渥肯建材 (VMC) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Vulcan Materials Fourth-Quarter and Full-Year Earnings Conference Call.

My name is Jennifer and I will be your operator for today. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Don James, Chairman and CEO. Please proceed.

Good morning. Thanks for joining this conference call to discuss Vulcan Materials' Fourth-Quarter and Full-Year 2010 results. I am Don James, Chairman and Chief Executive Officer. Joining me today is Dan Sansone, our Executive Vice President and Chief Financial Officer, and Danny Shepherd, our Executive Vice President for Construction Materials.

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 10K.

We start 2011 with optimism that the decline in demand for our products bottomed in 2010 and that growth and shipments is ahead of us. We have worked diligently throughout this long downturn to position the company for earnings growth when demand recovers. Improved stability and economic factors that drive demand for our products will bring the strength of Vulcan's fundamentals back in to focus. As a result of these efforts, our cash earnings for each ton of aggregates sold in 2010 were $4.15 per ton, 26% higher than it was at the peak of demand back in 2005.

The attractive industry characteristics of our primary product, aggregates, and the determined efforts of our employees have allowed us to maintain this level of profitability in 2010, despite a significant and prolonged decline in shipments during the past four years due to the economic recession. In 2010, the year-over-year decline slowed significantly from the prior three years. During the period from 2007 through 2009, aggregate shipments adjusted to include major acquisitions and divestitures declined 11% in 2007, 21% in 2008, and 26% in 2009. In 2010, aggregate shipments declined 2% from the prior year, reflecting varied market demand conditions across our footprint.

Fourth-quarter aggregate shipments in several of our key markets exemplified these very varied market demand conditions. In Florida, demand remained relatively weak during the fourth quarter, while California exhibited some modest growth in shipments versus the prior year. In Texas, aggregate shipments in the fourth quarter increased more than 30% from the prior year, while in our markets in North Carolina shipments declined to more than 30%. Finally, Tennessee and Illinois, two states that quickly obligated and awarded their stimulus funded highway projects, both realized growth in aggregate shipments versus the prior-year's fourth quarter.

While overall aggregate shipments in the fourth quarter were flat compared to the prior-year, we experienced unfavorable mix variances versus the prior year. Accounting for the majority of the 4% decline in reported freight-adjusted selling prices. The remaining decline in the average freight-adjusted selling price in the fourth quarter was mostly attributable to competitive price pressures in Florida and California.

The earnings effect of lower freight-adjusted selling prices in the fourth quarter of 2010 was $15 million. This earnings effect was offset somewhat by higher earnings in our transportation businesses that support our aggregates businesses by moving aggregates from producing quarries to sales yards in regions where local aggregates are unavailable.

The average unit price paid for diesel fuel in the fourth quarter increased 19% from the prior year. Reducing earnings approximately $4 million. Excluding energy related costs, aggregates unit cost of sales in the fourth quarter were favorable compared to the prior year reflecting the effective cost control efforts by our employees.

Overall segment earnings for aggregates in the fourth quarter were $58 million versus $70 million in the prior year. Segment earnings in 2010 included $7 million of certain adjustments and charges in the quarter. In our asphalt segment, earnings were $8 million versus $10 million last year. Selling prices for asphalt mix increased 2%, offsetting a portion of the earnings effect of a 14% increase in liquid asphalt cost. Sequentially, unit material margins in the fourth quarter increased slightly from the third quarter . This is our second consecutive quarter of improving asphalt mix margins.

In our concrete segment, the earnings effect of lower average selling prices more than offset 5% higher shipments and lower unit cash cost of sales versus the prior year's fourth quarter. Cement shipments in the fourth quarter increased 43% from the prior year due to higher internal consumption by our concrete operations.

Overall, for the quarter, our EBITDA was $65 million. Our cash earnings were $46 million, and our net earnings were a loss of $47 million. For the full year, EBITDA was $371 million. Our cash earnings were $228 million, and net earnings were a loss of $96 million. Full-year earnings results included a pre-tax charge of $22 million. This net amount includes a $43 million charge for the settlement of the IDOT lawsuit, as well as $21 million of certain adjustments and charges recorded in the fourth quarter. These charges were somewhat offset by a $39 million gain reported in the first quarter.

For the full year, the earnings effect of higher cost of diesel fuel and liquid asphalt reduced EBITDA $51 million. Additionally, the full year earnings effect of lower aggregate shipments reduced EBITDA approximately $21 million. However, shipping trends for our products continued to stabilize in the fourth quarter. Trailing-12-month aggregate shipments have increased modestly since February. And asphalt and concrete trailing-12-month shipments were relatively stable throughout the second half of 2010.

While economic improvement and growth in construction activity across our footprint have not materialized equally, we expect the improvement in shipping trends for our products to continue in 2011 and contribute to earnings growth. There are several factors that make us more optimistic about the prospects for earnings growth in 2011. First, from the perspective of the overall economy, most GDP forecasts for the US indicate additional growth in 2011. Additionally, state and local tax revenues have been increasing for the last four quarters ending December 2010, according to an independent research organization. This pattern appears to be consistent with past cycles, in which state and local tax revenues have rebounded after GDP recovers. Since the spring of 2009, all Vulcan served states have shown positive growth in gross state product, an indication economic recovery is underway.

