渥肯建材 (VMC) 2013 Q3 法說會逐字稿

Welcome to the Vulcan Materials' earnings conference call. My name is Victoria, and I will be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded. I will turn the call over to Mr. Don James, Chairman and Chief Executive Officer. Mr. James, you may begin.

Good morning. Thank you for joining us to discuss our third-quarter 2013 results. I'm Don James, Chairman and Chief Executive Officer of Vulcan Materials. 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 you on the webcast.

Before we begin, let me remind you that certain matters discussed in this conference call, as indicated on Slide 2 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 10K. 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 2013 earnings release.

Turning now to Slide 3, I want to begin by briefly discussing a few highlights from the quarter. Our net sales increased 13% for the quarter and gross profit increased 25%. EPS from continuing operations improved from $0.12 per share last year to $0.32 for this year's third quarter.

Aggregate shipments increased 9% in total and 10% on a same-store basis, adjusted for the divestiture of our Wisconsin operations and the acquisitions of three bolt-on quarries in Georgia and Texas. Volumes continue to be particularly strong in Florida and Texas, where shipments increased sharply compared to last year, up 36% and 29% respectively. Aggregates volumes in other key markets, including Arizona, California, Georgia, and North Carolina all improved at least 14%. Some of the volume improvement relates to recovery from the particularly wet weather we had in the first half of the year, which we discussed in our prior conference calls.

Ready-Mixed volumes were up sharply for the quarter, and were higher in every market. Cement volumes were up on strength in Florida and asphalt shipments, up 4%, were particularly strong in Texas and Southern California. On a freight-adjusted basis, Aggregates pricing for the quarter was up 2.4%, or $0.26 per ton, to a average selling price of $10.89 per ton. This is the highest quarterly sales price in Company history. Pricing in our Ready-Mixed segment was up 2% for the quarter. Geographic mix had a slightly negative impact on Ready-Mixed pricing, but all Vulcan states saw higher pricing. While asphalt pricing was almost flat, liquid lower asphalt costs resulted in increased materials margins.

Vulcan-served states continue to exceed the US average in private construction activity. We have seen improvement in sales momentum and awards in a number of our states. Single-family starts are growing in virtually all markets, and key Vulcan states such as Texas, Florida, California, and Virginia are seeing sharp demand growth in private non-residential buildings.

Slide 4 provides a summary of our third-quarter financial results. Consolidated net sales increased $88 million and gross profit increased $32 million, as both the Aggregates and Non-Aggregates segments reported year-over-year improvements in earnings. Gross profit margin increased 200 basis points. EBITDA for the quarter was $180 million, an increase of $39 million from the prior year's third quarter. Included in 2013 EBITDA is a $9 million pre-tax gain on sale of reclaimed real estate. Diluted earnings per share from continuing operations were $0.32 for the quarter. With that, I'd like to turn the call over to Danny Shepherd, who will walk you through our segment results for the quarter.

Thanks, Don. Turning to Slide 5, you see a 9% increase in third quarter Aggregate shipments. As often discussed, incremental volume has a significant impact to gross profit, and you can see this during the third quarter. This 9% increase in shipments, or 3.4 million additional tons, drove a $25 million improvement in Aggregate's gross profit, or $7.35 per incremental ton sold. This attractive incremental margin per incremental ton of aggregates sold demonstrates the earnings leverage of our Aggregates business.

Non-Aggregates earnings increased $7 million, due to improving private construction demand, which benefited concrete and cement volumes, and lower liquid asphalt costs, which increased materials margins in asphalt. The concrete earnings improvement reflects higher shipments and pricing in all of the Company's served states. Third quarter shipments of ready-mix concrete increased 17%, and pricing increased mid-single-digits in most markets. Cement earnings were down slightly in the third quarter, as the earnings effect of higher volumes was offset by higher repair cost associated with the timing this year of a scheduled kiln outage.

Now turning to Slide 6, you see that Aggregate's gross margins increased 130 basis points, due at a higher volumes and pricing. Aggregate shipments in a number of markets increased sharply versus the prior year. As you'll recall, wet weather had a significant impact in this year's first half. While the wet weather continued into July, we experienced the catch-up effect, as some shipments delayed due to weather we realized in the third quarter, contributing to higher volumes and margin expansion.

Aggregates pricing improved 2.4% compared with the prior year. Most markets realized positive growth, with year-over-year improvement ranging from low- to mid-single-digits versus the prior year. The sharp increase in shipments this quarter lead to a 2.8 million ton reduction in Aggregate's inventory at the quarries. Production levels that were below our level of shipments had a negative impact on total cost for the quarter.

