Vulcan Materials Company (VMC) Q2 2008 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Second Quarter 2008 Vulcan Materials' Earnings Conference Call. My name is Channel [ph] and I will be your coordinator for today. At this time, all participants are in 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 conference, Mr. Don James, Chairman and CEO -- President, Chief Financial Officer. Please proceed.

Good morning. Thank you for joining us for this conference call to discuss our second quarter results and our outlook for the remainder of 2008. I'm Don James, Chairman and Chief Executive Officer of Vulcan Materials. We appreciate your interest in Vulcan; we hope our remarks and dialogue today 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; Bag Badgett and Ron McAbee, Senior Vice Presidents in our Construction Materials Business. Before I begin, let me remind you that certain matters discussed in this conference call contain forward-looking statement, which are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Descriptions of these risk 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. Moving now to the quarterly results; we reported our second quarter financial results yesterday after the market close. Those results included net sales with $966 million and EBITDA of $339 million. Our net sales increased 20% from the prior year second quarter, and our EBITDA increased 21%, despite lower aggregate sales volume. Earnings per diluted share were $1.27 versus $1.45 in the prior year second quarter. Higher energy related input cost accounted for approximately 25% of the total year-over-year decrease in earnings per share. Liquid asphalt which is produced from a barrel of oil and used to make asphalt mix which would sell, and diesel fuel used to operate our large mobile equipment accounted for most of this year-over-year decrease in earnings per share. The average unit price for liquid asphalt increased 60% from the prior year second quarter, and reduced our company earnings approximately $0.12 per diluted share. The unit average price pay for diesel fuel in our legacy operations increased 70% from the prior year second quarter, and reduced earnings approximately $0.09 per diluted share. Additionally the current year second quarter results include $0.34 per share referable to the gain on sale of quarry sites divested as part of the Florida Rock acquisition. While the economic environment in which these results were achieve is challenging, we remain focused on positioning our business to benefit from our recovery and demand, by effectively managing our cost structure, and capturing the operational cost synergies from integrating the Florida Rock assets and development. Before I move into specific comments regarding consolidated second quarter results; let me remind everyone that current year's second quarter results include Florida Rock, while the prior year results do not. Historical comparison for Vulcan's and Florida Rock's legacy businesses are difficult, because we have rapidly integrated and restructured the combined businesses into five of Vulcan's operating divisions. However we will continue to provide legacy comparisons throughout the current year where possible, if those comparisons will help you understand our results. Generally our business has performed well in the second quarter, notwithstanding difficult economic conditions in many key markets. Higher pricing, the inclusion of Florida Rock and our cost control initiatives, partially offset the earnings impact due to lower aggregate volumes and higher energy related costs. Aggregate EBITDA decreased approximately 60 million versus the prior year second quarter. The average price [indiscernible] the units sales price for aggregates increased 8% from the prior year second quarter. Total aggregate shipments declined 6% compared to the second quarter of 2007. Aggregate shipments in most Legacy Vulcan serve markets saw double-digit volume declines when compared with the prior year second quarter, except for markets in Texas and along the Central Gulf Coast where volumes increased year-over-year. These markets in Texas and along the Gulf coast are benefiting from large industrial and energy construction projects which are contributing to growing demand. During the quarter, we drove production levels down to match the lower level of demand. Our plant mangers did an excellent job of managing cost in the quarter despite the upward pressures due to higher energy prices and lower volumes. The results of their efforts will benefit our earnings when volumes begin to recover. Excluding energy related costs, such as diesel fuel and electric utilities, unit variable production cost in legacy Vulcan aggregates operations were relatively flat when compared to the prior year second quarter. Additionally cash fixed cost at Vulcan's legacy aggregate operations were approximately 14% lower than the prior year second quarter. These cost control results demonstrate relatively greater production flexibility, our aggregate plant managers are able to achieve, compared with most of other continuous process type manufacturing facilities. Earnings for the asphalt and concrete segment were equal to the prior year second quarter. Concrete earnings increased from the prior year second quarter due to the addition of Florida Rock's concrete operations. But asphalt earnings were lower verses the prior year, due principally to the higher unit cost for liquid asphalt. One of the bright spots in this quarter is our 4% increase in asphalt volumes. Asphalt prices increased approximately 8% from the prior year second quarter. However we were not able to move prices up fast enough in the quarter to offset the sharp increase in liquid asphalt costs. The average unit price paid for liquid asphalt at the end of the second quarter was 60% higher than the prior year second quarter and was 42%... I'm sorry, 26% higher than the unit price at the end of the first quarter of 2008. The rapid rate at which liquid asphalt prices escalated during the second quarter, have created a timing difference. With appropriate increases in average unit sales price for asphalt mix, we expect some of this timing difference to dissipate in the second half of 2008 if liquid asphalt prices remain at current levels. The average concrete selling price, including Florida Rock's operations, increased approximately 2% from the prior year second quarter. The inclusion of Florida Rock's operations more than offset the earnings effect of lower volumes from our legacy operations. Selling, administrative and general expenses in the current year second quarter, were approximately $85 million, versus $71 million last year. Legacy Vulcan SAG expenses were approximately $11 million lower than the prior year, but more than offset by the inclusion of the new Florida Rock operations. Also included in our second quarter SAG expenses, is $6 million of expense referable to the fair market value of donated real state. This donated real state had virtually no earnings