Vulcan Materials Company
Q1 2008 Earnings Call Transcript

Published: 6 May 2008

[Operator:]

Good day, ladies and gentlemen, and welcome to the Vulcan Materials' first quarter 2008 earnings conference call. My name is Lacy, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Don James, Chairman and Chief Executive Officer. Please proceed.

[Donald M. James:]

Good morning. Thank you for joining us for this conference call to discuss our first quarter results and our outlook for the remainder of 2008. I'm Don James, Chairman and Chief Executive Officer of Vulcan Materials Company. We appreciate your interest in Vulcan and we hope our remarks and dialogue will be helpful to you. A replay of this conference call will be available later today at our website. Joining me today is Dan Sansone, our Senior Vice President and Chief Financial Officer. Before I begin, let me remind you that certain matters discussed in this conference call contain forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Descriptions to these risks and uncertainties are detailed in the company's SEC reports, including our most recent report on Form 10-K. Forward-looking statements speak only as of the date hereof and the company assumes no obligation to update such statements. Vulcan's first quarter financial results reported yesterday after the market closed include net sales of $772 million and EBITDA of $160 million. Net sales increased 23% from the prior year's first quarter due to the inclusion of Florida Rock. The prior year's EBITDA was a $199 million, which included $43 million from the gain on sale of real estate in California in last year's first quarter. Earnings per diluted share were $0.13 versus $0.91 in the prior year's first quarter. Of course, the prior year's first quarter results included $0.26 per diluted share referable to the sale of the California real estate. The earnings in the current year include a $0.06 per share non-cash charge or deprecation and amortization attributable to the write-off of Florida Rock's assets to fair market values under the purchase accounting rules. We had included a summary table in the body of our press release, which highlights the major changes from the prior year's first quarter to the current year, which we hope will help you to analyze the changes. The economic environment in which these results were achieved was certainly challenging. Housing-related construction has continued to weaken and the credit crisis has begun to affect some private non-residential construction end markets. We are pleased with the resiliency of pricing for all of our products. All major product lines achieved higher pricing compared with the prior year's first quarter in spite of weaker demand. We remained focused on positioning our business to benefit from a recovery in demand by effectively managing our cost structure, fully developing the operational and cost synergies from the Florida Rock acquisition and continuing to add reserves in key higher growth markets. Before I move into specific comments regarding consolidated first quarter results, let me remind you that the current year's first quarter results include Florida Rock, and of course, the prior year results do not. Historical comparison for Vulcan's and Florida Rock's legacy businesses are increasingly difficult, because we have rapidly restructured and integrated the combined businesses into five of Vulcan's eight divisions. The operations in Georgia and Tennessee we divested on April of the 11th as a result of Hart-Scott-Rodino review are included for the full quarter. The operations in Virginia we divested in late March are included for the period that we owned those operations. Generally, from an operational standpoint, our businesses performed well in the first quarter, in light of the much lower volume. Aggregates net sales increased 1% to $490 million. Aggregates EBITDA approximated the prior year's first quarter, as higher pricing offset the earnings impact due to lower volumes. Aggregates pricing increased 9%, with all major markets realizing price increases from the prior year. Aggregates shipments in most legacy Vulcan served markets saw double-digit volume declines when compared with the prior year's first quarter. Overall, shipment levels declined 4% after inclusion of Florida Rock's volumes in the quarter. Certain markets such as Texas and along the Gulf Coast are benefiting from large industrial construction projects, which were contributing to growing demand. Other markets in California, Florida and Mid-Atlantic states were negatively affected by weakness in construction activity, particularly in housing and Aggregates shipments in our Midwestern and Mid-South markets were adversely impacted by snow and unusually weather conditions, particularly late in the quarter. Unit production cost of sales for aggregates and legacy Vulcan operations increased approximately 12% from the prior year's first quarter, due mostly to higher energy-related costs and the impact on lower production volumes. During the quarter, we drove production levels downward to match the lower level of demand. We also saw a sharp increase in energy costs in the quarter. Our plant managers did an excellent job of managing costs in the quarter despite these upward pressures. If energy and the earnings effect from lower production volumes are excluded, their cost reduction efforts resulted in flat year-over-year unit cost of sales for aggregates. These results demonstrate the flexibility of our aggregates plants and our management teams to adjust production levels relatively efficiently to match market demand. Diesel fuel prices or costs, that is, unit cost for diesel fuel increased 53% from the prior year, lowering earnings approximately $12 million. While cash fixed costs related to aggregates production were slightly lower than last year's quarter. Earnings for the asphalt and concrete segment increased from the prior year's first quarter due to the acquisition of Florida Rock. Material margins in these product lines have been under pressure due to higher cost for asphalt and internally supplied aggregates, as well as weaker volumes. However, higher prices in these product lines were realized versus the prior year and we remain encouraged by our price resiliency in the context of weaker construction activity. Asphalt prices increased 3% from the prior year, that is asphalt mix prices. We were not able to move prices up fast enough to offset a 25% increase in the average unit cost for liquid asphalt and the higher cost for aggregate supplied internally through our asphalt plants. The average concrete selling price including the legacy Florida Rock operations increased approximately 4% from the prior year's first quarter. The earnings effect of lower volume and the higher cost for key raw materials such as cement and internally supplied aggregate more than offset the price increase. Fixed costs in the asphalt and concrete segment were down over 5% in the quarter, as our managers aggressively focused on costs. Selling, administrative and general expenses in the current year were $93 million versus $74 million in the prior year's first quarter. Legacy Vulcan SAG expenses were $3 million lower than last year's first quarter, but were more than offset by the inclusion of the legacy Florida Rock operations, which accounted for all of the year-over-year increase. As a percent of net sales, consolidated SAG costs were 12% compared to 11.8% last year. Interest expense increased approximately 37 million from prior year's first quarter due to the additional borrowings to fund the acquisitions of Florida Rock. Our outlook for 2008 is subject to a great