Looking more specifically at our construction end markets, public construction activity, particularly highways, should continue to provide solid support for aggregates demand provided that Congress acts in a timely manner to extend authorized highway funding levels at current levels for the remainder of the year. Overall the rate of growth in demand for our products in 2011 largely depends on the pace of recovery in single-family residential construction, the stabilization of private non-res construction, and the continuity of federal funding for highways at current levels without interruption.

With that said, we expect aggregate earnings in 2011 to increase from the prior year due to higher shipments and selling prices, compared to the prior-year, as well as the benefit of our cost reduction efforts. The midpoint of our estimated growth range in aggregate shipments is 2% above prior-year levels, driven by low to single -- mid-single digit volume growth in most markets outside of California and Florida where shipments are expected to be in line with the prior year.

Most of our aggregate markets are expected to realize year-over-year price growth in 2011. We believe a more stable outlook for demand will benefit pricing overall. Assuming comparable geographic and product mix, we expect aggregate pricing in 2011 to increase 1% to 3% from the prior year's level. In our asphalt business, material margins on each ton of asphalt mix sold have trended higher in the second half of 2010, due to a relatively more stable cost environment for liquid asphalt. Allowing average selling prices for asphalt mix to better reflect the cost of this key input. In 2011 we expect this trend to continue resulting in continued recovery in materials margins.

Overall, we expect asphalt earnings to increase from the prior-year. This growth in segment earnings assumes a modest increase in sales volumes as well as improved material margins as higher selling prices should more than off set higher cost for liquid asphalt. In concrete, we expect higher sales volumes and slightly higher selling prices. As a result, we expect the loss reported in 2010 to narrow somewhat. In cement we expect segment earnings in 2011 to improve slightly from the loss we reported this last year.

Selling, administrative and general expenses in 2011 are expected to be lower than the prior year. Total SAG expenses of $327 million in 2010 included approximately $24 million of adjustments and charges referable to the fair market value of donated real estate, severance costs, and expenses related to legal settlements. In 2011 we do not anticipate similar adjustments and charges. As a result we expect SAG expenses in 2011 of $305 million to approximate a comparable level in 2010.

Included as part of SAG costs is our ERP project which began in 2008 soon after our acquisition of Florida Rock. Implementation of this project is on schedule and most major milestones should be achieved by the end of 2012. Annual project costs peaked in 2009 at approximately $13 million, but were slightly lower in 2010 reflecting realization of a portion of the cost reduction benefits. We expect a further reduction in net costs in 2011 of approximately $6 million related to the ERP project.

Our earnings in 2011 will be affected by the absence of certain adjustments, charges, and gains recorded in 2010. In our press release, as well as my early remarks in this conference call, we outlined $21 million of adjustments and charges recorded in the fourth quarter. Additionally, we incurred $42 million in charges in the second quarter for the settlement of the IDOT lawsuit and recorded a $39 million gain in the first quarter as part of the sale of non strategic assets. The net earnings effect of these items lowered EBITDA for the full year by about $22 million . In 2011 we do not anticipate similar adjustments, charges, or gains.

Further, we are involved in three arbitration proceedings seeking recovery from our insurers of legal settlement costs and fees expensed in 2010 and prior periods that could impact earnings in 2011. The first arbitration relates to a case filed in Modesto, California in 2008 referable to our former chemicals business. In the third quarter of 2010 we agreed to a settlement range with our insurer subject to final arbitration and booked the minimum amount for $6 million is pre-tax income from discontinued operations. In January of this year, last month, we received a favorable arbitration award for the full amount we claimed. As a result, we expect to book an additional $7.5 million of pre-tax income from discontinued operations and to collect $13 million in cash in the first quarter of 2011.

We are also pursuing two arbitrations related to the IDOT settlement in which we are seeking to recover from our insurers the amount paid in settlement above a self-insured retention of $2 million, as well as a portion of our defense cost. As previously reported, we recorded a $40 million charge to operations in the second quarter of 2010 for the full settlement amount. Defense costs were expensed as incurred. Any amounts we recover through these two arbitrations will be reported as income from continuing operations when realized.

Interest expense for full-year 2011 is expected to be in the range of $170 million to $180 million based on expected interest rates and a reduced level of capitalized interest on capital projects. We expect our liquidity profile in 2011 to be strengthened by an increase in earnings as well as the absence of any long-term debt maturities until the fourth quarter of 2012. We have carefully reviewed our capital spending needs based on projected demand levels and as a result we now expect to spend approximately $125 million in 2011, up from the $86 million spent in 2010, but still sharply lower than the $353 million spent in 2008. Due in part to lower capital spending the last couple of years, we expect depreciation, depletion, accretion and amortization to be approximately $365 million in 2011 down from $382 million in 2010.