impact, because the difference between the fair value of the properties and the carrying value of the properties are recorded as a gain on sale of property, plant and equipment. Interest expense increased to approximately $30 million from the prior year second quarter, due primarily to the financing related to the acquisition of Florida Rock. In June, we completed the planned issuance of long-term debt financing related to the Florida Rock transaction. As a result we added approximately $950 million of new long-term debt and reduced our short-term debt by a commensurate amount. Our business generates very good cash flows throughout the business cycle. Debt reduction and achieving target debt ratios remain a priority use of these cash flows. In summary, we achieved good second quarter results during this time of rapidly rising energy related cost, and weaker demand for our products. The aspects of the business which we can control, such as production and overhead cost were lower, versus the prior year if energy related costs are excluded. Our effectiveness at managing controlled cost coupled with price improvement, despite lower sales volumes, gives me confidence that we are executing well in a tough economic environment. Turning to our earnings outlook for the full year. We now forecast EBITDA of approximately $1 billion to $1.1 billion in 2008. This guidance reflects a slight increase in EBITDA in the second half of 2008, compared to the second half of 2007. Our outlook assumed diesel fuel and liquid asphalt remaining at the high levels existing at the end of the second quarter. Our sensitivity of $0.10 per gallon change in diesel fuel is about $6 million pre-tax for the year. Fortunately crude oil prices have fallen, since the end of the quarter. And if that trend continues, we have some upside through our projected earnings. Additionally, our guidance reflects a prolong downturn in residential construction and weakness in non-residential and highway construction activity. Through June, private non-residential construction spending in the U.S. is measured by the seasonally adjusted value of construction put in place, shows growth versus the same period in the prior year. However the leading indicator such as contract awards are down double-digit year-to-date through June pointing to some future weakness in this end market. Public constructions spending including highways is also increase, versus the prior year in nominal terms. However the cost of construction input such as liquid asphalt, diesel fuel and steel, are consuming a larger proportion of highway and infrastructure construction dollars resulting in fewer new construction projects. In Vulcan served markets contract awards for June are lower when compared with the same period in the prior year. The section in this trend is the large industrial and energy projects in Texas and along the Gulf coast. We now expect residential aggregates demand in 2008 to decrease over 30% from 2007 levels. This decreases is indicative of further weakness that materialized in the second quarter of 2008. Our aggregates demand forecast for non-residential and highway construction also compares unfavorably to the relatively flat demand forecast at the end of 2007. As result we now estimate full year aggregate shipments, including former Florida Rock operations for the full year to decrease from 2% to 5%, versus last year. This forecast reflects total aggregate shipments in the second half of 2008 to be slightly lower than in the second half of 2007. The market environment that recognizes the high cost of replacing reserves has been instrumental in helping us achieve price improvement despite nine consecutive quarters with lower volumes. Additionally, aggregate 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 improvement for the year of approximately 8%. We expect to achieve this price improvement in spite of lower shipments and our higher price markets, particularly Florida and California. Consolidated earnings from continuing operation, should be in the range of $2.95 to $3.25 per diluted share. Our 2008 earnings outlook, includes 74 million of EBITDA and $0.34 per diluted share, 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 perceiving as planned. And will certainly help make Vulcan a stronger organization for the future. We continue to expect an annual synergies level of $50 million to be achieved by the end of 2008. These savings are being realized, both operationally and for overhead reductions. During the first half of 2008, we completed several transactions that when combined added approximately $210 million tons of aggregate reserves, net of the justice department required divestitures. These new quarries will enhance our ability to serve our customers effectively. These transactions include four quarries in California. Including a rail connected quarry to serve the greater sacramental market. The California geological survey estimates that total industry-permitted reserves to serve Sacramento County will be depleted in less than 10 years. We also acquired two quarries in Virginia that complement our existing operations, and that serve attractive markets and the Shenandoah Valley along the interstate 81 corridor. We also required a quarry in the growth quarter west of Chicago. Finally in Texas and North Carolina, we acquired land with valuable permitted reserves that are adjacent to our existing quarries; those reserves will extend the reserve light at both of these quarries. Each of these transactions enabled us to differ income taxes, arising from the sale of quarry sites required by the Justice Department as part of the Florida Rock acquisition. The cash benefit from these tax deferrals is being used in large parts to fund strategic capital spending projects that would have otherwise been funded with debt, thereby allowing us to reduce our borrowing requirements. In closing, I would like to reiterate our confidence in future sales and earnings growth for Vulcan. Our construction materials business has generated good results during times of weaker demand for our products at much better results as demand improves. The foundation of our confidence is the strategy we have employed to establish an aggregate 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 focused business and how this strategy benefits Vulcan and our shareholders. Our 2008 results should benefit from the following attributes. Aggressive management of controllable cost, the diversified regional exposure, an increasing value of permitted reserves in fast growing metropolitan markets, and the broad use of aggregates and downstream products in diverse end markets including relatively stable demand from public funding where multiyear construction projects are typical. Again I thank you for your interest in Vulcan. Now the operator will give you the required instructions, we'll be pleased to respond to your questions. Question And Answer

[Operator Instructions] Your first question comes from the line of Ajay Kejriwal of Goldman Sachs.

