渥肯建材 (VMC) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Second Quarter 2011 Vulcan Materials Company Earnings Conference Call.

My name is Marisa, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today's call, Mr. Don James, the Chairman and Chief Executive Officer. Please go ahead.

Good morning. Thank you for joining our conference call to discuss Vulcan's second quarter results. I am Don James, Chairman and Chief Executive Officer of Vulcan. Joining me today is Dan Sansone, our Executive Vice President and Chief Financial Officer; and Danny Shepherd, our Executive Vice President, Construction Materials.

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

Let me open my remarks with some comments about our second quarter operating results. We are encouraged by the broad-based improvement in pricing versus the prior year's second quarter. The average unit sales price increased in all major product lines and across many of our markets. Trade-adjusted aggregate prices increased 2.5%. Asphalt and ready-mix concrete prices each increased 8%, and cement prices increased 2%.

In the second quarter, we achieved improved aggregate prices across a number of our markets. There was also less regional variation around the 2.5% change in the Company's average sales price, suggesting more stability going forward.

Our asphalt mix segment realized price improvements that more than offset the increased costs of liquid asphalt, thus achieving an 11% increase in the margin per ton of asphalt mix sold. Our concrete segment realized higher prices across most of our geographic footprint. Collectively, for the quarter, the higher pricing across all major product lines mostly offset the earnings effect of lower volumes. Our ongoing efforts to run our plants as efficiently as possible and to reduce our SAG expenses offset some of the impact of higher diesel fuel costs and lowered our SAG expenses 9% versus the prior year.

Second quarter segment earnings in aggregates were $103 million compared to $122 million last year. The earnings effect of the 9% decline in volume was approximately $23 million, accounting for more than the year-over-year decline in segment earnings. Segment earnings were further reduced by a 43% increase in diesel fuel cost per gallon. However, the earnings impact of higher diesel cost was more than offset by the improvement in pricing and production efficiency gains.

Earnings in our asphalt segment were $8 million, an increase from the prior year second quarter. Asphalt mix sales prices were higher in the second quarter, both sequentially, as well as year-over-year. As a result, unit margins increased versus the prior year, despite the 17% increase in liquid asphalt costs.

Our concrete segment reported a loss of $9 million versus a loss of $6 million in the prior year. Improved pricing for concrete led to higher unit materials margins but the earnings effect of this was more than offset by the impact of the 12% decline in volume and the 43% increase in the per gallon cost of diesel fuel. The cement segment second quarter loss of $1 million was flat with the prior year, as the earnings impact of lower sales volume was offset by the effects of lower costs and higher prices.

SAG expenses in the second quarter were $76 million versus $83 million in the prior year. The $7 million reduction reflects lower spending in most major categories, including lower spending for our legacy IT replacement project.

In June, we announced and completed a set of comprehensive actions that recapitalized our balance sheet and improved our debt maturity profile for the next five years. These actions included a $1.1 billion bond offering, a tender offer for $275 million of senior unsecured debt due in 2012 and 2013, the retirement of a $450 million term loan due in 2015, and the paydown of $275 million outstanding on our revolving credit facility. As a result, the only significant debt maturity through the end of 2014 are the remaining outstanding amounts of $135 million for the notes due in December of 2012 and $150 million for notes due in June of 2013.

This comprehensive set of actions resulted in a second quarter pretax charge of $26.5 million, that was recorded as interest expense in the quarter. This $26.5 million pretax charge reduced second quarter net earnings by $0.12 per diluted share.

We also recorded a significant specific charge in the second quarter of 2010. That charge of $41 million pretax, or $0.21 per diluted share, was for the settlement of a lawsuit in Illinois.

Excluding these two charges, diluted earnings per share from continuing operations improved to $0.07 for the second quarter of 2011, compared to $0.03 for the second quarter of 2012 (sic).

Turning now to our outlook; we expect earnings growth in the second half of 2011, driven by earnings improvements in all of our businesses, particularly aggregates, as well as SAG savings. We continue to expect aggregate prices to increase 1% to 3% for full year 2011.

As for aggregate shipments, we're maintaining our assumption for the second half of 2011 of 2% to 6% growth year-over-year. This will result in full-year volumes that could be flat to down 2% versus the prior year. Our expectations for an increase in second half aggregates volumes is supported by the timing of certain large projects in a number of key markets, including California, Virginia, Maryland, and Georgia. Additionally, we're assuming the four million ton decrease in shipments in the second quarter won't be recovered in the second half of 2011.

We expect weakness in single-family residential construction and uncertainty surrounding the timing and the amount of a new federal highway bill to more than offset demand pushed out in the second half of the year because of April's severe weather across many of our markets and the flooding throughout the quarter in our river markets.

Our expectations for higher diesel fuel costs have not changed materially from our expectations in May when we reported first quarter earnings,that is higher selling prices for aggregates.

The benefits of production efficiencies and cost management measures are expected to offset higher energy-related cost pressures expected throughout the remainder of the year.

In our asphalt business, we expect full year earnings to increase from prior year due to improved margins, as higher selling prices more than offset higher costs for liquid asphalt. We also expect asphalt mix volumes to increase from the prior year, based on large project work.

In concrete, we expect the loss reported in 2010 to narrow somewhat due to continuing improvements in pricing and margins. Second half cement earnings are expected to improve year-over-year due to some volume growth and lower costs. For the full year, cement earnings are expected to decrease modestly from the $4 million loss recorded in 2010.

