Vulcan Materials Company (VMC) Q3 2010 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Vulcan Materials Third Quarter Earnings Conference Call. My name is Luisa, and I'll be your operator for today. [Operator Instructions] I would now like to turn the call over to Mr. Don James, Chairman and CEO. Please proceed, sir.

Good morning. Thank you for joining this conference call to discuss Vulcan's third quarter results. I'm Don James, Chairman and Chief Executive Officer of Vulcan Materials. Joining me today are Dan Sansone, our Senior Vice President and Chief Financial Officer; as well as Ron McAbee and Danny Shepherd, our Senior Vice Presidents for Construction Materials. Before we begin, let me remind you that certain matters discussed in this conference call contain forward-looking statements, which are subject to 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. As you know, last night, after the market closed, we released our third quarter earnings. In the third quarter, our EBITDA was $150 million, and our net earnings were $13 million. Cash earnings were $116 million, up slightly from the prior year's third quarter and approximately $103 million more than our reported net earnings. This continuing contrast between our cash earnings and reported net earnings is primarily attributable to relatively high levels of non-cash DD&A charges contrasted with lower levels of production. The higher levels of DD&A come from two sources: first, almost $101.3 billion in CapEx over the years just prior to the recession from 2006 through 2008, which added reserves, increased production capacity, replaced equipment and improved cost; and second, from the wind-up of the Florida Rock assets through purchase accounting. One of the benefits of this higher CapEx in prior years is that we will be able to produce substantially higher tonnages of aggregates with relatively little additional CapEx above current levels. And one of the benefits of higher production levels going forward will be to spread this DD&A over more tons, which will leverage our GAAP earnings. Dan Sansone will give you more details on our CapEx spending toward the end of our remarks today. Before I discuss segment results supporting these third quarter earnings, let me start by highlighting several underlying trends we are following that could benefit our earnings opportunities going forward. Shipping trends and aggregates continue to improve in the third quarter. Trailing 12-month aggregate shipments have been increasing since February, and asphalt and concrete trailing 12-month shipments have been relatively stable since May and February, respectively. Our continued focus on controlling costs and managing production levels to current demand contributed to lower cost of sales and aggregates excluding energy cost, through sequential improvement in material margins for asphalt, and to a reduction in selling, general and administrative costs. Some aspects of our cost structure are outside our control in the short term, such as energy and the impact of lower demand levels on production costs. However, we believe there's always room for improvement and controllable cost. Overall, we're pleased with our continuing progress in managing our costs, our inventory levels and our cash earnings. Third quarter segment earnings in aggregates were $125 million compared to $133 million in the prior year. Aggregate shipments declined 2.6% from the prior year's third quarter, accounting for most of the year-over-year decline in segment earnings. All of the decline in shipments can be attributed to a strike in July in Chicago, affecting our customers' employees for most of that month. Aggregates pricing in the third quarter was in line with the prior year, reflecting mild variations across Vulcan-served markets. Many major market realized price improvement from the prior year's third quarter. Other markets have remained challenging due to competitive pressures arising from reduced demand, higher transportation cost and in some cases, from mix shifts. Excluding the impact of higher energy cost, unit cost of sales for aggregates declined 2% from the prior year, demonstrating continued focus by our employees in running our plants in the most efficient manner possible and the cost benefit of production levels that are now matching sales volume levels. The cumulative effect of reducing aggregates inventory levels over the past two years allowed us to match production levels with sales levels in the third quarter, which contributed to the reduction in aggregates cost of sales. The average unit cost for diesel fuel increased 17% in the quarter reducing pretax earnings $4 million. Segment earnings in asphalt were $8 million lower than the prior year, due in part to a 14% increase in unit cost for liquid asphalt and lower selling prices. The year-over-year increase in liquid asphalt cost reduced asphalt earnings $6 million. Selling prices decreased 3% from the prior year, reducing segment earnings approximately $4 million. Selling prices for asphalt mix generally lagged increasing liquid asphalt costs that were held in check due to competitive pressures. On a sequential basis, unit material margins for asphalt had been improving since the first quarter due to some improvement in pricing and a relatively stable liquid asphalt cost. In the third quarter, unit material margins increased 10% on a sequential basis from the second quarter. Segment earnings in Concrete declined $9 million from the prior year, due principally to a decline in selling prices. Cement earnings in the third quarter were a loss of $2 million, due primarily to lower selling prices. Turning to our outlook, let me start by saying that while the current construction environment remains challenging, our optimism that the worst is behind us continues to grow. Most GDP forecast take further growth in the overall U.S. economy. In past cycles, demand for aggregates has improved as GDP has grown during the initial years of recovery. Additionally, the growth state product of all Vulcan-served states has shown positive growth since the second quarter of 2009, an indication economic recovery is underway. As the general economy continues to recover, public construction, particularly highways, continues to provide solid support for our aggregates demand. During September 2010, the Federal Highway Administration reported that approximately half of the $27 billion of total stimulus funds obligated for highways is yet to be spent. In August, the Congressional Budget Office forecast total outlays for highway construction for the current fiscal year ended September 30, 2011, increased 7% from the year just ended. This projected increase includes a 14% increase in outlays from the Highway Trust Fund as well as a continuation of stimulus funds. This projected increase in outlays for the regular highway funding program reflects a catch-up in obligating awarding and spending following a decline that occurred during the months just before and following the expiration of the six-year Highway Bill last September 30 when state departments of transportation were operating with limited funding visibility and limited contract authority, both resolved with the passing of the HIRE Act in March of this year. The 14% increase in outlays from the Highway Trust Fund from the regular highway funding program this fiscal year as well as the projected increases in regular highway funding from a Highway Trust Fund through 2012 should continue to provide solid support for aggregates demand. In Washington, we have been very pleased to see that the administration has now come out strongly in favor of sustained transportation infrastructure spending, calling for a multiyear Highway Bill as a key way to help lead the country out of recession and create jobs. In a significant and very positive report issued by the U.S. Department of Treasury on October 11 of this year, the administration has made a compelling case for major infrastructure investment now and going forward. The report points to the long-term economic benefits of the infrastructure investment, the disproportionate benefits received by the middle class and the strong pent-up demand from the public and private sectors. It also emphasizes the high level of unemployment in the construction sector, which has been at almost twice the national unemployment level and points to infrastructure investment as a key to creating and sustaining jobs. The Treasury Department report entitled "An Economic Analysis of Infrastructure Investment" is available on the Department of Treasury's website. It also notes that 19 out of 20 Americans are concerned about America's infrastructure and that 84% support greater investment to address infrastructure problems. Our company and the entire infrastructure community must make this case to a new Congress. In particular, this quote from the Treasury report is a key, and I'm quoting: "Americans have voted repeatedly for increased investment in transportation infrastructure. In 2008 alone, over 80% of the 59 transportation infrastructure projects proposed in local referenda were approved by the public. Even more striking is that over 98% of the funds requested for these projects were approved by the voting public." In addition, major business organizations like the U.S. Chamber of Commerce and the American Trucking Association support higher fuel taxes for highways to relieve congestion, improve transportation efficiencies and create jobs. Private construction, particularly private non-residential construction, remains the most challenging sector overall. On the positive side, trailing 12-month single-family housing starts through September have increased 10% from the prior year. The rate of decline in private non-residential construction contract awards has slowed. The rate of decline in trailing 12-month contract awards has slowed in each of the last three quarters. The start of a recovery in this end market will be influenced by employment growth, business investment and lending activity. Overall, pricing for our aggregates remain stable. A number of Vulcan-served markets were realizing meaningful year-over-year price growth, while pricing in certain other markets has declined due to competitive pressures from weak demand and the shifts in product mix. As a result, we expect pricing in the fourth quarter to approximate the prior year. In our Asphalt business, material margins on each ton of asphalt mix sold have trended higher since the first quarter this year due to a relatively more stable cost environment for liquid asphalt. We expect this trend to continue in the fourth quarter. In our Concrete business, we expect sales volumes in the fourth quarter to increase from the prior year's fourth quarter, due mostly to the timing of some large projects in Florida. We expect pricing to decline due to competitive pressures. In our Cement businesses, we expect fourth quarter segment earnings to approximate the prior year's results. Now, I would like to turn the call over to Dan Sansone, our Chief Financial Officer, who will make a few comments related to our outlook for SAG, debt reduction and liquidity. Afterwards, I'll conclude our prepared remarks with a closing comment before taking your questions.