Good morning gentlemen.

Good morning.

Just wanted to start by asking a question on guidance. You got the 2008 guidance with 1Q early May 19%. Now three months later, cutting guidance again by 26.7%, so my question I guess is; what changed in the last couple months that you did not anticipate in May? I know diesel is part of the answer, but is demand a lot worse than what you thought in May, or is it that some of the pricing surcharges that you thought you would be able to push through did not come in?

No, the change is virtually all in the new outlook on contract awards which are down, which caused us to reduce our aggregate volume forecast. That is the vast majority of the bases of the change, is in aggregates volume based on new information about contract awards, obviously the forward-looking information. Secondly, a significant amount -- but by a large majority less is the huge increase in diesel fuel cost and liquid asphalt cost which we have projected through the end of '08 as indicated in my remarks. Since the end of the quarter there's been some relief and certainly in crude oil pricing we do have some upside there, but between aggregate volume based on contract or data and higher energy cost, those account for virtually all of the change in guidance from the end of Q1 to the end of Q2.

So, now as we look at your full year guidance just to get a sense of what's been and a good color you provided on demand for res, I thought you said down 30% but maybe if you could provide numbers for non-res and highways and other buckets?

Yes, our full year projection now for demand in our markets. Res is -- the actual number is about 33%. We see a highway -- these are aggregate units, not dollars. We see highway is down about 10%, other infrastructure down about 8% and buildings essentially private non-res down about 7% for a total of '08 market demand for aggregates in our market's down about 14% from last year our legacy volumes we project to be down about 13% for the full year.

And how does that compare with volumes in the quarter... how much was highway and the non-res portion down in Tokyo?

I don't have that data in front of me, I'm sorry we'll be happy to give that to you.

Okay good. May be just a question on EBITDA guidance, if you could some more color on what to expect in terms of free cash flow for the year and if there are any debt covenants that are at risk or are round dividend payments?

[Indiscernible] respond to others.

At the time of the last call we indicated we thought we will be able to reduce debt by approximately $200 million during 2008. Our current view is that we'll still be able to reduce debt by approximately $175 million to $180 million during the year. Obviously the magnitude of the decline in EBITDA even net of taxes is greater than the decline in our debt reduction guidance and that's explained by a couple of factors. First we do think our capital expenditures for 2008 will come in lower than prior guidance, we have previously indicated about $485 million and we think that will be $30 million to $40 million lower at this point in time. Also the tax benefit to which Don referred earlier growing out of the like kind exchanges from the divestiture the assets pursuant to the DOJ requirements, the tax saving associated with those differed like kind exchanges is going to be greater than what we had contemplated in our previous guidance. So while the EBITDA numbers are down quite a bit more we still believe that we will make a meaningful debt in the debt reduction for this year. Also our works in capital requirements which tend to be very seasonal will be less obviously because of the local business. We are not in anywhere near risk of touching any of our debt covenants. The only covenant that we have on our credit facilities is one that requires debt to total cap, capital to be 65% or less and we are currently at about 49%... 48% to 50% depending on how you calculate it. So we're nowhere near bumping up against any debt covenants.

Got it, thanks.

Your next question comes from the line of John Fox of Fenimore Asset. Please proceed.

Hi good morning everyone, I have a number of questions.

John, how are you?

I am doing fine, thank you. First one is the interest expense in the quarter, is that a good quarterly run rate?

Yes.

Okay.

We will be some where around $180 million this year, net interest expense.

Okay great. And Don, did you give shipments in the quarter same-on-same, without the effect of Florida?

Yeah, I think legacy volumes are down about 16%.

Okay, thank you. And do you anticipate any further price increases this year, any mid year or I guess we are already passed midyear, but any end of the fall?

Well, as we have said before, there will be some price increases as we move forward in various projects, in various markets. But, we expect in the year, up about 8% over last year.

Okay.

And most of that is probably already in place. But there'll be some projects that will warrant price increases.

Okay. Now I have two kind of bigger picture questions, ask both of them. One, could you just comment on California and their budget situation and where that stands for their funding. And number two giving fewer miles driven and gas tax reduction, that type of thing, can you talk about funding for a highway nationally?

Yes. And I think those are both very key questions. The leader of the California Senate put out a published statement on July 30th saying that rating any out of the California transportation funds will absolutely not happen on his watch. He says, one thing we've done right in California is to work together to build our long, neglected infrastructure. Thanks to our efforts, we are building roads, schools, et cetera. And he say... he goes on to say, I see prop 42 and prop 1A as key components in these efforts. Rating these funds now would break fate with voters who joined us in supporting the plan to rebuild California, and slowdown one of the state's best engine for economic growth. I think when you have democratic leader of the senate and a republic and governor aligning to say we have got to keep this problem intact, that gives us great confident that California will deal with its budget problems in some way other than what the leader of the senate refers as shortsighted thinking. So we are optimistic about that, we are actually booking a lot of work now under the California infrastructure program that will shift probably most of it beginning in '09 but perhaps some of it in '08.