Selling, administrative and general expenses in 2011 are expected to be lower than last year. Total SAG expenses of $328 million in 2010 included approximately $24 million of certain adjustments and charges reputable to the fair market value of donated real estate, severance costs, and expenses related to legal settlements. As a result, we expect SAG expenses in 2011 of $305 million to approximate the comparable level in 2010.

We are taking additional actions to reduce our overhead costs. While the 2011 effect is expected to be cost neutral, these actions, as well as lower costs related to our ERP project, should result in $10 million to $15 million of additional annual savings, going forward.

Net interest expense is expected to be approximately $102 million for the second half of 2011 and approximately $215 million for the full year, based on the recently completed debt financing, expected interest rates and a reduced level of capitalized interest on capital projects.

We continue to monitor our capital spending requirements based on projected demand levels, and as a result, we are lowering our 2011 estimate from $125 million to approximately $100 million.

Private, non-residential construction activity exhibited modest growth, all be it from a small base, in the second quarter. Trailing 12 month contract awards turned positive in June, the first year-over-year increases since the first half of 2008. This year-over-year increase was driven by continued growth in manufacturing construction, as well as the first increases in trailing 12 month contract awards for both office construction and store construction, we have seen, as I've said, since the first half of 2008.

Public construction activity in Vulcan-served states, particularly highways, should continue to benefit from the increase in contract awards in 2010 and early 2011, as well as from the continuation of stimulus funding. This stability in activity in the pipeline of projects is particularly comforting given Congress' inability, at this point, to finalize a new federal highway bill. We are hopeful that recent developments in Congress will be a catalyst for progress in the renewal of the federal highway program.

In early July, both the House T&I committee and the Senate EPW committee presented their outlines of their proposals for the next federal highway bill. the House T&I committee outline, which has no Democratic support, is for six years and includes approximately $230 billion in funding for highways and transit. This would represent an across-the-board 30% cut for every state in FY 2012 from the current FY 2011 funding levels. Almost every Senator and Congressman from both parties, with whom we have talked, find this level of funding for their states to be inadequate.

The Senate's bipartisan proposal is for two years at $109 billion in funding for highways and transit, essentially maintaining current levels of funding, adjusted for inflation. The broad-based transportation coalitions, including state and local governments, labor, commercial and consumer highway users and transportation builders, are all coalescing around the Senate proposal.

Another aspect of the highway funding deliberations that have materialized in the last few weeks is contained in the proposal by the Gang of Six, the bipartisan group of three Democratic and three Republican senators to reduce the deficit. This proposal states that an additional $133 billion in revenues for highways should be generated through tax reform without raising the federal gas tax. It is estimated that this level of funding would stabilize the highway trust fund for the next ten years.

The proposal by the Gang of Six explicitly acknowledges the need for additional revenue for highways and they have put it on the table for discussion. Their proposal reflects the fact that transportation infrastructure is a basic and fundamental public good and that the purpose of the federal programs is to provide the nation with a transportation infrastructure that is essential to the functioning of the US economy. The next step in highway funding process in Washington will be an extension of some duration past the current September 30 expiration of the federal highway program.

While Congress works to draft a new federal highway bill, several of our key states are proactively working to make major investments in their transportation infrastructure. Earlier this year, Virginia Governor Bob McDonnell signed into law a plan to infuse Virginia's ailing transportation infrastructure with $4 billion over the next three years. As a result, in July, the Virginia Department of Transportation announced a $10.6 billion six-year construction improvement program, a 36% increase from the prior plan.

Other examples of key states with solid growth in highway construction activity are Texas and Illinois. If we compare trailing twelve-month contract awards for the period ending June 30th of this year to the level of awards two years ago, Texas and Illinois are up 42% and 23%, respectively.

In all three examples regular funding, that is excluding stimulus, show robust improvement from a comparable level a year ago. This is a pattern we are seeing in many of our states, as regular funding is replacing the decline in stimulus funding.

In the case of Virginia and Texas, another positive factor driving the -- excuse me -- one factor driving the sharp increase in contract awards I just mentioned, particularly in Virginia, is the still significant levels of stimulus funding remaining to be spent in our states. According to the Federal Highway Administration, approximately $4.8 billion or 29% of the total stimulus funds apportioned for highways in Vulcan-served states, remains to be spent. This is true across Virginia, Texas, Georgia, California, and Florida, in particular.

Let me close by saying Vulcan has a tremendously valuable asset base which we believe is well-positioned to realize strong earnings leverage as the economy recovers. We continue to evaluate opportunities to better match our scale and size and our operating footprint to fit current and projected future demand levels. These opportunities can come in the form of divesture's, acquisitions, asset swaps or cost savings, and we will continue our diligent effort to make the best decision for our shareholders.

Now if our operator will give you the required instructions, we would be happy to respond to your questions.

(Operator Instructions). We have your first question from the line of Jack Kasprzak from BB&T. Please proceed.

Good morning, Don.

Good morning, Jack, how are you?

I am well. Yourself?

You're in the hot bed of construction.

The hot bed literally, too, as it has been 100 degrees here for the past couple weeks. I wanted to ask, first, as a point of clarification, you made a comment about $10 million of additional savings. Were you referring to SG&A? I just didn't get all of that comment. Sorry.

Yes, it is SG&A. It is $10 million to $15 million. We're taking some steps now to take another $10 million or $15 million of SG&A savings out of our current run rate. We won't show up probably in 2011 because we will have costs associated with achieving that run rate savings, but it should show up, beginning in 2012.