Thank you, Don. We expect SAG expense for the full year 2010 to approximate the prior year level. There are, however, a number of unusual items in the SAG category that I'd like to highlight. In the fourth quarter of last year, SAG costs included a non-cash charge of $8.5 million representing the fair market value of donated real estate. We do not anticipate a similar item in the fourth quarter of 2010. Additionally, we recorded a non-cash charge of $9.2 million for donated real estate in the first quarter of this year, and we currently do not anticipate any similar charges or transactions in 2011. The second significant item affecting SAG expenses, is our major ERP project, which began in 2008 soon after the acquisition of Florida Rock. This multiyear project is replacing Legacy systems and processes throughout the company, consolidating back-office activities and standardizing common processes and procedures. As of today, all of the Legacy Vulcan business units are operating on the new financial systems platform. The Legacy Florida Rock division will transition onto the new platform in the first quarter of 2011. We will begin to implement the major non-accounting modules of the project early in 2011, with project completion anticipated in 2012. This initiative has had a material impact on our SAG expenses over the last couple of years. Annual project cost peaked at 2009 at approximately $13 million. Project costs in 2010 should be approximately $2 million lower than last year, reflecting lower design and implementation costs and the beginning of the realization of cost reduction benefits. We expect a further reduction in net costs of approximately $6 million in 2011. Interest expense for the full year 2010 is expected to be approximately $175 million based on current levels of interest rates and a reduced level of capitalized interest on capital projects. We expect to reduce total debt by $120 million by the end of 2010. Depreciation, depletion and amortization for 2010 will be approximately $385 million. We have carefully reviewed our capital spending requirements relative to current demand levels. We now expect capital spending in 2010 to be approximately $100 million, down slightly from the $110 million spent in 2009 and down sharply from the $353 million spent in 2008. The sharp decrease in capital spending in the last two years results from lower production levels as well as the higher levels of capital spending during 2006 through 2008 that Don mentioned in his opening remarks. During that three-year period, cumulative capital spending totaled approximately $1.3 billion. These projects added reserves, increased production capacity, upgraded mobile equipment fleets and lowered production costs. Our aggregates plans and rolling stock were in very good condition going into this economic downturn. As a result, our capital spending needs have remained relatively modest. We have maintained the production capacity necessary to respond quickly and efficiently as demand recovers. And Don will now pick up with some closing remarks.