Okay.

But related to that, you see that our asphalt shipments are at or above 4% in the quarter.

Right.

Which is remarkable, given the slowdown in other end markets that asphalt is actually -- of that's coming a lot of adds from taxes, but also shipments have been relatively good in California and Arizona. So we are optimistic about that. Now moving to the federal level; as you probably know depending upon their various estimates that the '09 Highway Trust Fund shortfall because of fewer vehicle miles being driven as we... it's in the range of $3 billion to perhaps $4 billion. And if that is not plugged, that could result under the rob-up [ph] adjustment and a drop in spending of probably $13 billion which would be literally hundreds and thousands of jobs that would be lost. Thus the house... about a week ago or 10 day's ago... two weeks ago past a bill refunding $8 billion to the Highway Trust Fund that was taken out or borrowed back in 1998, well over 70 senators have indicated their support for that bill. It is not yet past the senate, because it's been attached to couple of times to controversy of bills that haven't made it through the hopper. But we are cautiously optimistic that the senate will take that backup in their three week session, when they come back in September. But I think in this particularly in this economic climate, the prospects of losing hundreds of thousands of jobs by failing to repay this $8 billion to the Highway Trust Fund is one that not many people that don't want to have to deal with.

Right. Sure.

We are cautiously optimistic that that will occur as we look to the reauthorization of the Highway Trust Fund, and highway bill which will begin in September of '09, there's a lot of work being done, a lot of discussion. Many people are looking at various options, I think the price of gasoline and the price of oil will have a lot to do with that debate and we have no... I have no great insight as to what's going to happen to gasoline prices, but it... that will be a factor, a significant factor in that debate. One other item which we are certainly not baking into any kind of outlook at this point, but which I think has been generating a great deal of discussion in Washington is infrastructure as a stimulus, additional infrastructure spending and Senator Byrd from West Virginia has introduced the bill to add money to infrastructure spending as part of the stimulus pattern. So we are hopeful that there will some legs to that discussion as well.

Okay, thank you. And just a clarification, Dan. You said a 180 for interest expense, you are at 80 year-to-date, what am I missing there?

Let me think, well what you missing is we now have rolled $950 million out of short-term debt for which we were paying very low rate in the 270, 275 range into a long-term debt where we're paying considerably higher rates on that. That's really the main reason and there is also a seasonal working capital bill that's typically greater in the second half of the year.

Right. Okay, thank you.

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

Morning all. I think I've got four questions if I may; and I will probably reel them straight off if you like. In terms of Florida Rock, Don, if your legacy volumes are down 16% in Q2 it looks then as if the Florida Rock volumes were probably down 25 to 30, would that be fair?

Yes, I think that's a good estimate.

Okay, thank you. Secondly on asphalt prices, I mean you sort of flagged up that you don't really expect to get much in the way of extra aggregate price increases for the second half of the year, would that also apply to asphalt?

No we'd expect to get asphalt price increases. The liquid has increased so much and we are not alone, everybody who produces asphalt mix is feeling that same pressure. So asphalt volumes are up for us in the quarter. I would expect some upside there but it will be offset probably by the high cost of liquid. It remains to be seen whether falling crude prices will affect liquid asphalt prices substantially or not, there's a lot of refinery issues that go into that. But we do expect that, and I don't think it's a fair conclusion to say we don't expect much in a way of aggregate price increase in the second half. In order for us to achieve our 8% guidance we will continue to get some price increases that won't -- we don't as you know price in nationwide statements about aggregate pricing, and we do it on a job-by-job market-by-market basis. But we are continuing to get price increases right.

Okay, but maintaining that sort of same 8% rate?

Yes.

Yes.

Okay. I mean, sticking on the subject of pricing, I mean are you seeing in the weaker volumes some of the small independent players maybe being less aggressive than the majors on pricing there?

Well that's, yes. I think that's always happened. But in the large metropolitan markets where we tend to be focused, we have some insulation from there and that tends to be a bigger factor in smaller market.

Okay, thank you. And just briefly the acquisitions you made, the quarries you have bought in second quarter. Can you just give an annual run rate in terms of volumes there?

Let me come back with that one. I can estimate them but I probably would be wrong.

Okay, fine.

And they will add... certainly, they will add... we had to give up capacity as a result of the required divestures by the Justice Department. I think the important point is that we were able... both through swaps and through additional acquisitions, we were able to actually increase our reserve base. We gave up probably in the neighborhood of 300 million tons of reserves. We are picking up a net of 210, so basically we have picked up about 500 million tons of reserves in these acquisitions. At all... the California operations are all productive quarries, the Virginia operations are productive quarries and the Texas and North Carolina, and the Illinois acquisition is a productive quarry. The two reserves, the land in Texas and North Carolina won't necessarily increase our production, they just strengthen our longer term reserve positions.

