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Vulcan Materials (NYSE:VMC)

Q3 2013 Earnings Call

November 04, 2013 11:00 am ET

Executives

Donald M. James - Chairman, Chief Executive Officer and Chairman of Executive Committee

Danny R. Shepherd - Chief Operating Officer and Executive Vice President

Daniel F. Sansone - Chief Financial Officer and Executive Vice President

Analysts

Kathryn I. Thompson - Thompson Research Group, LLC

Garik S. Shmois - Longbow Research LLC

Ted Grace - Susquehanna Financial Group, LLLP, Research Division

Trey Grooms - Stephens Inc., Research Division

John F. Kasprzak - BB&T Capital Markets, Research Division

Matthew Rybak - Goldman Sachs Group Inc., Research Division

L. Todd Vencil - Sterne Agee & Leach Inc., Research Division

Stanley S. Elliott - Stifel, Nicolaus & Co., Inc., Research Division

Desi DiPierro - RBC Capital Markets, LLC, Research Division

Christopher David Olin - Cleveland Research Company

Operator

Welcome to the Vulcan Materials earnings conference call. My name is Victoria, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded.

I will turn the call over to Mr. Don James, Chairman and Chief Executive Officer. Mr. James, you may begin.

Donald M. James

Good morning. Thank you for joining us to discuss our third quarter 2013 results. I'm Don James, Chairman and Chief Executive Officer of Vulcan Materials. Joining me today are Dan Sansone, our Executive Vice President and Chief Financial Officer; and Danny Shepherd, our Executive Vice President and Chief Operating Officer. We have posted a short slide presentation to our website that we will reference during the call. These slides are also available to you on the webcast.

Before we begin, let me remind you that certain matters discussed in this conference call, as indicated on Slide 2 of our presentation, contain forward-looking statements, which are subject to risk and uncertainties. Descriptions of these risks and uncertainties are detailed in the company's SEC reports, including our most recent report on Form 10-K. In addition, during this call, management will refer to certain non-GAAP financial measures. These measures are not prepared in accordance with U.S. Generally Accepted Accounting Principles. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures and other related information in Vulcan's third quarter 2013 earnings release.

Turning now to Slide 3, I want to begin by briefly discussing a few highlights from the quarter. Our net sales increased 13% for the quarter, and gross profit increased 25%. EPS from continuing operations improved from $0.12 per share last year to $0.32 for this year's third quarter. Aggregate shipments increased 9% in total and 10% on a same-store basis, adjusted for the divestiture of our Wisconsin operations and the acquisitions of 3 bolt-on quarries in Georgia and Texas.

Volumes continued to be particularly strong in Florida and Texas, where shipments increased sharply compared to last year, up 36% and 29%, respectively. Aggregate volumes and other key markets, including Arizona, California, Georgia and North Carolina, all improved at least 14%. Some of the volume improvement relates to a recovery from the particularly wet weather we had in the first half of the year, which we've discussed in our prior conference calls.

Ready-mixed volumes were up sharply for the quarter and were higher in every market. Cement volumes were up on strength in Florida and asphalt shipments up 4%, were particularly strong in Texas and Southern California. On a freight adjusted basis, aggregates pricing for the quarter was up 2.4% or $0.26 per ton, to an average selling price of $10.89 per ton. This is the highest quarterly sales price in company history. Pricing in our ready-mix segment was up 2% for the quarter. Geographic mix had a slightly negative impact on ready-mix pricing, but all Vulcan states saw higher pricing. While asphalt pricing was almost flat, liquid lower asphalt cost resulted in increased materials margins. Vulcan served states continued to exceed the U.S. average in private construction activity. We have seen improvement in sales momentum and awards in a number of our states. Single-family starts are growing in virtually all markets. And key Vulcan states such as Texas, Florida, California and Virginia are seeing sharp demand growth in private nonresidential buildings.

Slide 4 provides a summary of our third quarter financial results. Consolidated net sales increased $88 million and gross profit increased $32 million, as both the aggregates and non-aggregates segments reported year-over-year improvements in earnings. Gross profit margin increased 200 basis points. EBITDA for the quarter was $180 million, an increase of $39 million from the prior year's third quarter. Included in 2013 EBITDA is a $9 million pretax gain on sale of reclaimed real estate. Diluted earnings per share from continuing operations were $0.32 per quarter.