deal of uncertainty, with respect to both the economy and the turmoil in the financial markets. We are seeing a prolonged and severe downturn in residential construction. We also see weaker macro data for contract awards and other end markets. In addition, we see the impact of higher cost for construction inputs and the effect of increasing energy-related costs. In the first quarter, we were able to reduce operating hours and hold cash fixed costs flat. We will continue to evaluate costs in all areas in order to ensure that costs are aggressively managed in light of weaker demand outlook. We continue to expect improved pricing for our products to help offset these higher costs. Leading indicator such as contract awards project a continuation of the significant decline in residential construction as well as some weakness in other end markets. In Vulcan served markets, we now expect aggregates demand for residential construction in 2008 to decrease approximately 27% from last year's levels. This decrease is indicative of further weakness that materialize in the first quarter of '08 and compares unfavorably to the roughly 15% decline we forecast at the end of 2007. Certain categories of non-residential construction are also expected to weaken during 2008. These subcategories include stores, retail and institutional construction projects, which are more closely related to the level of residential construction activity and comprise a large percentage of the overall non-risk category of construction. Large industrial projects in Texas and along the Golf Coast should mitigate some of this weakness in Vulcan served markets. Highway and infrastructure construction continues to be steady. However, the costs of construction inputs such as liquid asphalt and diesel are consuming a larger proportion of highway and infrastructure construction dollars compared to aggregates. As a result, we now estimate full year aggregate shipments including legacy Florida Rock operations for the full year to be flat to up 4% versus the prior year. We expect relatively stronger shipments in the second half of 2008 than in the first two quarters. A pricing environment that recognizes the higher cost of replacing reserves has been instrumental and helping us to achieve price improvements by lower volumes. Additionally, aggregates production continues to be burdened by increasing cost for energy-related and steel-based materials. Pricing momentum we achieved in 2005 and 2006 continued in 2007. In 2008, we believe this momentum will continue resulting in price improvements of approximately 8%. We expect to achieve this overall average price improvement in spite of relatively lower shipments in our higher price markets, particularly Florida and California. Overall, we expect a 10% to 15% increase in aggregates segment earnings in 2008. Asphalt mix and concrete segment earnings should be 10% to 20% higher in 2008, due to the inclusion of earnings from Florida Rock's concrete segment. Total concrete volumes for the company in 2008 should be in the range of 7 to 7.3 million cubic yards. The average unit price for asphalt mix and concrete should increase in 2008 and partially offset cost increase for key raw materials, including liquid asphalt, cement and internally supplied aggregates. For the reasons indicated, we now expect consolidated EBITDA for 2008 to be in the range of $1.170 billion to $1.260 billion. Consolidated earnings from continuing operations should be in the range of $3.85 to $4.35 per diluted share. This 2008 earnings outlook includes $76 million of EBITDA and $0.41 per share of diluted earnings referable to gains related to the two divested properties that were owned by Vulcan, prior to the acquisition of Florida Rock. The integration of Florida Rock is proceeding, as planned, and will help make Vulcan a stronger and more diversified organization for the future. We expect an annual synergies level of $50 million to be achieved by the end of 2008. These savings are being realized operationally and through overhead reductions. Our ability to serve our customers effectively in certain markets will be enhanced and the strategic assets received in exchange for the divestitures required by the Justice Department will add to our capability. We applied a rail-connected quarry to add production capacity and over 20 million tons of critical reserves to the Greater Sacramento market, where the California Geological Survey estimates they are less than 10 years of permitted reserves to serve that market. We acquired two quarries in Virginia, along interstate highway 81 in the Shenandoah Valley, with over a $130 million tons of reserves that complement our existing operations, but serve markets that we could not reach effectively from our existing points. In San Antonio, we added over 85 million tons of valuable permitted reserves to our existing 1604 quarry. In the first quarter, we also acquired a quarry in the western suburb of Chicago, with a 185 million tons of reserves, as part of our 1031 exchange to deferred cash taxes on the divestiture of properties from the Florida Rock transaction. Early in the second quarter, we acquired a quarry outside of Los Angles, with a 159 million tons of reserves, which we also included in our 1031 exchange. Both of these were stock transactions. In addition to these strategic assets, we will use the 240 million of cash proceeds to receive this part of the transactions to reduce debt. During the first quarter, we received a 10 million annual earn out payment related to the sale of our chemicals business back in 2005. In closing, I would like to reiterate our confidence and future sales and earnings growth for Vulcan. Our construction materials businesses have generated good results during times of weaker demand for our products and much better results as demand improves. The foundation of our confidence is the strategy we've employed to establish an aggregates focused business that has the great advantage of strategic locations in major U.S. markets, expected to experience above average growth in aggregates demand for many years into the future. Summarizing the key attributes of our aggregates focus business and how this strategy benefits Vulcan and its shareholders, our 2008 results should benefit from the following attributes. Aggressive management of our controllable costs, a diversified regional exposure, increasing value of permitted reserves in fast growing metropolitan markets and the broad use of aggregates in downstream products and diverse end markets, including relatively stable demand from public funding or multi-year construction projects are typical, and a strong and consistent focus on cash generation. Beyond 2008, we remain optimistic about state and federal leadership to fund transportation and infrastructure construction. As an example, California's needs for additional spending on infrastructure is well documented and the governor and state legislator have put in place continuous strategic growth plan which currently contemplates over a $140 billion for infrastructure construction, with over $200 billion being in the overall long-term plan. The debates in Washington over fuel taxes and infrastructure spending places increasing focus on our nation's need for improved infrastructure and a sound system to finance those needs. We believe that debate is healthy for industry and our company, as well as our country and will ultimately lead us to a more dynamic and soundly finance public infrastructure program. We thank you for your interest in Vulcan. Now, our operator will give you the required instructions. We will be happy to respond to your questions. Question And Answer

