渥肯建材 (VMC) 2012 Q3 法說會逐字稿

Welcome to the 2012 Vulcan Materials Company quarter earnings conference call. My name is Hilda, and I will be your operator for today's call. At this time, all participants in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Don James, Chairman and CEO. Mr. James, you may begin.

Good morning. Thank you for joining us to discuss our results for the third quarter 2012. I am Don James, Chairman and Chief Executive Officer of Vulcan Materials Company. Joining me today are Dan Sansone, our Executive Vice President and Chief Financial Officer, and Danny Shepherd, our Executive Vice President and Chief Operating Officer. We have posted a short slide presentation to our website that we will reference during the call. These slides are also available to those of you on the webcast.

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

In addition, during this call, management will refer to certain non-GAAP financial measures. These measures are not prepared in accordance with US Generally Accepted Accounting Principles. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures, and other related information in Vulcan's third quarter 2012 earnings release, and in the Investor Relations section of Vulcan's website. during the quarter with an adjusted EBITDA of $146 million, an increase of 9% over the third quarter of last year.

Turning now to slide three, I want to begin by briefly discussing a few highlights from the quarter. We have continued to deliver earnings improvement during the quarter, with an adjusted EBITDA of $146 million, an increase of 9% over the third quarter of last year. We achieved these results despite a demand environment that remains highly challenging, as reflected in the weak volume we saw in the quarter. Adjusted earnings from continuing operations were $0.14 per diluted share, a 27% per share improvement from a loss of $0.13 per diluted share in last year's third quarter. The earnings impact of lower aggregate volumes was about $18 million of EBITDA, or $0.10 per diluted share.

We also generated higher aggregates profitability. Aggregates unit profitability has measured by cash gross profit per ton was a third quarter record, and the fourth consecutive quarter of year-over-year improvement. Aggregate segment gross profit margin increased 340 basis points due to a 4% increase in aggregates pricing, and the benefits of our continued cost reductions efforts. Cost reduction is an ongoing focus of our management team and all of our employees. In addition to lower unit cost of sales in our aggregates business, we also realized our fourth consecutive quarterly decline in year-over-year SAG expenses.

As we look ahead, we are encouraged by the leading indicators for private sector construction. In addition, we are looking forward to more predictable funding provided by the new federal highway bill, and the benefits from a greatly expanded TIFIA program within that bill. Moving now to slide four, we are very pleased with the margin expansion we realized in the third quarter and year-to-date, particularly given the lack of top-line growth. Our margin expansion will further enhance earnings leverage as volumes recover.

Employees throughout the Company remain keenly focused on managing controllable costs. Thanks to their continued efforts, earnings leverage in our Aggregates business continues to grow, as evidenced by the consistent increases in gross profit margins and adjusted EBITDA. We also benefited from stronger pricing in both the third quarter and year-to-date periods. Through the nine months ended September 4th of this year, adjusted EBITDA, which excludes $18 million in real estate gains was $321 million, up $64 million, or 25%. Again this was despite a 1% decline in aggregate volumes.

SAG expenses for the third quarter were $65 million, down from $67 million for the third quarter last year. Excluding the effects of certain accounting charges tied primarily to employee benefit plans, and resulting from an increase in the Company's stock price, SAG expenses were reduced $10 million from the prior year's third quarter. With that, I would like to turn the call over to Danny Shepherd, who will walk you through our segment results for the quarter. Danny?

Thanks, Don. Turning to our segment results on slide five, as Don said earlier, aggregate segment revenue remains sluggish as a result of weaker volumes. On the same store basis, Aggregates declined 6%. We are pleased in spite of the sluggishness in public construction, Aggregates' gross profit increased $12 million from the prior year's third quarter. Aggregates cash gross profit per ton was $4.75, a 10% improvement over the prior year. As Don mentioned, and I would like to further emphasize, the $4.75 per ton Aggregates cash gross profit is a record level of unit profitability for the third quarter. Also gross profit margins expanded, as he said, by 340 basis points over prior year third quarter. Pricing, which was good news, and specifically a 4% improvement in pricing contributed significantly to higher segment earnings and profitability. In addition, our operations teams lowered unit cost of sales for the quarter by 1%.

Turning to slide six, here you will see our bridge for the Aggregate segment, and it shows the benefit of higher pricing and effective cost controls which more than offset the earnings effect of lower volumes. Now it is important to note that despite overall sluggish volumes in the quarter, we were encouraged by strong Aggregates' shipments in several key states, including Arizona, Florida, and Texas.

Total volumes from these three states increased 12%, due primarily to growing demand from private construction. Now, if you look at the green bars on the slide, they illustrate the earnings contribution of higher pricing and lower cost. Year-over-year price improvement was achieved in most of the Company's markets, including key markets in Florida, Texas, and in Southeast states, the Mid-Atlantic, and the Midwest. The improvement and operating cost is a result of our intense focus on cost control and productivity.

