact of higher fuel cost, unit variable productions costs for aggregates declined slightly from the prior year, demonstrating the continued focus of our employees in running our plant sufficiently. Segment earnings in asphalt were $14 million lower than the prior year due mostly to lower selling prices and a 26% increase in the unit costs for liquid asphalt. The year over year increase in liquid asphalt caused reduced asphalt earnings $9 million. Asphalt volumes increased 2% from the prior year's second quarter.

Our selling prices for asphalt mix were 5% lower than the prior year. Selling prices for asphalt makes generally lag increasing liquid asphalt costs and further were held in check due to competitive pressures. Segment earnings in concrete declined $3 million from the prior year due to an 11% decline in selling prices. Some end earnings in the second quarter declined $1 million from the prior year as lower average unit selling prices offset higher sales volumes.

Our forecast for aggregates demand in the second half of 2010 continues to reflect an increase in public construction driven by stimulus related funding as well as the formal extension of the Federal Highway Bill which occurred in March of 2010 along with an increase in residential construction albeit from low levels. Single family housing starts in the second quarter increased 6% from the prior year in Vulcan served states. This year year-over-year increase follows a 41% increase in Vulcan served states in the first quarter. As a result, most key states for Vulcan now reflect positive growth in trailing 12 month single family housing starts.

In private nonresidential construction, rate of decline in contract rewards has slowed in recent months. The start of a recovery in this end market will be influenced by employment growth, business investment and lending activity. The flow of contract awards for highway construction, a leading indicator of future construction activity, has been improving since March of 2009 when stimulus related funds became available to each state.

In March of this year, the stimulus driven improvement and contract awards for highways was accentuated with the passage of higher act. This legislation formally extended the regular federal highway funding through the end of 2010 and transferred $19.5 billion into the highway trust fund.

A balance sufficient along with projected tax receipts into the trust fund to maintain current levels of federal funding of $41 billion for highways through 2012 according to congressional budget office projections. As a result, monthly contract awards for highways in the US have remained at high levels greater than 5 billion per month since January. Through the first six months of 2010 contract awards have increased 6% from the prior year. This increase follows last year's first half increase of 7%.

In Vulcan served states that increase has been more dramatic. During the first six months of 2010, total contract awards for highway construction in Vulcan served states including awards for federal, state and local projects increased 11% from the prior year. For 2010 the Federal Highway Administration reported that only 38% of the $27 billion of total stimulus funds obligated for highways has been spent which bodes well for increased construction activity from federal stimulus spending for the remainder of 2010 and throughout 2011. Last week, the US House of Representatives passed the fiscal year 2011 Transportation Housing Appropriations Bill. The house bill provides $45 billion in federal funding for highways.

A 10% increase from the FY 2010 level. The senate will consider its version of the FY 2011 appropriations bill after the August recess. This continuation of stimulus-related highway construction activity, as well as the prospect for regular highway funding through 2012 from a solvent highway trust fund provides a cornerstone of our demand outlook. In the second half of 2010, we expect aggregate volumes to be flat to up 5% from the prior years second half levels on a same store basis.

Overall pricing for aggregates remain solid despite the year-over-year decline reported in the second quarter. A number of Vulcan served markets are still realizing year-over-year price growth while other markets where pricing has been under competitive pressures or affected by recent increases in transportation costs, remain challenging. As a result, we expect aggregate pricing in the second half of 2010 to approximate the prior year.

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 in residential construction to increase 10% to 15% from 2009 levels and private nonresidential shipments to decrease 15% to 20%.

In the second half of 2010 we expect an average unit cost for diesel fuel to increase slightly from actual year to date unit costs. 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 and segment earnings in the second half of 2010 to approximate the prior year. In concrete, we expect sales volumes in the second half of 2010 to increase from the prior year and pricing to decline reflecting continued weakness in private nonresidential construction and competitive pressures. In our cement business, we expect second half earnings to be a slight loss versus the break even results reported in the prior year.

We expect SAG expense in the second half of 2010 to be flat with the prior year due to continuing cost reduction efforts as well as lower costs related to the replacement of legacy IT systems. Interest expense for full year 2010 is expected to be approximately $175 million based on the current level of interest rates and a reduced level of capitalized interest capital projects. After the close of the quarter in early July, we raised $450 million through a syndicated bank term loan at attractive interest rates of LIBOR plus 200 basis points. Proceeds of this transaction were used to further improve the Company's liquidity position.

We will continue to tightly manage capital spending, and as a result expect to spend approximately $125 million in 2010, up slightly from the 2000, -- $110 million spent in 2009 but down sharply from $353 million in 2008.