[Operator:]

[Operator Instructions] And our first quarter will come from the line of Ajay Kejriwal with Goldman Sachs. Please proceed.

[Ajay Kejriwal:]

Good morning, gentlemen.

[Donald M. James:]

Good morning, how are you?

[Ajay Kejriwal:]

Good. Thank you. Maybe just to start with, on pricing in the quarter 9%, could you clarify how much of that is due to the high priced Florida Rock stone, and if you could, how much was the pricing on the legacy operations?

[Donald M. James:]

Legacy op… from the price increase in legacy operations was approximately the same, as the overall price increase. Of course, you know, many of the Florida Rock operations are northern Florida, so that pricing was more typical of Vulcan overall. Certainly, the price increases in Florida were among the highest we achieved in the quarter, but, as you know, the volume in Florida is weak, and so the impact of Florida pricing on the overall price mix was very small.

[Ajay Kejriwal:]

Got it. So, maybe if you could help us with some geographic color, Florida was much higher, but what about California?

[Donald M. James:]

California price increases were not nearly as robust as in the prior six or seven years, as you can imagine, particularly in southern California. Demand was weak in the quarter. The Caltrans projects and the public infrastructure projects that are included as part of the infrastructure program are just beginning to roll out, and so the volume impact from those projects which we hope will offset the weakness in residential and private non-res were certainly not significant in the first quarter, but should increase and be visible by the end of the year. But we had, as I said, price increases all across our footprint. We didn't have any markets where pricing did not increase. Florida was among the higher and California was among the lower regions in terms of price increase.

[Ajay Kejriwal:]

Got it. Maybe moving to volume, and if you could help us understand, what volume did in California? Cemex couple of weeks ago mentioned that volume was down about 25%, so wondering how volume did for you in California?

[Donald M. James:]

Well, volumes are all over the board. Our Gulf Coast markets were up 57%. Now, that's coming, as you know, we added production capacity at our CALICA quarry and added a ship which came in service in mid-year '07. That market is booming. We are.. our entire shipping capacity including our new ship is fully committed for the year and volumes in Texas, the Texas Gulf Coast and the entire Gulf Coast including Louisiana, Mississippi and Alabama are booming. Texas generally is booming, and our volumes there were up over 25% in the quarter. Our volumes were down most significantly in the cold weather sort of central markets that is the Midwest and the Upper Mid-South markets, where we had volume decreases in the plus or minus 40% range, due significantly to bad weather, but we also believe the demand has slowed there to some extent. In California, our volumes are off, but probably in the 25% range… 20% to 25% range in California and that's varies substantially by market in California, but overall about a 20% to 25%.

[Ajay Kejriwal:]

Show good color there. Maybe moving to your guidance, wondering what's baked in, in terms of your end market expectations, you've provided good color on residential outlook, but just in terms of what you're thinking volumes for highways and non-res?