So it wouldn't be unrealistic to think, in terms of SG&A dollars, we could be looking for another reduction in 2012 versus 2011?

Correct, and for years after.

Yes. Okay. And in the quarter, volume is down 9%. Is it possible to try to bracket how much of that was due to the bad weather that we had?

Well, I think one indication of that is you know the tornadoes came ripping through the Southeast throughout the entire month of April, and we had hugely wet weather in the same periods in our Midwestern markets. April volumes were down about 20%. Then May and June volumes were down only about 3%, 3.5%, So while we can't -- we really can only estimate the impact of the bad weather, it is certainly -- the volume drop was heavily focused in April.

The other factor was all of that rainfall in the Midwest and the Southeast came roaring down the river system, and we basically couldn't ship material on the river for the entire quarter. Hopefully, that has now returned to normal. I was looking at our shipments in July, and it looks like the river system has returned to normal -- the shipments on the river.

But the combination of those two things certainly accounted for a significant portion of the 9% decline in shipments. That's not to say that the private sector continued to be weak as well, so it is a combination -- the 9% is a combination of bad weather and weak private sector markets, and I can't give you a precise tonnage breakdown between the two.

That's fair. That's helpful. Thanks. With regard to California, where we saw nice pickup in volume and mentioned some large projects; is that what you have been talking about, i.e. they've lagged spending stimulus dollars,so we're seeing some of that spending now? Do you expect, given that the large projects -- do we expect this good volume gains to continue there, through the balance of the year?

In fact -- really, the second half is going to be more impacted by the large project work than the second quarter was. But as you saw, our California shipments were up, I'd say 24%, in the second quarter. The vast majority of that was in public infrastructure projects. And those public infrastructure projects are also a piece of the large project work that we have -- that forms the basis of our view that our volumes will be up 2% to 6% in the second half. So it is large project work, primarily highways, in California.

Okay. Great.

When you get back to the East, there are highway projects, and in addition, there are some large significant Department of Defense projects in Georgia and Maryland and DC, including the Coast Guard Headquarters. So there is a lot of defense projects in these numbers, as well, for the second half.

Great. Thank you, Don. Appreciate it.

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

This is Josh Borstein in for Garik. Two questions for you. You mentioned in the press release that most of four million tons of aggregate volumes shortfall in Q2 wouldn't be recovered in the second half. Should we expect a model that -- returning in 2012? Or is that just volumes that you don't expect to return at all?

The volume will ultimately get shipped. And it is -- clearly, the four million that we missed in the second quarter is likely to be shipped in the second half, it just won't be incremental to the second half. And some of that -- we tried to explain that there is probably some weakness in the private sector that will not occur -- the shipments in the private sector will be weaker in the second half than we originally thought. And there will probably be some weakness in highway spending -- weaker highway spending than we had earlier thought, but the volume will flow through. It is just being offset by some additional weakness in the second half, if that makes sense.

The four million tons that were not shipped are not gone forever, it is just the whole flow of that material will occur, but it'll -- so the second half will be impacted by a carryover of some of the second quarter material. But then some of the other projects that we were looking at for the second half will be pushed off into 2012.

I rambled on that, and I am sorry, but it isn't four million discreet tons that are gone forever. It is a flow through of that material through the remainder of the year, along with the normal projects that we had projected for the second half.

Okay. That's helpful. Thank you. One follow-up question on California. I realize it is one of the biggest states in terms of revenue. Volumes were up pretty good and looked to continue. Do you think that volumes in that state have recovered enough to support some price increases, either this year or early next year?

Certainly, we believe it will. I think the missing piece in California, right now, is the private sector. The public sector -- these big projects tend to be competitive, obviously, and I think in order to start regaining significant price growth in California, we're going to need some help from the private sector, as well.

Great. I appreciate it. Thank you.

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

Good morning. This is Jamie Baskin on the line for Kathryn. With the $25 million reduction in CapEx, are you scrapping the larger projects, cutting back across the board? What's really going on here?

CapEx, as we have said a number of times, is really just a function of the tons of rock that run through our mobile equipment and our crushing plants, and as we have reprojected our needs based on volume, we think we don't need to spend $125 million -- all the $125 million. It is not in any particular large project, per se. It is just a realization that we don't need to spend the money this year, given the condition of our plant and equipment and the volumes we're running through it. For example, we produced about 2.5 million tons less in the second quarter than we did last year. You don't wear out your plant when you produce less.

Okay. That makes sense. My next question -- can you talk about your internal contingency plans around more cost-cutting, if the economy slips back into a recession?

Certainly. We will take serious looks at which plants we run and how long we run them and what parts of the year. We'll continue to take hard looks at overhead costs and we will continue to look hard at CapEx, because if there is a double-dip recession -- private sector spending is at such low levels, it is hard to imagine it can get any lower, but it certainly can, I am sure. But we are down 75% in contract awards and spending, in both residential and private non-res. And we're at levels that are 40% or 45% lower than we have ever seen in the last 40 years. So that being said, is there more downside? Certainly there could be. But we do have a number of options that we can execute that will further shrink our cost base to better align it with market demand.

That's helpful. That's all I had. Thank you.

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

Thanks so much. Good morning.

Good morning, Todd.

Don, can you tell me -- housekeeping issue -- can you tell me the average diesel price in the quarter? And how many gallons you went through?

The average diesel price in the quarter was about $3.46 a gallon. And one of my colleagues will flip over --

-- went through about 10.8 million gallons Unidentified Company Representative: in the quarter.