In closing, I'd like to reiterate our confidence in future sales and earnings growth for Vulcan. This confidence comes from our successful strategy to continue strengthening our aggregates focused business which has the compelling advantage of great locations in major US markets that are expected to experience above average growth in aggregates demand for 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 billion for highways and bridges. We are the clear leader in the US aggregates industry and are well positioned for significant participation in economic recovery and in public infrastructure programs. We thank you for your continued 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 Jerry Revich with Goldman Sachs. Please proceed.

Good morning, Jerry.

Sir, your line is open. You may be on mute.

Yes, good morning. Can you hear me?

Yes.

Terrific. Thank you. Don, I'm wondering if you could talk about pricing trends you've seen in asphalt over the past couple months. Your guidance on flat year-over-year profits in the back half appears to imply 10% or so% price increase 3Q over 2Q. Do we have that right?

Yes, we expect 3% to 4% price growth in the second half. The issue there are liquid asphalt costs which, you know, were up about $100 a ton in the first half and will probably be up about $90 a ton in the second half based on our current outlook. So we are closing the gap on asphalt pricing versus liquid asphalt costs but it takes awhile to get that done.

And have you soon that starting to kick in July yet or do you have some more work to do over the coming months to get to that price hike?

Well, the -- a lot of the asphalt we shipped in the second quarter was priced last year. A lot of it is stimulus work and it was priced in the period in the second half of 2009 largely when stimulus work was about all that was out there because the regular federal highway program was in limbo. As you know, it expired September 30 for several months prior to that and all the way up through mid-March of 2010 there was very little in a regular federal highway program. So competition for asphalt as well as aggregates was about as intense as it has been in a long time in the public sector. So I believe, you know, the situation is improving from the standpoint of visibility of future demand. But liquid asphalt pricing remains a challenge.

Thank you. And lastly, can you talk about aggregate pricing trends over the past couple of months? I think your guidance implies a modest sequential increase. Have you seen early signs of sequential improvement across your markets?

Well, again, I think a lot of the aggregates shipped in the second quarter were priced back in the end of 2009 or the second half of 2009 when as you can recall housing was still very weak private nonRes was falling sharply and there was no other work other than the stimulus project. So we think the environment is better going forward for aggregate pricing than it certainly was in the second quarter.

And so the declines in outlook was that driven by some incremental spot work that was shipped or is that driven by makes or timing of shipments, I guess, considering the good visibility you've had wondering why the pricing outlook has been reduced there?

Well, the highway work generally is strong and improving. The offsetting factor is the continued decline in nonres construction, primarily private nonres construction. Housing is continuing to pick up in our markets but it is a relatively small portion of total demand. So the balance here is the relationship between the improving demand in the highway sector and the continuing decline in the private nonres sector. We are seeing signs that contract awards in the private nonres side or bottoming in the sense that the rate of decline is lessening and we are getting closer to a bottom there but it is still falling and that's offsetting the upside from the highway sector.

Thank you.

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

Hi. Thank you for taking my questions today.

Hi, Kathryn.

First on the pricing as you alluded to early pricing is impacted by the hangover pricing in late 2009 and also you allude to the long haul market. Which of the two had a greeter impact in the quarter and, also, do you have what percentage of aggregate shipped in Q2 as priced in late 2009?

I don't have that statistic, Kathryn, with any precision in front of me today. But the long haul. Our reported freight adjusted selling price in long haul markets was down about $1.00 a ton. Actual price to our customers was only down about $0.30 a ton. The other 70% is the incremental -- the other $0.70 is incremental freight costs that we absorb as we freight adjust our reported pricing. So that's the -- the long haul markets were significant and their reality is that there is a lot more capital tied up per ton of aggregate in long hall markets. You've got to have loading facilities at the quarry. You've got to have a distribution yard, and unloading facilities and either investment and transportation assets or hiring those transportation assets and then you've got more money tied up in working capital in both inventory and receivables. So in a rational world margins ought to be higher in the long haul business than in the truck served markets.

Unfortunately in this market, there is a lot of competitive pressures along the gulf coast. That's resulted in a reduction in our reported pricing. That accounts for about 27% of our volume, that is the long haul markets plus Florida and the far west being California and Arizona. he other portion of our business, our largely truck served markets, which was about 73% of our volume in the quarter, did very well. We got as I said, you know, 65% of contribution margin from the volume growth there. So, you know, the challenge for us is to get our pricing caught up in the long haul markets and ultimately -- and California is in reasonably good shape and to try to improve our margins in Florida.

And just to clarify in the long haul market. Is this a function of higher fuel or were there other additional competitive pricing pressures in the quarter?

Well, as I said, about $0.70 of the dollar is transportation which is largely fuel. And $0.30 is competitive pressure.

That's helpful. How have prices overall in your Ag grates group trended since the quarter end and how much did geographic differences play into pricing trends in the quarter?