In the quarter, our unit cost of sales decreased 1% on lower production volumes. And when we look at our operating metrics, like we do, it shows that we continue to improve. Turning to slide seven, you will see from this chart that we remain encouraged by the momentum that we have seen over the last year. Aggregates unit profitability continues to improve. And for the trailing 12-months ending September 30, 2012, our cash gross profit per ton was $4.28. That is 8% higher than the prior year, and 30% higher than the peak year in volumes which was 2005.

If you turn to slide eight now, third quarter earnings from the Company's non aggregate segments were in line with prior year. Earnings improvements in cement and concrete offset a slight decrease in asphalt mix gross profit. On slide eight, you can see evidence that is continued recovery in private construction activity led to solid increases in ready-mix concrete and cement volumes, as well as year-over-year growth in pricing for both segments. Concrete gross profit for the third quarter improved slightly from the prior year period. Year-to-date, concrete gross profit was a loss of $30 million, a $2 million improvement over the prior year.

Private construction led by housing is recovering sharply in Florida. There, ready-mix concrete volumes are up more than 20% and concrete block, albeit a smaller part of the concrete segment, are up almost 30% through the first nine months of 2012. Cement segment gross profit approximated a breakeven position in the third quarter, a modest improvement from the prior year. Through the first nine months of 2012, cement gross profit has improved $4 million from the prior year.

Finally, in our asphalt segment, gross profit in the third quarter was $11 million, which is a decrease of $1 million from the year-ago period. The unit cost for liquid asphalt increased 3%, thus reducing asphalt segment earnings by $1 million. Consistent with the public sector demand, asphalt sales volumes in California, the Company's largest asphalt market were down versus the prior year, which more than offset volume increases in Texas and Arizona. Year-to-date asphalt mix segment gross profit was $15 million compared with $20 million in 2011. In total, gross profit for our non aggregate segment has improved 9% over 2011 year-to-date.

Overall, we believe the non aggregate's earnings performance has stabilized, and should benefit from increased private construction activity. We remained focused on maximizing the Aggregate's shipments that are pulled through our downstream businesses, and we are focused on improving our profit and cash flow performance of these very valuable assets. Thank you and with that, I will turn the program back over to Don.

Thank you, Danny. If you will turn now to slide nine, I want to focus for a moment on publicly-funded construction. More specifically, highway construction. This slide depicts the historical relationship of the timing of contract awards to the passage of new federal highway bills. You will notice that historically, increases in contract awards for highway projects have followed the passage of new federal highway bills. This trend should continue with the July 2012 passage of the new federal highway bill Map 21, which will provide stability and predictability to highway funding for the next several years.

Evidence of this relationship between growth and new construction activity and the passage of a new federal highway bill, can be seen in dollars obligated for qualified federal projects. In the last two months of fiscal year 2012, that is in August and September of this year, 42% of the full year $38 billion budget was obligated. This share of full-year funding was disproportionately larger than normal, which means the prior ten months were disproportionately smaller, and is indicative of the State DOT's positive response to the final passage of a new highway bill in July. In the third quarter, the passage of the new highway bill had no material impact on shipments, which reflected softness in highway construction from the weak contract awards during the past 20 months as reflected on slide nine, and the winding down of stimulus-related construction.

Moving now to slide ten, this map highlights one of the important features contained in the new federal highway bill. The large increase in Transportation Infrastructure Finance and Innovation Act, or TIFIA funding contained in the new highway bill should positively impact demand in the future, particularly for several key Vulcan served states. The current backlog of potential projects requesting TIFIA funding is substantial. Currently letters of interest for 54 transportation projects have been submitted for more than $65 billion in total project cost. More than $42 billion of the projects are in Vulcan served counties, with almost 80% of Vulcan-served counties in three states, California, Texas, and Virginia. The uncertain timing of shipments to larger projects including these TIFIA-funded projects, continues to make forecasting quarterly volume growth difficult.

Turning now to slide eleven, looking at the other portion of public construction activity, you can see that other public infrastructure contract awards are improving. On this slide, we have overlaid year-over-year change in contract awards for new construction with construction activity completed, as measured by the Census Bureau's construction put in place monthly survey. As you can see, there is a lag effect between the leading indicator that is contract awards and the actual construction. We are optimistic that the growth in recent awards will continue and actual construction growth will follow.

We will move now to slide twelve. As we mentioned before, private construction activities, specifically residential housing starts and contract awards for nonresidential buildings, continued to improve during the quarter. Offsetting some residual softness in highway construction resulting from the prolonged delay in the renewal of the highway bill. On slide twelve, we see a very nice fit between housing starts and the actual construction activity, with a predictable lag between the start and completion of construction. We believe this growth trend will continue.

The same can be said for private nonresidential construction shown on slide thirteen. Here you see a slightly longer lag than in residential, but again, evidence of growth in new contract awards followed by growth in actual construction activity. Consequently, Aggregates demand into private construction is beginning to grow. We are seeing evidence of this in several of our key states, including Florida, Texas and Arizona.