Don, I am sorry, was that $3.42?

$3.46.

Thanks.

That's up from $2.43, which yields the 43% increase in the unit cost of diesel fuel. Fortunately, as we went through the quarter, it dropped -- from April to May and May to June. So there is a good trend. And oil prices are down -- were down yesterday with the whole stock market and all of the other fear and trembling in the financial markets. But we're looking for a full-year number that's probably slightly less than the second quarter, but sort of in the same range.

Got it. That's helpful. Thanks. I appreciate the comments on what's going on with the question of reauthorization. I think you said that you think we're going to get a continuing resolution here at the end of September.

I just don't think there is a reasonable likelihood that a formal bill is going to get passed, either on a two-year basis or a six-year basis, by September 30th. So the first step is going to be some sort of extension. Whether it is a continuing resolution or a formal extension will get worked out shortly. And then there will be some discussion -- as indicated in our comments, we and everybody else in this large coalition of people who have an interest in highways very much prefer the Senate two-year bill. It will be a formal two-year bill or a formal two-year funding.

The issue there is -- to achieve that they need to find a $12 billion offset for some other -- from some other spending cuts to support the highway program. Fortunately, the Chair of the Senate Finance Committee, Matt Baucus, is a member of the Senate EPW committee, and in a public hearing a couple of weeks ago, he said they are reasonably certain they'll find it and they found some of it, and they are working on it. So that is the process, I think, that will need to occur -- is that the Senate Finance Committee will find an offset.

That offset will be used to support the Senate formal two-year extension of the highway bill at current levels plus inflation. It is bipartisan. Hopefully, it will pass the Senate on a bipartisan basis. Then it will go to the House.

As you know, the House number is a very different-looking bill. It is six years based on the level of spending that the current gasoline tax would support. As I indicated, when you show the number to individual Senators and Congressman and say, is your DOT and your Governor prepared to accept this kind of cut, and it's federal support for infrastructure, there are very few people who will say yes to that.

It is going to be an interesting time. I think step one is a short-term extension. At what levels, we'll have to see.

Got it. Thanks for all that.

There is plenty of money in the Highway Trust Fund to extend to the current levels, for the next 12 to 18 months.

Your next question is from the line of Scott Levine from JP Morgan. Please proceed.

Good morning, guys.

Good morning.

I think you mentioned in your press release here that weakness in both residential and non-residential, lingering softness, I think you say, is a factor in not expecting to recoup some of the volumes you initially expected this year. Is there marked weakness in one area versus another? Is one relatively strong versus another? How would you compare recent trends -- or trends really since you initially provided guidance for 2011, on both the res side versus the non-res side, and how they each played out relative to your initial expectations?

Well, as we look for the full year, we actually expect res to be up mid-single digits and that's all driven by multi-family construction, apartment construction, not single-family housing. Non-res for the rest of the year, we expect to be down mid to high single digits. But I think what we're seeing -- and there are two different metrics here. One is the shipments we see going into those end markets for the remainder of 2011, which in both cases -- or at least in the case of non-res, we think will be down from last year, and in the case of res, up from last year. Both coming off very low levels.

But I think the more important statistic is when you look at contract awards. And as I tried to say in my prepared remarks, we have seen contract awards going into construction for manufacturing facilities. It has been up and up sharply for at least, on a trailing twelve month basis, for the last six or nine months. For the first time, we are seeing contract awards for both stores and office buildings.

While we saw both of those up on a trailing three-month basis in the first quarter, we were saying, well, you can't really peg a trend based on a three month -- trailing three months. We can now say that on a trailing twelve-month basis, contract awards for both office buildings and retail structures are up on a full trailing twelve-month basis. And again, that's the first time we have seen that since first half of 2008, three years ago.

So I think there is some positive trends. They are coming off very low numbers. So a percentage increase off low numbers don't move a lot of volume. But I think that shores up our view that we will see the bottom in shipments in the private non-res this year. And hopefully, beginning to turn up toward the end of the year and into 2012.

Single-family housing is very difficult for us to see much light at the end of the tunnel. But there is a significant increase in multi-family construction, as people who previously would have bought houses or have lived in houses are now looking to move into apartments. And apartment vacancy rates across many of our markets are small.

There is a significant difference in the multi-family construction in the Vulcan-served markets versus the rest of the country. We're seeing much more robust contract awards in our markets than in the rest of the country, which we believe is driven by the favorable demographics in our markets rather than any kind of economic factor, other than the fact that the foreclosure rate for single-family houses in our markets has been substantially higher than in the rest of the country, as well.

Got it. Maybe to summarize -- or correct me if I'm wrong here, it sounds like the recent news on contract awards, maybe non-res is a little bit more encouraging than what you have seen on the res side, relative to your initial expectations? Or would that be pushing it?

If you put single-family -- multi-family housing, it is really in the same pattern as private non-res. And single-family is very -- coming off very low base, and is probably -- we don't expect to see a whole lot of activity there, certainly for the remainder of this year.

Understood. One follow-up, then. We've got the comments regarding your recent recap and refinancing. Do you have any other thoughts? I think you indicated you had some small maturities left in 2012 and 2013. Any other plans on the refinancing front to be -- to note for the next few quarters here?

We're in the process of moving forward with our bank group on renewal of our multi-year credit line facility. And that will roll out over the next two or three months. And we'll report on that, I am assuming, as it gets finalized. But that's -- the existing $1.5 billion line of credit we have expires in November 2012. It is certainly our intention to have that renewed no later than November of 2011, and hopefully, couple of months in advance of that.