During 2010, we completed three acquisitions that will increase our aggregates reserve position and enhance our operational footprint going forward. Two of these acquisitions included quarry operations in Tennessee and in Southern California. The third was the acquisition of a concrete business in Atlanta.

In summary, we believe our business continues to get stronger as a result of cost control efforts and disciplined approach to pricing throughout this downturn. We will remain diligent in our efforts to look for every opportunity to reduce cost. The underlying trends in both shipments and in the general economy continue to build our optimism that the worst of the severe downturn is behind us. We are the leader in the US aggregates industry and are well positioned for significant participation in the economic recovery and in public infrastructure programs.

I would like to reiterate our confidence in the future sales and earnings growth of Vulcan. This confidence comes from our successful strategy to continue strengthening our aggregates focused businesses 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. We thank you for your interest in Vulcan and your participation in this conference call. Now if our operator would give the required instructions, we will be pleased to

(Operator Instructions) Your first question comes from the line of Trey Grooms; Stephens Inc.

Just a couple of questions. First, can you talk a little bit about the expectation you have for pricing in 2011? Are you expecting any mix, either geographic or product mix, to impact that pricing this year or do you think that 1% to 3% is going to be all real pricing impacts?

We don't have any mix shift built into those projections. Certainly by the time the year occurs there will very likely be a different geographic mix than we have projected. But at this point, the 1% to 3% price growth is not based on any sort of mix shift. Clearly if volumes continue to recover in California as they appear to have, or begin to stabilize and begin recovery, that will help on a mix. As we pointed out in the fourth quarter, our shipments in our markets and the portions of North Carolina where we have operations were down substantially.

North Carolina is a good state for us. We had much higher shipments in Texas and the average selling price in Texas is significantly lower than it is in North Carolina for example. So, recovery in North Carolina would help. If that occurs in 2011. There will always be some geographic mix differences. But the simple answer to your question is we have not projected any significant shifts in our pricing outlook for 2011.

Okay, and then as we sit here today, would you expect those price increases to show up immediately or is that something that will start to increase as the year progresses do you think?

I think they will begin. A lot of what we will ship in the early part of the year will be based on prices that we quoted in 2010. So I think you will start seeing the benefit of it, some in the second quarter. But then third quarter is when I think you will see increases. Our average for the full year is the 1% to 3% number. We haven't broken that out quarter by quarter.

Okay. That's helpful. And then, looking at North Carolina, just falling off the map. Can you talk a little bit about what's going on there? Is that mostly weather, or was there some big -- what happened there?

Well, in our portion of North Carolina, which is certainly not the full state, we are much stronger in the western half than the central and eastern half of the state. Charlotte is one of our key markets and Charlotte is struggling on housing and private non-res. Coastal Carolina that we serve is like many other coastal markets where the vacation business is not great. And the state budget in North Carolina is under some pressure. And while there has been a fair highway program it has not been in the parts of the state that we serve, in large part. So the combination of those factors has reduced our shipments substantially in North Carolina in the fourth quarter.

Okay. And then on Texas, I know that weather has been favorable there relative to last year, or I guess year-over-year in the quarter, in the fourth quarter. That's an awfully big jump. In that mostly weather or are you guys seeing a pretty big jump in demand coming back there as well?

Well, it certainly -- last year's fourth quarter in Texas the weather was absolutely awful. So we have a relatively easy comp in Texas for the fourth quarter. That being said, the economy in Texas is better than it is in most other parts of the country. And, Texas continues to grow. I'm sure you've seen the census forecast that Texas is going to add four congressional seats as a result of the 2010 Census. And there's just a lot of momentum there that is yet to be picked up in some other parts of the country.

All right. Thanks Don. I will just jump back in queue here.

Okay.

The next question comes from the line of Jerry Revich; Goldman Sachs.

Hello, Good Morning. Don, can you say more about your asphalt material margin forecast for 2011, what are you assuming for liquid asphalt costs? And can you give us an update on asphalt market pricing in January from your end? Thank you.

We think liquid asphalt cost will be up again in 2011, above $10, probably on average maybe $50 a ton. We expect to be able to continue to increase our pricing for asphalt mix to recoup the big run-up in liquid asphalt prices that has occurred over the last couple of years. As we have said in many meetings and presentations, the ability to get asphalt mix prices tends to lag liquid asphalt .

Liquid asphalt tends to be bought and sold on a spot basis and asphalt mix tends to be sold on a contract basis over some longer period of time. So there is some lag. When we have the highest material margins in the asphalt business is when liquid asphalt prices start down. And we have booked prices at higher numbers. So we think we will see gradual recovery in the margins in 2011 in asphalt mix, even assuming the higher cost of liquid asphalt. You had asked about trends in January and we are not prepared to go into January results at

Okay. Thanks Don. And Dan, you have a couple of maturities on the debt side coming up over the next year. Should we think of a draw down on your bank line? And can you talk about how you are thinking about the capital structure broadly with the bank loan maturities in 2012? Thank you.