We are in the midst of our planning for 2013 but preliminarily, we believe the indicators shown on the last five slides point toward solid growth in aggregates demand in 2013. We expect private construction demand to grow again in 2013 as housing starts and contract awards for private nonresidential buildings continue to improve. Additionally, we expect the stability and predictability that will come from the new federal highway bill, coupled with the potential for large TIFIA-related transportation projects to begin in several of our key states some time next year, could lead to modest growth in demand for highway construction.

We will provide you with additional details in February when we report our fourth quarter results and our outlook for 2013. Turning now to our outlook for the remainder of 2012 on slide fourteen, we now expect same-store shipments in 2012 to approximate the 2011 level, and total aggregate shipments to decline approximately 1%. As a result of our successful efforts to offset earnings effect of lower volumes, we will continue to reduce controllable costs and achieve improved pricing. The geographic breadth of pricing gains achieved in the third quarter reinforces our expectations for full-year freight adjusted price growth of 1% to 3% in 2012. This price growth reflects the continued recovery in private construction activity and the newly-enacted federal highway legislation.

We remain laser focused on improving our profitability at today's volumes, while enhancing our already strong operating leverage. Full-year earnings improvements in the Company's cement and concrete segments are expected to offset lower asphalt mix segment earnings. As a result, collectively, full year non aggregates earnings are expected to approximate last year. Cost reduction initiatives continue to improve Vulcan's run rate profitability. These initiatives are reducing our overhead costs and support our expectations for full year SAG cost, it would be approximately $260 million compared to $290 million in 2011. We continue to focus on executing our initiatives, enabling us to generate higher levels of earnings and cash flow, further improve our operating leverage, reduce overhead costs, and strengthen our credit profile.

We now expect 2012 adjusted EBITDA of $435 million to $455 million, an improvement of 23% to 29% from the prior year, and a significant accomplishment in the current economic environment. This adjusted EBITDA guidance reflects principally the earnings effect of lower volumes in aggregates and asphalt, and the timing of realization of our cost reduction initiatives. Approximately $20 million of the decrease from our prior guidance is a result of the earnings effect of lower aggregates volumes, and approximately $20 million is from lower earnings in asphalt and concrete. The remaining $15 million relates to delay in the realization of some cost savings components of our profit enhancement plan. We expect to exceed our $25 million target for our profit enhancement plan in 2012, and we remain on track to achieve the target run rate savings in 2013. Our efforts to accelerate more of the 2013 savings into 2012 have proven more challenging than we thought earlier in the year, in part because of weaker volumes.

This EBITDA guidance excludes results related to the planned asset sales and costs associated with the unsolicited offer, terminated earlier this year. This guidance does include $29 million in gains, of which $18 million has been realized through the first nine months of 2012. These gains are incremental to the $4 million of routine gains completed during the normal course of business. The Company continues to work on additional asset sales in the fourth quarter that are expected to result in $100 million to $150 million of cash proceeds, and incremental gains of $25 million to $45 million. However, the ultimate timing of these transactions is difficult to predict, thus we have excluded them from our current guidance.

In terms of cash, as of September 30, cash and cash equivalents totaled $243 million. Debt maturities in the fourth quarter of 2012 totaled $135 million, which we expect to pay off out of available cash. Capital spending is expected to be approximately $100 million for 2012. In summary, turning now to slide fifteen, we are pleased to see continued earnings improvement. This quarter marked the fourth consecutive quarter of higher year-over-year profitability. Overall, year-to-date, controllable costs have decreased approximately $70 million. Through the first nine months of 2012, adjusted EBITDA is up sharply from the prior year, and earnings per diluted share has improved.

Finally, we remain cautiously optimistic that construction-related fundamentals will continue to improve. Trailing 12-month contract awards for private construction continue to grow, and if history repeats itself, contract awards for highways should again begin to recover with a new federal highway bill in place. Demand for our products is driven by economic cycles and public infrastructure funding which are largely beyond our control. We do have control over our cost and pricing initiatives that will enable us to generate higher levels of earnings and cash flow, further improving our operating leverage, reducing our overhead costs, and strengthening our credit profile. With that, I will now turn the phone over to the operator to begin your questions. Thank you for your interest in Vulcan. We look forward to your questions.

Thank you. (Operator Instructions). We have Bob Wetenhall from RBC on line with a question.

Hi, Don, how are you?

Good. How are you?

I was just hoping to get clarification on the guidance. It sounds like your new range of $435 million to $455 million, that is down from $500 million which was the prior guidance, but it is up year-over-year from the $354 million number last year. Is that correct?

That is correct.

Could you fill us in terms of asset sales between normally-occurring and nonrecurring, what is included in that number and what is excluded?

Bob, there was $29 million gains that were in our $500 million guidance which remain in our current guidance. Any other asset sales under our planned asset program are not included in our current guidance, and were not included in our prior guidance, and those are the items we talked about that could generate $100 million to $150 million of cash. Year-to-date of the $29 million in our guidance in gains, we have already realized $18 million, and we expect to realize the remaining $11 million in the fourth quarter.

