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Vulcan Materials Co. (NYSE:VMC)

Q4 2009 Earnings Call

February 9, 2010 11:00 AM ET

Executives:

Donald James - Chairman and CEO

Daniel Sansone - Senior Vice President, CFO

Analysts:

Jack Kasprzak - BB&T Capital Markets

Jerry Revich - Goldman Sachs

Timna Tanners - UBS

Kathryn Thompson - Thompson Research Group

Adam Rodrigo – Wells Fargo

Garik Shmois - Longbow Research

Ted Grace - Avondale Partners

Todd Vencil - Davenport & Co.

Presentation:

Operator

Good day, ladies and gentlemen, and Welcome to the Third Quarter 2009 Vulcan Materials Fourth Quarter 2009 Earnings Conference Call. My name is Yvette and I will be your coordinator for today's conference. (Operator Instructions).

I would like to turn the call over to Mr. Don James, Chairman, and CEO. Please proceed sir.

Donald James

Good morning. Thank you for joining this conference call to discuss our fourth quarter and full year 2009 results and our outlook for 2010. I am Don James, Chairman and Chief Executive Officer of Vulcan Materials. We certainly appreciate your interest in Vulcan and we hope our remarks and dialog will be helpful to you. A replay of this conference call will be available later today at our website.

With me today is Dan Sansone, our Senior Vice President and Chief Financial Officer and Ron McAbee and Danny Shepherd, our Senior Vice Presidents in our Construction Materials Group.

Before I begin let me remind you that certain matters discussed in this conference call contain forward-looking statements, which are subject to risks and uncertainties. Descriptions of these risks and uncertainties are detailed in the company's SEC reports, including our most recent report on Form 10-K.

I would like to begin my remarks by discussing our fourth quarter and full year results and then give some comments about why we think 2010 could be another year of solid cash generation.

The fourth quarter of 2009 presented a very tough operating environment due to a combination of the weak construction economy and significantly adverse weather in most of our markets.

As a result, sales volumes in the fourth quarter were sharply lower than the prior year. Nevertheless we achieved EBITDA of $99 million and cash earnings of $67 million in the quarter.

Fourth quarter net earnings from continuing operations were a loss of $13 million or $0.10 per diluted share. Aggregate shipments declined 23% compared to the prior year’s fourth quarter, which reduced our EBITDA approximately $69 million from last year.

Extremely wet weather in the quarter contributed to lower shipments in key markets in the Mid-Atlantic States in and Southeast in the Mid-west and in the Southwest.

Ten of the 12 major metropolitan areas served by Vulcan experienced more than twice the number of wet workdays of a year ago. The most notable effects where in Charlotte, Washington DC, Chicago, Atlanta, Birmingham and San Antonio.

Additionally, aggregate shipments were negatively affected by the uncertainty regarding the timing and duration of an extension of the Federal highway program, which expired September 30, 2009.

Construction activity on stimulus funded highway projects varied widely in 2009 across the country and in certain key Vulcan states stimulus pending lagged the rest of the country.

The average unit sales price for aggregates increased 5% in the fourth quarter reflecting price improvement in most of the Vulcan served markets. Markets on the lower end of the range or price increases were California where the average selling price improved 1% and Texas and Florida were pricing declined 1% and 3% respectively.

Price improvement from the prior year’s fourth quarter benefited somewhat from a more favorable product mix reflecting proportionally greater levels of aggregates used for highway construction particularly pavement improvement.

Our managers continue to mitigate some of the cost pressures caused by these significantly lower volumes. They maintained production efficiency and reduced cash fixed cost, an additional 8% below last year’s fourth quarter.

Shipment in asphalt and ready mix concrete declined 12 and 31% respectively from the prior year’s fourth quarter due to the same economic factors affecting aggregates. Fourth quarter segment earnings were lower than the prior year due to lower volumes and to lower material margins in both products.

Selling administrative and general expenses in the fourth quarter declined $6 million from the prior year. This year-over-year decline in overhead cost is due primarily to reductions in employee related expenses, which more than offset a year-over-year increase in project cost of $2.6 million related to the replacement of our legacy IT system.

Additionally, the current year’s fourth quarter included the expenses of $8.5 million for the fair market value of donated real estate. The prior year’s fourth quarter result included $5.1 million for similar transactions. Excluding the affects of donated real estate SAG expenses declined a 11% versus the prior year’s fourth quarter.