The first half of the question about pricing trends in Q3 I won't go there at this point because I don't want to give that information until the quarter ends.

Sure.

With respect to geographic mix, the higher priced markets had relatively lower volumes. And that would be Florida and California. And on an absolute basis the long haul markets, the way we reported are the freight adjusted basis that would not be the case. But there is some geographic impact to the reported pricing. Some of our markets had price growth. In fact, our pricing ranged from about -- up about 6% in some divisions to down significantly in Florida.

We are hearing from our checks that you have been attempting to push through pricing throughout much of 2010. Are you still trying to push the pricing now and how is the market accepting any attempts to pass through pricing?

Depending upon the location and the job and the dynamics in the market, you know, we are trying to push pricing every day. Where we are seeing competitive pressure is when an established customer is being called on by a competitor and offered lower pricing and we have to deal with that in order to maintain the competitiveness of our customer. So we are responding to issues in the marketplace which really are driven by weak demand in a number of markets. It is a very good coalition. Where demand is improving pricing is improving. Where demand is weak pricing is weak. It is supply and demand and pricing are very alive and well in this industry.

Overall just stepping back you talked a little bit earlier in your prepared comments about incremental margins. Has your position on incremental margins really changed at all?

Well, I think we have said publicly we would expect 60% incremental margins with improved volume in 70 markets that had 73% of our volume we got more than 60%. We had erosion in gross profit in some of the markets where we had to absorb the additional transportation costs and where there is tremendous competitive pressure right now. We think volume growth which is certainly available through highway construction will allow most markets to exhibit the kind of incremental gross profit growth as a percent of revenue that we have experienced historically.

And my final question before I get into the que is more related to volumes. We noted that in mid-may there is an overall sentiment change in many key markets in the US. Maybe just fundamental time change but there definitely was a marked step, more conservative outlook from a variety of different construction industries. How much did this play into effectively lowered guidance for the back half of the year?

Well without knowing that if you're hearing from contractors who build nonhighway privately funded construction there has got to be a great deal of pessimism there because the highway -- I mean the contract awards for private nonres construction are weak and not yet improving. On the highway side the contract awards are relatively robust. So I think you would get very different reports from highway contractors compared to general contractors who do similar work in the private nonres sector. If that's inaccurate from what your people -- what your sources are saying I'm surprised.

No, not necessarily. Really, what we are seeing -- I mean a great example is you have an aggregate producer still having the same fundamentals but is scaling back on CAPEX because they are not sure of outlook because of stimulus wearing off with the uncertainty of the new highway bill. So it is not an overall market shift and the fundamentals of change meaningfully but just being a little more conservative.

Well, I think you can see that in our CAPEX over the last 24 months. We have certainly been cautious until we could see -- until, A, we had the need for it which when we were producing roughly 50% of what we were at the peak we don't consume capital at the same rate we do at the peak. So it is natural that our CAPEX would be down.

I think there are as you well know several hurdles yet on the highway side. We talked about the 2011 appropriations bill which we were pleased with passage last week in the house of representatives. It has got to pass the senate. As you know the authorization now runs through the end of this year and I think most importantly is that the congressional budget office is projecting that the balance in the highway trust fund given the current balance plus the projected receipts are sufficient to maintain a $41 billion regular highway program through 2012 and I think that's a very positive number that gives us optimism that highways will be strong when you overlay that with the stimulus spending and the remainder of 10 and throughout 2011 highway spending is going to be robust. The real question then becomes when does private nonres bottom so that it's no longer falling and how quickly will residential begin to recover? But we are -- I think our confidence is high in the highway sector over the next three years or so.

Don, thank you so much for answering my questions today.

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

Good morning. Just wanted to follow up on a question with respect to fiscal 2011. The appropriations that passed the house. Seemed like the senate in recent weeks, or coming back a little further has been a little bit less keen on increasing spending. Any color that you can provide on that and any initial reads on whether or not the senate will pass the $45 billion spending plan would be helpful.

If I don't have a prediction. We have been toll by the care of the environmental and public work committee that they are working hard and will have hearings and try to get something done right after they come back after the August recess. I think the good news is that congress can appropriate the $45 billion which is what the house appropriated out of the balances in the highway trust fund without having to increase revenue in the near term. That would likely result in the balance in the highway trust fund not being sufficient to take it all the way through the end of 2012.

Basically it would accelerate some spending out of the highway trust fund from 2012 into 2011. But at some point congress will have to take up a multiyear highway bill. The reality is that is probably going to be after the November elections where we have had several senior people in both houses indicate that they expect to get it done in 2011. That it would be a multiyear highway bill. But at this point the thing that is, I think, tangible is that the balance in the highway trust fund is sufficient to maintain a significant federal program through 2012 without any incremental tax receipts and I think whether congress decides to accelerate the spending or maintain level spending Ex the stimulus is the real question.