Okay, Thanks. And the last one I had really was on the sort of level of operational activity if you like in the quarries across the group now, I mean if you are talking volumes down again, well then they are coming down. I mean are you going to get your point where you will actually start maybe to multiple some of the smaller quarries, because simply the volumes are not high enough in some areas?

Well, we... in some smaller quarries particularly in non-urban areas we've already been doing that in terms of moving cruise from one plant. And running plants on a sort of a campaign basis, to built some inventory and then move our cruise around. That's not new for Vulcan, that's part of our culture is to be able to operate plants at low volumes efficiently as well as high volumes, and across 300 sites, there are always markets that are booming while other markets are slow. So it's... we have a lot of operational know-how to be able to adjust production levels efficiently to meet demand. So, yes we are doing that and have been doing it for most of the year.

Thanks a lot. One last and I think probably more Dan's path. But the $28.5 million worth of proceeds from the loan and life insurance policies that's in the cash flow that was a new one on me. Can you just sort of explain what's behind that?

Sure Florida Rock had a portfolio of life insurance policies on certain members of their those senior management team. And we've monetized the cash surrender value of those policies and effectively have liquidated them.

Okay. So it was very much one off and --

One off.

-- and [indiscernible]. Don't have to give the money back at any point?

No.

Okay. Thanks, so much gentlemen.

Your next call comes from the line of Mike Betts of JPMorgan.

Yes --

Hello Mike.

Hi Don. I had a number of small questions as well although the first one is probably a bigger one. The first one is just on cost cutting; you obviously talked about the $50 million of synergies, you've talked about the $11 million of SG&A savings. But obviously you must be doing much more cost savings than that given the big volume reductions. I am not sure how best you could describe it to me, but maybe my question is, what is the employment level now at Vulcan that is a year ago. Trying to do pro forma for Florida Rock because both of the businesses have probably lost best part of 30% volume. So, can you kind of help me on what you've done operationally on the cost side?

Well, we have cut operating hours in many operations. We have reduced employment in many operation, both hourly and salary. I don't have any specific numbers to give you some of my colleagues or looking at those. We are on the other side of the ledger, however, up grading substantially our infrastructure and our technology. And so we are adding people to get that rolled out but there's still a very substantial net decease in employment; probably the bigger factor is the net increase in operating hours.

Decrease.

I mean decrease, excuse me, in operating hours. That's really the place that within a broad range we can ramp up and ramp down production as an operating hour.

Okay. Thank you for that. Then two questions if I could on cement. There was the maintenance time that the cement kiln was down in Q2. I mean could you quantify what the impact to that was; is that... did that occur... I mean is that normally in Q2 or was that kind of a one off or is that it's normal seasonal --

Well, that's a normal... that's a normal annual maintenance outage. It probably impacted earnings something like $2.5 million in the quarter negative.

Okay.

That's... we wont... don't have to do that in Q3.

Okay. And the other thing on the external cement was the selling price declined. Was that a mixed factor or you actually seen prices in Florida actually decline? That's sequentially?

There is a mix in that... yes prices in Florida are relatively stable, the cement production and demand in Florida are relatively stabled that's because imports have potentially seized and the domestic production is currently matching the demand. There is some cementing exported domestically, but exported out of Florida. And the transportation cost when you net sales price against transportation cost that causes some decline as you've seen in the net selling price back at the plant.

Okay. And then other question just on the asphalt. What sort of the proportion of your sales is actually indexed? I mean obviously then you recruit that automatically, or is the majority of the contract base that we have to wait for contract renewals?

I don't have a percentage in California for Caltran's project, asphalt is indexed. But that's a portion of our business, but not all of it, a lot of our work is private as well and that is of course not indexed per se. But those projects generally are shorter term, so and the bid period is much tighter. So we have some ability to adjust pricing to reflect the higher asphalt. But clearly in the quarter we got caught with a much higher liquid asphalt in relation to our committed selling prices. Even though our prices were up 8% and our volume was up 4%, earnings were down, and it all had to do with this big spike up in liquid asphalt.

Okay. And final question just related to that Don. I mean, I think you said earlier that your guidance for the year was based on end June pricing level for things like diesel and other things.

Yes.

Has the cost of asphalt actually gone up, though since the end of June? I was... I don't look at particularly good series, I guess, but I was under the impression actually the big increase there was in July or maybe that was just a series I look --

I think asphalt is still moving up and I think an explanation for that in light of lower crude oil prices is that refiners like producing diesel fuel because they get higher margins, and when you produce more diesel fuel versus gasoline, you end up with less liquid asphalt at the end of the cycle. And so liquid asphalt is continuing to run... increase.

Okay, that's great. Thank you very much.

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

Hi good morning. And thanks for all the great detail. Don, Dan I was wondering actually if you could give me a little bit more details specifically on the balance sheet and any risk maybe some down grades in the rating agencies, if you can give us a little bit of color maybe of your conversations with them or what they might be; anything you can provide there? And then along the same lines talking to us and reminding us a little about the time frame for any short-term issues that you might have?