The difference between the fair value of the donated real estate and the carrying value which was $7.6 million in the fourth quarter of 2009 and $5.1 million in the fourth quarter of the prior year are recorded as a gain on sale of property plant and equipment.

Employment levels across the company at the end of the fourth quarter are down 11% from the prior year. This reduction in employment across the company is a result of a continued focus on adjusting our production levels and our cost structure to match the weak demand environment as well as to the early effects associated with the rollout of our new shared services IT platform.

Before making some comments on our outlook for 2010, let me highlight some aspects of our full year results, that maybe of interest. In 2009, our efforts to tightly manage cost and to maintain price discipline offset some of the earnings effect from lower sales volumes.

Full year net earnings were $30 million, while our cash earnings were $369 million from continuing operations and an additional $12 million from discontinued operations.

The decrease in aggregate shipment for reduced full year earnings by $334 million. Aggregates pricing increased 3% in 2009 reflecting the attractive fundamentals of our businesses in most of our markets even in this difficult economic environment.

Finally, let me highlight our cash generation during 2009. Free cash flow in 2009 was $343 million, a significant increase from the $82 million realized last year. This increase in cash was due to our sharp focus on effectively managing those aspects of cash flow that we can control our inflows.

Additionally, we reduced total debt in 2009 by $810 million, reflecting cash generation from augmented by proceeds from the June equity offering.

Overall the factors contributing to a challenging outlook for construction activity are principally the continued weakness in private non-residential construction activity and the uncertainties surrounding the timing and the amount of continued funding for the federal multiyear highway program.

Highway funds from the American Recovery and Reinvestment Act were portioned in the first week of March 2009. Since May, stimulus related funding has increased highway construction awards significantly.

For the 12 months ending December 2009, awards for new highway projects in the U.S., were up 7% versus the prior year. Record setting awards from May to August, when contract awards exceeded $6 billion each month, reflected good initial progress by the state transportation agencies and starting shovel ready projects intended to stimulate construction activity and create jobs.

As a result during the second half of 2009, aggregate shipments in some Vulcan-served states such as Illinois and Tennessee were relatively stronger than in other states due in part to more rapid spending of stimulus related funding.

Other key Vulcan-served states such as Florida, Virginia, California and Georgia lagged other states in awarding and starting stimulus related highway construction in 2009, and as a result aggregate shipments in these states have yet to benefit as much from stimulus funding.

The varied spending patterns for stimulus projects in individual states depend on several factors including the number of projects each state have that were shovel ready soon after the funds were appropriated, the types of construction projects that each state has elected to pursue, and the projects are in large urban areas involving metropolitan planning organizations where project planning and execution can be more complicated and time consuming.

In the fourth quarter however contract awards were highway constructions in Vulcan-served stage increased 13% from the prior year compared to a 2% increase in other states.

We are optimistic by the increased award activity and are encouraged that stimulus related highway projects in Vulcan-served states after a slow start are now moving forward and will benefit demand for our products in 2010.

As a result we continue to believe that 2010 will be the biggest year for stimulus related highway construction followed by another solid year in 2011.

Overall our 2010 outlook for aggregate shipment reflects a 10 to 15% increase in aggregates going in the highway and other infrastructure related construction activity due primarily to stimulus related funding and assuming that the FY10 budgeted levels for the regular highway spending are approved by congress within the next few weeks.

While we have assumed that regular highway funding for highways will remain at an annualized level consistent with FY2009 under safety loop, congress will need to act quickly to restore fiscal year 2010 levels and contract authority prior to the start of construction season this spring.

Senate leadership is working to introduce its first jobs bill of this session which in its most recent draft includes restoration of FY10 authorized highway funding at $42 billion as previously budgeted and which provides for an extension of that funding until December 31, 2010.

As part of the package, Senate leadership is working with key Republicans on the finance and the Environmental and Public Works Committees to also return some $20 billion to the Highway Trust Fund in the form of interest previously owed to the fund.

We are cautiously optimistic that this Bill can pass the Senate. This would be a very important step for the nation on the path to long-term highway funding stability will occur with the ultimate passage of a multi-year highway bill.

The Senate has already passed the Jobs Bill in December containing similar provisions as they relate to the Highway Trust Fund.

Residential construction activity should increase year-over-year in 2010 albeit from very low levels. Starting in November single-family housing starts broke a sting of 43 consecutive months of year-over-year declines.