Understood. Thanks, guys.

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

Good morning, thank you.

Good morning.

I want to just go back to one of the previous questions about CapEx and how it relates to dividends. If I look at your CapEx, even just for the full year 2009, 2010, and if I measure it as a percentage of sales or depreciation, it really looks like you have been underspending, relative to historical averages, even going back to, I think, 2002 or 2003, when you saw your last little dip in sales. So I wonder if you can tell me why I am wrong if I am thinking that you're really underspending and that might catch up with you in the future.

And secondly, I want to just talk about how you weigh CapEx versus a dividend cut. And I know that's a board decision but curious, Don, what your personal opinion is on that.

If you look at our CapEx over the last decade, you see huge increases in CapEx in -- what, 2004, 2005, 2006, 2007, 2008. And as a result of that, our plant and equipment, given the current level of production, is in good condition. We just don't need to spend the CapEx now.

At some point, when volume starts coming up, or with the passage of time, we will need to move back to higher levels of CapEx spending. But we just simply do not need that today, either for -- we certainly don't need to spend anything to increase our production capacity. We simply need to replace what needs to be replacing, from an efficiency standpoint.

The other thing that's running through our depreciation that you are seeing is the effects of purchase accounting. So instead of assets being depreciated on historical basis, with purchase accounting, you write everything up to fair market value and you start all over again. Acquisitions are the basis of that.

We're not intentionally cutting CapEx. We're just trying to spend the money prudently, as needed, to keep our plant and equipment running efficiently. We certainly will never cut CapEx to pay a dividend. Our whole strategy on dividends, as I have said before, and what our board looks at, look at our cash earnings, look at our needs for CapEx, and look at what is left over. We believe returning cash to shareholders is appropriate, along with a projection of being able to get our debt paid down over time.

The real issue for us is volume. We get any kind of volume recovery, our ability to generate cash to reduce debt will be very substantial. So our -- the way we analyze it is cash earnings, CapEx, look at what's left over, and see what is appropriate to return to shareholders.

We really, at this point, because of the refinancing, don't have any debt to repay other than a little bit in the revolving credit agreement, which is just sort of a seasonality of working capital requirements that's covered by that. I hope I have addressed your question.

Yes, thank you. On the debt, though, given the refinancing, should we assume that your interest now is about -- guiding to $51 million or so a quarter for the last two quarters of this year, and if that's going to maintain that level, I would think you would want to -- that's going to next year offset any kind of SG&A savings you will get, so would you have a strong preference for paying that debt down and getting interest costs down?

One of the problems, as you saw with the second quarter, when we go out and pay debt early, we pay a premium for it. We paid a large premium to buy those bonds back in, those 2012 and 2013 maturities. So in theory, we would love to pay debt down. The reality is we really don't have any debt to pay down now, except either doing a very high priced tender offer for some of our outstanding debt or paying down our revolver. And as you see we have -- in June 30, we had something like over $100 million of cash on the balance sheet. The practical answer is, that's not prudent for us to do at this point.

Great. Thanks, very much.

Your next question is from the line of Mike Betts from Jefferies. Please proceed.

Thank you very much, and good morning. I had three questions, if I could. The first one, just to explain maybe the tax charge, Dan, it was quite a high rate in Q2.

The second one, Don, maybe you can explain what happened or give us more details on Florida, in terms of the volume trend in Q2, and also on pricing.

And my third question, obviously very good price movements Q2 on Q2 on aggregates, but when I look sequentially, I think if my calculations are right, or I have the right numbers, it was only up about $0.03. Is that due to the timing of the price increases this year? Because I think the first one was in January. And can I lead from that into -- because I think you put a mid-year price increase -- about what sort of success you've had with that? And what the expectation might be in the second half? Or in reality, we may be looking for the impact of that in 2012?Thank you.

Mike, I say this completely tongue in cheek. If you don't understand the tax rate, we don't have time to explain it to you. I am being facetious. I'll let Dan -- cause it is confusing a lot of people. Dan?

Actually, Mike, I was hoping you would have asked that question of Don. Let me try to give you a summary of the tax rate machinations and then if the summary isn't adequate, we can go into more detail.

First of all, I would encourage to you look at the tax rate on a year-to-date basis, not from a quarterly basis. Because the process that companies have to go through in booking their tax rate is to begin by looking at the best estimate of the full year rate and the corresponding dollars of tax provision and ensure that, through the year-to-date results, in this case the first six months, that you have brought the accrual inline with your estimated full-year rate. So what happened to us in the second quarter is -- there was some true-up adjustment necessary to get the first six month rate essentially inline with where we needed it to be.

What may be more helpful than going into all of those machinations, I would start by encouraging you to look at it on a full-year basis. And let me try to walk you through what I think would be the best way to think about the tax rate on a full year basis, and almost take it on face, that what's booked in the first quarter and the second quarter is just bringing our year-to-date results inline with our thinking about the full-year rate. What I would encourage you to do is go through your earnings model and come up with your best guess of our full year pre-tax earnings.

Right.

The first step is, I would apply a statutory rate of 35% to that earnings or loss. And if it is a loss, make the assumption that we will get a benefit -- a tax benefit in the provision of 35% of that full year pre-tax loss. Then we have one really significant permanent difference in our tax provision, and that's statutory depletion. Again, I think the best way to think about depletion is on an annual basis and not on a quarterly year-to-date basis.