Switching gears to volumes in the quarter. Could you provide a little bit more color on the year-over-year progression of volumes as you move through April, May, June?

I think they have been relatively stable each month in the range of our -- I guess we gave an April volume number at the end of the first quarter. So volumes have continued to grow in the 6% range steadily through the quarter. If that's your question?

It is. I guess what I was trying to get at. I believe the April number was higher than the 6% that you reported.

But April is a smaller volume month than June. So you -- yes. We haven't seen a material shift in monthly volumes through the second quarter if that's your -- any variation is just within the normal range of some months have one less shipping day, some months might have one more shipping day and that moves the monthly numbers around. But if you're looking for a trend that shipments are way down in June compared to April I don't think you'll find that.

And that's I guess what I was getting at. The back half of the year guidance flat to plus 5 suggests somewhat of a slowing year over year trend. You did mention that there was some segments that you expected to I guess lag versus recover. You know, for the full year the guidance -- or at least for the second half of the year the guidance that you provided for your various end markets were pretty similar to what you had offered for the full year previously.

That's correct.

Okay. Any one area that you feel I guess better or worse about?

Well, I certainly feel better about highways.

Okay.

And I'm less certain about private nonres just simply because we don't see the catalyst in the near term for a change there but on the highway side the combination of the reauthorization of the regular federal highway bill in March, the additional money going into the highway trust fund plus the overlay of the stimulus projects in 2010 and 2011 I think are the place there is upside. Housing, you know, how much -- if you look at housing incrementally month-to-month you get one picture. If you look at it this year versus last year you get a different picture. So, we are looking at this year versus last year. Housing is up.

Whether the launch of the tax credit loss of the tax credit for housing is going to cause a double dip in housing one could speculate but we don't have that -- we don't have that. We think housing will be stronger in 2010 than it was in 2009. And that will continue well into the future. Housing starts are just so low relative to the amount necessary to replace obsolete housing and to deal with new house hold formations that we think that that's got to move. Plus interest rates are at historic lows and affordability is that historic high. So we have some optimism with housing but it is a small part of our business relative to highways.

And just my last question is just looking at the ready mix and asphalt volumes related to aggregates. Just purely geographic?

Primarily, yes. Our concrete is in Florida, Washington, DC, Metro area and all the way from Richmond up to Norfolk up to Baltimore, in San Antonio, Albuquerque, Phoenix and California and some of those markets have had housing -- housing has been hit harder than the rest of the country. Our asphalt is in Texas, California, Arizona, New Mexico. And, you know, our volume in asphalt is relatively stronger or as strong as our volume growth in aggregates in those markets.

Okay, great. Thanks for answering my questions.

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

Good morning. In the past you talked about stimulus that's not related to highways. Do you have any updates on how that is tracking?

That is hard to track. We keep trying to track it. But it is much less precise than the highway side but certainly it is moving, I think, the brack work, there is a little bit of that stimulus money that goes to the base realignment and closure and brack work is very strong right now in several of our markets. Some of the other projects, water and sewer projects go through a far less efficient contracting and bidding and awarding process than highways and some of that's got relatively long lead times. Our sense is the $30 billion or $32 billion of nonhighway stimulus funded heavy construction is lagging the highway side but I can't give you a precise metric. We are pretty confident that 38% spending through the end of the second quarter on the highway stimulus is a very good number. That comes from the government. But on the other side we think it is probably materially lower than that but we don't know exactly what it is.

Okay. Thanks for that in the second half with the 5% volume increase that amounts to sort of a lower volume recovery than what you had signaled for the full year and given your confidence in highways I'm kind of trying to understand what accounts for that downgrade. I know you talked about it a little bit but if you could help me out.

Private nonres.

Okay, so that's worse than you thought?

When it is going to bottom. You can follow the contract awards which is what it is all about but the contract awards are still declining. The rate of decline has decreased but it is still declining and credit the lack of credit to developers is really a big part of the issue. And so until credit becomes more accessible it is hard to see private nonres construction turning up significantly.

Okay. Great. Thanks. Then final question from me is we had modeled in a payment due by the end of the year of about $340 million. So does this bank loan then address that? Is that how --

Yes, that's what it is about.

Great. Thanks very much.

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

Yes. Hi. Good morning.

Hello, Brent.

I guess just maybe to summarize some previous questions and maybe it a bit early to ask but based on some of trends you are seeing today do you anticipate you could see some pricing growth in 2011 for aggregates?

We would certainly hope so. If highways continuing to improve as contract awards would certainly indicate they will, housing continues to solidify and if the rate of decline in private nonres continues to be reduced or private nonres actually bottoms so there is not a down sector, there is a flat sector and two up sectors then volume and price are pretty closely related over the long-term and we would expect -- we would expect opportunities for price growth.