Jerry, our next meaningful maturity is in December of 2012 of $300 million. In 2010, excuse me in 2011 and 2012, prior to that large one, the maturities are de minimis, $5 million here or $5 million there. So at this point in time, we are not facing any significant maturities at all in the current year. And as we get closer to the 2012 maturity in December of that year we will assess both our free cash flow and credit market conditions at that point in time and make a decision on how to fund it. But right now we don't believe there is any reason to have to go out and pre-fund that 2012 maturity.

Okay. Thank you.

Next question comes from the line of Jack Kasprzak; BB&T Capital Markets.

How much were aggregates prices down in California and Florida in the quarter, if you can tell us?

Let me get to the quarterly numbers. In Florida, they were down about 14% . And in California, they were down, we have different markets in California but they were probably down 6% or

Two of our California markets were down, and one of our markets in California was actually up 2%.

Okay. And do you guys know in the infrastructure part of your business in 2010, what the volume change was for the year?

If you mean -- Do you mean infrastructure including highways, or infrastructure excluding highways?

Including highways.

Including highways. In 2010, highways were up for us about 13%. Shipments into highways and shipments into infrastructure were up about 7%. So that's where, obviously, that was where our strength was. Non-construction, that is, railroad ballast, environmental ag line, etc. was also up significantly 18% --. The big drop, of course, was in private non-res.

Okay. And I was also curious about concrete, the expectation that prices might be up slightly in 2011. Just given that you have some bigger Florida exposure there, obviously, and that residential is still pretty weak in Florida. Not getting better anyway. Why would pricing even be up a little?

Our concrete business is not all in Florida. It is also in Washington DC; Northern Virginia area; Baltimore, Richmond, Norfolk, Virginia; Atlanta; San Antonio; Albuquerque; Phoenix; San Diego; Central Valley of California. So, we have a mix and Florida has been a very tough environment. But -- while we had a tough year in 2010, we believe the situation is set for some ability to get price increases in concrete. We are not in the business of selling concrete at a cash loss and we are not going to do that.

Okay. And, lastly, do you guys anticipate any asset divestitures in 2011?

We have some non-core assets that we would sell if the right deal came along. If they were worth more to someone else than to us. We don't have anything built into our projections for that, but certainly we do have some things that are not strategic to us. And we -- that's nothing new. We continue to prune our portfolio and we will continue to do that.

Okay. Thanks very much.

Your next question comes from the line of Timna Tanners; UBS.

Two questions. I was interested in the part of your release where you talk about the second half of the year potentially staying leveraged to your business model with the private sector coming back. I just want to get a little bit more color on how you weigh the two factors of public stimulus continuing through the year, but at some point tapering off, and then the private sector picking up. How do those factors play against one another?

I think what we were trying to communicate was that we expected the second half of private non-res to be better than the first half, but we don't think private non-res is going to improve in '11 over '10. Overall, we think private non-shipments into private non-res in '11 will be down 4% to 5% compared to this year.

While -- it is stabilizing, we are not seeing the huge drops that we saw in 2008, 2009, slightly lower drop in 2010 than the prior two years. But it looks like to us in contract awards that private non-res is bottoming . And when we had a reference to the second half, it was the second half would be really better than the first half. But overall for the full year, we don't expect any increase in shipments into private non-res. Hopefully, we can be surprised. But at this point we are not projecting uptrend in private non-res for the

Okay. So the stimulus' continuing to be solid are going to help the volume story overall?

There is still a lot of unspent stimulus money. The Congressional Budget Office Report, which has to be accurate, says there is still $9.4 billion in stimulus money for highways to be spent in fiscal year '11. Now, fiscal year '11 includes the fourth quarter of '10, so that full amount probably doesn't exist today. But still, the stimulus impact is not over. We expect the stimulus to have an impact in 2011 and even a small impact into '12 with a tail running all the way out to '13.

Okay. Great. And maybe more for Dan, I wanted to know. I had written in my notes that there would be $120 million debt pay down in the fourth quarter and maybe I missed how exactly that was -- if I was wrong there or if that was addressed. And then also on tax guidance, if you could help give us some color on if we are going to continue to see what we will saw in 2010 into 2011?

There is not a $120 million maturity in the fourth quarter of this year. I think what you may be remembering is, we did have a term loan that we entered into in December of 2008 which was a three-year note that would've matured in the summer of 2011. When we put in place the $450 million term loan in the summer of last year, we used some of that cash to pre-pay that maturity. So that is gone now.

And the remainder of that $450 million term loan that we took down in July of 2010 was used to satisfy the $325 million maturity in the fourth quarter of 2010. So the only maturity we have in 2010 is a $5 million, excuse me in '11 is a $5 million maturity and the only maturity we have in 2012 is a $300 million maturity in December of 2012.