Timna the... we have a practice of communicating with the agencies routinely as we approach our quarter-end. We've briefed both of the agencies that rate our debt on our second quarter numbers. I think it would be inappropriate for me to speculate as to what actions if any they may choose to take. If they're going to take an action we'll read about it, if they don't, we won't. And I... but I think I can say that we are firmly committed to keeping the agencies fully informed as to how our business is evolving and what our free cash flow estimates are likely to be and what we intend to do with that. So they know more than you know and we'll just have to wait and see what conclusions they reach. Your second question about short-term debt financing, we have termed out into the long term debt markets what we currently intend to have turned out or put differently we have no immediate plans for any additional long-term debt offerings. We have at this point in time approximately $750 million of unused borrowing capacity under our lines of credit, and those lines of credit are used either as a back stop for issuing commercial paper or for borrowing directly. And so right now we believe we have more than adequate liquidity turn to meet our needs; is that getting to the question or not?

Yes, definitely I mean, just trying to get a flavor for what the time frame might be for any... if you need to approach markets it sounds like you are saying you might not need to. When you talk about your top priority being paying down debt I am just trying to understand the magnitude of what kind of different avenues you are considering. If you are considering further reduction to CapEx, like how much of your CapEx right now is maintenance, how much of it is kind of more optional, your dividend seems fine, you are not buying back shares that seems like for now but, anything else you can provide for us on your color --?

Well if you look at our debt maturity schedule we have about $45 million to $50 million of debt that matures in the fourth quarter of 2008. We have a large maturity in April of 2009 of $250 million. Our current... and then we have an additional run of $15 million a quarter maturity on our term loan and our current view is that on all of that we'll issue commercial paper. When we get to the large maturity in April, we'll just evaluate the company's liquidity and the condition of the capital markets at that time and decide if we are going to finance that with commercial paper or whether we want to go back out for another long-term issuance. But April of 2009 and these capital markets is too far into the future to speculate on how we will actually make that funding.

Okay, thank you.

We have gotten to the debt structure in balance sheet that was our target. So we are basically finished with a long-term debt financing. Certainly we don't have any plans or any equity issuance or any share repurchases on the old side. So we are pleased with where we are, we think it's certainly adequate for us as we go forward. We will... while we haven't given guidance and aren't yet prepared to give guidance on '09 capital spending, we think it will be substantially less than '08 for a lot of reasons and that will be a source of cash. So we are very pleased with our balance sheet now.

Okay that's really helpful. The only other question I had was, if you have any comment on ticks [ph] I know you had talked about some surcharge on aggregates and I know they are a small player but, is there potential for a surcharge September time frame is what... how would the market respond to that, any thought?

Well, we have never believed that surcharge is... energy surcharges for our products was an appropriate way to price. We price on a whole different kind of concept of just what's happening in the marketplace and both from the customer standpoint and the competitor standpoint. Some companies have surcharges, I guess we noted, Monday that one large producer of concrete came out saying they were going to eliminate surcharges and put in a 25% nationwide price increase for concrete beginning October 1... I mean, $25 yard price increase for concrete to replace any surcharges or and also deal with the... sort of cost pressures that are going on. So some people will have and some people won't, we will not have them, we will deal with that in our, pricing of our product.

Okay, thank you.

Your next question comes from the line of Jack Kasprzak of BB&T Capital Market. John Kasprzak - BB&T Capital Market: Well thanks, good morning Don.

Hi Jack. John Kasprzak - BB&T Capital Market: Hi, I wanted to ask about the cement plant expansion project. Can you update us there, is it still on its original schedule?

Yes, probably end of first quarter, maybe end of the second quarter will be complete and in production. John Kasprzak - BB&T Capital Market: Of '09?

Yes. John Kasprzak - BB&T Capital Market: And it's about double the size of the plant right, about another 850,000 tons?

That's correct. John Kasprzak - BB&T Capital Market: Okay. And then secondly I wanted to ask on the subject of aggregates...

Jack, I think an important point is that our total cement consumption will exceed our total cement production as a company, so that's important to us. John Kasprzak - BB&T Capital Market: Sure the plant will make then about 1.7 million tons and you'll buy more than that right now.

Right. We consume more than that. You would be surprised, the current production we consumed partially internally the sales portion of that. John Kasprzak - BB&T Capital Market: And then on the subject of the aggregates pricing, have you guys gotten any price increases in aggregates in either California or Florida in calendar 2008?

Absolutely, I am surprised you would ask that question? John Kasprzak - BB&T Capital Market: I asked that question because there are some other competitors saying that you are not getting price increases in the market side, need to figure it out.

Well, we are... we certainly are, particularly I mean Florida has been the strongest pricing market in the country in '08. Now you can get mix shifts. As I said in our prepared comments, our volumes are down more in California and Florida than they are in some other markets and California and Florida are our two highest priced markets. So when we tell you we've gotten an 8% price increase that means, we can get a larger percentage price increase in every market. But if our higher price markets are down more than our little lower price markets then that rolls up to 8%. So maybe that's what people are saying, I don't have any idea. But we are getting same product same market, we are getting prices across the board. John Kasprzak - BB&T Capital Market: There is a big price increase in Florida and aggregates in October of '07.