While this is only two months of data, it is encouraging and coupled with improving affordability numbers which we see across all of our markets declining inventory levels and attractive interest rate levels we believe there is room for some optimism in single-family housing construction in 2010 and beyond.

For 2010, we expect aggregate shipments in the residential construction to increase 15 to 20% from 2009 levels. For non-residential buildings we expect construction activity to remain weak in 2010.

Less contract awards for stores and office buildings declined 62% and 63% respectively in 2009, while public buildings declined more modestly down only 16% reflecting some impact from stimulus funding.

In Vulcan-served states the declining contract rewards in 2009 was similar to the U.S. as a whole, as a result the year-over-year percentage decline in Vulcan aggregate shipments from non residential construction including both privately financed and publicly financed sources is expected to be down 15% to 20% in 2010.

As a result, Vulcan’s total aggregate shipments are expected to be flat to up 5% from 2009 levels due mostly to an increase in aggregates used in highway construction and some improvement in housing. For the full year 2010 we expect aggregate pricing to improve 2% to 3%.

Higher aggregate volumes and pricing in 2010 should more than offset a projected 20% increase in cost for diesel fuel. In 2009 our average cost for diesel fuel was $1.94 per gallon.

In 2010 we expect to consume approximately 40 million gallons of diesel fuel. At this level of diesel fuel consumption a $0.10 per gallon change in the average cost of diesel fuel impacts operating earnings by 4 million per year.

In our asphalt business we expect sales volumes to increase approximately 5% from 2009 levels. Pricing for asphalt mix is expected to increase from 2009 levels, but not enough to offset projected higher prices for liquid asphalt and aggregates. As a result we expect lower materials margins in asphalt when compared with 2009.

In concrete, we expect sales volumes to remain flat with the prior year and pricing to decline modestly, reflecting continued weakness in private nonresidential construction.

We expect full year SAG expense in 2010 to be slightly lower than 2009 due to continuing cost reduction efforts as well as lower costs related to the replacement of legacy IT systems.

As discussed previously, we have a major project underway to implement new integrated systems in processes to replace our legacy IT system. Along with the legacy system replacement, we are also redesigning related administrative support functions to reduce cost and improved service.

The project is proceeding as planned. To-date we have successfully installed our new financial systems at the corporate office and in three of our non-operating divisions. Total cost of this project peaked in 2009 as most of the design and development was completed. Implementation will continue into 2010.

We expect 2010 to be the final year of significant spending with net expense reductions occurring there after. We expect SAG cost related to the ERP project to be approximately $3 million less in 2010 than it were in 2009.

Cash interest expense for the full year expected to be approximately $175 million based on the current level of interest rates and a reduced level of capitalized interests on capital projects.

We will continue to tightly manage capital spending and as a result to expect to spend approximately $125 million in 2010 up slightly from the $110 million we spent in 2009 but down sharply from the $353 million in 2008.

This continued operations earnings will benefit from a projected $10 million of cash proceeds in 2010 as part of the 5CP earn-out, this earn-out was included as part of the divestiture of our chemicals business several years ago, and will lend in 2012.

Finally I would like to provide an update regarding recent permitting activity in the Lake Belt in South Florida. Last week the U.S Army Corps of Engineers issued a record of decision in support of mining in the Lake Belt region. Simultaneously the Corps of Engineers began moving ahead with issuing permits. Vulcan should receive its new permit within the next two weeks.

Based on the record of decision, the company expects that its permit will be for a period of 20 years, will cover 940 acres, and will allow mining in excess of 80 million tons of limestone.

In closing, I'd like to reiterate our confidence in future sales and earnings growth for Vulcan. This confidence comes from our successful strategy to continue strengthening our aggregates focused business, which has a compelling advantage of great locations in major U.S markets that are expected to experience above average growth and aggregates demand for many years into the future.

The current construction economy is weak but the economic stimulus plan will help drive earnings growth at Vulcan over the next 2 years to 3 years. Our available production capacity and ongoing efforts to improve cash margins position Vulcan to participate efficiently and effectively in the $50 billion to $60 billion of stimulus related construction, including significant remaining portions of the $27 billion for highway and bridges in Vulcan-served states.

The key determinant of highway construction spending for years to come is of course the multiyear federal highway program, which represents a substantial growth opportunity for Vulcan. We along with many business, industry and labor groups are urging congress to act promptly to sustain the momentum from the $27.5 billion provided for highways and bridges by the economic stimulus plan.