Okay. And then so on the tax rate guidance if you could help us with that? It's been something you --

Yes, That's hard. Let me try to tackle the tax rate this way. Let's look at the 2010 numbers as a springboard. We posted a tax provision of $85.9 million, it was a tax credit of $85.9 million. There's a lot of pieces that make that up but the two drivers that I think you need to focus on in developing your tax numbers for your projections, are first, the tax at the statutory rate and if you just take the pre-tax income, tax effective at 35%, that's the federal tax rate.

And that will be the starting point for the tax provision. So in 2010, that was about $67.5 million. The second significant piece of the tax equation is statutory depletion on our mining operations. And that amount in 2010 was just a shade over $20 million. So the federal tax credit and the depletion benefit combined, represented virtually all of our tax provision.

There is obviously some state tax that has to be factored into that, and then of course, you have the myriad of other tax items and true ups and adjustments with the taxing authorities, et cetera. But they have in the last couple of years generally netted to a fairly small number. I have no reason to think that is going to be materially different in 2011. So I guess my guidance would be, begin with your own assumption on what pre-tax earnings is going to be for the Company. Start with tax at the statutory rate, or the 35%, that will be your debit or credit based on whether you have us at earnings or a loss.

And then the depletion benefit will generally track the activity in the aggregates business. So if you are projecting aggregates, revenues, and earnings to rise, there will be kind of a scale effect for depletion rising with that. And if you were to have aggregates earnings declining that depletion benefit would be declining. It's not necessarily a straight one-for-one relationship, but if I just look at history I think you can get pretty close. That's my best advice on planning for tax provisions for 2011.

Okay. Thanks.

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

Two questions. I'm sorry if I missed this but did you guys break out what the $21 million in Q4 charges were?

Yes, I will go over that again. We had about $3.8 million or $4 million of it was SAG, most of that was in severance and some of the remaining part was in legal fees in a case that we have settled and disposed of which will not be returning. There is about $7 million of it that ran through gross profit in our aggregates business.

Some portion of that was a write-down of some inventory values at a Legacy Vulcan quarry in Florida that we have moth balled. And when we look at the reprocessing cost of that material and current selling prices, we booked a charge there. We are also consolidating some of our deep water terminals in Florida, Legacy Vulcan terminals, and there is some non-cash charges associated with that, that ran through gross profit. The total of that is about $7 million. Then there were a number of a non-cash charges that ran through other income. Some of that was asset retirement obligations, some were some impairment for non-strategic assets.

And some -- yes, essentially ARO type things, one was a lawsuit settlement of some reclamation obligations that go back to a predecessor of CalMat many, many, many years ago. So all of that rolled. That was roughly $10 million or $10.5 million. So you roll all of that up and it's about $21 million. We don't expect any repeat of any of those things in 2011, or even those categories of things in 2011.

That's helpful. My second question is just on free cash flow for 2011. This is a preliminary kind of estimate but just to take a quick stab at it I don't see real robust cash flows next year after dividends and your CapEx. I was curious what your thoughts were there and if you've revisited cutting the dividend again at all?

Our board will take up the dividend at our next board meeting. We look at cash earnings, or cash flow, or free cash flow, as you do. We certainly believe that over the long-term our cash flows will increase substantially. And at this point we have not elected to reduce our dividend since the equity offering back in June of 2009.

I indicated, we took some charges in 2010 related to some litigation. Hopefully, we can recover a substantial amount of that from our insurers. We certainly believe we are entitled to it. That will have some benefit to cash as well. So there are some moving parts. On cash, that give us comfort as Dan Sansone has reported, our maturities of any of our debt, we don't have any significant maturity until late in 2012. So we have the lion's share of our $1.5 billion line of credit still untapped. So we are not concerned at all about liquidity or cash in the near term.

Great. Thank you.

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

Couple of quick questions. First, on highway build. We all heard what the President said and the Republican's rebuttal and I think there's been a lot of consistency there . Among other things, that we need to live within our means, the Highway Trust Fund is clearly under funding on a structural basis, and other people we've spoken to in DC have suggested that we may well need to live within our means with the new Highway Bill. That obviously would imply pretty substantial cuts. I was hoping maybe you could start by talking about what you're hearing on the Highway Bill and then we can go

Well, I think there are a couple of points of misinformation that have occurred. Somebody reported that the Highway Trust Fund was in deficit. That is not correct. The highway trust fund has ample funding to maintain the $41 billion or $42 billion spending levels through fiscal year '12, which will be September 30, 2012. That doesn't necessarily mean that Congress will spend that amount. But that amount is in the Highway Trust Fund. So there is no deficit, current deficit in the Highway Trust Fund.

You are correct that the current receipts into the Highway Trust Fund are less than current expenditures. That's being off set by the supplemental appropriations that have gone into the Highway Trust Fund, the most recent of which was $19.5 billion earlier in 2010 as a result of the HIRE Act. And it was a restitution of interest on unspent balances in the Highway Trust Fund that had been drawn down for the accounting side, I would say, of deficit reduction in the past. And that money was restored to the Highway Trust Fund.