Understood. That is helpful. Could you touch on, your sales in the aggregates business were unfavorably impacted by volume. Sales were off $24 million but I saw that gross profit rose by $12 million. Can you just talk about the sustainability of incremental margins at that level, and kind of what is driving that? Because I assume it is pretty difficult to get better gross margins off much weaker volume? I am just trying to understand how that is working?

Well, it is a combination of a lot of factors as Danny Shepherd pointed out, our unit cost for aggregates was down 1% in the quarter through a lot of work at the plants. Our pricing was up 4%. And those are powerful numbers. We are I think extraordinarily well-positioned to benefit from a little bit of volume recovery. And we are, as a management team and I think our entire employee group is really encouraged by the fact that we are generating record levels of unit profitability at lower volumes.

Both lower sales volumes and lower production volumes and when volume comes back, we get a compounding effect from higher production volumes and the opportunities that come with slightly higher volumes in our markets. So we are really encouraged where we are, both from the standpoint of the things that we can control which is price and cost, and equally important as we look at the future, given the contract awards in the private sector both housing and non-res, as well as the real opportunities from the new highway bill, in particular, the big TIFIA projects that are about to kick off in 2013, we are very encouraged by our opportunities for next year.

That is helpful. If I could just sneak a last question in. Could you touch on how you think increased new residential construction activity could impact volumes in the concrete business?

Yes. As I think as Danny Shepherd pointed out, year-to-date housing starts in Florida, for example, are up 38%. Our ready-mix shipments in Florida year-to-date are up 21%. In the last quarter, they were up 33%. So housing starts are a huge driver for concrete demand. And obviously every, virtually every yard of concrete we pour has got Vulcan aggregates in it. Florida it has Vulcan cement in it. So that has a significant effect not only on the concrete business but also the aggregates and cement business.

Got it. Thanks very much, Don.

Thanks, Bob.

Trey Grooms from Stephens Incorporated is online with a question.

Good morning, Don.

Hey, Trey.

Given your kind of high-level outlook, I guess for 2013, it sounds like you are expecting improvement I guess pretty much across the board, but especially in highways. Given that, should we be expecting any type of geographic or product mix impact on pricing as we kind of look on to the next year or so?

Trey, it is too early for us to try to give you guidance on that. I think we expect private sector construction to grow on a percentage basis probably significantly more in 2013 than public sector construction. Although we do think there is an opportunity for growth in the public sector and the big wild card is how quickly some of these big TIFIA projects kick off. The Interstate 95 hot lane project which is a $927 million project up in northern Virginia is scheduled to begin in 2013, the Grand Parkway in Houston, which is a $1.1 billion project is scheduled to begin in 2013, and I think the Route 460 in the Hampton Roads to Richmond TIFIA project which is over $1.7 billion, and there is a big project in Dallas Fort Worth about $1.6 billion, the Southwest Parkway Chisholm Trail.

Those are four big TIFIA projects that have the potential to start in 2013, and if they do, that could certainly impact, or would significantly impact demand. But it is just really too early for us to know whether and how much those big projects are likely to occur in 2013. The basic highway program is in place, and as I pointed out, 42% of the money for 2012 in the regular highway program was not obligated by the states until after the Map 21 passed in July. So the effect of that is that made the current year weak, and is pushing a disproportionate amount of the 2012 highway budget into 2013. We will have better data on all of that when we talk to you again in February. But directionally, I think we are encouraged that all end markets are likely to be up, or all of our major end markets are likely to be up in 2013 over 2012.

Great. That is very helpful. Thanks for that, Don. And I guess, I may have missed this in your prepared comments but what were California volumes in the quarter?

California volumes in the quarter were down slightly. Let me check that.

Down about 6% or 7%.

6% to 7%?

Yes.

Okay, perfect. Thank you. And then lastly, is there any update you can give us on the progress of any potential asset sales, or anything like that from some of the stuff you outlined a few quarters ago?

No. We are still working hard. We have pretty strict criteria about what we would sell and under what circumstances. But as I pointed out, it is about $100 million to $150 million of transactions that are in the process of being I will say papered, I guess. So we are working on those. Whether some or all of those hit in the fourth quarter, or close in the fourth quarter is not certain at this point. But they are all in process.

Great. Thanks a lot. Good luck.

Garick Shmois from Longbow Research is online with a question.

Hi, thank you. Don, you have outlined a number of large TIFIA projects in your markets. I was wondering if you could help us understand a little bit the lag between when these projects would start, and when you would actually start to see aggregate shipments in these projects, just so as we start following these projects a little bit more closely, we might be able to time your volumes associated with them?

Well, I wish we could project it better ourselves. We have gotten a lot of information from the TIFIA office. The metrics I gave you earlier all come from the TIFIA office. The particular projects that I mentioned are already approved by the Federal DOT, and are likely to begin or certainly have a probability or possibility of beginning some time in 2013, and that is the I-95 hot lanes in northern Virginia, Grand Parkway in Houston, the Southwest Parkway Chisholm Trail in Dallas Fort Worth, and the Route 460 from Hampton Roads to Richmond.