In order to add and save construction jobs in 2010, this broad coalition is currently urging congress for a formal extension of baseline highway funding at FY10 budgeted level of $42 billion, we are also urging congress to do this in time to impact the 2010 construction season. Such legislation will then set the stage later in the year for the development and enactment of the next multi-year surface transportation program.

We are the clear leader in U.S. aggregates industry and well positioned for significant participation in the economic recovery and in public infrastructure programs. We thank you for you interest in Vulcan.

Now our operator will give the required instruction, we will be happy to respond to your question.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line Jack Kasprzak - BB&T Capital Markets.

Jack Kasprzak - BB&T Capital Markets

I wanted to ask with regard to volumes in 2010, I know you guys haven’t given quarterly guidance, but your guidance have flat to up 5% given that it seems like most of that improvement is expected to come from stimulus money that is flowing through to your states.

Would you expect any improvement in volume would be more skewed than usual to Q2 and Q3? I’m trying to get a gauge in particular, of how you might think the first quarter, bad weather, shutdowns, not a lot of private construction, is going to look versus the fourth quarter even?

Donald James

Well Jack, I think that’s absolutely correct. Highway contracts are not loaded up with a large backlog and they are going to try to do their work in the most favorable weather environment that’s available.

And, that’s not - we didn’t see that in the fourth quarter and I don’t expect we’ll see it in the first quarter. So, they will, unlike some prior years, in which they had backlogs and needed to get started early, I don’t expect that to happen this year.

So, I think Q2 and Q3 will be the heaviest part of the construction year for us and our customers. And, as you pointed out, the weather in the fourth quarter was awful and it looks like the weather in the first quarter is even going to be worse on a comparable basis.

So, I would expect to see that Q2 and Q3 will be major quarters for us in 2010.

Jack Kasprzak - BB&T Capital Markets

And with regard to pricing guidance up 2% to 3% for 2010, are there markets where you’re going to get a fresh price increase in calendar 2010 where you’ve implemented a price increase and that’s why you expect overall, you’re going to get a modest improvement?

Donald James

I think modest is the right word, but yes. Another factor, which we pointed out is the mix shift as a larger proposition of our work is going into stimulus funded highway projects, those are users of the hardest to make, most expensive aggregate sizes we produce and just that mix shift has a positive impact on the reported average selling price.

Jack Kasprzak - BB&T Capital Markets

And we forget to -- the fact that the Federal Highway Program has been under a serious of continuing resolutions to this point, have you guys seen disruption in flow of work for, I know we are in winter but contract or customers flow of work that that’s been coming out versus maybe expectations just because the regular highway program as you point out has been a bit disrupted?

Donald James

Well I would say, it’s been more than a bit disrupted and certainly the flow of bid lettings and contract awards has been severely impacted by the exploration of the regular multi-year highway program on September 30, 2009 and the, shall I say distraction of Congress over other matters including in particular healthcare, they have just not got into it.

The result is and this period has been worse than prior periods, the funding extensions are only at a level of about $2 billion a month whereas the regular, the budget is for something like $3.6 billion a month, spread equally across the year.

So they are two big impacts, number one the amount of money being appropriated has been substantially reduced and there are lot of technical reasons for that all of which would be fixed by the bill now pending in the senate and the one that has have been passed in the house.

And secondly the DLTs have just said we are going to build and award stimulus project, but until there is some clarity in Washington about whether the U.S. is going to have a highway program or a regular multiyear program, it makes absolutely no sense for us to have bill lettings and award new contracts and that’s been going on since mid year 2009, that’s why it’s so important that Congress address that issue now before we lose the 2010 construction season.

Jack Kasprzak - BB&T Capital Markets

I’ve been calling for other reasons, but I guess I’m calling for that too. SG&A 2010 versus 2009 looks like 2009 you had donated real estate that inflated the reported number, you expect the IT expenses to be down 10 verus 9. For modeling purposes do you think SG&A dollar should be down 2010 versus 2009?

Donald James

Absolutely.

Operator

Your next question comes from Jerry Revich - Goldman Sachs.

Jerry Revich - Goldman Sachs

Can you please talk about your aggregate cost structure heading into 2010, if you hit the low end of your volume and pricing guidance, can you expand your margins in that type of environment?

Donald James

I think the issue is going to be around diesel fuel cost, I mean we’ve got a number in our model which is pretty high. We don't obviously know what the final cost are going to be but in terms of labor productivity, efficiency, cash, cost at our plants all of those things our folks continue to manage aggressively but the real uncertainty about aggregate production cost in 2010 is all about diesel fuel prices.