[Donald M. James:]

Well, in terms of aggregates tones as opposed to aggregate revenues , we are… we currently see highway is being down about 7% year-over-year, something in that range, other infrastructure projects about 5% and then buildings probably in the 6% to 7% range down. So, and that's really based on as much on construction award data that just come in, in the last quarter. We're seeing some weakness we think, a lot of the weakness and again this is in units and not revenue dollars, as construction input costs go up, the same number of dollars are going to buy newer funds of aggregates, and that's we are seeing that. But we believe we will continue to get price increases, so the revenue trends from these end markets will be relatively stable other than residential.

[Ajay Kejriwal:]

Thank you. I appreciate it.

[Operator:]

And our next question will come from the line of Garik Shmois with Longbow Capital Research.

[Garik Shmois:]

Hi, good morning, gentleman.

[Donald M. James:]

Good Morning.

[Garik Shmois:]

Just wondered if you can expand a little bit on your comment with respect to volumes on the second half of the year growing relative to the first half, is that… is your expectation of year-over-year improvement in the second half on volumes or is it just relative to second half--?

[Donald M. James:]

It's relative. We see the first half being relatively weaker against prior year's first half than the second half. We don't expect volume to increase second half over second half, but we don't think the decrease will be as great second half over second half as first half over first half. And that's based on, strong reduction in the rate of decline, particularly in some end markets.

[Garik Shmois:]

Okay. Can you care to expand on which end markets, you could expect the rate of decline to soften a little bit?

[Donald M. James:]

Well, I believe that highways and public infrastructure ought to be better in the second half, housing is anyone's guess, and then the whole non-res, we think the industrial construction particularly in the Southeast and the Gulf Coast is going to continue to be very strong and grow, but retail, buildings it will probably soften. We've seen a number of large retailers, like Home Depot and others have announced a slowing of the number of new stores they are building, and that's probably showing up in the end markets contract award data.

[Garik Shmois:]

Sure. And, can you talk a little about diesel, and are you seeing perhaps a change in the distance that you're willing to ship or competitors willing to ship, based on higher diesel costs. Has that changed perhaps over the several last months and does that impact perhaps your pricing strategy?

[Donald M. James:]

Well, certainly, it… at the end of the day, the delivered cost of aggregates tends to be what matters to customers and I think as the much, much higher cost for diesel fuel has occurred, the shipping radius for trucks or quarries tends to shrink. The railroads are charging higher rates to offset the higher diesel fuel costs they are consuming and even with barge and ship shipments, the ships are dramatically more energy efficient than any other means of aggregate transportation. But even there, I think, the cost of energy have a certainly a very significant impact on the delivered cost of aggregates and that makes a difference in how far people are willing to move.

[Garik Shmois:]

Do you see an opportunity there, giving your--?

[Donald M. James:]

Certainly, we've said before that that it is one of the reasons that we are able to get price increases in a weaker market just because the shipping radius is diminished.

[Garik Shmois:]

Okay. Thank you very much.

[Operator:]

And our next question will come from the line of Jack Kasprzak with BB&T Capital. Please proceed.

[Jack Kasprzak:]

Hi, good morning, Don.

[Donald M. James:]

Hi, Jack, how are you?

[Jack Kasprzak:]

Thanks, yourself?

[Donald M. James:]

Good.

[Jack Kasprzak:]

I wanted to ask with regard to the comment on credit market issues and effects those issues are having on construction, and did you guys… are you guys actually seeing projects that you thought the customers are telling, you're going to go ahead being delayed or canceled, I mean, was that a more mediated impact here in the last few months?

[Donald M. James:]

No, I think our comment is based on macro data, just tightening of credit standards and then some on reduction in consumer confidence and seeing that playing out in the announced retail construction program of many big retailers. So, I think the financial market impacts have a lot to do with consumer confidence. They have a lot to do with tightening credit standards. But in terms of seeing individual projects being canceled, that's not he bases of our comment. Our comments are based totally on the macro outlook that we are seeing in terms of construction awards and lending standards in the announcements of other company.

[Jack Kasprzak:]

Okay.

[Donald M. James:]

But not seeing projects that we had booked or planned on actually being canceled in our market.

[Jack Kasprzak:]

Okay. Also you mentioned that the $10 million earn out related to chemicals business, but that did not affect Q1 '08?

[Donald M. James:]

No, that's in discontinued operations.

[Daniel F. Sansone:]

Jack, there is no earnings impact of that, that has been anticipated, so it was just a cash flow benefit.

[Jack Kasprzak:]

Okay. I just wanted to clarify that.

[Donald M. James:]

Yeah, and that will flip over into earnings from discontinued ops once we… probably in…

[Daniel F. Sansone:]

Probably in '09.

[Donald M. James:]

Yeah, and then continuing for few years after that.

[Jack Kasprzak:]

Okay. And I wanted to ask to maybe for Dan, update if you could on '08 CapEx, D&A and interest expense?