Long-term, for the country to grow highway spending in a way that will at least maintain the condition of the current investment in highways and to create jobs, as you know, in the construction sector unemployment is running twice what it is in the general economy. It will require some incremental revenue stream to the $0.184 per gallon that was last adjusted back in 1993.

At this point, we don't have a prediction, or projection, for when we will see a new multi-highway bill or what the source of funding is there. Our focus today is to get the authorized level of spending approved through the rest of the year. Then we will begin to look at sources of revenue. A lot, I think a real important fact is that a lot of the highway users, that is not the construction materials industry, but the people that use the highways in their business are saying come on guys, get on with this highway program.

The US Chamber of Commerce has embraced higher fuel taxes to go in the Highway Trust Fund. The American Trucking Association has embraced higher fuel taxes to go in the Highway Trust Fund. We are in this political game of chicken where nobody wants to say, raise taxes, either side of the aisle. So, that's where we are.

Yes, that's helpful. I guess, on a related note, It'd be great to get your state of what's going on with the individual states. Certainly we think that states are probably the better part of half of total road and highway. It's not something that gets a lot of attention. And certainly, while to your point, tax receipts are improving, states are -- there is a ton of survey done that says states are still facing, I think it's fair to use the word, massive deficits. So as they look at spending in relative to the priorities, education, healthcare, public safety take precedence over just about everything else.

We've seen some anecdotes, Kansas most recently where the Governor actually in his budget included taking funds out of state Highway Trust Funds. In our conversations with ARTBA, they highlighted similar risks at most states and they actually referenced similar issues and risks in Maryland, Virginia, and Florida. So, just curious if you have any perspective on that side of it as well?

Well if you look at the source of highway spending, in 2009 you had, from the regular federal highway program, you had $42 billion, you had about $6 billion in stimulus, and you had about $34 billion in state and local. State and local dropped in 2010 down to about $30 billion, as the stimulus spending ramped up from $6 billion to $11 billion, the regular federal program with some fits and starts and ebbs and flows continued.

We don't see a big drop in any state and local. In fact, we think the state and local contribution to highway spending in 2011 will actually be up slightly to offset a slight decline in stimulus spending. Every state's got a different story. I think it is important to drill down to how states fund their state and local highway programs. Generally, they don't use income taxes -- or sales taxes, general sales taxes, which has been the most volatile source of revenues for states.

Many states use fuel taxes, or excise taxes, on transportation related items including taxes on automobiles or vehicles. So there's a huge -- it's really difficult to generalize from state to state in the condition of the transportation budget. That being said, there are many states with improving programs, projected improvements in the programs, and many states with declines in the program. Overall, we think it's reasonably balanced as we go forward.

Okay. And the last thing I'll ask is a follow-up to Jerry's question. Did I hear you correctly, right now your best guess is liquid asphalt price is up $50 year-over-year?

Yes. That's an estimate but it's like predicting the price of crude oil. Who knows? That's just where we are when we put our numbers together.

And what's the base number for liquid asphalt? What your average price in 2010?

$464 a ton.

$464. So if we take $464 and we assume it's 5% that's kind of the rule of math we use?

The 5% is by weight. But the aggregate goes in at $10 or $12 a ton in the liquid asphalt goes in at $464 a ton. So you need to do your math differently, I think. It's not 5% of the cost, it's 5% of the weight.

No, Exactly. So if you convert it, it's about 70% of the cost of the ton of asphalt.

That's roughly correct.

Yes, and if we look at -- we'll look at diesel features as a proxy for liquid asphalt because historically it has shown the highest correlation. There, that would probably point to plus 20% inflation. I guess, what I am curious to understand is, when you look at your guidance of volumes up say 2% for aggregates, how does that adjust for the fact that state budgets are at best semi-fixed on the dollar perspective, and you have got pretty substantial inflationary component in liquid asphalt, which actually essentially deflates your real purchasing power?

Well, we have factored all that into our projections. We live and breathe all that every day. That is one of the problems with a fixed cents per gallon revenue stream set back in 1993 when the price of the index go up. And the one that by far is the most volatile is liquid asphalt. It does reduce purchasing power. And more of the dollar goes to asphalt mix and ultimately liquid asphalt then to the other components.

Okay. Said differently, if you actually think on a dollar basis road and highway spending is up more than your tonnage assumptions would assume on aggregates?

Well, our's is based on our markets.

Yes.

Not the whole Company. Not the whole country. And so we're -- we do it on a very granular basis and I can't get beyond -- I don't have the data to try to get beyond what will happen in our markets.

Okay. Well, that's very helpful guys.Best of luck for 2011.

Thank you.

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

Hello. Thank you for taking my questions today. For your guidance that you gave for the year does that assume flat federal highway funding for 2011, so in other words, about $41 billion spent?

Yes. I mean within the range of $42 billion to $41 billion it's flat.

Also, in terms of your driver for your increased CapEx what is the primary driver for your increased CapEx?

Let me go back. We are projecting stimulus spending to be down some in 2011. So the total federal piece of highways we do expect to be down some compared to '10.