With that, I'd like to turn the call over to Danny Shepherd, who will walk you through our segment results for the quarter.

Danny R. Shepherd

Thanks, Don. Turning to Slide 5, you see a 9% increase in third quarter aggregate shipments. As often discussed, incremental volume has a significant impact to gross profit, and you can see this during the third quarter. This 9% increase in shipments or $3.4 million additional tons drove a $25 million improvement in aggregates gross profit or $7.35 per incremental tons sold. This attractive incremental margin per incremental ton of aggregates sold demonstrates the earnings leverage of our aggregates business. Non-aggregates earnings increased $7 million, due to improving private construction demand, which benefited concrete and cement volumes, and lower asphalt cost, which increased materials margins in asphalt. The concrete earnings improvement reflects higher shipments in pricing in all of the companies served states. Third quarter shipments of ready-mixed concrete increased 17% and pricing increased mid-single digits in most markets. Cement earnings were down slightly in the third quarter as the earnings effect of higher volumes was offset by higher repair cost associated with the timing this year of a scheduled field outage.

Now turning to Slide 6. You see that aggregates gross margins increased 130 basis points due to higher volumes and pricing. Aggregate shipments in a number of markets increased sharply versus the prior year. As you'll recall, wet weather had a significant impact in this year's first half. While the wet weather continued into July, we experienced the catch-up effect, as some shipments delayed due to weather were realized in the third quarter, contributing to higher volumes and margin expansion. Aggregates pricing improved 2.4% compared with the prior year. Most markets realized positive growth with year-over-year improvement ranging from low- to mid-single digits versus the prior year. Sharp increase in shipments this quarter led to a 2.8 million ton reduction in aggregates inventory at the quarries. Production levels that were below our level of shipments had a negative impact on total cost for the quarter. These actions negatively affected earnings by $6 million in the third quarter. Our current inventory levels provide opportunity for higher production levels and efficiencies, as demand continues to improve. Additionally, robust shipments to remote sales yards in response to growing demand along the Gulf Coast increased cost of sales $2 million, due to increased freight and distribution cost. Most key productivity and operating metrics improved versus the prior year. Labor productivity and energy efficiency improved, highlighting a solid quarter of cost management.

As shown on Slide 12, on a trailing 12-month basis, our cash gross profit was $4.24 per ton, 26% greater than it was at the prior peak and trailing 12-month shipments ending in the first quarter of 2006, and this is superior to that of our peers. Because of our disciplined approach to pricing and cost management, the earnings leverage in our aggregates business continues to increase. For the quarter, cash gross profit per ton of $4.83 was the highest third quarter level in company history and the highest of any quarter over the last 4 years. This higher unit profitability positions us well for greater earnings leverage from incremental aggregates tons, as demand continues to improve.

With that, I'll turn the call back to Don.

Donald M. James

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

Turning now to our end markets on Slide 9. This slide shows how private construction activity is currently fueling most of the recovery in demand. Trailing 12-month housing starts are up sharply, compared to the prior year, due to broad-based growth in both single-family and multifamily starts. Most Vulcan-served states realize double-digit growth in housing starts for the trailing 12 months ended September 30. We are seeing particularly significant growth in key Vulcan-served states such as Florida, Texas, California, Georgia and Arizona. Housing starts in those 5 states accounted for 36% of all growth in trailing 12-month housing starts in the United States. We are also encouraged by leading indicators of future activity for private nonresidential construction.

Trailing 12-month contract awards, as measured by square feet, for private non-res construction, are up 10% in the U.S. as a whole. Remarkably though, Florida, Texas, California, Georgia and Arizona are leading the way here as well, accounting for approximately 80% of all U.S. contract awards for private non-res construction, as measured in square feet. Growth in stores and office buildings, which for us, includes all commercial office and lodging, are the primary drivers. Growth in private construction activity in key Vulcan-served states, like Florida, Texas, California, Georgia and Arizona, is important, because not only will we realize the attractive incremental margins from higher aggregates volumes, but we also have non-aggregates businesses in those states that will benefit us well.