[Daniel F. Sansone:]

DD&A for 2008 will be in the neighborhood of $395 million. CapEx will still be at… Cash CapEx will still be at the $485 million number we indicated previously. That excludes, of course, the two acquisitions that Don referenced in his prepared remarks. Those acquisitions were funded through the issuance of stock, so there will be no cash requirement for those two deals. And the interest expense for the year will be in the $185 million to $190 million range and that does anticipate that we term out another $600 million to $800 million of… or convertible $600 million to $800 million of short-term debt to long-term debt about the middle of the year.

[Jack Kasprzak:]

Okay, great. Thanks very much.

[Operator:]

And our next question will come from the line of Chris Manuel with KeyBanc Capital Markets.

[Christopher Manuel:]

Good morning, gentlemen.

[Donald M. James:]

Good morning, Chris.

[Christopher Manuel:]

A couple of questions for you. First, could you give us an update on the Lake Belt and the situation down there?

[Donald M. James:]

Well, at this point the 11th Circuit Court of Appeals in Atlanta has not yet ruled. We would not be surprised to see a ruling any day now. The other piece of that is the Army Core of Engineers permit. I believe that the Core of Engineers website indicates that their environment impact works… supplemental environmental impact statement would be released in sometime in May. I don't know whether that's still a good date or not. But at this point, most of the quarries are still operating at full throttle. The ones that are limited are the Vulcan quarry, the Titan quarry and one of the White Rock quarry. So, at this point, we are still in the same status we have been since last year and we are waiting on a ruling to see where we go, it's our outlook for the full year assumes in essence simply no change from the status quo. We believe there will be a change from the status quo, but it would be very difficult for us to predict what that would be in terms of earrings impact for the full year. But, so, it really is as negative for us today, as it can be, in the sense that we are limited, while others are not, at this point.

[Christopher Manuel:]

Okay, that's helpful. The other questions I had were with respect to I really would say were stop transactions, the one in Chicago and the one out in California.

[Donald M. James:]

Yes.

[Christopher Manuel:]

As well as, then you did an asset swap with Mark Marietta. Could you give us a stance as to valuations as multiple say of EBITDA for the acquired and divested property?

[Donald M. James:]

We have done some numbers in the… depending upon what you include, the range of EBITDAs for the divested properties for the last 12 months is 10.5 to 11, if you go back to the EBITDAs, at the time, we bought them from Florida Rock, the multiple we got was up in the 14 range. So, we were pleased with the outcome. These are great quarries. They are wonderful assets and I know that Martin Marietta and Luck and Frank Foley then in Columbus, Georgia have gotten very good assets and will do well and we were very pleased with the properties we got in exchange plus cash proceeds.

[Christopher Manuel:]

And then the other two stock transactions?

[Donald M. James:]

Yes, I don't have that information in front of me.

[Christopher Manuel:]

Okay.

[Donald M. James:]

I don't have that, I am sorry.

[Christopher Manuel:]

Okay. That's fine. But I am guessing it won't be material different?

[Donald M. James:]

I don't know that. I just don't have it. I don't have the…

[Christopher Manuel:]

No problem, I'll follow backup.

[Donald M. James:]

Okay.

[Christopher Manuel:]

And then one question for you, with respect to the financing, I think you said you anticipated a mid-year type of term out for the rest of that, for another slug of that debt. Have you seen any change with respect to what do you think rates were either worst or better? I know we have had a couple of cuts in interest rate, but yet credit markets have got worst, can you give us an update there as to how you anticipate that playing out?

[Donald M. James:]

What we've been seeing in the last few weeks is a general improvement in the receptivity of the investment grade bond market to new issuances. We are seeing generally more liquidity than we had seen earlier in the year. We are seeing the longer end of the yield curve creep up and we are seeing a little tightening of spreads. I am not sure that it's translating into meeting for your lower rates, but fortunately as the back end of the yield curve has crept up, we have seen a bit of tightening in spreads. So, we are not looking at a dramatically different all in costs than we were contemplating few months earlier. But we do, as of this week, feel very good about the liquidity in the market and the ability to place this debt and one of the areas where that has been coming through is that the new issuance concessions or the new issuance premiums have been coming down a little bit. So, all in all, assuming the wheels don't fly off, we are cautiously optimistic that we will have a fairly smooth offering when we do go to market.

[Christopher Manuel:]

Okay, perfect. That's all I have. Thank you very much gentlemen.

[Operator:]

And our next question will come from the line of John Fox with Fenimore Asset Management. Please proceed.

[John Fox:]

Thank you. Good morning, everyone.

[Donald M. James:]

Hi, John.

[John Fox:]

I got a number of questions. First, Don, your answer to the last question that 10.5 to 11, was that the multiple of EBITDA on the properties exchanged with Martin?

[Donald M. James:]

That was the total package of all properties exchanged. That included some properties from Luck Stone.

[John Fox:]

Okay. But that was a multiple EBITDA, not the EBITDA itself?

[Donald M. James:]

Correct, yes, multiple.