In summary, we believe our business continues to get stronger as a result of our cost control efforts in this downturn and our disciplined approach to pricing throughout the recession. We will remain diligent in our efforts to look for every opportunity to cut costs, and we look forward to the opportunity of getting the great leverage in earnings that volume recovery will provide us. The underlying trends in trailing 12-month shipments have increased our optimism that the worst of this severe downturn may be behind us. We are in the process of reviewing our specific projections for next year, and we'll provide an outlook in February when we report our fourth quarter results. Our available production capacity which, as Dan pointed out, is in very good condition, positions Vulcan to participate efficiently and effectively in an increase in Federal Highway spending projected by the Congressional Budget Office. By the second half of 2011, we expect a continued growth in the overall economy and an improving job market will begin driving an increase in private construction activity, accelerating the earnings leverage of the company. We are the clear leader in the U.S. aggregates industry and are well positioned for significant participation in the economic recovery and in public infrastructure programs. I would like to reiterate our confidence in future sales and earnings growth for Vulcan. This confidence comes from our successful strategy to continue strengthening our Aggregates-focused business, which has the compelling advantage of great locations in major U.S. markets that are expected to experience above-average growth in aggregates demand for many years into the future. We thank you for your interest in Vulcan. Now if our operator will give the required instruction, we'll be happy to respond to your questions.

[Operator Instructions] And your first question comes from the line of Garik Shmois with Longbow Research.

First question on aggregates pricing. I was wondering if you could walk us through a little bit geographically, mainly California and Florida, what you saw on pricing. And then secondly, it seems like pricing, broadly speaking, in many of your markets does appear to be stabilizing. But if you could talk about the mix in your backlog as you look out over the next several quarters if there's any either positive or negative mix issues that we should be aware of over the next several quarters, that would be helpful.

Generally, our pricing ranges, with few exceptions, from being up about 6% to being down about 10% across markets. I think you're correct that Florida and California have been the markets where the private construction has been hit hardest and longest, and those are the states in which our pricing performance has been weakest. Generally, markets where demand is stable and improving also have stable and improving pricing. There is a pretty tight correlation between demand and pricing, and we believe as soon as we see demand firming up in some of the weaker markets, we'll see pricing opportunity come back. The second half of your question, Garik, was what?

Was on product mix. And if you look at your backlog, if there is any mix issues that we should be aware of one way or the other that could...

I think the only sort of -- and it's really not a mix issue, but the only significant thing is that as the initial stimulus projects get built and rolled off, those were bid at very competitive pricing and at a time, as we've said, when the regular Federal Highway Program was in limbo and the only work coming out, the private sector demand was in the trough and the original stimulus projects got bid at very competitive rates, and as those projects roll off, I think you'll start seeing reported pricing improving.

I just wanted to take it again on the CapEx a little bit. You did reduce your CapEx forecast for the year. I was wondering when the volumes come back, how much volume can you absorb in these capital levels before you have to start taking cost back into the system?

As we've said, our plant and equipment is generally in very good shape. I think certainly, as volumes come back, as we add 25 or 30 or 40 million tons of production, we'll start needing to replace some plant and mobile equipment, which we'll do, but we are, as a result of the very large CapEx we had in the years prior to the downturn, I think we're in great shape. So CapEx will go up, but it won't go up nearly as high as annual DD&A.

Does your new capital forecast imply any change to your incremental and your view that the business can generate a certain incremental margin on the initial tonnage?

No. I think in this quarter, where we had volume growth, it reflected the incremental margins that we believed it should, which are in the 60% range.

My last question is on the Asphalt business. Just on volumes, I believe coming out of the last quarter, there was an expectation of the second half of the year was going to deliver some volume growth in that business. If you could talk about the volume decline in Asphalt in the third quarter, if that was related to project delays or if there's anything else going on?

I think some of it is timing, some of it is continuing weak asphalt demand in the private sector work. There's not a single issue there. We are very pleased that our material margins, that is the spread between selling prices and material input costs, continued to improve. As you know, they sort of hit cyclical lows earlier this year as a result of the higher price of liquid asphalt and the difficulty of passing that through in the asphalt mix selling prices, but those material margins are improving. And as we began to see volume recovery, that should enhance earnings in that product line.

Your next question comes from the line of Jerry Revich with Goldman Sachs.

Don, your Ready Mix revenue per cubic yard was up sequentially for the first time in a while. Can you talk about whether October pricing was above your third quarter average? Also, can you touch on what kind of Ready Mix pricing trends you're seeing for your customers in areas where you're not vertically integrated?