Jerry Revich - Goldman Sachs

So, if you get the two points of price but you're looking forward it doesn't have more than offset the diesel fuel cost or are there were some other --?

Donald James

Yes, if we get a little volume growth and our current outlook is -- it will be flat to up five so if we get low volume growth we get the price improvement.

Our cash margins will certainly continue to improve and Jerry this is Don and in addition as we've noted the cash fixed costs have been coming down in almost every quarter but they have not been decline as fast as the volume has declined. I would expect on the uptick likewise that those cash fixed costs will now grow as fast as volume grows going out of this as well.

We think that, as we've said to you and others before, we're in great shape with respect to cash margin if we can just get a little bump in volume we will see the results very shortly. It's all about volume for us at this point.

Jerry Revich - Goldman Sachs

Can you talk about what kind of price increases are you seeing at ready-mixed customers putting through in areas where you're not vertically innovated. Can I absorb that two to three points of price increases that you're targeting for next year or this year?

Donald James

Well, we haven't said that the 2% to 3% price increase will be to ready-mix customers.

Jerry Revich - Goldman Sachs

But I guess there’s a substantial part of the equation where you get --?

Donald James

We have said our own ready-mix prices are likely to be down in 2010 compared to 2009. I think the focus of price -- overall reported priced improvement for 2010 will be in highway construction markets.

Jerry Revich - Goldman Sachs

Can you talk about what kind of price increases you saw in January year-over-year, and now that month is in the books?

Donald James

No, and you know I don't need to expand on why I am not telling you that. We just don’t give monthly pricing.

Operator

Your next question comes from Timna Tanners - UBS.

Timna Tanners - UBS

Just wanted to follow up with some of other questions. If we look at the government spending, it sounds like it's going to be critical for 2010. How important do you think it is for a longer term extension to the safety loop -- a successor have a resolution to the highway trust fund?

Meaning do we need to have a solution to how we’re going to pay for roads to actually get this extension any longer, I'm wondering.

Daniel Sansone

I think the extension can be fully funded. The extension through 2010, that’s part of the jobs bill that passed the house and its part of pending legislation in the senate -- through 2020 the highway trust fund can be fully funded by credit in the interest that was pulled out of the highway trust fund and used in other portions of government.

So that part is okay, I think to actually get a fully funded new six year federal highway bill there will need to be some revenue streams, the existing revenue streams will have to grow as a result of economic recovery and then all likelihood there will need to be some incremental revenue streams dedicated to the highway trust fund.

I think that the practical reality isn’t until the economy begins to recover it is very unlikely that congress or the administration is going to advocate any higher fuel tax or other incremental revenue streams in the highway trust fund.

That’s why we think getting the extension through the end of 2010 is the important first step and then hopefully beginning later this year perhaps in the fourth quarter the conversation about the next six year bill and funding met bill will become key topic.

Timna Tanners - UBS

Then you talked about, it's really interesting that $2 billion a month is being funded in extension where the budget would be for a higher value. The difference between those two numbers, if I understood you right, what happens to those dollars, are they still being saved somewhere or they go away?

Donald James

Well part of the problem is the recession that occurred with the exploration of the safety loop in September 30 that had an impact on contract authority. So its, there are lot of technicalities but the reality is twofold.

One is, without a formal extension the DOTs are sitting and secondly the amount of money currently available for reimbursement to the states is reduced as a result of the - even though it’s in the budget for 2010, because of the technical problems that need to be solved by Congress, that 2010 budgeted number is simply not available to the state DOTs except in a substantially reduced level.

So, it is a legislative problem that normally gets fixed. I think healthcare, as I said earlier, has diverted the attention and has obviously polarized Congress. And so, we’re hopeful that this Senate portion of the jobs bill, which they are breaking into individual pieces, we think the piece that will contain the restoration and the correction of the highway trust fund, hopefully, will be the first significant piece of bi-partisan legislation that gets passed.

But, the snowstorms in Washington have slowed that activity somewhat. But it’s on the agenda and hopefully, stay tuned over the next two to three weeks and see how that moves.

Timna Tanners - UBS

On the Lake Belt discussion that you had, does it sound like we should be thinking about that as a longer-term story in (asphalt) given the situation in Florida? Can you talk a little bit more about that?