If you look at last year's results for the Company, we recorded statutory depletion in 2010 of approximately $20 million -- $20.3 million, to be more precise. That depletion benefit is going to move from year-to-year, up or down, based principally on changes in volume and the underlying profitability of the aggregates operations. When I say volume, I mean volume of aggregates, not the downstream products. Because ready-mix concrete and asphalt do not generate depletion benefits, although the cement business does. In the grand scheme of our depletion calculation, it is driven by aggregates.

So I think as you look at the depletion benefit we recorded last year, you then go back to your earnings model and say, what assumptions have you made for aggregate shipments. And if they're flat, your prior year depletion number is going to be in the ballpark with the amount of depletion that we will record for 2011, plus or minus a few -- 5%, give or take, a little bit. Then if you get those two items down, meaning the tax at the statutory 35% rate and the depletion benefit, everything else that flowed through our tax provision last year netted out to about just over $2 million. And there is nothing else going on in 2011 that we see right now that will cause that all-other number to be more than $2 million or $3 million.

So I think -- you look at your operating results, get the tax at the statutory rate, look at depletion. And again, that will be somewhere in the $20 million to $21 million neighborhood, in all likelihood, given your volume assumptions, I assume, and then all-other is the small number. That's the way I would think about the tax provision. I can go on for an hour-and-a-half on the quarter-to-quarter mechanics, but I don't think that's going to change the real answer, which is, what's it going to be for the full year?

I will add this, Mike. We didn't invent this system for calculating tax rates. This is one of the benefits of the clarity that GAAP accounting brings to our financial statements. And so we just do it the way the rules tell us to do it, and that's the way it shows up.

Mike, if that discussion wasn't helpful, I can either try again here or we can follow-up offline and go into the quarterly stuff in more detail.

No, that's helpful, Dan. I think that gives me what I need. Thank you for that on that question. Thank you.

On the other two questions, Mike, if you try to do quarter-to-quarter sequential pricing from a cold weather quarter to a warm weather quarter, you will be overwhelmed with complications. The reality is that the geographic mix shifts greatly from Q1 to Q2. The product mix shifts greatly from Q1 to Q2. For example, there are very few places in the country where people are actually doing asphalt paving in the first quarter. And there are not many places in the country where large quantities of concrete are poured in the first quarter, relative to the second quarter. So you just get a distortion that is not helpful. You just can't understand. There are too many changes in the product mix and the geographic mix to look at things on a sequential basis in this business because we're so seasonally affected.

You asked about Florida. Demand remains weak in Florida, but pricing is improving. As we indicated, our concrete prices in the whole Company are up, and Florida is certainly up, as well. Our aggregate prices, on a product adjusted basis are up -- really higher than the total Company is up. So we think Florida, while demand is weak, we think pricing has certainly stabilized and is moving in the right direction in both concrete and aggregates.

The thing that is going to be necessary for Florida demand to recover will be some recovery in housing and related recovery in private non-res construction. As we said before, Florida has a fair amount of stimulus money yet to spend on its highway program. But there is just a huge -- still a housing problem in Florida. You may have seen the article in the Wall Street Journal about all of the cash purchases of new high-rise condos in Miami. I think those are the kinds of things that will ultimately bring Florida back, but it is going to take awhile.

And, Don, just to follow-up -- final question; the mid-year price increase, Don, was it mid-year or is it more September or does it vary by states? And is it significant? And how is it holding?

Well, I will say what I have said many, many times before. Our price increases are a moving job-by-job, product-by-product, market-by-market movement. There is not a set price increase across the board on all products in all markets at a single timeframe. That's just not the way pricing in our business -- or certainly in our Company -- works. There are price increases. They're flowing through.

I think one of the caveats I will tell you is -- there is a lag effect between the volume in a quarter and the pricing in a quarter. There is relatively little material that shipped in the quarter that's priced in that quarter. So as you see volumes moving and you ask about what's the effect on pricing, the effect on pricing is often times delayed by a quarter or more, in terms of when the actual shipments go out the gate and when the material is quoted and the order is booked.

Understood. Thank you very much.

Your next question comes from the line of Brent Thielman from D.A. Davidson. Please proceed.

Good morning.

Good morning.

Just maybe a follow-up to the last, Don, I am just trying to get clarification; but you did mention broader-based regional improvement in pricing for aggregates. Are there still markets for you, maybe ones that are a little more material to you, whether it is that top five or top ten, where you are still seeing significant downward pressure in pricing? Or even have those stabilized?

There would be individual markets -- and by a market, I am talking about a piece of a metropolitan area somewhere, where there may be pricing pressure, and or because of large project work and certainly the competitive environment in which we operate, that we and others are -- bid large projects aggressively and when those projects ship, it will have an impact on our freight adjusted selling prices in that market.

That said, I think there is a lot more stability in pricing today than there was a year ago, and certainly two years ago. When this recession started in a big way and the stimulus work came out, there was a lot of aggressive pricing in order to book the stimulus work because that was about all that was on the horizon. And you were seeing shipments into private non-res and residential construction dropping 20%, 25% per year. You're not seeing that now. There is much more stability in the level of demand at low levels, but there is stability.

And I think anybody who has been in this business for any significant period of time understands that in an individual market, there is very little price elasticity to the demand for aggregates. In an individual market, nothing -- you're not going to change the overall demand for aggregates by raising or lowering prices. It is just the shipping radius is too small because of all of the factors you are aware of. And as a result of that, there is competition in every market for every job. But you really don't see the kind of price swings you would see in global commodities, where material can move all over the world. You don't see the upside of pricing. You don't see the downside.