Well, that's a lot of questions. Ready Mix pricing is still under pressure, ours and others. We're pleased to see that we expect our volume to be up, particularly in Florida, but it's related to some large projects that we've booked earlier. Ready Mix is much more heavily dependent on private construction than aggregates and asphalt are, and I think Ready Mix will continue to have some pressure on pricing. We work really hard to recognize that our Ready Mix business is really tied to pulling our aggregates through, as well as our cement through. So we look at that business differently than a pure Ready Mix producer might. But generally, pricing is going to be under pressure in Ready Mix until private sector demand begins to stabilize and improve.

And on the asphalt side, you mentioned your gross margin per ton was going to be expanding in the fourth quarter. Can you comment on whether that's a function of liquid asphalt prices coming down or your pricing stabilizing?

Both.

And so sequentially, should we be looking for asphalt price increases from 3Q levels?

Modest.

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

I noticed that when you gave your guidance in yesterday evening's press release and today that it didn't give aggregate volume guidance. But last quarter, you gave second half aggregate volume guidance of flat up 5%, which implied mid-single-digit volume growth in Q4. My question today was, was this omission of volume guidance to the aggregate intentional? Or do you expect mid-single digit volume increases in Q4 in that segment?

Kathryn, one reason volume guidance for aggregates in the fourth quarter is so difficult is because it depends on when it turns cold and when it starts raining and snowing in our cold-weather markets and when it gets too cold to pour concrete or put down asphalt. So for us to be trying to predict aggregate volume in any meaningful way in the fourth quarter, we have to be trying to predict the weather patterns in our various markets and that's just not something that we're very clever at. Generally, we think demand is improving in highways and infrastructure. It's improving and housing, and it's continues to decline, although at a much slower rate in private non-res and how that rolls up compared to whether in the fourth quarter we're just -- it's tough to make that call in a short term.

Moving to pricing and, I know in Q2 you'd indicated that long-haul would somewhat of an impact on pricing. Did this carry over into the Q3?

Yes, we report freight-adjusted pricing, and long-haul transportation continues to have cost escalation in the transportation piece. Fortunately, we're, over time, able to recover that in pricing. I think in Q2, we saw a more severe disconnect between the price spiking up, particularly related to fuel escalation clauses and the ability to pass that through into the shipments going into the yards. But I think that is a phenomenon that will adjust itself over time, and I think you saw it to some extent adjust in the third quarter.

And speaking of pricing, anything that you'd like to comment on in the aggregate group, in particular about pricing as it's progressed over, say, the past from right now three to four months. Has there been any specific changes in mix or geographic differences other than what you commented on earlier in the call?

Well the geographic differences have to do with states and markets where volumes are up and what the average selling price is in those markets and volumes and markets where volumes are down, and so there's always a geographic mix shift going on because our pricing varies significantly from market to market, as you know. But that being said, I don't think there's anything dramatic about our pricing in this quarter compared to prior quarters. Our mix shift, our product mix is not dramatically different, and our geographic mixes moves around some, but basically, I think we have just had a very disciplined approach to pricing and are trying to provide quality in service to our customers and get paid for it. And that's our basic strategy.

You have $325 million notes due in December, and that's my understanding that strength in the second half of the year is somewhat a factor in funding these notes. My question today is given the current market conditions, what's your strategy for paying off this note?

Kathryn, we closed that $450 million term loan in July of this year with the intent of using those proceeds to fund the $325 million maturity as well as we pre-funded $100 million term loan maturity from next year. So what we will do in December when that comes due is either issue commercial -- we'll use available cash and any balance will be met by issuing commercial paper and/or drawing on our bank loans.

My final question for today is what were the primary drivers -- you had nice improvement, sequential improvement in aggregate gross margins on fairly modest sequential improvement in volumes; just shy of 1%. What was the primary driver with this improvement in gross margins?

While our aggregates cost of sales x energy was down about 2%. Our pricing remained relatively stable, and in the markets where we got volume growth, we got very good leverage, in the 60% range. While volumes were down in some markets and up in others where we got the up volume, we certainly got the nice contribution to our margin.

Your next question comes from the line of John Kasprzak with BB&T. John Kasprzak - BB&T Capital Markets: I wanted to ask about Concrete as well. Looks like the sales were virtually identical from the second quarter to the third quarter and yet the gross loss was little about double, $5.6 million I guess to $10 million on this quarter, third quarter. So again that's sequential comparison, could you talk about what happened there on same amount of sales?

Pricing was weaker. John Kasprzak - BB&T Capital Markets: And the cement price sequentially also picked up almost $3 a ton. I assume there was no price increase in Florida. But so what else could have accounted for that if you have any color?

I don't believe our cement pricing -- sequentially.

It had to be customer mix.

Yes, customer mix. We're supplying more of our own cement, but that comes with a little longer transportation haul, which we net back out. I don't think there's any specific item that would stick out. It's just the various -- as Dan said, customer mix.

Your next question comes from the line of Trey Grooms with Stephens.

One question, I guess just kind of broader question. Don, if you think about the Highway Trust Fund and where we stand today, I'd really like to get your input or opinion on kind of how this thing could kind of play out, if we were to see or how it could change in the different scenarios of what could happen today during the elections, if we saw Republicans take control or Democrats kept or start with -- voted out? Do you think something might get speed up in the lame-duck session? Just to get your thoughts on that?