Donald James

Well, as I indicated the core has moved forward with new permits. Some have already been issued, others are being issued even as we speak to the producers in the Lake Belt. We obviously can’t control, what if anything will happen with respect to any new challenge to those permits, but the court did an extraordinarily good job researching the issues, addressing the issues raised in the prior litigation, but that doesn’t mean that there won’t be some further judicial proceedings there.

One of the other aspects, one of the things the court did to address some of the concerns raised in the prior litigation was to take larger setbacks between the areas to be mined in the Lake Belt and the Everglades and that has taken some slice of the reserve from the long term Lake Belt mining out of the picture, that law become clearer I think once the remaining permits get issued.

But at this point, mining will be able to resume under the new permits in the Lake Belt, as you know it’s been shut down for most of 2009 and we’ll go from there, demand of course remains very weak, so there is not a huge incentive to crank production up to high levels by any of the producers, we don’t believe.

But we’ll monitor that, but at this point I would expect as the construction season moves forward we will all see a resumption of production in the Lake Belt quarries.

Timna Tanners - UBS

Finally for me on that goodwill impairment question that people always seem to ask every quarter. Is there anything new to think about there, how you are looking at the Florida rock asset?

Don James

Well we have done our impairment testing and we have concluded that we don’t have any impairment issues for 2010 that of course that process goes on every quarter. But the big impairment testing is as of the end the year and we completed that and I believe there is no impairment.

I think one of the things Timna is a recognition that a substantial portion of the Florida Rock aggregates and assets were not in Florida, though while Florida has been extraordinarily weak, Florida was a portion of Florida Rocks assets and operations, but it was certainly very large portion outside of Florida in Georgia, Virginia, Maryland, Alabama. So it’s not all about Florida.

Operator

Your next question comes from Kathryn Thompson - Thompson Research Group.

Kathryn Thompson - Thompson Research Group

I think the big question that everyone has today is how we are able to achieve 5% pricing when some of peers were would not able to achieve that and it's going to see to some extent could you discuss how much your in-market mix geography and other item played into pricing, that’s in bottom beyond the highway mix that you talked about in your prepared comments.

Donald James

Well, I think reported pricing as we've said in previous quarters is a function of not only prices of individual products in individual markets, it’s also a function of geographic mix shift and a product mix shift.

So I think your question is right on point. We were very happy to see our pricing in California be up 1%, which was good news after some periods of declining pricing. California has very good -- in absolute terms pricing for aggregate and that helped.

I think as we indicated the mix going into stimulus projects and shovel ready projects is highly focused on (inaudible) asphalt stone as opposed to lot of base material and also relatively low respect material that would be going into housing and things like that.

So there was a mix shift in 2009 compare to our historical, there will be a mix shift in 2010 compared to '09 into our historical. And I think the mix shift is moving toward highway construction which is our sweet spot and for companies that are most focused on concrete.

It's a tougher environment for pricing as I drive to indicate in our earlier - we have to keep our concrete customers competitive, and so it's market-by-market, product-by-product, customer-by-customer challenge and our guys have done a really good job looking for places where we can still get modest price increases and I think that’s reflected in our numbers in the quarter and for the full year.

Kathryn Thompson - Thompson Research Group

And thinking of your end market breakout, it's obviously shifted a great deal between res, non-res and public since the peak of the market. Looking to 2010, what is your estimation for the breakout of res, non-res and public as percentage of your total revenue?

Donald James

We have not done a precise attempt at calculating that. I would say generally highways and other public infrastructure will be well north of 50% of our projected in 2010. Housing will move up but from a very low base probably in the mid teens. Private non-res will move down probably in the 20% plus or minus range.

Public buildings have certainly much more streak than the private buildings. So that’s a very rough estimate but I would expect that we will see more than our historical average going into publicly funded projects in 2010, which is a positive for us I think.

Kathryn Thompson - Thompson Research Group

Great, and turning to one other follow-up question on the impact of pricing, I know there’s been some talk about managing inventories and base inventories and the overall impact on pricing

Are you running into any issues and managing overall inventories and no you haven’t said that in prepared comments but it seems to be that you guys are doing a good job on that? Could you talk a little bit about your inventory management, particularly managing that base inventory?

Donald James

Well our guys have been aggressively managing inventory levels for at least the last 18 months and setting up their plants to maximize the production of products that are currently in demand and minimizing the production of the products that are not in strong demand.