Year-to-date, concrete shipments demonstrate this expanding recovery in private construction, particularly residential construction. Through the first 9 months ending September 30, our concrete shipments were up 10% on a comparable basis to 2012. Highway construction is the largest end market for aggregates demand within public construction. New highway projects, as measured by trailing 12-month contract awards, were up 7% versus the prior year's level, as shown on Slide 9. This recent growth provides some evidence that the more stable and predictable highway funding environment has led to improving construction activity. The large increase in TIFIA funding contained in the Federal Highway Bill known as MAP-21 should also positively impact future demand. Contract awards for TIFIA projects are projected to add $30 billion to $50 billion, highway and infrastructure construction. Some TIFIA projects have been underway in 2013, but 2014 should be a much more significant year in shipments to TIFIA projects. The growth in new highway projects should help offset recent weakness in other public infrastructure, as shown on this slide. Last year, highways composed approximately 30% of full year aggregate shipments, while other public infrastructure accounted for less than half that amount.

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

As we look specifically to the remainder of 2013 and into 2014, the projects that could materially impact our aggregates volumes continue to include a disproportionately greater number of large highway and industrial projects. The timing of shipments to these projects remain outside our control, and in some cases, have been delayed into 2014 and 2015 due to project schedules. Full year reported aggregate shipments and pricing are expected to reflect the same growth rate as our year-to-date results through the first 9 months. Year-to-date reported aggregate shipments have increased 2% from the prior year, and same-store shipments have increased 3%, adjusted for the divestitures and acquisitions completed this year.

Forecasting shipments in the fourth quarter always contains an added level of uncertainty due to weather. Our expectation for shipment activity in the fourth quarter is based on normal weather patterns, which we have certainly enjoyed for most of the month of October. Year-to-date, freight-adjusted pricing has increased 3%, and we expect full year pricing growth to approximate this result. Full year concrete volumes, materials margins and earnings are expected to continue to improve, as housing and private nonresidential construction continues to improve in our key states.

Strong asphalt sales in Texas should drive full year shipments above 2012 levels. Materials margins are up over 10% year-to-date, and we expect continued earnings improvement in that segment. Cement earnings are ahead of -- on our year-to-date basis, on higher volume and improved pricing, and this trend is expected to continue through the remainder of the year. Finally, we continue to work on additional transactions that will allow us to strengthen our balance sheet and credit metrics, while redeploying capital into assets with higher returns.

With that, I'll now turn the call over to the operator to begin to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Kathryn Thompson with Thompson Research.

Kathryn I. Thompson - Thompson Research Group, LLC

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

Donald M. James

Thank you, Kathryn. Clearly, the visibility of future demand, which we believe is out there, will help shore up our pricing and, I think, industry pricing generally. In terms of the quarter's pricing, we did have a fair amount of negative product mix impact in Florida and Georgia, where we -- in Georgia, we had some very high SMA, Stone Matrix Asphalt, pricing in last year's third quarter and we didn't have nearly as much of that in this quarter. And in Florida, our product mix shift was much more toward some base and shot rock compared to last year's third quarter, based on some large projects that we are currently shipping to. We are reasonably confident we will get to the 3% to 4% price growth full year. And as we look -- the last part of your question, Kathryn, had to do with geography. Pricing across our footprint certainly adjusted for the Georgia and Florida product mix shift, we were up in pricing across virtually the entire footprint. And that's very positive. We continue to believe there are opportunities for price growth supported, as you indicated in the first part of your question, by strong visibility of future demand, as we move into 2014.

Kathryn I. Thompson - Thompson Research Group, LLC

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

Donald M. James

I don't know the answer to that. I don't think there was a material difference in the product mix. Basically, what happened is we had a production plan for the quarter, shipments jumped up higher than we anticipated when we set the production plan and we just ended up shipping out of inventory about 3 million -- 3.2 million tons that we didn't get to produce. As we said in the press release, had we produced at the same level in the quarter that we shipped, our earnings on a pretax basis would have been about $6 million higher. So we're looking forward to the opportunities to run our plants at higher and more efficient production levels, as we move into 2014.

Kathryn I. Thompson - Thompson Research Group, LLC

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

Donald M. James

Well, it's a -- it's very market specific. But in Charlotte, we are supplying a good number of highway projects; in Florida, we are supplying a lot of large commercial-type projects, as well as much stronger housing demand. Housing is coming back in Atlanta, lot development is coming back. That's certainly the significant driver in housing. And in Virginia, particularly in Northern Virginia, around Washington, D.C., there's a tremendous amount of commercial construction. As you know, the East Coast has been -- was, during the first half, weak, largely because of bad weather. We had better weather in the West. But as we sit here today, we're seeing strong recovery in housing in Arizona. A big backlog, as we referenced in private non-res construction based on contract awards all across Sun Belt in California, Arizona, Texas, Florida and Georgia. And as I said, it is remarkable that 80% of the improvement in non-res contract awards is in 5 states for the entire U.S. So we're looking forward to significant opportunities as that end market, which is typically a follow on to residential construction appears to be performing as it has historically.