These actions negatively affected earnings by $6 million in the third quarter. Our current inventory levels provide opportunity for higher production levels and efficiencies as demand continues to improve. Additionally, robust shipments to remote sales yards in response to growing demand along the Gulf Coast increased cost of sales $2 million, due to increased freight and distribution cost. Most key productivity and operating metrics improved versus the prior year. Labor productivity and energy efficiency improved, highlighting a solid quarter of cost management.

As shown on Slide 12 (sic -- see slide presentation, "Slide 7"), on a trailing 12-month basis, our cash gross profit was $4.24 per ton, 26% greater than it was at the prior peak in trailing 12-month shipments ending in the first quarter of 2006, and this is superior to that of our peers. Because of our disciplined approach to pricing and cost management, the earnings leverage in our Aggregates business continues to increase. For the quarter, cash gross profit per ton of $4.83 was the highest third quarter level in Company history and the highest of any quarter over the last four years. This higher unit profitability positions us well for greater earnings leverage from incremental aggregates tons as demand continues to improve. With that, I'll turn the call back to Don.

Thanks, Danny. If you'll turn with me now to Slide 8. Strengthening our balance sheet remains a priority, and we are doing that through both debt reduction and improving EBITDA. During the past 12 months we have reduced our total debt by $289 million while investing more than $100 million in strategic assets and reserves in Georgia, Texas, and Virginia. During this same period, we have increased EBITDA by $137 million. As a result, net debt to EBITDA has improved from 6.9 times a year ago to 4.5 times as of the end of this quarter. We remain committed to further improvement.

Turning now to our end markets on Slide 9. This slide shows how private construction activity is currently fueling most of the recovery and demand. Trailing 12-month housing starts are up sharply compared to the prior year, due to broad based growth in both single-family and multi-family starts. Most Vulcan-served states realized double-digit growth in housing starts for the trailing 12-months ended September 30. We are seeing particularly significant growth in key Vulcan-served states such as Florida, Texas, California, Georgia, and Arizona. Housing starts in those five states accounted for 36% of all growth in trailing 12-month housing starts in the United States.

We are also encouraged by leading indicators of future activity for private non-residential construction. Trailing 12-month contract awards, as measured by square feet, for private non-res construction are up 10% in the US as a whole. Remarkably though, Florida, Texas, California, Georgia, and Arizona are leading the way here as well, accounting for approximately 80% of all US contract awards for private non-residential construction, as measured in square feet.

Growth in stores and office buildings, which for us includes all commercial, office, and lodging, are the primary drivers. Growth in private construction activity in key Vulcan-served states like Florida, Texas, California, Georgia, and Arizona is important, because not only will we realize the attractive incremental margins from higher aggregates volumes, but we also have non-aggregates businesses in those states that will benefit as well.

Year-to-date, concrete shipments demonstrate this expanding recovery in private construction, particularly residential construction. Through the first 9 months ending September 30, our concrete shipments were up 10% on a comparable basis to 2012. Highway construction is the largest end market for aggregates demand within public construction. New highway projects, as measured by trailing 12-month contract awards, were up 7% versus the prior years level, as shown on Slide 9.

This recent growth provides some evidence that the more stable and predictable highway funding environment has lead to improving construction activity. The large increase in TIFIA funding contained in the Federal Highway Bill known as MAP-21 should also positively impact future demand. Contract awards for TIFIA projects are projected to add $30 billion to $50 billion highway and infrastructure construction. Some TIFIA projects have been underway in 2013, but 2014 should be a much more significant year in shipments to TIFIA projects. The growth in new highway products should help offset recent weakness in other public infrastructure, as shown on this slide. Last year, highways composed approximately 30% of full-year aggregate shipments, while other public infrastructure accounted for less than half that amount.

Turning now to our outlook on Slide 10. Our outlook for operating earnings improvement in full year 2013 remains on track, and is supported by continued growth in private construction activity, which should drive volume growth, improved pricing, and disciplined cost management. Year-to-date Aggregates volumes were consistent with our earlier expectations; however, the quarterly increases to get to this point have been more uneven due to the wet weather in the first half of the year. That said, growth in residential construction activity and its traditional follow-on impact on private non-residential construction continues to underpin our expectations for future volume growth and earnings improvement.