[John Fox:]

Okay. And then for the guidance for this year, the base level for shipments, is that the 231 for last year?

[Donald M. James:]

Yes.

[John Fox:]

Okay. So, we would be--?

[Donald M. James:]

And John one of the… I've said earlier in response to another question that the question was that we expect volumes in the second half to be higher than in the second half of last year and on legacy, the answer to that is no combined Vulcan, the answer is yes, we expect volumes to be higher in the second half of the '08 than in the second half of '07.

[John Fox:]

Right due to the inclusion of the Florida Rock asset.

[Donald M. James:]

Correct.

[John Fox:]

Right, I got that. Okay. For Dan, given if things go according to plan, would you say that, what would be the debt level at the end of the year?

[Daniel F. Sansone:]

Our current projections indicate that we will by the end of the year achieve approximately a $200 million debt reduction from year end 2007, which was right at above $3.7 billion of debt at year end '07.

[John Fox:]

And that's with--?

[Daniel F. Sansone:]

$400 million.

[John Fox:]

Okay. Thank you. And I was just curious about, if you could comment on highway funding and lot of noise about gas tax holiday and different things? And if you could just talk about your appropriations and what do you look to see for highway funding in 2009?

[Donald M. James:]

Right. I think the key issues are things that are being debated and are pending in congress right now. One is the projected shortfall in the Federal Highway Trust bond for the '09 fiscal year and it's about $3.7 billion or so which is the projected shortfall.

[John Fox:]

Right.

[Donald M. James:]

As you are aware, there is a federal aviation reauthorization bill is in the senate, attached to that is a made whole appropriation for the highway trust fund for the '09 fiscal year. That bill is tied up in some debate over some various and sundry taxes that are unrelated to the highway trust fund that are in there.

[John Fox:]

Okay.

[Donald M. James:]

But there is a commitment by Congress to fill that void, or projected void, in the highway trust fund for '09. We are, I think, reasonably optimistic that that problem will get solved. The every billion dollars of highway funding at the federal level generates 35,000 to 45,000 jobs and I think that's a… in addition to the great need for infrastructure improvements, that's very sensitive in Congress. So, we don't foresee that as being a problem, if it is a problem, it is a matter of timing and it maybe that state DOTs until that hole is plugged or sitting on some contracts and that is probably one of the reasons that we are seeing a little bit of weakness in highway contract awards over the last 3 to 6 months, but we think that one will be okay. The other issue that's going on is the gas tax holiday. We obviously view that as being very poor public policy for a whole lot of reasons even beyond our own economic self interest, it just doesn't make sense. The projected impact on an average consumer is very low and there is a big question as to whether they would ever actually see a reduction in gasoline prices or fuel tax reduction. Our information is that leaders in the both House and the Senate have no interest in that and it's right now [inaudible] something that presidential candidates get to debate about on philosophical basis, but there is not any legs to it, but we are encouraged that even though let's say that the gasoline tax should be suspended or also coming back and saying whatever impact that would be on the highway trust fund balance which is projected to be in the range of $10 million would need to be restored out of other funds. So, we don't think even if that holiday is passed, that it will ultimately affect the highway trust fund. The third big issue is reauthorization, which would begin in FY 2010.

[John Fox:]

Right.

[Donald M. James:]

The report of the commission which the last time bill authorized is come out, I am sure you read it, but it is calling for dramatic increases in pubic infrastructure spending, particularly highways. We also note with some interest, the growing coalition of state and local government leaders that is bipartisan, it has Governor Schwarzenegger, it has Governor Rendell from Pennsylvania, have Mayor Bloomberg and they are basically saying, we have dramatically underspent on public infrastructure spending. This has to change. It should no be a political football, and so we think there is a growing consensus among state and local government leaders and very high profile leaders, like the three I mentioned, to change the mindset, particularly in the White House about what public infrastructure spending also look like in the next six year bill. There is a lot of work to be done, a lot of analysis to be done, but we are… I think, we are bullish on the ultimate outcome and as painful as it is to pickup the newspaper and read about our presidential candidate proposing to spend the gasoline tax, it is forcing the debate and it is forcing the issue in Congress and that is, we think that is ultimately positive.

[John Fox:]

Okay. Thank you very much.

[Operator:]

And our next question will come from the line of Trey Grooms with Stephens Inc. Please proceed.

[Trey Grooms:]

Good morning.

[Donald M. James:]

Good morning.

[Trey Grooms:]

Could you guys give us a little bit more clarity on the guidance as far as volume, like you gave us in February where you breakout legacy Vulcan and then with Florida Rock, I understand what with Florida Rock is, but can you break it out what just legacy Vulcan expectations will recognize?