Operator

The next question is from Garik Shmois with Longbow Research.

Garik S. Shmois - Longbow Research LLC

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

Donald M. James

Among the large projects we are tracking, some began to ship in 2013. Virtually all of them have very significant carryovers into 2014. The TIFIA projects, the Grand Parkway in Houston, the I-75/I-575 Corridor in Atlanta, it will start in '14. We didn't ship any of that in '13. Most of the big projects -- most of the big TIFIA projects did not start in '13, but will start in '14. We have been shipping on some legacy TIFIA projects, particularly in Virginia, on I-95 during the course of the year. On industrial projects on the Gulf Coast, we have been shipping to several energy-related projects along the Gulf Coast. We referenced the fact that we were building -- or we did build inventory in our coastal markets. The majority of that build was coming by ship from Mexico, although we did our building inventory in some rail yards along the Gulf Coast. So that whole market had good shipments in 2013, and we expect that to continue in 2014.

Garik S. Shmois - Longbow Research LLC

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

Donald M. James

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

Garik S. Shmois - Longbow Research LLC

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

Donald M. James

Well, we think it is an opportunity for improving pricing. The reason being, these are large projects. The aggregate cost as a percent of the total cost of the project is typically not very high. And as a result of that, reliability, quality, service becomes a bigger factor perhaps than the absolute selling price. And we believe that, that gives us a competitive advantage in the markets. We have booked the midtown tunnel in Norfolk, that's about 700,000 tons over the next 2 years. We booked some of the Grand Parkway in Houston. We booked some of the I-69 design build work in Corpus Christi. As I said, we booked the I-75/I-575 Corridor work, that's about 1.5 million tons over the next 3 years. That will start in 2014. So we've been having very good success. We booked the Folsom Dam project in California that will start early next year. So about 500,000 tons. So we're having good success and we're doing it at good pricing.

Garik S. Shmois - Longbow Research LLC

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

Donald M. James

No, we didn't have any disruption. The inventory build, Garik, is not at the quarry, it's in the yards along the Gulf Coast, as we are building that inventory in response to higher actual demand, and particularly, projected demand in 2014 [ph].

Operator

Your next question is from Ted Grace with Susquehanna.

Ted Grace - Susquehanna Financial Group, LLLP, Research Division

Don, you certainly painted an optimistic picture of the demand environment. I was wondering, I know you didn't give formal '14 volume guidance. But could you give us maybe a little more of a qualitative assessment of how you're thinking about growth prospects on a volume basis next year?

Donald M. James

Well we are -- Ted, we are in the process of rolling up our 2014 outlook from the ground up, and we'll also compare that with the macro view from the top down. The macro, and I'll give you some third-party indication of what -- at least McGraw-Hill, through their Dodge Construction outlook for '14 will see, I'm not saying this will be our outlook, but certainly, we look at this and try to reconcile this with our own internal numbers. But McGraw-Hill sees single-family housing up 26% in dollars and 24% in units in 2014 compared to '13. They see multifamily up 11% in dollars and 9% in units. They see commercial building up 17%. They say institutional buildings will edge up 2%, turning the corner after 5 years of decline. And public works construction, including highways, they see down 5%. Their concern is federal focus on deficit reduction is going to make highway funding more difficult as we move into '14. We believe there's a lot of TIFIA work that will begin in '14 and more TIFIA projects that will be approved in the contracts let. But this is a pretty robust outlook, particularly on the private side. Again, we're not adopting these numbers yet. But in terms of trying to give you views on how we see '14, I think certainly, this will, directionally, we would agree with these numbers.

Ted Grace - Susquehanna Financial Group, LLLP, Research Division

Yes, we'd agree with those. And then, if you look at the September highway contract awards, I mean, you guys were up 39% in the month of September and on a trailing 6-month basis, you're up 12%. So that's -- I mean, I think we all recognize the challenge on highway federal level. But it seems like your set up in the next year is pretty solid, no?