And the ability to do that from quarry to quarry depends in part on the geologic formation and depends in part on the plant design and construction and it depends in part on the operating expertise of the plant folks, the plant manager and area manger and the people who work in the plants.

So it is clear to us that we need to focus our efforts on managing our production processes to maximize the production of what's currently in demand and minimize the production of what's not.

At this point we don’t see any material impact on our financial results from the shift in demand but that just hadn’t happened automatically that’s been a result of the hell a lot of focus of people who know how to run plants different ways and I can assure you I'm not very helpful in that regard but thank goodness there are lot of people in our organization who are.

Kathryn, the overwriting inventory guidance through out the company has been, if in doubt (inaudible) the facility for cash generation. So, we have at every turn, opted to, wherever possible, not spend the cash to keep the dollars invested and inventory low, even though to put some inventory on the ground would boost short-term GAAP reported earnings.

Donald James

Right, and that’s a real focus. And I want to reiterate what Dan said, and that’s an excellent point. Building excess inventories doesn’t generate cash. It consumes cash. It does help your GAAP earnings, but we’re really focused on cash and we do that historically. But we have really focused on that issue in this downturn.

Kathryn Thompson - Thompson Research Group

And the final question relates to volumes. First, do you see any improvement in volumes in certain markets, certain geographies and how much did weather impact your overall volumes and therefore margins in the previous quarter?

Daniel Sansone

Well, the fourth quarter was terrible from a weather standpoint. I guess it could be worse. But we were really wet for extended periods of time in most of our large key markets as I have indicated.

Weather hadn’t improved quarter-to-date in the first quarter. I think in response to Jack Kasprzak’s question, we certainly would expect -- volumes that didn’t get shipped in the fourth quarter, we don’t expect them to get shipped in the first either.

So, those will likely - we will hopefully see the results of those beginning in Q2 when a lot of this stimulus work that was slow coming out of the box in a lot of our key states, begins to happen.

It is really interesting to look at the level of stimulus spending state-by-state as a percentage of total and look at what happened to our aggregates volumes in those states and two of our strongest markets in the second half of 2009 were Tennessee and Illinois and when you look at the stimulus spending as a percent of the total in those two states, they were among the highest in the country.

There were some other northern states like in New England and the upper Mid-West that also had high spend out numbers. But the warm weather states who were, for various and sundry reasons doing different kinds of work or doing more work in cities rather than rural areas, Florida and California in particular but also as we pointed out Georgia and Virginia.

The vast majority of their spending is in front of them. So that hold the different spend out patterns is certainly showing up in our markets both plus and minus.

Kathryn Thompson - Thompson Research Group

Then, that we will know that strictly with our DOT work and things had sniffed outside in those states into 2010. I guess my final question, parting question, I know that the appellate courts ruled in favor of the Florida judge what does this really mean for Lake Belt especially in light of the core of engineers issuing permit?

Donald James

Take off my lawyer’s hat, which is old and tired now and probably completely irrelevant put on my practical hat, and I think practically the judge's opinion was taken into account and fully addressed by the core of engineer record of decision.

So at this point we think it is the new core permits that's relevant and that the litigation is essentially behind us. So at this point the focus is on the new permits and the issues with the old permits are over.

Operator

Your next question comes from Adam Rodrigo – Wells Fargo

Adam Rodrigo – Wells Fargo

I was wondering if you could share your thoughts a little bit about how you view the asphalt and concrete and cement businesses right now and in particularly and letting your comments that the margins would be lower, could be lower next year and if I look at it -- looks like the asphalt, concrete gross margin was 6% this year.

So it’s not a ton of them for to go much lower. I just wondering if there was -- what the remedy it could be is there point where you just decided to shut down production or really just how you view those businesses?

Donald James

Well, I think asphalt is a different story than concrete in 2010. I think asphalt markets will be improved. The issue with asphalt is what liquid asphalt prices are going to do. It’s very much the same as diesel fuel and that is - that’s affected so much by the global economy and by demand for co-products.

So at this point we’re projecting at least in our outlook we’re projecting much higher or significantly higher liquid asphalt cost in 2010, hopefully that is somehow mitigated during the course of the year but at this point we're looking at a higher numbers.

But demand for asphalt is expected to be up, it's just the relationship between the cost of liquid asphalt and our ability to pass that through in pricing and the timing differential between those two areas basically we have to buy liquid asphalt now almost on spot basis and we price our material on a contract basis.