Okay. Thanks for the clarification on that. As far as your increased capital expenditures, you talked about it a little bit earlier in your prepared comments but what are your first areas for spend and where do you see that overall, just stepping back and looking for the next several years, where do you see a more normalized maintenance CapEx?

Well, maintenance CapEx is really a function of tons of throughput of aggregate going through the plants. And the plants don't depreciate or deteriorate with age or time in any meaningful way. It's really how hard you run them and how many tons you're running through it. As you can imagine, running -- crushing rock consumes plant and equipment with a fair amount of vigor. So the best way to think about CapEx, replacement CapEx, is on a cents per ton basis. It is not smooth. When you have to rebuild a plant that gets to be lumpy. But most of our projected CapEx for 2011 is replacement CapEx, although we've got some other things in there.

So, is it like replacement of mobile equipment initially?

Yes. Well, not a lot of that because we are not wearing out our mobile equipment today at the same -- We were wearing it out twice as fast five years ago as we are today because of the difference in volumes. Same thing with our fixed plant equipment. So, we didn't -- we said $88 million in 2010.

I guess what I'm trying to say is what are you replacing?

That was less than we had projected at the beginning of the year because volumes were actually slightly weaker than we projected at the beginning of the year. And it's really a function of how much volume we use is how fast we consume our plant. With the number of plants and the mobile equipment fleet that we have, we have a fair amount of flexibility in utilizing our resources across a big footprint.

Sure. You said that much of the 2011 CapEx is replacement. What exactly would you be replacing if it's not mobile equipment and if it's not fixed plant equipment?

I didn't say we wouldn't.

Okay.

That's what you replace.

There is no single category of equipment or asset that dominates the $125 million. In certain locations we are replacing processing segments within a plant that have either become inefficient, or have to be moved to get better access to the reserves. There is a number of projects for further development of some greenfield sites to make sure that we do what is necessary to protect the permits for those sites. And some other cases, there are some pieces of mobile equipment being upgraded. It's really a large number of very small projects, generally speaking, spread across a pretty broad footprint, as Don said.

Okay. Great. That's helpful.

And there's some carry over spending embedded in that $125 million. If my memory serves me right, it is around 25% to 35% of that total is spending that will occur in 2011, on similar type projects, that were begun in 2010 or earlier, where we are just completing them. So again, it is really no single category jumps out and says my gosh we are having to spend a lot of money on this or that. It's really site-specific and responding to very, very specialized needs. You may have one location where there's a problem with a screening circuit, you'll deal with that. Another location where you have a mobile equipment issue, you deal with that. It is not a single across the board category that is making up the spending.

Okay. Helpful. Also, you projected lower SAG on a dollar's basis for 2011 and understanding you do have some IT costs that you are not carrying over into 2011 that you had in 2010. What are the other drivers for the lower SAG costs in 2011 on a dollar's basis?

We had a fair amount of severance. We had a fair amount of legal fees. I think I covered these earlier.

But, we had -- and related to the ERP project. As we have rolled that project out, we have been able to reduce the head count associated with transactional accounting. And those implementations in the various businesses have occurred sequentially. So we are seeing a full-year effect in 2011 of some of the reductions in administrative costs that occurred as a result of the ERP project. We have only partial year benefits in 2010.

Kathryn, the major items are donation, We had a $9.2 million donation in 2010. We had roughly $7 million in severance costs. We had about $8 million in professional fees that we don't believe we will have again in 2011.

Okay. That's helpful. And this is more just an industry question for you. Do you know what the aggregate intensity of a single family versus multi-family developments for aggregates?

Our estimate is single family -- if you use single family as a 1. Multi-family is going to be like a 1.8. It's going to be more like retail construction, because you have parking lots, and typically more concrete and asphalt than you would in single family. Per dollar of spending.

Okay. That's helpful. And also just in terms of -- I know there's been a lot of focus on overall cost for raw materials and other input costs into 2011, could you differentiate what your thoughts are, or your forecast for your truck versus your rail rate trends for 2011?

I think they are both driven by fuel cost. And if -- the question is what will be the escalator if any in delivery cost of truck versus rail, I think it's all fuel cost and the fuel costs are similar. In terms of change from year-to-year.

Okay. That's all I have for now. Thank you.

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

Thanks. Can you just parse out on the pricing side of the 4% decline in the quarter. You mentioned in the remarks that most of it was due to geographic mix, but how much was the declines in California and Florida a part of the 4%? Is it fair to think about as maybe 1% or --

Yes, that is what we were saying. It's about 1%.

And then, just lastly, on cement prices. There is an increase in the market in Florida. If you could comment on that, if you are participating on that and if you expected to hold?

We certainly intend to improve our cement pricing. Our volumes were way up in the year as we indicated, driven largely by internal consumption. But we think the stage is set for some improvement in cement pricing in our market.

Okay. Thank you very much.

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

My question has been answered.

Thanks Keith.

Your next question comes from the line of Todd Vencil; Davenport. Please proceed.