And then I guess just given the pressures you've seen in your concrete business, has your view changed in terms of your relative exposure there? Would you view the current downturn as an opportunities to some of the others out there still struggling?

We continue to look at the opportunity. I think being able to supply cement and aggregate to ready mix is a key factor for us. The ready mix business by itself is not something that is strategic to us. But if it is integrated with our aggregates business and particularly if it is integrated with our cement business we think it is an attractive business. In a normalized market. This is a really tough market for concrete as you can imagine. But we are actually -- there is a fair amount of concrete in some public infrastructure projects particularly water and sewer projects. But concrete by itself is not to us. Concrete or integrated products more so.

That's helpful. One last one. Any additional anticipated costs associated with the flooding in Nashville, or is that taken care of at this point?

No, that's done. We just had huge amounts of water pouring into several of our quarries and destroyed or impacted some of our equipment which we had to spend money to replace or restore and that's essentially the gist of that and that's behind us.

Sure. Understood. Thank you.

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

Hey, guys. Don, you've done a great job kind of outlining your expectations on the federal highway side and then obviously been quite clear on your views on nonres. As we think about total, call it road and highway demand, about 40% of total aggregates go to that channel and as we think about it about half that funding comes from the federal government and about half from states. And if you look at the spending trends to date and it is really every month this year and even goes back into last year, the numbers have been kind of flat to up on a total reported basis if you look at road and highway construction as the census bureau reports it. If you back out the spending from stimulus it would suggest that the underlining spending is down substantially. Year-to-date called the underlying spend is probably down 15%. Now, we know that the federal dollars has been constant because of the extension. So, you know, one read on this is states are under a lot more pressure than, you know, the market maybe aware and it is something that, you know, the industry hasn't really addressed. My question -- my first question is, could you speak to your view on the state situation as opposed to the federal highway situation because it is obviously a huge component for highway demand for aggregates and how you are thinking where we are now, how that trends in the second half of this year and given the budgetary pressures there under how that looks for 2011?

Well, for us that's about 22 different questions because every state is different and within the state the local situation is different. I think overall the fact that in -- for the last six months total highway contract awards including federal, state and local in our markets are up 11%. So without regard to construction put in place numbers which are backward looking, the contract awards are forward looking and they are positive. Now, perhaps a greater portion of that 11% contract awards is coming from federal money contrasted to state and local than we have seen historically. But the net result for us is that total highway contract awards funded from all three sources, state, local and federal, are up significantly year over year and that gives us the basis for our optimism of future demand through that sector. Some states -- and I will go -- you know, some states have struggled with getting state highway budgets funded and contract awards out the door. Others have done a very significant job. Some states are viewing highway construction as a state level stimulus. I think Texas has among the largest state highway program in history. Illinois has a large program that hopefully will begin to roll out soon. And California has still got a very large state highway program notwithstanding all of the budget issues California has got. The state highway program still appears to be very robust going forward.

Let me give you a couple of total numbers we were able to pull up. If you look at the total state and local awards year-to-date, and this is through June 30. So it is the first half of this year compared to the first half of last year. Total state and local awards are up 11%, that excludes all the federal activity. The state only awards, state department of transportation awards are actually up in the high teens. And these are in well conserved states that I'm citing. And the local awards are down 5% or 6%. When you put the state an local together you are up 11% first half of this year versus first half last year.

Who was it? Mark Twain who said the story of my death has been greatly exaggerated. That may also be true about state and local highway funding.

I certainly hope so. As a follow on to Jerry's question on pricing. Can you give us any color on kind of current spot pricing versus reported either for the second quarter or at the end of second quarter? I realize it is tough across the whole portfolio but if you could just frame it out a little bit..

As I say we are pricing virtually every highway project separately and there are so many factors that go into that. I don't think I can give you an answer that would make -- that would be accurate that would make any sense. We haven't seen any momentum change in the quarter, I guess, is the best way I can answer that.

Okay. Fair enough.

Up or down. I mean, it's been the -- individual projects will be bid at individual prices and they're going to take into account all sorts of things including transportation costs. But in terms of trying to see a monthly momentum shift or even a quarterly momentum shift that's a very subtle distinction.

Understood. Last question and kind of follow-on to that response. Given, you know, higher transportation expenses in the long haul markets are diesel costs and local, you know, across your platform, are you undertaking or anticipating taking any more cost cutting efforts to help on the margin side?

Well, as I indicated in our remarks, absent the cost of diesel fuel which we have relatively little influence over, our variable production costs at our plants are actually down slightly. So our guys are doing a tremendous job at the plant. Our labor efficiency as I indicated is up. So costs for us is a function of volume and if we can continue to get volume growth, that will help on our overall cost structure and we continue to look hard at our overhead costs and try to rationalize them as we work through this period of relatively low volume.