As we look specifically to the remainder of 2013 and into 2014, the projects that could materially impact our Aggregates volumes continued to include a disproportionately greater number of large highway and industrial projects. The timing of shipments to these projects remain outside our control, and in some cases have been delayed into 2014 and 2015, due to project schedules.

Full-year reported Aggregate shipments in pricing are expected to reflect the same growth rate as our year-to-date results through the first 9 months. Year-to-date reported Aggregate shipments have increased 2% from the prior year, and same-store shipments have increased 3%, adjusted for the divestitures and acquisitions completed this year. Forecasting shipments in the fourth quarter always contains an added level of uncertainty due to weather. Our expectation for shipment activity in the fourth quarter is based on normal weather patterns, which we have certainly enjoyed for most of the month of October.

Year-to-date, freight-adjusted pricing has increased 3%, and we expect full-year pricing growth to approximate this result. Full-year concrete volumes, materials margins, and earnings are expected to continue to improve as housing and private non-residential construction continues to improve in our key states. Strong asphalt sales in Texas should drive full year shipments above 2012 levels. Materials margins are up over 10% year-to-date, and we expect continued earnings improvement in that segment. Cement earnings are ahead of -- on a year-to-date basis on higher volume and improved pricing, and this trend is expected to continue through the remainder of the year.

Finally, we continue to work on additional transactions that will allow us to strengthen our balance sheet and credit metrics while redeploying capital into assets with higher returns. With that, I'll now turn the call over to the operator to begin to take your questions.

Certainly.

(Operator Instructions)

Your first question comes from Kathryn Thompson with Thompson Research.

Hi, thanks for taking my questions today.

Good morning, Kathryn.

Good morning. First question is on pricing. As you see broader-based recovery in volumes, and our research is showing you're seeing a greater number of new construction projects in particular, how does that impact pricing? And specifically if you could talk about this quarter, how did mix impact pricing? How should we think about it going forward? And also if you could clarify what markets we're seeing the strongest price increases? Thank you.

Thank you, Kathryn. Clearly, the visibility of future demand, which we believe is out there, will help shore up our pricing, and I think industry pricing generally. In terms of the quarter's pricing, we did have a fair amount of negative product mix impact in Florida and Georgia where we, in Georgia had some very high SMA, stone matrix asphalt pricing, in last year's third quarter, and we didn't have nearly as much of that in this quarter; and in Florida, our product mix shift was much more toward some base and shot rock compared to last year's third quarter, based on some large projects that we are currently shipping to.

We're reasonably confident we will get to the 3% to 4% price growth full year, and as we look, and the last part of your question, Kathryn, had to do with geography. Pricing across our footprint, certainly adjusted for the Georgia and Florida product mix shift, we were up in pricing across virtually the entire footprint, and that's very positive. We continue to believe there are opportunities for price growth supported, as you indicated in the first part of your question, by strong visibility of future demand as we (technical difficulties) into 2014.

Thank you. My second question is on aggregate inventories, and reduction that you mentioned in both the press release and your prepared comments. Do you have any clarity that you can pass on, on how much of the reduction was from base versus clean stone?

I don't know the answer to that. I don't think there was a material difference in the product mix. Basically what happened is we had a production plan for the quarter. Shipments jumped up higher than we anticipated when we set the production plan, and we just ended up shipping out of inventory about 3 million, 3.2 million tons that we didn't get to produce.

As we said in the press release, had we produced at the same level in the quarter that we shipped, our earnings on a pre-tax basis would have been about $6 million higher. So, we're looking forward to the opportunities to run our plants at higher and more efficient production levels as we move into 2014.

Great. And then finally, my final question is on volume side. We had noted that it had been relatively weaker out east, and you're seeing some markets catch up, notably Atlanta, Orlando, and the Charlotte markets. What type of projects are you seeing out of markets that you're seeing recovery that previously had lacked?

Well, it's very market-specific, but in Charlotte, we are supplying a good number of highway projects. In Florida, we're supplying a lot of large commercial-type projects, as well as much stronger housing demand. Housing is coming back in Atlanta, lot development is coming back. That's certainly the significant driver in housing, and in Virginia, particularly in Northern Virginia around Washington D.C. there's a tremendous amount of commercial construction. As you know, the East Coast has been, was during the first half weak, largely because of bad weather.

We had better weather in the West, but as we sit here today, we're seeing strong recovery in housing in Arizona. A big backlog, as we referenced, in private non-res construction based on contract awards all across Sun Belt in California, Arizona, Texas, Florida, and Georgia. And as I said, it is remarkable that 80% of the improvement in non-res contract awards is in five states for the entire US. So, we are looking forward to significant opportunities as that end market, which is typically a follow-on to residential construction, appears to be performing as it has historically.