Those are I guess in total probably $6 billion in TIFIA work. But the bigger chunk are in the letters that have been submitted to the TIFIA office and the Federal DOT for approval, and as I pointed out, the big majority of those are in Virginia, California, and Texas. And as those projects get approved, and as the contracting authority then starts awarding projects, we will have a lot better sense of what that would mean for the magnitude and the timing of increased shipments.

But I think the real point about TIFIA is while the regular federal highway bill is at $40 billion, plus or minus a year, according to the DOT and the next two year period, there could be another $40 billion over that two-year period of incremental awards under the TIFIA program. So when we say we have optimism about growth in awards, it is based on number one, the stability in the regular federal highway program now that we have one, plus the big increase of TIFIA. The wild card at this point is the timing of those shipments, and the quantity of those shipments, and we will continue to update you on that as we have better information.

Okay. Thank you. I guess just switching to margins, certainly another good quarter of cost controls. How much of your $100 million profit enhancement program has been realized year-to-date, and perhaps if you could provide some granularity as to how much was incremental in the third quarter?

Well, as I have said in my prepared remarks, our target for 2012 was $25 million. We will get more than that. I don't have an amount that we would call out in the third quarter, but some of the metrics that you could look at is our SAG is expected to be down $30 million in the year. Some of that is under our profit enhancement plan. Some of it is from the work we had done earlier in our restructuring. Our controllable costs are down $70 million year-to-date. A significant portion of that is coming from profit enhancement plan.

The reason things are murky, Garik, is that we have a lot of cost initiatives going on throughout the organization. Some of it is an outline of the profit enhancement plan which we gave you earlier, which is all still in place but there is a lot of additional stuff going on. And whether we count it as a profit enhancement plan or other cost reduction is largely irrelevant to us. We just like the cost reduction, and so I think the combination of the two so far is about a $70 million year-to-date reduction in our controllable cost.

Okay. That is helpful. Just the last question is on asphalt demand. If I remember correctly coming out of the second quarter, you had anticipated year-over-year growth in asphalt earnings, you anticipated some large project starts in the second half of the year supporting that. And now it doesn't sound like the projects will be starting in the back half of the year. Just wondering if you could speak to that. If I remembered that correctly. Maybe provide an update on to when you would anticipate some of the big projects would get underway?

Let me refer that to Danny Shepherd.

Yes, Garik, first of all, as I pointed out, we had a good quarter in Texas and Arizona. We were challenged in California, and more specifically southern California, and we are moving to address that market properly. In southern California, there was some work that was not let that was anticipated, and as you know, we are an asphalt producer supplier, and we have customer alignments in southern California, and some of our customers missed work in the quarter. So we are really focused on southern California, because we find that is our weakest asphalt market, and hopefully we will see improvement as we travel through 2013.

Okay. Real quickly to follow-up, would you anticipate some of these projects that weren't let would be let in 2013?

Yes, we do. Sorry I didn't answer that part of your question.

Alright, great. Thanks a lot.

Kathryn Thompson from Thompson Research is online with a question.

Hi, thanks for taking my questions today. For the quarter, could you give some clarity of how much did pricing benefit from mix versus natural price increases, and maybe talk, you touched on it a little bit earlier but maybe digging a little bit more into that dynamic with mix, particularly if we get into larger infrastructure projects that would be more base rock heavy? Thank you.

Kathryn, of our 4% price growth, about 3 percentage points of the 4 are real price growth spread over the vast majority of our markets. That is very encouraging. About 1% could be accounted for as mix shift. More of that in geographic mix, a little bit in product mix. With some asphalt, high-priced, high specification asphalt material, but our shipments in the Midwest were relatively lower than in the Sunbelt, and we have relatively better pricing in the Sunbelt than we do in the Midwest. So about 3% is just across the board. Price improvement about 1% is a positive mix shift.

Okay.

You asked about, will the TIFIA projects in some cases, like in northern Virginia with the hot lanes or lane additions, those are beautiful for us in the sense that the aggregate intensity per dollar of spending is about as good as it gets, because as you point out, there is base, and then there is the lift of either concrete or asphalt to get to the surface, the surface mixes. But the TIFIA projects and the Grand Parkway in Houston, is I think, virtually all new construction. That would consume the Highway 460 in Virginia is virtually all new construction, and that would consume a full range of aggregate products. So I think whether that will change our pricing mix is way too early for us to tell. But you are correct that this new construction will consume base as well as clean stone, which certainly will help with our production and production cost.

So even if pricing was slightly lower, the volume would trump all of that?

Oh, absolutely. Absolutely.

Could you talk a little bit more detail about the new resi construction activity. You talked a little bit about Florida, but also in Texas and Arizona. What scale projects are you seeing implemented, obviously there has been a lot of talk about new construction in all of those markets, but if you could get a sense of what types of projects, and how they compared relative to the peak of the market, and what you think is a normal market?