[Donald M. James:]

I can do that for the first quarter and legacy Vulcan volume were down about 18%. Legacy Florida Rock volumes including the divested quarries for the first quarter were down something like 27% in aggregate volume. As we go forwarded that becomes increasingly a murky, because we are moving volume to the most efficient quarry location, and so the difference between legacy Florida Rock and legacy Vulcan has essentially gone away. Recall every Florida Rock operation was essentially a bolt-on operation to existing Vulcan operations and part of the synergy and the transaction is particularly in a time of very hard diesel fuel cost is optimizing the source of material to customers and project to minimize the transportation costs and that's by barge, by rail, by truck and by ship, all of which were implicated between the Vulcan and Florida Rock ingredients. Clearly, Florida volumes, we expect the state of Florida both legacy Vulcan and legacy Florida Rock volumes, we project to be weak throughout 2008. So, overall, it will be increasingly difficult for us as quarters go on to say, legacy volume was up or down. We can do it from individual quarries, but the problem is, we are making conscious shifts to move volume back and forth and that complicates or makes the analysis far less reliable.

[Trey Grooms:]

Okay. And them just one other question, with the run up of diesel that you guys have talked about quite a bit, that's impacting you guys, the 8%, you have brought your guidance, the pricing guidance to just more of a finite 8%. Does this assume any additional price increases, maybe mid-year or something to help offset diesel or are all those price increases already in place?

[Donald M. James:]

There will be some price increases. As we have said before at Vulcan, we do pricing by product, by customer, by quarry, and not some overall price increase at some point in the year. There will be price increases that will take effect throughout 2008. They are not all in place at this point. We don't… typically Vulcan does not provide the truck transportation. For our aggregates, we do that only in a couple of markets. So in that respect, we would not have any sort of surcharge. Certainly, we provide barge transportation and ship transportation and we typically would not have a fuel surcharge but would have an adjustment as those costs change and the rail movements often times will have a fuel surcharge from the railroads and we would work that out on a case-by-case basis with our customer.

[Trey Grooms:]

Okay, thank you. And I just have one last question and I apologize if I missed this. But on the acquisitions that you talked about on the call, not related to the Florida Rock divestitiures and swaps, what kind of impact, if any, do you expect from these acquisitions in the year, and is that I guess in your guidance as well?

[Donald M. James:]

It is in our guidance. There will be additional aggregate volume from those operations. They were not… and I think this is an important point, while those two transactions were not a part of the swap with Martin Marietta or Luck Stone per say, they were done as part of the overall 1031 transaction which allowed us to defer gain on the disposition of the quarries by reinvesting the proceeds in other quarries and that's… so in that sense, they were part of a larger transaction.

[Trey Grooms:]

Okay. So, if I understand that right, so they were part of the $0.41 that you guys already talked about?

[Donald M. James:]

The $0.41 is just the two operations that were divested that were legacy Vulcan operations.

[Trey Grooms:]

Okay. I got you.

[Donald M. James:]

Yeah, the Florida Rock operations were pursuant to purchase accounting, were written-off to whatever we sold them for [ph]. So, there will be no gain or loss on the disposition of legacy Florida Rock operations.

[Trey Grooms:]

Got it. Thank you.

[Daniel F. Sansone:]

Where the effect of the inclusion of the two acquisitions, the one in Illinois and the one California, have an effect is really in the cash taxes that are paid. It shows up more in the cash flow schedule and not in the income statement, because it is allowing us to differ some of the gain on disposition of the nine operations that we had to sell. So, we are not paying as much cash tax on those tax gains and that's where the effect really, really manifested. So, in the entire mix of acquisitions and divestitures by employing the 1031 exchange, we have already differed approximately $30 million in cash tax savings and we still are teeing up additional properties to match against some of that and will have additional cash tax savings. That's all embedded in the debt reduction guidance that I gave earlier.

[Donald M. James:]

And for those of you who have followed Vulcan over a longer period of time, you realized we are far more focused on cash flows than accounting earnings and so we have tried to structure the transactions in a way to maximize the cash benefit and not the accounting results.

[Operator:]

And our next question will come from the line of Aynsley Lammin with Citi. Please proceed.

[Aynsley Lammin:]

Hi, good morning.

[Donald M. James:]

Good morning.

[Aynsley Lammin:]

And could you just first one, if you just comment a bit on the kind of cement market in Florida and your expectations for volume and prices this year? And if you could just remind us of the annual capacity you got in cements and the expansion plan. I think it was just the plant in Newberry 2009 coming on, if you can just confirm that. And then secondly just kind of returning back to the aggregates, your expectations of the margins in the aggregates business, is the increase in process you are seeing. Are they just enough to offset the cost or would you expect some margin expansion in the aggregates segment this year as well?