Sure. Okay. Thank you very much, guys.

Thank you.

Your next question comes from the line of Mike Betz with Jeffries. Please proceed.

Hi, Don.

How are you?

I'm good, thanks. I had two questions. One related to California and one related to Florida. Heidelberg, on their call on Friday were indicating that they seen some volume improvements in California, a change in trend at the end of the quarter which continued into July. I'm wondering whether you had seen any of that? And my second question related to Florida. Semics were indicating on their call that some of the pricing issues that occurred because of somebody dumping stone into the Florida market. I mean, is that something you have seen and is there any sign, if you have seen that, seeing that situation coming to a conclusion, coming to an end? Thank you.

You know, California, our volumes there are down slightly in the quarter. But are stabilizing. We certainly have not seen volume growth in California in the second quarter. In Florida there appeared to be a producer, domestic producer with new capacity that's being aggressive in Florida. But many factors there. But, you know, Florida has got to get some overall volume recovery, I think, to get pricing back up. I have seen, you know, some price increase announcement by some parties in Florida and certainly given the earnings difficulty everybody in the industry in Florida is under I would hope that will occur but I can't give you a projection about what we will be able to report in the second half in Florida pricing?

And how has long that new capacity on Florida been onstream?

It is not in Florida it is railing in from another state.

Okay. And just finally just back to my first question, Don. I hear what you say about California across the whole quarter but was there any sign of any improvement at the end of the quarter?

Yes. We did see an improvement in shipments in June significant offsetting, you know, the whole quarter was essentially flat which meant April/May were down some and June was up. So, yes, the trend is good. I would caution that we shouldn't take one month's shipments compared to a prior month's shipments and conclude that there is a trend there. Like I said just having one or two more shipping days versus one or two fewer shipping days can move the numbers around plus or minus 10%. But I think our June shipments did improve relative to the two months -- first two months of the quarter in California.

Okay. That's great. Thank you very much.

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

Thanks a lot. Good morning, guys.

Good morning, Todd.

Just getting on to the competitive dynamic a little bit. I'd just like to drill that and a few people have done that already, of course. Are you seeing more competition on base stone or clean stone or does it matter at this point?

I don't know that we see a disearnable trend either way.

Okay. Is there a theme with regard to -- First of all, has there been a change in sort of the tenor or the identity of the competitor or any of that? I mean, have there been any changes in that way? Has it become more aggressive and volumes have started to kind of pick up this year?

I mean, everybody market's different and some competitors have -- appear to have one strategy in one market and a different strategy in another market. So it is so market specific that I don't think there are any generalizations to be made. I think as we indicated, the markets along the golf coast and Florida in particular which have been historically high growth markets and will again be high growth markets are, you know, the adjustment period has been steeper and longer than in most of the rest of the country. And so the issue about volume and price like I said earlier in markets where volume is flat to up, pricing tends to be up in markets where volume is down, pricing tends to be down. So that's -- and the gulf coast right now is -- much of the gulf coast is -- has lower volumes and therefore lower pricing.

Got it. And sorry to belabor the point.

And a lot of it is the freight adjusted piece of the pricing. As I said, 70% of the pricing off of our yards is the freight adjustment whereas, you know, once we can get that built into our ultimate selling price then that will correct itself hopefully.

So just to follow up through that. Is it fair to say that whereas, you know, you guys who are long hauling into that market are experiencing, you know, very significant, you know, net delivered I guess -- I should say net of freight price declines maybe some guys who are closer aren't being as competitive on purpose they just happen to be closer and.

Well, in the gulf coast nobody is closer. There is no rock down there.

Right.

So it is all moving. Everybody is moving rock a relatively long distance.

Do you feel like your competitors, whoever it is who sort of is driving the competition is trying to grab spare or trying to generate cash? Do you know?

I can't look into the minds of our competitors. I'm sure the need to generate cash is significant. I don't know that there is a conscious effort on the part of any bigger competitor to go in and try to grab market share. I would say most competitors are probably not doing very well in long haul movements right now. And trying to grow market share in an area. The difference -- there is a fundamental difference in the trucks are in the long haul markets and that is there is a big chunk of cost, ultimate cost over which you have almost no control and that is the railroad. And so long haul markets are tougher and riskier in that respect.

Got it. On the question of stimulus and looking into the future a little bit, what do you think is the breakdown of the percentage of stimulus work for you guys that gets spent in 2010 versus 2011?

Our initial projection which we think has proven to be reasonably accurate is that by the end of 2010 about 60% or 65% of the highway stimulus dollars would get spent. Through Q2 that's about 38% or 40%. Then in 2011 there is probably another 30% of the total highway stimulus we would expect to be spending with a little bit of carry over to 2012.