So one of the factors in this quarter, that we tried to highlight, is that while our freight adjusted price increased about 2.5%, the variation around that number, across the Company, is less than it has been in some prior quarters. And we think that's because there is much more stability and visibility in the end markets today than there were over the last couple of years, when nobody could see the bottom.

Okay. Thanks for that. And then as a follow-up, it looks like a nice progression in price on the asphalt mix business. And I am just curious, is there anything mix related there that would impact that number? And also, can you talk about how that pricing progressed through the quarter April through June?

The asphalt mix is largely going to large infrastructure projects, highway projects. We have asphalt in California, Arizona, New Mexico and Texas, and it is heavily public sector infrastructure. And asphalt mix pricing is sensitive to asphalt oil costs but with a lag.

So as liquid asphalt prices -- costs go up, it typically allows us to increase our asphalt mix prices, but typically, with a lag. We are buying some amount of our asphalt oil on a spot basis and we're contracting with our customers over longer term periods for projects, sometimes we pass the oil costs through. Sometimes we don't. But generally, I think the higher the liquid asphalt costs -- the larger the price increase for asphalt mix that you will see flowing through our system and if we do it right, we're able to expand our material margin and therefore our margin (inaudible) business as we raise our prices in response to liquid asphalt costs.

And have you seen some stabilization in liquid asphalt costs at this point?

Not really.

Not yet?

I would say that --

-- continuing to creep.

It is up, i think, in the 560 range in the second quarter, compared to about 477 a year ago. And we think it is probably going to stay in about that range. But that's an estimate on our part. That's a lot of different markets, a lot of different suppliers. So that's the average that we have. And I am not -- there is not a monthly trend that's --

Okay.

It is still trending up, somewhat, whereas diesel fuel is trending down. So I think -- if they don't move, they don't move in lock step.

Sure. Thank you.

Your next question comes from the line of Bob Wetenhall from RBC Capital Markets. Please proceed.

Hi, guys, this is actually Tom Austin on for Bob Wetenhall.

I just wanted to clarify some of your comments about your expectations for the federal transportation spending. And just close the loop on what you think that means for next year. If you guys think that maybe baseline expectations are that we get a continuing resolution through next year that keeps funding at steady levels, and then maybe you have some stimulus funds that are coming off, but maybe some states that are stepping up to fill the gap, do you think that would, all equal -- if we get a continuing resolution with equal funding; do you think that would lead to flat volumes next year, maybe slightly increased, maybe slightly down? I don't know if you have any expectations for that.

I won't answer it in terms of what our expectations for our volumes would be next year, because that's something we'll do a lot more work on before we try to give an outlook on that. But with respect to funding next year on the federal side, I think the range of possibilities would be funding at current levels, that is $41 billion, $42 billion plus maybe an inflation adjustment, as in the Senate EPW outline. Probably the low end would be the number that's in the house T&I outline.

As I said, there is enough money in the Highway Trust Fund to stay at current levels through FY 2012 and probably halfway through FY 2013. So in a continuing resolution or short-term extension scenario, the money is there, there's probably going to be -- some likelihood that that would provide for continuing funding at current levels. Stimulus will, of course, continue to wind down as we move into 2012. There is probably going to be still some stimulus money to be spent, but it will certainly be less.

What we're seeing is that the states ramped down regular funding, state and federal funding, on projects as stimulus ramped up. That was not supposed to happen, but it did. A couple of reasons for that, I am sure, is one, the states only had a finite number of projects to bid during the time period of the stimulus, and they took everything they had and bid it with stimulus money. And so the regular programs tail down. As the stimulus money is tailing off, we're seeing the regular highway contract awards -- the regular state and federal supported state contract awards moving up. And I think there is a graph in our investor materials that shows that.

So as we look forward, we don't think there is a down draft from the winddown of stimulus spending that is going to result in a significant drop in state -- the total highway spending. Because the regular programs are moving back up to offset that. The wild card, of course, is what happens after September 30 and what the amount will be on a continuing resolution or short-term extension. And certainly, as I have said, we are working hard, along with a lot of other people, both industry and labor and organizations that represent people like the truckers and the American Automobile Association. And there is a large coalition that says don't cut highway spending because you're going to cripple jobs, you're going to cripple consumer transportation, you're going to cripple commercial transportation, and it makes no economic sense to do that. But we'll have to see how it works out.

Got it. Thanks.

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

Hi, guys, how are you doing?

Hi, Ted.

I had a quick question on pricing. Is there any way you could potentially decompose pricing in the second quarter? Help us understand what the benefits or headwinds would have been on geographic mix, product mix versus underlying pricing?

Well, the only thing I can -- I think help you with there, Ted, is that the spread between the highest and lowest change in pricing has narrowed. Which says to me that across the country, across markets, there is more stability in pricing and there is less aberrational activity.

In terms of product mix, we probably have more asphalt, stone, and concrete stone in the second quarter, as a percent of the product mix, than in the first quarter, because of the weather and the ability to do paving work and pour concrete as the weather warms. But that's no different than the second quarter last year. That's just a sequential quarter issue, in terms of last year's second quarter versus this one. I know of no huge geographic mix shift or product mix shift that is worthy of mentioning. If we had, we would have mentioned it.