Donald M. James

Well the -- the good thing is, after MAP-21 passed in, basically, September of 2012, it took the DOT 3 or 4 months to start awarding a higher level of highway contracts, most of those are now in the pipeline. So we're -- we have a pretty good, as you can tell from the contract awards, which is a clear example of the pipeline, which includes not only federally-funded projects but state and local projects as well, with essentially flat federal funding, the contract awards in dollars are up significantly, and that builds the pipeline. We're all working very hard, as you know, on trying to find a way to fund the next highway bill. We spend a lot of time and energy with freight [ph] associations and user groups, which are really a key, and the user groups would be companies like FedEx and UPS and Walmart and the American Trucking Association and AAA on the consumer side. I think there's a growing consensus that we are under investing in -- particularly in highways, but public infrastructure as well. As you know, there is a battle going on in Washington, not only between Republicans and Democrats, but between segments of the Republican Party. And so we are working hard to try to make the case for improved infrastructure funding, but at this point, we certainly don't have any crystal ball as to how that's going to turn out.

Ted Grace - Susquehanna Financial Group, LLLP, Research Division

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

Donald M. James

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

Danny R. Shepherd

I think the way to look at this is, in 2011, we had an operating EBITDA of $346 million. And if you look at, at street estimates today, I think the average is right around $468 million. So I think it's fair to conclude that we've delivered on the Profit Enhancement Plan, because as we all know, volumes have not improved significantly since our starting point in 2011. It just give you a qualitative comment about the overall program. If you -- when we look at our G&A, our sourcing and our transportation categories, we believe that we've achieved greater than $100 million. And it's our intention to hold on to those savings, as we move forward into future periods, Ted. So we feel good about where we are, and we're going to make every effort to hold the greater than $100 million number that we think we've achieved.

Ted Grace - Susquehanna Financial Group, LLLP, Research Division

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

Danny R. Shepherd

Let's do that off-line. We had a good the third quarter. We believe that we -- we're right around $20 million in the third quarter of 2013. But we'll give you that comparison off-line, Ted.

Operator

The next question is from Trey Grooms with Stephens Inc.

Trey Grooms - Stephens Inc., Research Division

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

Donald M. James

Trey, I want to be clear that -- that the data we have given are contract awards nationwide and in our states that are reported, not that we have booked all of that. So we believe we will get our fair share of those particularly given the fact that, as I indicated, 80% of them are in 5 of our key states. That being said, we continue to pursue those vigorously, because that's where the big growth is coming, we think. The kind of projects, some of them are industrial and energy-related projects on the Gulf Coast. But there are still a number of hotels and office buildings and retail that spread across our footprint. That's a pretty broad-based recovery. And I think we were holding our breath that the traditional relationship of private non-res recovery lagging res recovery by 6 to 9 months would hold true to this cycle. And it appears to be doing that. In fact, it appears to be even stronger in a lot of our markets than res has been. The construction cycle for private non-res varies greatly depending on the nature of the project. The bigger more complicated projects, obviously, take longer from contract award to material shipments, retail projects and hotels and office buildings typically can move a little faster, particularly they're not -- have government projects associated -- government restrictions and regulations associated with them. That being said, we would expect -- again I'm not trying to give guidance, but we would expect, based on macro data, that our shipments into private non-res will improve in '14 over '13. To give you a quantification of that, at this point, I'm not able to do.

Trey Grooms - Stephens Inc., Research Division

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

Donald M. James

Well, I think I'd start with what the DOT behavior was coming out of the passage of MAP-21 in September 2012, and that is the DOTs geared up, got projects out for bid, and they'll move -- they got those projects approved through the Federal Highway Administration and they'll move forward. On the regular Federal Highway Program, typically as we have -- get closer to the expiration of the highway bill, the bid letting at the state DOT level on federal projects will begin to diminish. We are still 11 months away from the expiration of that bill. But so far, the contract awards, on a trailing 12-month basis or year-to-date, are still positive. Again, TIFIA is not part of the regular Federal Highway Program, per se, out of the -- and those projects are funded out of a different funding source. As you know, they have treasury, financing is available for those TIFIA projects, along with some private, typically some private money, and they tend to be revenue-generating projects. So I think, even if the regular federal paid highway program out of the highway trust fund begins to slow in terms of contract award, as we approach September 30, 2014, we are cautiously optimistic that the TIFIA projects, which at $30 billion to $50 billion spread over probably 2 or 3 years in terms of contract awards will help offset whatever weakness there maybe in contract awards in 2013, coming out of the regular state aid federal program out of the trust fund. But as I said, the TIFIA is far clearer that it will move forward in a significant way. And the funding source for the Federal Highway Trust Fund is yet to be resolved.