Correct. John Kasprzak - BB&T Capital Market: And then I think at that time, the feeling was there might be another one to begin '08 and this is all kind of all tied into Lake Belt issue, but then the quarries were, I guess, remained in operation they weren't taken offline more or less. So, maybe the second price increase was not effective. But I guess, in calendar '08, you are saying it still got some incremental pricing.

Yes, I think the... basically there was a $5 a ton announced price increase by some producers and I think all producers to a greater or lesser degree had some sort of comparable price increase and those are still in effect and employees. I don't think you will see another $5 ton price increase in '08 in Florida. But as you know, our quarry in Miami has now resumed production as a result of the pallet court although ruling final court. But we are... we'll have to put this in the context of a baseball game. You are a baseball player, but we are probably in the third inning before it's over. So lot more litigation to go, with lot more core engineering work and permitting look forward to go before we know what else in that come from be in the Lake Belt. John Kasprzak - BB&T Capital Market: You guys have pretty good ball pens, I like your chances there?

Well, we do have a good ball pen; that's probably good analogy. We can bring the labors in from all around. John Kasprzak - BB&T Capital Market: Great, thanks a lot.

Your next question comes from the line of Rod Norsley from Simon Bank [ph].

Good morning, gentleman. Dan, I had a quick question for you. When you look at interest expense and I know you've addressed this in a couple of ways during the call. Obviously, it was down sequentially versus the first quarter. You mentioned converting the bridge and the short term financing long-term debt. Yes, I guess what I am looking at your average interest rate on your debt, it looks to more than 6.5%, yet the 38 million interest expense implies in average blended rate of about 4%. So, I guess, I am trying to figure out to the discrepancy here, clearly interest expense should be trending higher than what we saw. Can you kind of walk there, I mean, are you capitalizing interest... is there something... some reasons for why interest expense is lower than first quarter. And what should we expect in third and fourth quarter in terms of run rate?

I think what is... I am really afraid. The only thing that's distorting that analysis is the amortization through interest expense of hedging loss activity that grew out of interest rate hedges, we put on soon after the announcement of the Florida Rock deal. And if you recall the timing of rates, we announced the deal in February. We put some hedges on in the months immediately following at which time rates were... had been pretty stable. And then treasuries dropped dramatically by the time we got the clearance from the DoJ to closed the deal and ultimately fund it. And we had some fairly hefty interest... hefty losses on those interest rate hedges. I don't have the exact number in front of me. And it's been our 10-Q with this will closed. I think, cumulatively between the debt issuances in December and the issuances in June of this year. I think we have probably some $70 million of $70 million to $80 million of losses on the interest rate hedges, which in the way the accounting for those work is, they were hedges. So the... we cash settle those to hedge losses after time of debt issuance. But the $70 to $80 million in losses is amortized to interest expense over the corresponding... the term of the corresponding debt. So that's one piece of the equation that's probably distorting your analysis. And having set around another $30 million to $35 million of those hedge loses in June, none of the amortization was in the first half for the year. And the you will have that amortization in the second half of the year. And those are all five and ten year note, so it will be amortizing off pretty quickly. My guess is that's what probably distorting your number. Also I had said that the net interest expense would be about 180, but if you look at just the interest expense line, it tells that's probably closer to a 189 or 190 million. And we did have some interest income netting against that this year and you ask why would you have interest income, if you were so heavily invested in the short-term debt markets. The reason is the cash proceeds that we've got from divesting the assets, were used in a tax differed exchange. The cash flows, cash proceeds, which exceeded $200 million were... are effectively being held in ESCROW accounts until the corresponding exchange properties are acquired. So we actually had considerable amount of cash that was sitting under balance sheet in those ESCROW accounts, generating interest income. So I think that's probably influencing your number as well. And there is some capitalized interest coming through on capital expenditures, I don't have an exact number for that as well. But I... we can get that.

Okay. That helps a lot. Thanks so much.

Your next question comes from line Todd Vencil of Davenport. Todd Vencil - Davenport & Company: Hi guys thanks for taking my call.

Good morning. Todd Vencil - Davenport & Company: Can you break out the impact that layering on... just given the difference in maybe the average price between the Florida Rock legacy and the Vulcan legacy aggregates had. What's the impact on '08 just from bringing Florida Rock on? Is there way to break that out?

Well, actually the way our finance and accounting staff calculates that the 8% is price increase with legacy Vulcan. Todd Vencil - Davenport & Company: Okay.

If we put Florida Rock impact in there, it's going to push that up some, but the 8% is legacy you put in the Florida Rock, I don't have the number, but it's going to be higher than 8%. Todd Vencil - Davenport & Company: Right, okay. And I mean have... you were talking earlier that the concept that they feel like, aggregate pricing power just given what's going on everywhere is probably diminishing, and we have seen the year-over-year changes for you guys come down although 8% is still a very healthy number. Are you prepared to talk at all about the trend or maybe what that looks like going into next year?