Thanks so much for answering my questions today.

Your next question is from Garik Shmois with Longbow Research.

First question is on the volume growth that you saw in the quarter. It seems like it exceeded your expectations and it came in faster and stronger than you saw it. Is it possible to break out how much of the volume growth was coming from these large projects that you've cited over the last several quarters as potentially getting underway in the back half of the year versus a little bit more granularity on the pent-up demand that was from the volumes that were pushed out from the first half of the year to the second half? And the third bucket would be just organic growth in your core markets.

Among the large projects we are tracking, some began to ship in 2013. Virtually all of them have very significant carryovers into 2014. The TIFIA projects, the Grand Parkway in Houston, the I-75/575 corridor in Atlanta, it will start in 2014. We didn't ship any of that in 2013.

Most of the big projects, most of the big TIFIA projects, did not start in 2013 but will start in 2014. We have been shipping on some legacy TIFIA projects, particularly in Virginia on I-95 during the course of the year.

On industrial projects on the Gulf Coast, we have been shipping to several energy-related projects along the Gulf Coast. We referenced the fact that we were building, or we did build inventory in our coastal markets. The majority of that build was coming by ship from Mexico, although we did our building inventory in some rail yards along the Gulf Coast. So that whole market had good shipments in 2013, and we expect that to continue in 2014.

So is it fair to assume that the majority of the strong volume growth in the quarter was coming from, as you mentioned, the pent-up demand from weather in the first half of the year, and just organic growth in your strongest markets?

Yeah, and we had volume growth across our footprint in virtually every market. And so there is -- and housing is recovering in most of our markets, and that's driving some of the improvement. But the improvement is coming from virtually all of the end markets with the exception of non-highway publicly-funded infrastructure, which is down a little.

And then can you speak to the bidding environment on some of these TIFIA projects? Is it possible to discuss what pricing is looking like as you bid on TIFIA work?

Well, we think it is an opportunity for improving pricing. The reason being, these are large projects. The aggregate cost as a percent of the total cost of the project is typically not very high, and as a result of that reliability, quality, service becomes a bigger factor, perhaps, than the absolute selling price, and we believe that that gives us a competitive advantage in the markets.

We have booked the Midtown Tunnel in Norfolk. That's about 700,000 tons over the next two years. We booked some of the Grand Parkway in Houston. We booked some of the I-69 design build work in Corpus Christi. As I said, we booked the I-75/575 corridor work that's about a 1.5 million tons over the next three years. That will start in 2014. So we've been having very good success. We booked the Folsom Dam project in California that'll start early next year. So about 500,000 tons. So we're having good success, and we're doing it at good pricing.

Okay, great. And then just one last question, just a follow-up on the inventories that you're building in Mexico. Just wondering, was there any disruptions, whether it was late in the quarter or early into the fourth quarter, in your largest quarry there from the flooding that occurred in the region?

No. We didn't have any disruption. The inventory build, Garik, is not at the quarry. It's in the yards along the Gulf Coast as we are building that inventory in response to higher actual demand, and particularly projected demand (technical difficulties).

Got it. Thanks so much.

Your next question is from Ted Grace with Susquehanna.

Hello guys, how you doing?

Good morning, Ted.

Good morning. Don, you certainly painted a optimistic picture of the demand environment. I was wondering, I know you didn't give formal 2014 volume guidance, but could you give us a little more of a qualitative assessment of how you're thinking about growth prospects on a volume basis next year?

Well Ted, we are in the process of rolling off our 2014 outlook from the ground up, and we'll also compare that with the macro view from the top down. The macro, when I give you some third-party indication of what at least McGraw Hill through their Dodge Construction Outlook for 2014 will see, I'm not saying this will be our outlook, but certainly we look at this and try to reconcile this with our own internal numbers. But McGraw Hill sees single-family housing up 26% in dollars and 24% in units in 2014 compared to 2013. They see multi-family up 11% in dollars and 9% in units. They see commercial building up 17%.

They say institutional buildings will edge up 2%, turning the corner after five years of decline, and public works construction, including highways, they see down 5%. Their concern is federal focus on deficit reduction is going to make highway funding more difficult as we move into 2014.

We believe there's a lot of TIFIA work that will begin in 2014 and more TIFIA projects that will be approved, and the contracts less. But this is a pretty robust outlook, particularly on the private side. Again we're not adopting these numbers yet, but in terms of trying to give you views on how we see 2014, I think certainly this will, directionally, we would agree with these numbers.