Trey Grooms - Stephens Inc., Research Division

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

Donald M. James

So the thing that makes that transaction makes sense for both Vulcan and Plum Creek is that Plum Creek, of course, is a REIT. They don’t pay federal income tax and their cost of capital is lower than ours. And so a dollar that flows to Vulcan gets taxed at 35%, and a dollar that flows to Plum Creek doesn't get taxed at the REIT level and that makes a big difference in terms of the ultimate distribution of cash from the aggregates business to shareholders, either Plum Creek or Vulcan. As you see, we are paying off debt, as it becomes due. We paid off about $289 million. As we have opportunities that make sense, we want to continue to reduce debt. We also want to continue to look at strategic bolt-on aggregate opportunities. And there are a number out there that we are working on, as we speak, whether we are successful and can find value enhancing transactions, we'll see. But we think there are significant opportunities now. So we continue to look at both bolt-on aggregate opportunities, as well as debt reduction as potential uses for cash.

Operator

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

John F. Kasprzak - BB&T Capital Markets, Research Division

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

Donald M. James

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

John F. Kasprzak - BB&T Capital Markets, Research Division

Private. Yes. Okay. On the profit improvement, profit enhancement program and SG&A, I mean I know you're not giving guidance for '14, but done a good job keeping SG&A intact, and with that program, I mean looking forward to '14, I mean, should it be, more or less, flat? Would you expect a little bit of inflation? Just how should we think about that line, if you care to offer any comments?

Donald M. James

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

John F. Kasprzak - BB&T Capital Markets, Research Division

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

Daniel F. Sansone

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

Donald M. James

But from a GAAP purpose -- GAAP purpose...

Daniel F. Sansone

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

Donald M. James

But you do the math to get to, what, an EPS at...

Daniel F. Sansone

About 4-ish, roughly $0.04.

John F. Kasprzak - BB&T Capital Markets, Research Division

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

Daniel F. Sansone

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

John F. Kasprzak - BB&T Capital Markets, Research Division

Okay. Last question is diesel prices in the quarter. Can you tell us what they were compared to last year?

Donald M. James

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

Operator

Next question is from Jerry Revich with Goldman Sachs.

Matthew Rybak - Goldman Sachs Group Inc., Research Division

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

Donald M. James

Our volume outlook for the fourth quarter, whether it sounds high or low, should be highly suspect, because weather can move that significantly. As we indicated, we had, compared to market demand, depressed shipments, particularly in the second quarter because of weather. We had some catch-up effect in the third quarter. Demand is good and growing. Though I -- we're not -- I would ask you not to focus much on the volume projection for the fourth quarter, simply because there are too many moving parts. But we did have lumpiness in the first 3 quarters of the year, almost totally driven by weather. Although with that weather overlay, there has been improvement in the market demand as we move through the year. So if we can keep that momentum, we're optimistic we could do perhaps better than what our year-to-date volume has been. But if we get unseasonably cold or wet weather or early cold or wet weather, people will shut down and move volume to '14. So we'll have to see how that plays out.

Matthew Rybak - Goldman Sachs Group Inc., Research Division

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

Donald M. James

I think, going forward, we probably -- that will be our production schedule. As we look at, from the -- and that has to be done on a quarry-by-quarry basis. It's not some high level inventory management structure. Each quarry, each market has to look at projected future demand, timing of shipments, the sizes, the specifications, and has to build a production plan around the sales forecast. Certainly, as we see here today, if we see volume continue to move, to grow in 2014, our production levels should begin to approximate shipment levels, which certainly help our GAAP earnings.

Operator

Your next question is from Todd Vencil with Sterne Agee.