[Donald M. James:]

I'll address the cement question and ask Dan to comment on the margin question. We have about 850,000 tons of domestic production capacity at the Newberry plant. The second phase of that plant will come on stream probably by the end of the first quarter of 2009. Cement production and consumption in the state of Florida now is affected by the dramatic reduction in imports. The increase in production capacity for the domestically produced cement and the decline in the demand have so far been, I think in reasonable balance. There are, as our additional 850,000 tons of capacity coming on at the end of first quarter '09 with a couple of other plants that will add to capacity in Florida will in all likelihood create some excess capacity at current levels of demands. Hopefully current levels of demand in Florida are not permanent they will begin to recover in 2009, 2010 timeframe, but the reduction is supply has come largely come from imports. But the… but I think it's a fair conclusion that the new capacity coming on stream given the current level of demand will create excess cement capacity in Florida. Certainly some of that capacity is now being shipped outside the state. And that will certainly continue as well. Dan can get to your margin question.

[Daniel F. Sansone:]

The margins that we see for cement are on a cash margin basis, which would exclude the effect of many of the step up and depreciation charge. As a percent of revenue or on a per ton basis, they are actually about flat with the 2007 comparable levels. And that had to do with the makeshift that Don mentioned and that being we are selling a lot less, imported cement on which we make a thinner margin and a bigger proportion of our cement sales are on produced cement. And so the mix affect is actually yielding roughly a comparable cash margin. Of course the growth profit margin, gross profit as a percent of revenues will be lower and a lot of that reduction is attributable to the step up in depreciation growing out of purchase accounting.

[Donald M. James:]

There was a county in earlier, question earlier about the impact of the cost of higher fuel prices certainly the cost of imported cement and Florida is affected not only by those higher fuel costs but also by the weakness of the dollar. So if you are buying Euro based cement, and importing it into Florida with higher fuel cost you can understand why the imports have been… the supply side that has gone away.

[Aynsley Lammin:]

Just one final one if you could just, and give an indication of the price of cements in Florida at the moment please?

[Donald M. James:]

No, it's plus or minus $100.

[Aynsley Lammin:]

Thanks very much. Thank you.

[Operator:]

And our next question will come from the line Timna Tanners with UBS. Please proceed.

[Timna Tanners:]

Hi good morning.

[Donald M. James:]

Good morning Timna.

[Timna Tanners:]

I wanted to ask you a little bit more about what your backlog tells you, just how much visibility do you think it provides currently?

[Donald M. James:]

I don't think there is any inconsistency with our backlog and our outlook. We don't… backlog for us is limited to large projects. We are typical smaller project things are not done by long-term contract they may begin and end in a three month cycle. So we wouldn't have a contractual backlog say for things that might go into the third or fourth quarter of 2008. But for the large projects we have more visibility and only industrial projects. I think things are more robust now than they have been in the past and I mentioned particularly things that relate to energy projects, that is refineries and LNG facilities and that relate to heavy manufacturing things like rail cars and automobiles that are increasingly being manufactured in the South-East and the steel, growth in steel business to supply those automobile and rail car facilities, there is very good visibility there. There is almost no backlog based on residential construction, there never is and that's just done on almost spot basis. Highways, large highway projects do have some visibility and we are, I think, we are well positioned there and are confident as I said in our prepared remarks, about the stability of demand for highways.

[Timna Tanners:]

Okay, great and then just the other question I had with on non-energy related cost. If you could give a little bit more color on the impact of higher explosives in steel costs for you?

[Donald M. James:]

Well, explosives are derivative of natural gas and so they have moved up with natural gas prices. We consume steel in the crushing process and certainly steel prices are up. But the big impact on our cost in the first quarter, were not those items. It was primarily diesel fuel and the fixed cost absorption impact of lower production volumes. Other than those two items, we had very good cost performances in the quarter. Dan, do you have any additional information to attend [ph] this question?

[Daniel F. Sansone:]

Drilling and blasting costs did rise, probably in the neighborhood of 10% to 11% on a per unit basis and that again reflects the energy content embedded in those costs. But that's a relatively small proportional of our total cost of sale. So, it is not really moving the total cost picture that far out of whack. It's really the diesel and energy cost that are the most dramatic.

[Donald M. James:]

And the real opportunity for us on the cost side is labor efficiency and productivity and cash period cost management, both of which we think our guys did a really good job on the first quarter and are very focused on the remainder of the year.

[Timna Tanners:]

Thank you.

[Operator:]

And our final question will come from the line of [inaudible]. Please proceed.

[Unidentified Analyst:]

Hi good morning gentlemen, I had just one question regarding price increase Martin Marietta in its press release mentioned some possible mid-year aggregates price, what do you think about that?

[Donald M. James:]

Well as I said in response to an earlier question we will have price increases for some products in some markets through out the year. At this note as I read the Martin Marietta press release that their first quarter prices increased something below 4% and they were projecting, I guess full year may be an 8% price increase, so I would assume from that that they expect to have some price increases throughout the year. At the end of the year we don't know where they will come out or where we will come out, but we are in substantially different markets then they are. So the overall pricing that we achieve and they achieve would be largely independent of each other.

[Unidentified Analyst:]

Thank you very much.

[Donald M. James:]

Thank you very much for your interest we look forward to talking with you at the end of the second quarter. We will see you then thank you so much.

[Operator:]

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day