No we have not done our work yet to project price increases for '09. Clearly on the cross side with energy, there is a... everybody, who produces aggregate is feeling the effects of much higher diesel fuel. And for no other reason that ought to have an impact on aggregate prices in the industry going forward. Todd Vencil - Davenport & Company: Fair enough. Thinking about volumes and I mean, and I don't... I am not trying to get you the sort of speak prematurely on next year, but I think that's the question on a lot of peoples minds. Portland cement came out yesterday with their forecast looking for cement volumes in '09 being down about 6%. Broadly speaking I mean do you guys have any sort of expectation given your comments about what you are seeing on contract awards and what that ought to be leading to for particular commercial construction and highway construction. Can I have an outlook for what you think volumes might look like next year, Don?

No, we haven't gone through our processes to begin to estimate that. I think the key is though... and thinking about '09 has a lot to the with the infrastructure, has a lot to do with highways for us at least. And today there is a hole in the '09 trust fund deficit, projected deficit of over $3 billion, which if not addressed would reduce spending in FY '09 by... as I've said about $13 billion. And that's what's hanging over the heads of the DOPs right now. If that gets fixed, which as I said, we hope when the Senate gets back, they will deal with that. That could certainly change the outlook on contract awards for highways. But that's not done yet and the other piece as I have said to watch is whether highways and public infrastructure becomes the subject of a stimulus package. So until we get... until those wild cards get answered, it's hard to know. But I think a part of the weakness we are seeing in how a contract awards has to do with the un-remitted shortfall in the Highway Trust Fund for '09. Obviously, there are a lot of other things like high liquid asphalt cost and other things. But, so if we see a resolution of the Highway Trust Fund for next year, I believe we will see some improvement in construction awards hopefully. Todd Vencil - Davenport & Company: Fair enough, thanks a lot.

Particularly,if we get stimulus package. Todd Vencil - Davenport & Company: Right.

But right now, we don't have either one of those. Todd Vencil - Davenport & Company: Okay, I appreciate it thanks a lot.

Your next question comes from the line of David Macgregor of Longbow Research.

Hi Don, hi Dan.

Hi David, how are you?

Good, thanks. I know we're over an hour here, so I will keep it short. But just what's the upside to the synergy number now? You talked in your press release about the fact that some of the Florida Rock operations still have relatively higher production costs. Is it possible that we could make substantial progress in that the second half of these synergy numbers might actually be bigger?

Well, certainly we are very focused on that. I think we have spent a fair amount of money in the first half on some of the Florida Rock operations to try to improve production efficiency. Getting the true benefit of that is harder with lower production volumes, than with higher production volumes. But at this point we believe staying with our $50 million is the most appropriate number. I think you can conclude from that that given the lower production volumes today than we anticipated at the time we came up with that number. We are getting some improvements in other areas that we didn't have baked into it. But I think you will see the key to getting the higher than $50 million run rate will be two things. One is a function of time to get the improvements in the Florida Rock plants fully operational; and second, when we start seeing the volume recovery, that's when we'll start seeing the real benefit of those operating improvements.

Okay, good. And then just last question has to with the Texas and Gulf Coast, where you indicated you are seeing strength. Can you break up volume shipments in that region for us? And also I guess how sustainable is it? How much forward visibility do you have on that strength?

Well, a lot of projects are just coming out of the ground. The big steel mill in Mobile is barely coming out of the ground. The Toyota plant in Mississippi is barely coming out of the ground at this point. Some other refinery and LNG projects are in various stages of completion. But I think we will see relatively robust demand along the Texas and Central Gulf Coast for industrial and energy projects well into the foreseeable future. The... a weak dollar has a... and high energy costs have very significant effects on the construction economy in those areas.

Right. And can you just say how strong those volumes were?

Well, Texas was up double digits, and... which is remarkable in this economy. And that's a whole State of Texas.

Right.

In which of course includes the Gulf Coast. And the Central Gulf Coast was up. I'm not... we don't... I don't have a number I feel confident. Here are my colleagues coming to my rescue. Well, we don't... I don't have it broken out by the region that's we are talking about on the sheets in front of me, but is it's up, probably not double digits.

High single?

But Texas is up double digits.

Great, thanks very much guys.

Your final question comes from the line of Chris Manuel of KeyBanc.

Good morning. This is Jason Brown for Chris Manuel.

Hi Jason.

Just one quick question, it appears that given the decline in second quarter legacy volumes and your outlook for the rest of the year, you are expecting some improvement or lessening of the decline in volumes for the legacy piece. Do I have that right first of all and...

Absolutely, and one reason is we've got a lot easier comps in the second half than we had in the first half, which... but we think... our outlook is based on volumes decline in second half of '08 compared to second half of '07 will be substantially diminished versus what we've seen in the first half.

Okay. Just wanted to clear that out; that's all I had. Thank you.

Okay. Thank you very much for your interest. We appreciate your interest in Vulcan and our business. As I said in earlier remarks, I think our plant, people, and our management teams are doing what they can. We are managing our non-energy variable cost very well. We are managing our overhead costs very well. We are managing our fixed cost very well. We are continuing to get price increases. The issue for us in the quarter was obviously aggregate volume and liquid asphalt and diesel fuel costs; this too will pass. We are looking forward to the earnings leverage we have with a little bit of volume growth and a little bit stability in energy costs. Hopefully before too many quarters, we'll be able to share with you the benefits of that. Thank you so much.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have an excellent week.