Well, I will go to the first, I will give you some examples. Housing starts year-to-date are up 66% in Arizona. They are up 23% in California. They are up 38% in Florida. They are up 36% in North Carolina, 29% in Tennessee, 28% in Texas. In Vulcan served counties overall, they are up 26%. That being said, they are coming from a relatively low base. So the good news is they are up, we look at housing numbers like everyone else. I guess right now, we are in the 850,000 range, annual seasonally adjusted range. Most people are saying that will be 900,000 to maybe over 1 million, and we believe, based on what we see and hear from economists and housing experts, is that the normalized run rate should be something like 1.5 million, 1.4 million to 1.5 million.

And given the pent-up demand and the number of household formations, I was reading an article in the Wall Street Journal yesterday about that. We have been five years with collapsed housing starts, and at some point, the demographics in the US are going to drive that sharply upward, and I think we are beginning to see the front end of that change. That helps our aggregates business, but it really helps our concrete business in Florida, California, and Texas, and northern Virginia. And I didn't mention Virginia, but Virginia, northern Virginia in particular, housing came back much earlier than in the rest of these states so it has been improving now for 18 months or so.

Okay, great. Thank you for that. Any plans for paying off the $140 million note due in 2013? What are your plans?

We are going to pay it off out of available cash. We are not refinancing either the bonds that come due end of this year, or the ones in June of next year.

Any ballpark --

We will have sufficient cash flow to do that. Dan, do you have a comment?

We have over $200 million on the balance sheet at the end of September. At the end of this year, we estimate that our cash will be in the neighborhood of $100 million. That is after paying off the December maturities. So we expect to pay the June maturity next year off out of available cash and free cash flow and not term that out. Just have a net reduction in debt.

Just to clarify, what would be the interest expense savings from this?

That will be approximately $14 million in total interest expense should be the reduction in interest from 2012 to 2013. Of that $14 million reduction in interest expense, $12 million will be cash. $2 million is noncash.

Great. Thanks so much.

We have Jack Kasprzak from BB&T Capital Markets online with a question.

Thanks. Good morning, Don.

Good morning, Jack. How are you?

Fine, thanks. With regard to the costs reduction profit improvement program, what can you say about, or update us rather on what we can expect in 2013? I don't think you have changed the overall goal of the program. What is left or what will be realized in 2013, and I would expect SG&A could be down again in absolute dollars. Would that be a reasonable assumption?

Yes. And our target, as you know, is $100 million, and have in place by midyear 2013, $75 million, and by the end of 2013 I think the full $100 million on a run rate basis. There is a substantial procurement piece of that, and the procurement dollars savings are tied to production volume. And so, if we are getting cost savings on various items of procurement, that is affected significantly by volume.

So as volumes recover, we can expect that the procurement piece of the private enhancement plan to materialize in relation to volume recovery at least in part, not all of the procurement savings are tied to plant production, but a significant portion are. The overhead piece is largely in place and we have, we will continue to get the benefit of that. And the transportation and logistics piece is being rolled out, so we are I think optimistic that we will achieve our targets as we have laid them out earlier this year.

Okay. Great. Maybe this is a question for Dan. Could you just update us on what you think a normalized tax rate is for modeling purposes? Obviously in recent quarters, it has been a bit all over the map on that?

Unfortunately, the quarterly numbers will continue to fluctuate. Here is the way I would try to model it going forward, Jack. Build your model. Get down to a pretax earnings number, earnings or loss. Begin with about a 38% to 39% tax or credit, and then about $20 million of tax benefit referable to statutory depletion, so the net of those two numbers, marginal tax at 39%, less roughly a $20 million statutory depletion benefit is going to get you pretty darn close.

Depletion is rated on volume?

Pardon me?

The amount of depletion by quarter is a function of volume?

Well, the amount of depletion annually is a function of volume.

Right.

That is actually a function of revenues but driven by volume. The quarterly recognition of that is a function of a set of fairly complex tax accounting rules. Sometimes it is pro rata. Sometimes it is not depending on if you are in an income or loss position. It is tougher to give you guidance on how to build the quarterly number. I would just start with the annual number and keep tracking toward that.

Okay, great. Very fair. Thank you very much, guys.

Adam Rudiger from Wells Fargo is online with a question. Adam Rudiger: Hi, thank you. I wanted to ask about your CapEx guidance for 2012. I think you said $100 million and you only spent about $50 million year-to-date so what is driving the big uptick in the fourth quarter?

Adam, as we have said before, our CapEx requirements are really a function of volume. Of materials. So we are still looking at that but we do have, we have got about an $18 million acquisition of reserves at an existing quarry that will close in the fourth quarter, and that will push our CapEx number up. But that will add a lot of reserves to a very good quarry, and that will bring us back closer to the $100 million that we are projecting.

And the remaining difference to get up toward the $100 million is really just a series of relatively small projects. A piece of mobile equipment there or here. A small piece there. There is no single project that jumps out, Adam.

Okay. The rest of my questions have been answered. Thank you.

Thank you.

Keith Hughes from SunTrust is online with a question. Keith Hughes: Thank you. You had referred to the prepared comments to $15 million cost savings in 2013. What would that bring the total cost savings right now in 2013? Number one, and what kind of projects do you have left to do next year?