So a bit more next year than in the back half of this year?

Yes.

Okay. Got it.

But 2010 overall will probably be slightly larger than 2011.

Got it.

From the stimulus piece.

Okay. Thanks for that. Dan, quick question. You talked about $41 million on the legal issue up in Illinois and I think there's $40 million on the income statement. Is there another $1 million buried --

Yes, that's in the SAG line. About $1.5 million of legal fees. The $40 million was the settlement itself and $1.5 million was legal fees incurred during the quarter.

Got it. Okay. This has been very helpful. Thanks, guys.

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

Good morning. Just a couple quick questions. Regarding the pricing trend in your truck market as you kind of came through the quarter were there similar to your long haul markets or other markets you talked about were there contracts that were being supplied based on prices end of last year in is there a disearnable trend in the truck markets as you moved through quarter?

Pricing in our truck markets is on a freight adjusted basis is relatively stronger than in our long haul markets.

And as you moved through the quarter did it continue to show strength?

Yes.

Sequentially?

Yes.

And then when we look at results I guess for the second quarter could you maybe help me understand how big an effect that weather pattern that we experienced in the first quarter did it shift the demand patterns into 2Q?

I'm certain there was some effect. It is very difficult to quantify. But we saw as we reported at the end of Q1. We saw improvement in March, January and February were a complete washout. We saw improvement in March, we saw improvement in April. I would imagine the largest impact from the terrible weather in January and February was seen in March and April. Maybe a little bit of carryover later in the quarter but I would think whatever we reported, April numbers were up maybe 9%. I would think that's where you saw the carryover.

Okay. That's helpful. So when we think of seasonal movements from Q2 to Q3 we are not --

Q3 is historically our largest shipping quarter because we have more of the construction season, more, you know, throughout our footprint in virtually all of our markets it is a full three months of good construction weather.

Okay, I just want to make sure that build on sequentially Q2 to Q3 this year there wasn't an abnormal large piece of volume that was just weather-related shifting from 1Q to 2Q if that makes sense. Thank you.

Next question comes from the line of Chase Jacobson with Sterne, Agee. Please proceed.

Hi, how are you?

Hi, Chase.

I was just wondering if you could give us some insight into what your strategy is in the markets that are more competitive in terms of how you're maybe going to combat the pressure that you're seeing from your competitors? Also, if you have had to take pricing down, how long do you think it takes to be able to regain that pricing?

Chase, I think one of the facts of life in this industry is that there is -- changing the price doesn't create or destroy demand in the marketplace. Put another way, there is very little price elasticity to demand in our products for our products because our products are a relatively small portion of the cost of a construction project.

That being said in markets where volumes are down and there is stress on pricing we have to focus on cost, we have to focus on serving our customers and keeping them competitive and basically volume recovery from improvements in the overall demand is really the thing that will allow us to improve price and margin. So our strategy is to keep our customers competitive. Be very diligent on cost and be very well positioned to take advantage of volume recovery when it occurs. The only place we can affect demand for our product is through public infrastructure funding. And that's an industry effort but we work very hard in that regard and we have virtually no impact on demand for our products in the housing and private nonres but the public infrastructure side is hugely important for us and we spend a lot of time and energy as a company and as a participant in the larger industry in trying to build the case for the public policy case for improved infrastructure spending.

You may have seen -- I believe there was an article in this week's Time Magazine, in fact, talking about how much sense does it make to continue to allow the US infrastructure to decline and the question is which is more dangerous for the future of the US? Higher deficits or declining quality of infrastructure. So there's a significant public policy case to be made. There has got to be an election in November before there is a real opportunity to get anybody to listen to that case.

So do you think there is a chance that just given the cost cutting across the industry that maybe some of your less disciplined competitors keep pricing lower even if demand does return given the incremental margins you can get on the higher volume?

You know, we study history, we study markets. Every market is different. Generally, in this industry as volumes recover pricing improves. Will there be an exception to that somewhere? Absolutely. But as a general principal over the hundred markets we participate in there's a price volume relationship. Stronger to volume the greater the pricing power, the weaker the volume the less pricing power. And that's not going to change I don't believe in this cycle.

Okay. Thanks.

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

Good morning, guys. Just two questions left that I have. Don, you mentioned 73% of your markets actually saw the 65% incremental margin that you kind of expected but that the -- so that would mean 27% of the aggregates markets are kind of dragging on the margin and has there been. Is there anything changing your opinion in those markets that will make those difficult to kind of turn the corner as the volume improves or is this just simply -- these are the hardest hit markets for volume an price and therefore they are going to take longer to come around?