Trey, I would love to see something happen in the lame-duck session. I wouldn't bet on it. I think that's going to be short, and I would expect the current extension of contract authority and funding levels for highways will be further extended in the lame-duck session, probably for six months. That's a yes. It could be shorter, it could be a little longer. I think the real action, though, is assuming that the Republicans take control of the House, which seems to be most people's projection, we'll have a new Chairman of the House transportation and infrastructure committee, probably John Michael from Florida. We believe, as I tried to indicate in my prepared remarks, that the administration, particularly the Treasury Department, is a very strong advocate for increased spending for infrastructure, and in particular highways for all the reasons I outlined and all the reasons stated in the report. This is really the first time the administration has come out strongly and said, "we need a new multiyear surface transportation bill, and we need to get on with it because it is a key way to address unemployment and end up with an economically efficient system when we get through with it". And their treasury in particular and Secretary Geithner, in particular, seem to be approaching this from a purely economic view and not such a political view. Now roll over to Congress. The political issue is going to be whether the Republican majority in the House feels it now has a joint responsibility for the economy. And I point it and I try to emphasize this, one of the points that we have to be able to make, and we is not just our company, but the entire transportation industry, is that voters support what I'll call user fees that are directly related to transportation improvements in their communities. Over and over and over again, that spending and that increased revenue is supported by voters. The point is, is that not all federal spending is bad and that there is public support as manifested through any number of activities for increased revenues and increased spending to relieve traffic congestion. The projections from the congressional commission that studied highway funding was $0.10 a gallon, fuel tax will raise an incremental $20 billion a year, and it will cost the average American family about $100 a year. And for that, they get all sorts of benefits including being able to get home and to work faster, having much lower repairs to their automobiles caused by poor surface conditions. So there's a tremendous amount of really good study and reports supporting it. We just got to make the case that voters will support it, and that's our challenge in this new Congress.

Your next question comes from the line of Adam Rudiger with Wells Fargo Securities.

I wanted to ask the question about asphalt mix a little bit different than you had already asked, I think. You said that normally there's a lag, but the competitive environment has kept the ability to pass that increase in liquid asphalt on. I was wondering if you think that competitive environment won't maintain that way and that the margin improvement in asphalt mix will be solely due to lower input costs? Or do you think you're going to be able to pass some of those costs on when they increase, if they increase?

I think the way to think about asphalt is look at the end markets. And obviously, public infrastructure is a very large end market for asphalt, much more so than for concrete. And that's the one place that we're seeing relatively strong growth in funding and demand. And as a result of that, assuming the wildcard here is what happens to liquid asphalt cost. But assuming stability in liquid asphalt cost, then we would expect material margins would continue to improve as we're able to get somewhat higher prices for the mix. But the wildcard is the liquid asphalt input cost that we have very little influence and control over, we are seeing liquid asphalt producers for the first time in several years being willing to commit to pricing for longer than a 30-day period, which gives us some more stability in getting work with a firm liquid asphalt pricing. And that's a phenomenon that we haven't seen since probably three or four years ago.

So you think the competitive pressures that you have referenced in your press release will abate somewhat as demand for asphalt increases, is that correct?

Yes.

And then secondly, really quickly, you said in your press release you attributed the overall decline in volume to the strike in Chicago. Do you think that, that will -- will those projects just canceled? Or are they delayed? If they're just delayed and they spill over into the fourth quarter, did that give you an extra point or two in year-over-year volume increases from that?

Some of the projects are moving forward, and we're seeing that. Some may get rolled over into 2011. I don't think there's any cancellation of the projects. It's really a timing. We saw a little bit of recovery toward the end of the third quarter. The strike was in July and volumes were down hugely in July because all of our customer operations were basically shut down. We saw some recovery in the volume in the latter two months of the quarter, and without being specific, I think it looks like some of that volume is occurring in the month of October in the fourth quarter and hopefully, those projects will continue to be caught up, will continue to catch up until cold weather hits in Chicago. And once cold weather hits, we expect a lot of our customers will close up for the year and go home and then crank back up next spring when the weather improves. So how much of that gets caught up this year really depends upon how long the construction season lasts in Chicago.

Your next question comes from the line of Mike Betts with Jefferies. Michael Betts - Jefferies & Company, Inc.: I've got a couple of questions if I could, please, Don. First question, after I say I'm struggling a bit about what obviously makes imminent sense that better volume markets give you better pricing. If we look at what your competitors reported today, it's kind of been the reverse. Their volumes are up by more, and yet their pricing is significantly weaker. So I guess you obviously don't have the benefit of there internal data but if I ask you, just give me some examples of which markets were up kind of the 6% and which were down to 10%, so maybe to help me to close that loop. And then once again, the $120 million in debt reduction or total debt reduction, I'm struggling with that a bit as well, Dan, because the way I would calculate that would to use the short-term borrowings and the long-term debt and that seemed to be up about $80 million in the nine months. So are you talking about net debt there or am I just miscalculating it?