I am having a really hard time hearing your question. I am sorry. Could you repeat it?

Yes, let me try begin --

That is much better, thank you.

You had referred to $15 million of cost saves that have been pushed into 2013. If that is realized, what would that bring the cost save look in 2013 to in aggregate? I guess number one. And number two, what kind of projects and what kind of things are you going to be doing next year to realize those numbers?

Okay. I think we have to start back to what our targets have been. Coming into this year, we were projecting $55 million in savings, from a combination of restructuring and other overhead reductions that we had put in place in 2011, and the first part of 2012. Incremental to that was our profit enhancement plan which was $100 million. So total of $155 million, and we want to have, our target is to have all of that in place on a run rate basis by the end of 2013. Now you are trying to put a number in your model I guess for 2013?

That is correct.

Through the third quarter, our controllable cost, which is a combination of all of these things are down about $70 million. So the remainder of that $155 million, we will have in place on a run-rate basis by the end of 2013. How much of that will be actually realized and taken to the bottom line in 2013, we will give you better guidance on that in February after we have gone through our, completed our planning and budgeting process.

But the $70 million you refer to is not bottom line. That is a run rate number?

That is bottom line.

That is bottom line.

That is bottom line.

The project, whatever it falls to in the near term, in terms of cash ti the bottom line, the project will be done at the end of 2013, is that still the plan?

Yes. And I would say this as a caveat. The officially-announced profit enhancement plan will be completed on a run rate basis by 2013. It is remarkable to me the opportunities our guys in the plants and in the regions are finding, and I think we will continue to find opportunities for cost savings above and beyond those targets, particularly when we start seeing some volume recovery which can pull, for example, more of the enhanced procurement savings through to the bottom line with additional volume. So we are focused on the $155 million, but I think there are additional opportunities if what we see as volume growth in 2013 materializes.

Alright. Thank you.

Todd Vencil from Sterne, Agee is on line with a question. Todd Vencil: You have talked about the growth that you are seeing in nonresidential private construction. Can you sort of unpeel that a little bit and talk about where and which of the sub-types of non-res you are seeing activity in versus which ones maybe not so much?

Sure. I guess I will refer you back to slide eleven and slide thirteen. Slide eleven is other public infrastructure, that is water, sewer, airports, and you see a bump-up in contract awards from the stimulus, then once the stimulus contract awards were done, a huge drop, and now you see beginning in sort of April of this year, contract awards turning positive again on a trailing 12-month basis.

So we are seeing that trend, and then if you flip back over to slide thirteen, and I don't know whether you are able to do that or not online, but in terms of private non-res buildings, you see a very distinct pattern where beginning about in first or second quarter 2011, we started seeing contract awards improving, turning positive on a trailing 12-month basis, and that has continued through the most recent months. Now there is a, and you can also see from that slide, there is probably a 12-month lag between contract awards and actual construction. But there is a very clear pattern. So Todd, I think it is in the private non-res buildings category, and then the publicly-funded infrastructure categories where we are seeing contract awards that are positive now for 10 or 12 or 15 months in a row on a trailing 12-month basis and they will begin to pull material through as those projects get under construction.

Got it. Perfect. And with regard to price, I think you said in the release that prices were up in most every market. Is there any place that is more difficult, or where you are not seeing price go through?

Within a relatively narrow range, pricing has been stable to improving. The markets where our pricing was not up in the quarter, is only down like 1% or so. So pricing is stable. And we are getting good opportunities. As I said, they are up in almost every market, a couple of markets where they are down, they are only down 1%.

And on those markets where they are down 1%, just to be clear, is that a same product, same store shift, or is there a mix impact on that? I am just wondering if real price is dropping anywhere still?

I would not suggest that real price is dropping anywhere. There are anecdotal spots, but a lot of that is mix shift. I think more than any quarter so far this year, we have got real price improvements showing up across the board.

That is great. Thanks for that, Don.

Mike Betts from Jefferies is online with a question. Mike Betts: Yes, thank you very much. Hi, guys. A couple of questions related to the downstream business. I guess maybe I ask the first one because the second one depends on the first one. You talked already, Don, the ready mix and I guess the asphalt has a lot of your own aggregates in. In the way you report gross profit, does the profit on those aggregates appear in the aggregates division or in the asphalt and ready-mix divisions, depending on where they are? That is my first question.

It appears in the aggregate segment, we attempt to price the aggregates that are consumed in our asphalt and concrete business at market prices, for the market in which the concrete and asphalt businesses operate. And the profit on the aggregate is in the aggregate segment, and with respect to cement, we try to do the same thing. We try to price the cement to our ready mix plants at market for cement, and the margin on the cement is reported in the cement segment. We also are very sensitive to the lack of profitability in our ready-mix business, and are working hard to improve that, but reality is we also have to look at that on what that business, every yard of concrete that goes out, how much margin is embedded in that, in our aggregate segment and our cement segment.