There is some of that, Trey. I think the freight rates have spiked up with fuel costs and that's been a factor. That's a significant factor. As I said, 70% of the freight adjusted decline in selling prices is freight. Only 30% is what I will call market factors or competitive factors, although the competitive factors make passing through the higher freight cost take a little more time than we would like.

Part of the issue in the second quarter and I can't quantify this but if you think about what's been going on in the Gulf of Mexico throughout the significant portion of the second quarter, the whole oil spill has not enhanced private construction in the gulf coast markets. That's a big tourism area and while I don't think we can attribute the totality of weakness in the gulf to the economic impacts of the oil spill it nevertheless is there and I can't quantify it.

But if you're somebody thinking about building something on the Texas gulf coast or the Louisiana or Mississippi or Florida gulf coast you aren't terribly enthusiastic with this oil spill going on an with the huge drop of tourism and economic activity from fishing and everything else. So there is some piece of that in there. Hopefully we are getting very close to being past that. I can't tell you that that's 2% or 20% of the issue in the gulf but it is an issue.

Sure. How much of your shipments were long haul in the quarter? Do you have that?

Generally they are about 15%. I don't know that I have -- I don't know -- I guess we said -- the 27% includes Florida, some of which is long haul, some of which is local. It includes California and Arizona most of which trucks are our market. So I'm guessing it is in the 10% to 15% range for the quarter. But that's an estimate. Okay. That's real helpful.

And then you had mentioned earlier just kind of looking into 2011 when you were asked the question if pricing should improve and you said you were hopeful that it would given kind of what you are looking for from a demand standpoint. Do you think that that would include these hardest hit states or are they going to be more of a lag than the rest of the business do you think?

I think the reality is that markets where volume and price fall more sharply tend to have sharper recoveries once recover begins.

Sure.

That's certainly been the historical pattern. Time will tell whether that repeats itself here. But the markets that have been hardest hit on pricing are the markets that generally have the most robust growth in pricing up through 2007. California and Florida. They are the ones where pricing has been hit the hardest . In the down turn history says they will be the ones that recover both in price an volume most robustly once the economy begins to

I guess what I'm trying to get at here is, you know, at what point are we going to start to see the outstanding incremental margin that this business has really start to take shape for the overall business and we can, you know, kind of start baking that into our thoughts, estimates.

I think in large part of our footprint that's happened. It is happening. We are very pleased with that. In order for the weaker markets to exhibit that kind of recovery we have got -- there has got to be some improvement in demand from whatever source we think public infrastructure is alive and well in Florida and California as it is in our other markets. The problem is the private side. And once we see some bottoming of particularly private nonres in those markets and some recovery beginning then I think we will certainly see the escalation in margins from the higher volume. But it is on the private side and that's what it is going to take to move those markets. In Florida and California. The gulf coast is a little different dynamic and it may correct itself soon.

And my last question -- and this is one that I think has a lot of people kind of scratching their head now. This is your first quarter to ever announce a down price -- or a down year-over-year price that I could ever find. And there is very little price elasticity with aggregate, et cetera. What I would like to get your view on why now when volumes are just starting to improve in 16 quarters are we now starting to see people in this industry getting more aggressive with price? And this is an industry that thus far has had incredible pricing power.

I think the answer to that question, Trey, is two fold. Number 1, in none of the periods you have looked at historically has the construction economy in the US been as stressed as it is -- as it has been recently. But I think perhaps more importantly is that the reported pricing in Q2 for us and perhaps everyone else in our industry is based on price quotes made in the second half of 2009. And if you remember what was happening to volume in the second half of 2009 and more importantly what the future prospects for volume were in the second half of 2009 it was a pretty grim situation. Private nonres was falling. Housing was beginning to bottom. But hadn't quite yet bottomed and there was no federal highway bill. All we had was some stimulus work. Hopefully what you're seeing in Q2 pricing is a result of the economic stresses in the marketplace in the second half of 2009. Those aren't behind us fully yet because private nonres contract awards are still falling. Albeit at a lower rate. But the thing that is going to pull us out of this both volume an price is the highway programs to a much lesser extent housing and then the real kicker is going to be when private nonres finally bottoms and has some upside. So I don't think this quarter's pricing and we tried to indicate this in our press release in our comments is, you know, it is not a step change or a functional change, it is the result of really tough markets back in the second half of 2009.

Don, thank you very much for that and thanks for letting me get my question in here at the en. I know we are going long.

Thanks Trey.

Ladies and gentlemen, this concludes our Q&A. I would like to turn the call over to Don James for closing remarks.

Well thank you for being with us today. We do appreciate your questions and more importantly your interest in Vulcan. Hopefully we have seen the worst of this downturn in our industry. And we are looking forward to talking with you again at the end of the third quarter. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.