L. Todd Vencil - Sterne Agee & Leach Inc., Research Division

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

Donald M. James

Well, a lot depends on what information you focus on. One of the factors that has supposedly slowed the sale of housing is the fact that prices have moved up sharply. And an explanation for prices have moved up sharply is the inventory of houses available for sale has fallen sharply. So it depends on whether you are selling an existing house or you're focusing on building a new house on a new lot. You're going to have a very different view about the current state of the housing market. We like the fact that inventory of houses available for sale is shrinking. We're seeing a significant amount of lot development going on, which is really one of the drivers for our product, much more than the actual construction of the house in markets other than sort of central and southern Florida, where there's a lot of aggregate in the construction of the house because of the building codes. I think we are cautiously optimistic that housing will continue its recovery based on demographics and affordability. Obviously, as interest rates are tending to move up and prices of housing is tending to move up, that will have an impact on demand presumably. But the McGraw-Hill data that I referenced earlier, they're saying single-family housing starts up 24% to 785. That's still a modest number compared to history and demographics and the normalized demand rate and construction rate for single-family housing. So while we recognize there are some headwinds to housing, in our markets at least, housing, at least in our -- most of our markets, the housing is -- remains very good.

Operator

The next question is from Stanley Elliott with Stifel.

Stanley S. Elliott - Stifel, Nicolaus & Co., Inc., Research Division

Quick question. The government shut down, does that have any sort of impact on business? I mean, obviously, the volumes are very strong. But when you think about -- kind of having to think about this again, in a couple of months, I was just curious kind of what you -- how the state DOTs react to that?

Donald M. James

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

Danny R. Shepherd

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

Stanley S. Elliott - Stifel, Nicolaus & Co., Inc., Research Division

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

Donald M. James

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

Operator

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

Desi DiPierro - RBC Capital Markets, LLC, Research Division

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

Donald M. James

I don't have a good read on that. It's -- when some of these particularly these TIFIA projects start is a function of weather and the gearing up of the construction consortium in some cases, I would think the regular Federal Highway Program should be relatively stable across the course of the year. The driver for whether we're seeing TIFIA projects begin to show up in a significant way in the first half versus the second half is really wait and see, I think. We don't have a good read on the actual timing of when shipments will go on the TIFIA projects, even those that we already have booked, and in terms of the first half versus second half.

Desi DiPierro - RBC Capital Markets, LLC, Research Division

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

Danny R. Shepherd

We still have opportunities. And we continue to make good progress, specifically in the transportation area. And we've had some really good successes on sourcing. So we believe that, that going forward in all 3 categories, G&A, SG&A, sourcing and transportation, we still have more that we can achieve.

Donald M. James

And I think as we see it today, we still believe there's an incremental 25 in 2014 that's not yet shown up on the bottom line in '13.

Danny R. Shepherd

Yes, we do. yes.

Operator

Next question is from Christopher Olin with Cleveland Research.

Christopher David Olin - Cleveland Research Company

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

Donald M. James

We are not capacity limited in any meaningful way. We can produce 12 million tons easily in that quarry. We have shipping capacity with our own vessels, as well as charter vessels. We also have the engineering work largely completed to expand the production capacity of that plant as we need to in a very cost efficient way. So that plant, which is our largest quarry, has a tremendous upside, as we look at continued growth along the Gulf Coast and in Florida and Texas, those are the principal markets, 3 markets, Texas, Florida and the Gulf Coast. And we have a plan to, as needed, to expand capacity very efficiently. So that is one of the really wonderful opportunities that Vulcan, going forward, is the shipments out of the quarry in Mexico.

Christopher David Olin - Cleveland Research Company

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

Donald M. James

To date, there's not been any shipments to any port expansion projects. But there are, as you know, there's sort of a race among several of the ports to be the first mover and try to be the port that will be able to take the first of the cape-sized container vessels. And we certainly are well positioned to benefit from any of those projects when they materialize. But to-date, I would say -- Danny, you correct me if I misstate this, I don't think we have shipped any of those projects, with the exception of a couple of years ago, we did a very large project in Norfolk at the Maersk terminal. And most of that material came out of our Havre de Grace quarry by barge. And that was plus or minus 1 million tons, I think. So the benefit of the work for us when these port expansions occur is the infrastructure to handle and store and transship the containers, which requires a very large storage and trans loading area, a huge amount of aggregate and a fair amount of concrete that would go into those projects. And so we're happy -- we'll be very happy to see them materialize, but we don't have any that are in any current state of bidding for materials.

Christopher David Olin - Cleveland Research Company

Okay. Just -- apologize if you said it, but did you give a -- the outage cost for the cements line or the maintenance cost?

Donald M. James

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

Operator

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

Donald M. James

Thank you very much for being with us today. We are certainly encouraged by the opportunities that we have to turn growing volumes into even faster growing bottom line. Thank you. We look forward to talking to you again after the close of the year. Have a good day.

Operator

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

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