Thanks. On the guidance for volumes were you gave the midpoint, would you care to put a range around that midpoint?

Well, you can probably say 1% to 3% or maybe 0% to 4%. That's sort of the parameter as we look at ups and downs. We don't see the situation, given our assumptions for a huge variation in demand, but we hope there are some more upsides. But as we sit here today, 2% is our best risk-adjusted estimate.

Got it.And you didn't mention it, so I assume it wasn't significant . But was there any product mix shift in a year-over-year price change in the

There's always some but it was not as significant a factor as the geographic news.

So we haven't really started to see the long anticipated shift back toward a more normal proportion of base material?

I don't know what that means but --

I guess we had heard, and I think we talked and if we haven't I could be mistaken, that there'd been a lot of demand for clean stone and that base material had been piling up and was fairly heavy inventories of that out there.

You probably were talking to somebody else. Certainly with the stimulus money using clean stone for resurfacing, there have been big increases in base material in the industry. We work very hard to manage that. Our inventories are actually down year-over-year. So, I don't think that's a factor for us next year.

Got it. You said in the last call that Florida that you hoped you were going to see some pricing stability there. And obviously prices were down year-over-year in the quarter. Can you talk about what you saw there sequentially?

From third quarter to fourth quarter?

Yes.

I don't think there's any. I don't think the price improvement we were looking for in Florida began in the fourth quarter. It will be a 2011 phenomenon.

Got it. Switching to a follow-up on some of the CapEx comments. If you think about the different businesses, and the different business segments, or however you want to think about it, where is the majority of the CapEx? Or what does that split look like from capital expenditures among concrete, asphalt, and aggregates.

It's heavily, heavily aggregate.

Is predominantly aggregate. Very, very little capital is being spent on the concrete or the asphalt businesses right now. Same with cement, we completed the expansion that was underway when we bought Florida Rock. So there is a lot of fresh capital there. We are not putting very much money in. Literally, the spending in concrete and asphalt is de minimis.

Got it. I absolutely accept the concept that the maintenance requirement goes way down as volumes go down. But, given that you are spending so far below D&A have you seen any sort of shift in repair and maintenance expenditure? Or are you sort of keeping that I guess --

I think the best indication of that is that we said that excluding energy costs, diesel fuel and electricity, our unit cost of sales in aggregates in 2010 were slightly lower than 2009 and that includes the R and M component as well as labor and other things, so --

I would also add that if you think about the level of CapEx spending today relative to DD&A. Don't forget that our DD&A charge is significantly inflated by the purchase accounting associated with the Florida Rock transaction. I don't have the number at my fingertips of how much is embedded in there for the markup but it's a significant portion. So if you factor that out and look at it on a traditional historic cost DD&A number, it is not nearly the gap that you are seeing.

And look at the difference in our cash earnings versus our GAAP earnings and you will see the impact of these big non-cash depreciation charges.

Got it. That's very fair. Final I guess, category for me. I asked you last quarter about $35 million that showed up on the cash flow statement that you said was -- bought a concrete operation in Georgia. It looks like almost the same amount is on the cash flow this quarter. Can you talk about that a little bit?

Yes, we've bought two quarries, as I indicated in my remarks. We bought a quarry in San Diego, we bought a quarry in the Knoxville, Tennessee market.

Got it. Fair enough.

These are operating quarries. They are bolt-on's for us and they were strategic to us.

That's great. Thanks a lot.

Your next question come from the line of Brent Thielman; D.A. Davidson & Co. Please proceed.

Hello. Two quick ones. Just first on the cement business. We've all heard about the challenges in the Florida market but you've experienced a pretty robust improvements for a few quarters now. Just help me understand the discrepancy there.

I don't know that there is a discrepancy. As Dan Sansone said, we completed and brought the second line of our cement plant in Florida on stream. We are supplying a greater proportion of our internal needs both directly and indirectly through swaps. That's the story.

Okay. Perfect. And then on concrete prices, it sounds like you are expecting it to hit a floor here, maybe in 2011. Are you starting to see some evidence of that here in Q1?

Yes. We've got price increases in place in a number of markets.

Okay. Perfect. Thank you.

Your next question comes from the line of Aynsley Lammin; Citigroup. Please proceed.

Hello. Morning. Just two quick questions. Firstly, if you could comment on your expectations for any kind of underlying cost increases or decreases on margins outside oil and energy and depreciation and any other cost of sales? And then can I just clarify, I think you said your finance costs this year you'd expect to be between $170 million and $180 million. Is that correct?

Correct. The only place we see cost escalation in aggregates business is in diesel fuel. A little bit and explosives. We hope to be able to offset that by productivity and efficiency.

And can you just remind us again how many gallons of diesel you use across the group?

43 million gallons and of course that is way down because we are producing a lot less rock than we did four years ago.

Sure. Okay. Thank you very much.

There are no further questions at this time. I will now turn the call over back to Don James for closing remarks.

They do very much for being with us today. We look forward to talking to you again after the conclusion of the first quarter. Have a good day.

Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.