Yeah, we would agree with those, and if you look at the September highway contract awards, you guys were up 39% in the month of September, and on a trailing six-month basis you're up 12%. I think we all recognize the challenge on highway, the federal level, but it seems like your set up in the next year is pretty solid, no?

Well, the good thing is after MAP-21 passed in basically September of 2012, it took the DOTs three or four months to start awarding a higher level of highway contracts. Most of those are now in the pipeline. So we have a pretty good, as you can tell from the contract awards, which is a clear example of the pipeline, which includes not only federally-funded projects, but state and local projects as well, with essentially flat federal funding, of the contract awards and dollars are up significantly, and that builds the pipeline.

We're all working very hard, as you know, on trying to find a way to fund the next Highway Bill. We spend a lot of time and energy with trade associations and user groups, which are really a key, and the user groups would be companies like FedEx and UPS and Wal-Mart and the American Trucking Association and AAA on the consumer side. I think there's a growing consensus that we are under-investing in, particularly in highways, but public infrastructure, as well.

As you know, there is a battle going on in Washington, not only between Republicans and Democrats, but between segments of the Republican Party. And so we are working hard to try to make the case for improved infrastructure funding, but at this point we certainly don't have any crystal ball, as to how that's going to turn out.

Okay, and then the second thing I was hoping to ask you is just on the profit enhancement plan. Could we just kind of, I don't know if it's Don or Danny or Dan, but maybe get a sense for where benefits came in for the third quarter? Where we are project to date, and what's left in the gas tank, and what upside we may have to the $155 million?

Yeah, I'll let Danny and Dan address that.

Yeah. Ted, I think the way to look at this is in 2011 we had an operating EBITDA of $346 million, and if you look at Street estimates today, I think the average is right around $468 million. So I think it's fair to conclude that we delivered on the profit enhancement plan, because as we all know, volumes have not improved significantly since our starting point in 2011.

To just give you a qualitative comment about the overall program. When we look at our G&A, our sourcing. and our transportation categories, we believe that we've achieved greater than $100 million. And it's our intention to hold on to those savings as we move forward into future periods, Ted. So we feel good about where we are, and we're going to make every effort to hold the greater than $100 million number that we think we've achieved.

Is there any way to quantify what the benefits were year on year in the third quarter? If it's easier to take that offline, I'm happy to do that.

Let's do that offline. We had a good third quarter. We believe that we were right around $20 million in the third quarter of 2013, but we'll give you that comparison offline, Ted.

Okay, great. Congratulations. Best of luck this quarter.

Thank you.

Your next question is from Trey Grooms with Stephens, Inc.

Hello, good morning.

Morning, Trey.

Congratulations on a great quarter, Don.

Thank you. We thought it was a great quarter too, but we want to see what you thought about it first.

Well, I think it was great. Looking at the backlog up in private non-res, can you talk more specifically, Don, as to what kinds of projects you're seeing there? Also, with awards being up 10%, is that quicker turn than you would expect from, like from infrastructure-related backlog, for example? So that 10%, would that be something we could expect a little bit quicker?

Trey, I want to be clear that the data we have given are contract awards nationwide and in our states that are reported, not that we have booked all of that. So, we believe we will get our fair share of those, particularly given the fact that, as I've indicated, 80% of them are in five of our key states.

That being said, we continue to pursue those vigorously because that's where the big growth is coming, we think. The kind of projects, some of them are industrial and energy-related projects on the Gulf Coast, but there are still a number of hotels and office buildings and retail that spread across our footprint.

It's a pretty broad-based recovery, and I think we were holding our breath that the traditional relationship of private non-res recovery lagging res recovery by six to nine months would hold true in this cycle, and it appears to be doing that. In fact, it appears to be even stronger in a lot of our markets than res has been.

The construction cycle for private non-res varies greatly, depending on the nature of the project. The bigger, more complicated projects, obviously, take longer from contract award to material shipments. Retail projects and hotels and office buildings typically can move a little faster, particularly if they are not -- have government projects associated with them, government restrictions and regulations associated with them. That being said, we would expect, again I'm not trying to give guidance, but we would expect based on macro data, that our shipments into private non-res will improve in 2014 over 2013. To give you a quantification of that at this point, I'm not able to do.