That's helpful. Secondly, in terms of just how we think about the pricing expectations implied in the back half of this year, is there any kind of assumption built in that you will get, for example, a lot more maintenance work that would imply more clean-washed stone, which has better pricing, and hence would be a tailwind, all else equal?

We haven't changed our outlook for full year pricing. We have said 1% to 3%. We got 2.5%in the second quarter, a little less than that year-to-date. But generally, as we move through the year, the price increases that we have been able to put into effect start materializing in actual shipments, and then showing up in our reported pricing. So I think we're comfortable with our price forecast for the full year.

It is, as I have said many times before, it is a lot clearer after the quarter is over and we look back and calculate our pricing, than it is at the beginning of the quarter, looking forward, is exactly how it is going to play out. Because there are literally thousands and thousands of individual pricing decisions that roll through to get to that result. And what goes out the gate in the quarter is what's counted, not what has been booked in that quarter. So we believe that pricing has stabilized, there is opportunity, going forward, for price growth, and we're certainly working to get that in all of our product lines. And we're very pleased with the success of that effort in the second quarter.

Terrific. That's very helpful. The second question I was hoping to ask you is, in terms of thinking about your margins in the aggregate segment in the back half of this year and to whatever degree you're comfortable talking longer term; would you just walk through the puts and takes of the cost structure, the big buckets called labor, R&M supplies, energy, and how we might, if at all, tweak our expectations on incrementals given a lot of companies this quarter, in particular, have had a tough time on the price cost balance. So if you could just help us recalibrate our expectations on incrementals or cost pressures, that would be great.

I am going to get Dan Sansone to run through that with you in some detail. But for us, you know, the big variable in the aggregate business is diesel fuel costs. That's what moves around. And on the GAAP side, not the cash side, but on the GAAP side, it is absorption of DD&A to a bunch of things. I will let Dan cover that with more sophistication than I can.

Ted, if you look at our costs per ton of aggregate in the first half of this year compared to the first half of last year, I think the basic relationships that we have cited, previously, have remained substantially the same. I am talking now about total costs. Our labor infringes this year for aggregates have averaged around 25%, 26% of our total spend for producing a ton of aggregate. On a per unit basis, this year a little bit higher than last year. And I think part of is, what Don just referred to, being a function of lower volume.

There was -- some of that labor cost is somewhat fixed. But additionally, we have had some higher repair and maintenance spending this year as compared to last year. And that number is going to move around a little bit, and frankly, will drift a little bit higher before it comes down. Because, in part, of the curtailed capital spending. So while we're not pushing the equipment nearly as hard as we did a couple years ago, we're not replacing as much, so on the margin, we're encountering some more repair and maintenance expense.

In a practical standpoint, you can think about it this way. You've got two pieces of equipment. You need to run only one. You run one. It breaks. You park it. You run the second one, something breaks, you have to fix it. So you're going to have a little bit of that. And you do incur some wages and labor to repair that equipment. And we did see a corresponding increase in the first half of this year in our cost of parts and supplies. Again, it crept up a little higher on a per unit basis or on a -- as a percentage of the total.

If you step back from that and you look at the basic cost structure of the business, it isn't changing a whole lot on the variable side --not changing dramatically. As we get into recovery and begin to see meaningful volume increase, we still expect to see very, very powerful contribution margins, as the available cost of producing a ton of this stuff is a heck of a lot lower than the selling price. So I think we will still stick with the view that through the early years of meaningful recovery, a 60% contribution margin on incremental aggregates revenues is still not unrealistic to achieve.

That's helpful. That's the net of the questions. The last thing I was hoping to ask you is, I think Don cited $4.9 billion of remaining stimulus funds in Vulcan states. Is there anyway you can couch that, just so we understand what that spend would like in 2010? Do you have a sense for what that spend looked like for the first half of this year and what you're expectations are for the back half? And if you assume the balance is captured in 2012, or if it is a longer tail than that? And I will get back in the queue. Thank you.

One of my colleagues has that data, and he is bringing it to me now, so I don't wing it from the --

In the sensitivity -- if other people have questions, I can talk to Mark about it offline if that's easier for you, Don.

Why don't you do that. We have that by state. It is all -- it is not our estimates. It is federal government numbers, and it is, I think, accurate. And we'll get those numbers to you.

Best of luck this quarter, guys.

Your next question comes from the line of Carly Mattson from Goldman Sachs. Please proceed.

Good morning. I just want to touch back on the revolver renewal. Would Vulcan consider offering security in turn for lower rates? Or what other factors are being considered in the revolver renewal?

I think it is too early to answer that question definitively. We're in the midst of our discussions with the banks. We have not yet launched a deal. We're still reviewing proposals. And obviously, given our credit rating and our leverage, the discussion of security is ongoing. And we're trying to evaluate and measure the trade-offs between security and the lack of security, as it relates both to pricing and the corresponding -- both covenants and negative covenants.

It is our strong desire to continue to pursue an unsecured revolver. But I must qualify that by saying, until we complete this review and actually launch a deal and see how receptive the market is, I don't want to predict where it will end up. We're pushing hard towards an unsecured transaction.

Okay. Great. Thank you.

I would now like to turn the presentation over to Mr. James for closing remarks.

Thank you very much for calling in today. We appreciate your interest. Thank you for your questions. We look forward to talking to you again at the end of the third quarter. And look forward to meeting with many of you in investor meetings later on in the year. Thank you very much.

Ladies and gentlemen, that concludes today's presentation. We thank you for your participation. You may now disconnect. Have a great day.