Mike, I think there's probably a misconception that because both Vulcan and Marietta are somewhat headquartered in the Southeast that we compete with each other on every market on every job, and that's really far from the truth. Our California, Arizona, New Mexico markets, they don't participate in. We don't participate in their Mountain West markets and their upper Midwest markets like Nebraska and Iowa. Our big Midwestern markets are Tecumseh and Milwaukee, and they don't participate in those markets there and Indianapolis and Ohio where we're not. Northern Virginia is a huge market for us. They really don't participate in that market. Florida, we have local production in Florida, and part Marietta has virtually none. So there's really a very small sort of overlap when you get to where we both participate. That being said, a lot of their volume growth seems to have come from shale gas and energy projects and markets, and we're not in the same markets they're in, but we are in some markets where that is a demand sector, and that has been significant. Remarkably, in North Carolina, there are big highway programs in the Raleigh market and in Eastern North Carolina and Western North Carolina is just sort of out-of-cycle highway projects right now. So there's probably a big difference in our North Carolina shipments even though we compete in relatively limited number of markets in North Carolina. So I don't think you can conclude from the disparity in price volume between the two companies that there's a market share shift going on in volume as a result of pricing. That's just not the case at least from our view. So I can't tell you specifically why their prices are down whatever it was, 3% or 4% and their volume was up 6% compared to ours. We've got enough to worry about with our business and not worry about theirs. Michael Betts - Jefferies & Company, Inc.: So which were your strongest markets though, Don? And a couple of example...

Well, if you look, say, at Virginia, Virginia, particularly Northern Virginia, is volume strong, pricing's good. If you look at Tennessee, Kentucky, volumes are good, pricing is good. If you look at San Diego, volume's good. There's just not a lot of places we can look at and look at their price and volume and our price and volume and draw any conclusions from that. There is a pretty significant relationships in our business between markets where volume is stable and growing and we're able to get a better pricing and it's contrasted where volumes are weak, and they are relatively weak in Florida stone and in some of the markets in California. Volume actually seems to be stabilizing and improving. So there are some disparities there, but in virtually every case, volume stability and improvement is going to provide the basis for price improvement. Michael Betts - Jefferies & Company, Inc.: And Florida would have been one of your weaker markets, would it?

Yes.

Mike, regarding debt, there's a couple of things that happened in the fourth quarter, and we expect it to be the case this year as well, a quarter in which we're a net generator of cash. Even though it's a slow period for shipments, we're pulling working capital down from the seasonally strong second and third quarters, particularly receivables. Secondly, the fourth quarter of this year will generate some additional cash for less exciting reasons. As a byproduct of the weak operating results we had, we're generating tax credits and not paying income tax. And we're actually able to apply those credits against prior year taxes paid. So we'll be bringing approximately $35 million from the treasury back to the company in the fourth quarter of this year for refunds from prior tax periods as well. So when you put all that into the mix, we will be reducing total debt and not just long-term debt by about $120 million. And you're correct, your definition is the same as mine. It would be long term as well as short term debt. Michael Betts - Jefferies & Company, Inc.: Just a follow-up on that Dan, the tax credit in the third quarter was due to that reason, was it?

No, no, no. The tax credit in the third quarter is on a book basis, then you have to essentially restate all your numbers on a tax basis. And because of accelerated depreciation and because of pension contributions that were made earlier in the year, we're actually generating sizable tax losses that really get greater than those shown on the book earnings, which give us the ability to get those refunds.

Your next question comes from the line of Keith Hughes with SunTrust.

Just a quick question on the release. You talked about the rate of decline in non-residential contracts slowing. I know you talked a little bit about oil and gas. Are there any other areas that stand out either substantially above, substantially below that trend as you participate in non-residential?

We would not include the holes and drilled platforms for oil and gas in private non-res. We would include that in private infrastructure. So our non-res are essentially buildings, both public and private. So our infrastructure, public and private, is up. Our highways are up. We're seeing that improvement in our numbers. The building side, the buildings that we are seeing are public buildings, both from the black work base realignment and closing of government military buildings is a good bit of that. There's a lot of government building up in the Washington Baltimore area. There are hospitals, university buildings, schools, to some extent, prisons. The place where there's continued weakness is in retail, office buildings and to a lesser extent, hotels. While there are some bright spots there. And just anecdotally, a huge new retail shopping center just opened here in the Birmingham market last week. So it's not dead everywhere, but it's certainly slow. But I think we're seeing it bottoming, and I think that's going to be a real key for us, probably by mid-'11. If the building sector of non-res has bottomed, then I think that's going to be a real key toward volume recovery going forward because that's where the greatest pressure has been for at least the last two years.

Your next question comes from the line of Todd Vencil with Davenport & Company. Todd Vencil - Davenport & Company, LLC: On the cash flow statement, it looks like there was about $35 million in there for the acquisition of a business. What was that?

We bought a Concrete business in Atlanta. It ties in beautifully with our existing Aggregates business and with our Florida cement plant. Atlanta is the largest single cement market that can be reached efficiently from our cement plant in North Florida, and it's an opportunity to leverage not only the recovery and cement demand in the northern half of Atlanta, but also let us pull through our aggregates and primarily our own cement and get the margins associated with those products. Todd Vencil - Davenport & Company, LLC: Are you going to have some detail on that in the Q?