I understand. Well, that's helpful. Looking into next year, the Highway Bill set to expire in September. Obviously, like you said Don, you don't have a crystal ball in how that will shake out, but neither do the State DOTs, and given your experience, what are your expectations for the DOT behavior going into the expiration of the current Bill as we look into next year?

Well, I think you have to start with what the DOT behavior was coming out of the passage of MAP-21 in September of 2012, and that is the DOTs geared up, got projects out for bid, and they got those projects approved through the Federal Highway Administration, and then they will move forward. On the regular Federal Highway Program, typically as we get closer to the expiration of the Highway Bill, the bid letting at the State DOT level on federal projects will begin to diminish.

We are still 11 months away from the expiration of that Bill, but so far the contract awards on a trailing 12-month basis or year-to-date are still positive. Again, TIFIA is not part of the regular Federal Highway Program per se out of the -- and those projects are funded out of a different funding source. As you know they have Treasury -- financing is available for those TIFIA projects, along with typically some private money, and they tend to be revenue-generating projects.

So I think even if the regular federal aid highway program out of the Highway Trust Fund begins to slow in terms of contract awards as we approach September 30, 2014, we are cautiously optimistic that the TIFIA projects, which at $30 billion to $50 billion spread over probably two or three years in terms of contract awards, will help offset whatever weakness there may be in contract awards in 2013 coming out of the regular state aid federal program, out of the trust fund. But as I've said, the TIFIA is far clearer that it will move forward in a significant way, and the funding source for the Federal Highway Trust Fund is yet to be resolved.

Fair enough. Last question. The recent transaction with Plum Creek, can you talk a little bit about the rationale? And then any update on use of funds. Would you be looking more at acquisitions like you did with the last deal, I believe with Plum Creek, about a year or so ago, or is there something else you have in mind there?

Well the thing that makes that transaction make sense for both Vulcan and Plum Creek is that Plum Creek, of course, is a REIT. They don't pay federal income tax and their cost of capital is lower than ours. And so, a dollar that flows to Vulcan gets taxed at 35%, and a dollar that flows to Plum Creek doesn't get taxed at the REIT level. And that makes a big difference in terms of the ultimate distribution of cash from the Aggregates business to shareholders, either Plum Creek or Vulcan.

As you see, we are paying off debt as it becomes due. We paid off about $289 million. As we have opportunities that make sense, we want to continue to reduce debt. We also want to continue to look at strategic bolt-on Aggregate opportunities, and there are a number out there that we are working on as we speak.

Whether we are successful and can find value-enhancing transactions, we'll see. But we think there are significant opportunities now. So we continue to look at both bolt-on Aggregate opportunities, as well as debt reduction as potential uses for cash.

Thanks a lot and good luck.

Thank you.

Your next question is from Jack Kasprzak with BB&T.

Good morning, Don.

Hello, Jack.

How are you?

Good.

I just want to make sure I'm comparing apples with apples. The categories that you gave for McGraw Hill, is the public category, the all-infrastructure category that would marry up with your, what you term your infrastructure component of your business, which is highway and all other public?

I believe that's correct. I'll defer to any of my other colleagues. I think their commercial construction is private and their public works construction is public, and here comes the answer. Say it again Mark? Yes, highway and non-highway, public works construction; and then commercial building is private.

Okay. On the profit improvement, profit enhancement program, and SG&A, I know you aren't giving guidance for 2014, but you've done a good job keeping SG&A intact with that program. Looking forward to 2014, should it be more or less flat? Would you expect a little bit of inflation? Just how should we think about that line, if you care to offer any comments.

I think you're getting ahead of us, Jack.

Okay, fair enough. And is there any tax impact from the gain, the $9 million gain, that you reported in the quarter?

Jack, there's only a very modest impact. First, we fully tax-affected the $9 million gain in our income statement. That gain, in terms of cash taxes, will not cost us anything, because it's basically going against our net operating loss carryforwards.

But for GAAP purposes --

Yeah, GAAP purpose, we taxed it at the full 39%, 40% marginal rate, and again it just helps us in the utilization of NOLs.

Right.

But you can do the math to get to what an EPS impact.

About $0.04-ish, Roughly $0.04.

$0.04, right. And just, so long term, we should normalized tax rate should still be in the high 20%s or so, we think?

Yeah, when we get back to normal operating levels, the key thing that moves our tax rate down from a statutory rate is depletion, and that's worth, at today's volume levels, just over $20 million a year of tax benefit. As our volumes grow and our operating income rises, you'll still have that $20 million to $25 million plus or minus of tax benefit for depletion that will bring the effective rate down into the range you mentioned.