Okay. And that is what I thought was the case. I guess the follow-up question then is I am surprised that the disparity between asphalt and ready-mix, not so much where the ready-mix is but where the asphalt is, because presumably, really, basically the majority of that is heating the raw materials, and adding the bitumen. Yet you are still making pretty good margin on that, or am I missing something there, because there is a huge disparity between those two?

Yes, the asphalt business is a good business if the variability in earnings is largely a function of the cost of liquid asphalt versus the time we can get that higher cost built into our pricing. And we get higher asphalt margins typically in periods in which liquid asphalt is ebbing down, and then the reverse is true. When liquid asphalt prices were moving up. I think in this quarter, liquid asphalt prices were up about 2.5% or 2.6%, something in that range. Which squeezed our margins a little bit. The real issue in asphalt though is volume. And hopefully improving demand in highway construction both regular highway construction and TIFIA construction, in the states where we have asphalt which are California and Texas primarily, but also in Arizona, that we will benefit from higher highway construction.

Okay. That leads nicely to my final question. Just in relation to those two businesses to help with modeling because I always seem to be wrong on them. Roughly what proportion in the costs in the asphalt business and what proportion of the costs in the ready-mix business are fixed costs when we are trying to model what the impact of what the volume would be, how much is fixed and how much is variable on the cost side?

I am going to refer that question to Mr. Sansone, who is working feverishly to calculate it.

Mike, on the --

Sorry.

On the ready-mix business first, I would say that the traditional fixed costs would represent something in the neighborhood of 10% of average selling price for the product. It is not a fixed cost intensive business.

Okay.

It might be a few percentage points higher than that but not a lot. It is basically depreciation and some supervisory costs. In the case of the asphalt business, a fairly similar although less fixed cost in that business, probably in the neighborhood of between 5% and 10% of average selling price, so again, what is going to drive earnings in both of those businesses is what we refer to as material margin, which is the difference between the average selling price and the cost of the raw materials, meaning aggregates and liquid asphalt and/or cement.

The points about high volumes means you have got a better chance of increasing that materials margin, I guess. That is the key point.

Absolutely.

Thank you very much.

Stuart Benway from S&P Capital IQ is online with a question. Stuart Benway: Thank you. Could you just give us a breakdown of how much of your business volume I guess really is in residential versus nonresidential, versus industrial versus municipal?

Yes. Our projection for this year is that highways would account for 30% or 31% of our aggregate volume. Infrastructure would be about 18% or 19%. Residential about 17% or 18%. Non-res, about 29%, and nonconstruction which would be environmental and agricultural would be about 4%. And the residential historically has been 20% to 25%, and those are not materially different numbers than 2011. So in this current demand environment, that is about the breakout. That will shift as housing and private non-res begin to recover, particularly housing.

How about energy? Is that in the nonconstruction or nonres?

The energy is in probably infrastructure.

Yes, so if you were building a power plant, it would be in the infrastructure, other infrastructure category that we highlighted in the slides.

Okay. Then just I mean, volume was down in the third quarter, and you say it was because of weakness in public construction activity. So is that pretty much from the winding down of the stimulus program, do you think?

Well, it is from two reasons. One is the winding down of stimulus projects and there are still some stimulus projects underway, we are shipping to some stimulus projects, but by and large, the volume going to those projects is tailing off. The other impact is that until July of this year, we did not have a federal highway bill. And even though there was roughly $40 billion in the pipeline for fiscal year 2012 which ended September 30, the states were very cautious about spending money on highway projects and awarding new contracts.

So I said in my remarks that 42% of the 2012 federal highway money was not even obligated until the last two months of the year, which were August and September. Which means that only 58% of the 2012 highway budget was even obligated. Obligation is a step before contract award. If you look on the slide we had on contract awards, you see a very prolonged period of declining, trailing 12-month highway contract awards, certainly the rate of decline beginning to reduce, but it has not yet turned positive. The last positive trailing 12-month period was probably February of 2011.

So we have now been, whatever that is, 18 months or so with declining contract awards, and I think the point is given the passage of the highway bill in July, given the obligation of 42% of the 2012 highway budget in the last two months, that is in August and September, and given the fact we have a new highway bill and a big TIFIA potential, we think we will see recovery in highways. But it has been, the highway sector and to some extent the public infrastructure sector, that has been weaker in the current period than we think either the past or the future will indicate.

Now there is one other little piece of nonconstruction, and that is the environmental stone to coal-burning power plants. That is a small but important piece of our business. But that is way down because utilities are burning more gas and less coal generally, and so consumption of chemical stone for power plants is down sharply, but that is a really small part of our business.

Just one last quick one. Have you made any, can you give us any guidance for CapEx for 2013, or is that a volume projection as well?

We will give you that in February. At this point, we are still developing our 2013 CapEx budgets.

Thank you.

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

Thank you very much for joining us today, and your interest in Vulcan. We look forward to talking to you again in February. Have a good day.

Thank you ladies and gentlemen. This concludes today's conference. We thank you for participating. You may now disconnect.