We will mention it. We don't typically don't spend a lot of time talking about bolt-on acquisitions and we view this just as a bolt-on acquisition because it's an end market acquisition. I should say, we're not going to grow our Concrete business generally, but where we can pull our own cement through or through swaps effectively pull our own cement through, it makes the economics look a whole lot differently than just the basic Concrete business. Todd Vencil - Davenport & Company, LLC: And then the only thing I have left is in Florida specifically, you all talked a bit on the last call about some sort of outside competition coming in there. Is the competitive situation -- and I realized that prices are under pressure there as you've said because volumes are still weak. Has the competitive situation changed any in the last three months or so?

I would hope that we'll see stability in pricing in Florida. I don't think we made a comment about that. I think someone else probably did in their conference call. But we're happy with our market position and our distribution capabilities in Florida. We are able to serve that market from forays in the state, as well as by ship from our big quarry on the Yucatán as well as by rail from Georgia and Alabama. So we have a great supply network and distribution network to serve Florida. At some point, when demand there begins to recover, we're going to be in great shape. But it's a tough market today. But in the long term, there are very limited reserves in Florida and there's a huge amount of growth potential, but it's going to take another time period. I guess we are pleased that housing starts in Florida are up in high double sort of 18%, 19%, 20%, 21% on a trailing 12-month basis. So there is some life in Florida after all, and of course, the highway projects and stimulus projects in Florida are finally getting underway. They were among the slower states to get that rolled out. So it's really when non-res construction begins to resume is going to be the key in Florida as it is in most other markets. But residential, what we think if it turn to corner in Florida, really more so than in the rest of the country.

Your next question comes from the line of Jason Brown with KeyBanc Capital Markets.

I think in the last call you talked about some non-core assets, I think a couple of quarries that you were looking at to potentially sell. It doesn't look like you did much this quarter but I just wanted to get an update on what you might have marked for sale there?

I think the only thing we're holding for sale now is a small quarry in a Concrete business in the Bahamas that came with the Florida Rock acquisition. We don't need that because we can supply Florida with high-quality limestone from our core on the Yucatán Yucatán Peninsula by ship very efficiently. We expect that to close any time. We did sell three quarries up in rural Virginia, in markets that had been supported by textile and furniture manufacturing. And as you are aware, I'm sure, those industries are in great distress, and it just didn't make a lot of sense for us to continue to keep those in our portfolio. We continue to look at opportunities where we may have some quarries that are not end markets that are key to us or strategic to us where they may be more valuable to someone else than they are to us. That's not anything unusual. We'll continue to pursue those, but it's difficult for us to sell operations, pay taxes on it and make a lot of sense on an after-tax cash basis. So that's one of the impediments to continue to prune our portfolio. But we do continue to look at that and we'll continue, and we'll report them as they occur.

My other question was on the pension. Are you expecting you have to put any money into the pension in 2011?

No, we've pre-funded our pension through I think the end of '12.

Probably '13.

So we don't see any need for additional funding.

Of course that's based on the actuarial assumptions that we used at the time. And obviously, things could change between now and then. But right now, we have no anticipated contributions, and we don't see anything on the landscape that would invalidate the actuarial assumptions that were used in concluding that we didn't need to do anything until 2012 or '13.

Your next question comes from the line of Clyde Lewis with Citi.

One on diesel. It's obviously going to moved up a little bit since Q3 costs. Can you guys do anything to mitigate those high sort of prices or was it very much? Hope to see some low prices for next year?

We buy diesel in nationwide contracts, but we don't hedge it, and we're not backward-integrating into the Refinery business. So there's not a lot we can do in the short term. We continue to monitor and manage own fuel efficiency in our plants and every plant every month, captures and reports tons of production per gallon of diesel fuel. So that's a big -- one of our major key operating parameters that we measure and monitor. But there's not a lot we can do about the price of diesel fuel as it moves around other than we try to buy in large quantities and get as lower price as we can.

Just remind me, how much you're likely to use this year in terms of millions of gallons?

About 40 million gallons. We will be happy when we're bringing 80 million which we've done before.

Hopefully, volumes will improve, up the same the PCA forecast and Mr. Sullivan's busy cutting his forecast again for 2011 and '12. The other question I had was on pricing and the strategy that you're seeing. I think you mentioned mainly the smaller private ones that are being more aggressive. Is that what you're seeing everywhere? Or are you actually seeing some of the bigger guys maybe holding that corner a little bit more as well?

Well, it's all of the above, I think. It's not so much that people are cutting prices and we're having to match. It's just it's very difficult to get in this market to be able to go into our customer and justify a price increase when they're having great difficulty maintaining the price of their product, i.e. concrete or asphalt mix. So we're not concerned about price cutting. We're concerned about volume recovery. And with volume recovery, I think we'll be able to resume some price improvement, hopefully well in excess of cost escalation in our production side. But as I said, we've maintained a lot of discipline in pricing, and we're trying to provide quality and service and reliability to our customers and keep them competitive through this recession, and that's a big order. But our guys have done a remarkably good job of it, as you look at our pricing metrics compared to most everybody else in the industry.

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

You've hinted at continued efforts to control costs, and I'm wondering if you could detail what kind of efforts you might be alluding to?