Last question is, diesel prices in the quarter, can you tell us what they were compared to last year?

Yeah, they were essentially flat with last year's third quarter.

Okay, great. Thanks very much guys.

Thanks, Jack.

Your next question is from Jerry Revich with Goldman Sachs.

Good morning, this is Matt [Ryback] on behalf of Jerry. Excellent Aggregates volume growth in the quarter. Your outlook comments, I think, suggest maybe a slowing year-over-year growth in 4Q versus 3Q, and just wondering if you might be able to touch on the drivers of that. Was there any lumpiness in the third quarter shipments we should be aware of, or just give us insight as to how you're thinking about that in the fourth quarter?

Our volume outlook for the fourth quarter, whether it sounds high or low, should be highly suspect because weather can move that significantly. As we indicated, we had, compared to market demand, depressed shipments particularly in the second quarter because of weather. We had some catch-up effect in the third quarter.

Demand is good and growing. So we're not -- I would ask you not to focus much on the volume projection for the fourth quarter, simply because there are too many moving parts, but we did have lumpiness in the first three quarters of the year, almost totally driven by weather. Although with that weather overlay, there has been improvement in new market demand as we move through the year.

So if we can keep that momentum, we're optimistic we could do perhaps better than what our year-to-date volume has been. But if we get unseasonably cold or wet weather, or early cold or wet weather, people will shutdown and move volume to 2014. So we'll have to see how that plays out.

Okay, great. And then on inventory, you've been reducing them for awhile now. Just wondering if you could comment on at what point you expect to be producing in line with demand?

I think going forward we probably, that will be our production schedule. As we look at.from the -- and that has to be done on a quarry-by-quarry basis. It's not some high level inventory management structure.

Each quarry, each market has to look at projected future demand, timing of shipments, the sizes, the specifications, and has to build a production plan around the sales forecast. Certainly as we sit here today, if we see volume continue to move, to grow in 2014, our production levels should begin to approximate shipment levels, which certainly helps in our GAAP earnings.

Fantastic. Thank you very much.

Your next question is from Todd Vencil with Sterne, Agee.

Thanks. Morning guys.

Morning, Todd.

So Don, a lot of my questions have been answered, but one high level one. On the residential side, you obviously had a lot of nice things to say about what you are seeing in the residential market. Certainly some of the home builders and a lot of investors have been concerned about a bit of a slowdown on the front end of what they're seeing in terms of orders and things like that. Can you square the circle a little bit and talk about what you may be hearing from your customers and what they are hearing from their customers?

Well, a lot depends on what information you focus on. One of the factors that has supposedly slowed the sale of housing is the fact that prices have moved up sharply, and an explanation for why prices moved up sharply is the inventory of houses available for sale has fallen sharply.

So it depends on whether you are selling an existing house or you're focusing on building a new house on a new lot. You can have a very different view about the current state of the housing market. We like the fact that inventory of houses available for sale is shrinking. We're seeing a significant amount of lot development going on, which is really one of the drivers for our product much more than the actual construction of the house in markets other than sort of Central and Southern Florida where there's a lot of Aggregate in the construction of the house because of the building codes.

I think we are cautiously optimistic that housing will continue its recovery, based on demographics and affordability. Obviously as interest rates are tending to move up and prices of housing is tending to move up, that will have an impact on demand presumably, but the McGraw Hill data that I referenced earlier, they are saying single-family housing starts up 24% to 785. That's still a modest number compared to history and demographics and the normalized demand rate and construction rate for single-family housing. So, while we recognize there are some headwinds to housing, in our markets at least, housing -- at least in most of our markets the housing remains very good.

Perfect. Thank you.

Your next question is from Stanley Elliott with Stifel.

Good morning, everyone. Thank you for taking my call. Quick question. The government shutdown, does that have any sort of impact on business? Obviously volumes are very strong, but when you think about having to think about this again within a couple months, I was just curious how the State DOTs react to that.

It is really hard for us to quantify the impact of the shutdown. If there has been an impact, it's hard to see. But I think it's much more of a macro consumer confidence kind of issue that may have some impact, but it's really hard for us to trace it down to our business.

And I think an important point is that the highway program, the Federal Highway Program and the Trust fund is insulated from the shutdown itself.

Yeah, that was my understanding, that sometimes environmental studies and so fourth would be delayed, but it doesn't sound like that was a big deal. And then as far as the debt paydowns, you have done a great job with that. Should we think about that as more as debt comes due, or are there any specific debt-to-EBITDA targets you're looking at? Just how to think about that, and also that within the context of the 2015 notes.

Well, we certainly would anticipate paying off the 2015 notes as they become due. Whether there's an opportunity to do anything before that remains to be seen. But we do want -- we have a dual strategy here. One is to pay off debt as we can find opportunities to do that. Also to increase EBITDA. Debt-to-EBITDA is the metric that needs improvement, and by increasing EBITDA we reduce debt. We're certainly getting that back in line where we want it to be.

Great. Thank you very much.

Your next question is from Robert Wetenhall with RBC Capital Markets.

Hi this is Desi filling in for Bob. Thanks for taking my question.

Hello, Desi.

Based on the commentary that you provided, it looks like public infrastructure spending should increase materially in 2014 in the states in which you serve. Do you think that growth will be fairly even over the year, or is there reason to believe volumes will be front- or back-end loaded next year?

I don't have a good read on that. When some of these, particularly these TIFIA projects start is a function of weather and the gearing up of the construction consortium in some cases. I would think the regular Federal Highway Program should be relatively stable across the course of the year.

The driver for whether we're seeing TIFIA projects begin to show up in a significant way in the first half versus the second half is really wait-and-see, I think. We don't have a good read on the actual timing of when shipments will go on the TIFIA projects, even those that we already have booked, internally first half versus second half.

Okay, and then a couple people touched earlier on S&G, how impressive that's been year-to-date. And it looks like the profit enhancement plan is scheduled to result in incremental $25 million of annual cost savings in 2014. Given the really impressive performance so far, do you think those savings are still available, or has some of that been pulled forward with -- over maybe this year and 2012?

We still have opportunities, and we continue to make good progress, specifically in the transportation area, and we've had some really good successes on sourcing. So, we believe that going forward in all three categories, G&A, SG&A, sourcing and transportation, we still have more that we can achievement.

And I think as we see it today, we still believe there's an incremental $25 million in 2014 that's not yet shown up on the bottom line in 2013.

Yes.

Great. Thank you.

Your next question is from Chris Olin with Cleveland Research.

How you doing today?

Hello, Chris.

Just a couple of quick questions. Just going back to your operations in Mexico. Are you limited at this point at any stage by capacity when you start targeting these growth areas from 2014? I just wondered how much upside can come from that area.

We are not capacity limited in any meaningful way. We can produce 12 million tons easily in that quarry. We have shipping capacity with our own vessels, as well as charter vessels.

We also have the engineering work largely completed to expand the production capacity of that plant as we need to in a very cost efficient way. So that plant, which is our largest quarry, has a tremendous upside as we look at continued growth along the Gulf Coast and in Florida and in Texas.

Those are the principle markets, three markets of Texas, Florida and the Gulf Coast, and we have a plan to, as needed, to expand capacity very efficiently. So that is one of the really wonderful opportunities at Vulcan going forward, is the shipments out of the quarry in Mexico.

Okay. I was also curious, you were talking about the demand strength across the Gulf of Mexico and building of inventories. I was just curious, within those demand drivers, has there been any impact from this port expansion or potentially people looking to accommodate the Panama Canal growth?

To date there's not been any shipments to any port expansion projects, but there are, as you know, there's a race among several of the ports to be the first mover and try to be the port that will be able to take the first of the cape-size container vessels. And we certainly are well positioned to benefit from any of those projects when they materialize.

But to date I would say, Danny you correct me if I misstate this, I don't think we have shipped to any of those projects, with the exception of a couple of years ago we did a very large project in Norfolk at the Maersk Terminal, and most of that material came out of our Havre de Grace quarry by barge. And that was plus or minus a million tons, I think.

So the benefit of the work for us when these port expansions occur is the infrastructure to handle and store and transship the containers, which requires a very large storage and transloading area. There's a huge amount of aggregate and fair amount of concrete that will go into those projects. And so we are happy -- we'll be very happy to see them materialize, but we don't have any that are in a current state of bidding for materials.

Okay. Just I apologize if you said it, but did you give the outage cost for the cement plant, or the maintenance cost?

About $3 million that we spent in the quarter on the scheduled outage.

Great, thanks a lot guys.

I'd now like to turn the call back over to Mr. James for any closing remarks.

Well, thank you very much for being with us today. We are certainly encouraged by the opportunities that we have to turn growing volumes into even faster growing bottom line.

Thank you. We look forward to talking to you again after the close of the year. Have a good day.

Thank you for your participation in today's call. This concludes the conference. You may now disconnect.