Running plant sufficiently, that is bringing our workforce in and running hard when we're there and then closing up and going home, moving crews around from plant to plant to achieve production efficiencies is another strategy that many of our operations utilize. Running plants at off-peak hours from the standpoint of energy costs, particularly electrical energy cost, in many markets if we run our plants at all peak hours, we get much lower electric utility rates than if we run in the middle of the day and at summer time. SAG costs is an area in which we are continuing to focus then since we only gave you some input on that. Going to our new ERP system has allowed us to begin to reduce some overhead cost, and that project will continue to move forward in that area. The principle it's not one single place, it's really across-the-board from -- as I mentioned, about diesel fuel consumption, we monitor all sorts of labor productivity. That is tons per variable man-hour, tons per total man-hour. It's done on a plant-by-plant, month-by-month basis, so there aren't any secrets out there. The plants that are doing great jobs show up, and the plants that need some work are also showing up. And so that's an emphasis for us, and it's small. It's pennies a ton, in 250 quarries. That's what the focus is.

My other question is for Dan, related to an investment grade rating. So Moody's in August knocked the rating down another run and to the quarter line with investment grade in junk. Just a couple of questions surrounding that. I guess one is if you could give us any color on that discussion. It sounds like if you're planning to perhaps draw down on commercial paper lines, and you're thinking that, that doesn't change for the time being. But maybe how important is it really to maintain an investment grade ratings for Vulcan?

First, with respect to the discussions with the agencies, we're in there in a detailed fashion with them. Multiple times a year, we have an active dialogue with them. There's no secrets. They know our plans. They know our priorities. And they do a very good job of tracking the industry and the company's performance. The issue with the agencies at the moment is frankly that our one single metric, debt to EBITDA has crept higher as our EBITDA has drifted lower in this cyclical downturn. And that metric, more than any is the one that's under the greatest pressure with the agencies. And it's the one that probably contributes the most to the current rating and to the threat of a downgrade. I certainly I'm not in a position to speak for what the agencies will choose to do when they see these numbers and when they see our numbers at the end of the year. But I think psychologically, we have a tendency to think of a movement from -- and I'll use the S&P rating just for simplicity, BBB- to a BB+ rating from investment grade to a non-investment grade as some sort of a huge step function it is. In terms of the financial markets, it's not nearly as dramatic a change. Certainly, a downgrade is not something we're hoping for, and we're trying to do the reasonable things we can do to manage for the current rating. But if we were to get downgraded, the incremental effect on our borrowing costs in the grand scheme of things is not very significant. Put differently, I don't think you should expect us to go to draconian measures to try to protect the current investment grade rating at the expense of -- at some extreme expense. In the current term loan that we put in place in July of this year I believe that if we were to get downgraded one notch, it would add 25 basis points to the borrowing spread over LIBOR. It's not the end of the world. If you look at indicative bond pricing in today's market, if we were a full notch lower by both agencies, it would add less than 100 basis points to the indicative coupon rates, and in today's market, that would bring in coupon rates that are still lower than the coupon rates the we have with the debt that was issued in 2007 and 2008. So yes, we worry about it. Yes, we communicate extensively with the agencies. Yes, we're very sensitive to it, but you won't see us turn the table upside down to protect it at all costs.

Your next question comes from the line of Keith Johnson with Morgan Keegan. J. Keith Johnson - Morgan Keegan & Company, Inc.: I was trying to get an idea of what liquid asphalt prices did on a sequential basis? And I apologize if I missed it from your discussion earlier going from the 2Q this year to 3Q?

The liquid asphalt costs in the third quarter were -- they averaged about $463, $464 a ton. In the second quarter, they averaged about $478 a ton, give or take a little bit. J. Keith Johnson - Morgan Keegan & Company, Inc.: Earlier in the call, you talked about the differential in pricing on the stimulus-related contracts. That was a lot more competitive when there were bids or the price points are a lot lower.

At least the first wave of those contracts when bid back in the mid to late 2009 when housing and private non-res looked so gloomy and the regular Federal Highway Program was virtually in limbo, it was in that period that bidding got aggressive. J. Keith Johnson - Morgan Keegan & Company, Inc.: Is there a way you could maybe shed some color and if you looked at your volumes how much you're kind of tied? I know you cover a lot of geographic areas, a lot of contracts. But how much potential you're tied to stimulus-related projects versus non-stimulus?

We don't track it that way and I don't think all stimulus-related projects for us were at lower pricing at all. It just goes market by market. And there are some projects were, for various product mix reasons, we wanted to make sure we got the work and so we bid some of those aggressively. I think there's some of those in Texas, but they are working their way through the system. I can't tell you today how many still have work to go on them, but I think over time, the shift away from those early stimulus projects will be beneficial to price, if there are reported pricing. To quantify that, I can't. But the trend will be, I think, improved.

With no further questions in the queue, I would now like to turn the call back over to Mr. Don James for any closing remarks. Sir?

Well, thank you very much for your interest in Vulcan. We will be back with our fourth quarter and full year press release, I believe, in early February. We look forward to talking to you then. Thank you so much. Have a good day.

Thank you for your participation in today's conference. This conclude your presentation. You may now disconnect and have a great day.