And so there is often a lag between out ability to pass through increases and when liquid asphalt falls it improved our margins because we have priced at higher numbers and the actual spot price goes down and so that's really the story on asphalt.

Concrete is a - and cement is a function of demand and demand for both of those products are low because private non-risk construction is down. Hopefully, some strength in housing will - in 2010 will help demand for concrete and therefore cement but until we start seeing significant recovery in housing and see a bottoming of private non-risk construction, concrete markets are tough and there's no way around that.

Daniel Sansone

Let me add one other point that the tail end of your question asked whether or not we would be shutting some of those operations down because of low margins. Let me remind you that virtually every asphalt and concrete operation that we have is tied to a Vulcan aggregate plant and we're selling Vulcan aggregate through those operations.

So the decisions to operate or shut down one of those downstream facilities; have to include the impact it has back on our aggregates business. And just to put it in perspective, in 2009 the asphalt and concrete segment numbers had an EBITDA margin of around 14%, but embedded in that is the aggregates that are used to produce that product that we also produced and our aggregate segment had a EBITDA margin of around 38% or 39%.

So there’s a significant pull-through of aggregate's profitability tied to those operations. So the decision to operate or shut down a plant is not solely based on the reported margin for asphalt or concrete.

Adam Rodrigo – Wells Fargo

And then just one quick modeling question, can you provide any guidance on tax rate, 2010?

Donald James

I guess the first guidance I would give you is do not think about it as a percentage because when you get down to the relatively small numbers that we’re reporting right now, and you consider some of the permanent differences that this industry enjoys specifically statutory depletion, thinking about a tax rate in percentage terms is pretty difficult.

The way I would advise you to think about it is more in dollar terms. And let me just try to give you a little color, 2009 -- I'll talk here about the full year number not the fourth quarter, we reported a pre-tax loss of $19 million for the full year, and we reported tax benefit of $38 million.

The reason for that is that our aggregate business is still profitable and still handsomely profitable, and still generates a significant statutory depletion benefit, which is permanent difference, it's essentially a tax a credit that can be applied back against previous tax payments or carried forward against future tax payments. So we still record that, that was a $20 million benefit that we enjoyed in 2009.

So and then, there was - in 2009 there was about another $5 million of tax benefit that’s ongoing if you will referable to accounting for our foreign operations and another 5 or $6 million of a couple of other items that again are generally ongoing.

So what will happen in the future is assuming our aggregate business rebounds, we'll get some incremental margin from that, obviously will generate some incremental tax on that at the normal 38, 39% kind of a rate but we will also get a sizable amount of additional depletion benefit to offset some of that regular tax.

So I think the way to model it is, this is kind of roll forward from where we were in 2009 and almost do a line-by-line kind of an estimate of the big components, and the really big components that are going to drive the tax provision in dollars year-over-year will be depletion benefit and tax at the marginal rate kind of offsetting each other.

When volume comes back a little bit we'll get back into a more steady state where the tax rate in percentage terms is more meaningful. But right now in percentage terms it doesn’t tell you much.

Operator

Your next question comes from Garik Shmois - Longbow Research.

Garik Shmois - Longbow Research

Just quickly, I know you've provided in the past can you offer the average cost for a liquid asphalt during the quarter?

Donald James

You mean in the fourth quarter?

Garik Shmois - Longbow Research

That’s correct.

Donald James

Somewhere in the - little over $400 a ton. Maybe between $400 and $410.

Daniel Sansone

Actually it was just a shade under $400. I’m sorry. You’re right. It was just -- $400 to $410 is the right number.

Garik Shmois - Longbow Research

Okay. So, relatively flat compared to the third quarter if I remember?

Donald James

Right.

Daniel Sansone

Right. And much lower than a year ago.

Garik Shmois - Longbow Research

For modeling purposes, would you anticipate the increase in liquid asphalt to occur also in the second and third quarters as seasonally (Multiple Speakers)?

Donald James

I can't. I’m not that clever to be able to do it. I think for the full year we’re looking at a 20% - 25% increase in liquid asphalt. Hopefully, that won’t occur, but that’s what we’ve got built into our numbers.

Garik Shmois - Longbow Research

Lastly, can you just talk about the impact of diesel on the competitive environment? With your expectations it will be up 20% this year. Would you anticipate that it might price out competitors who have been moving into some of your markets, who had been more willing to travel longer distances because diesel was low in 2009? So you think it could reverse it and make the playing field a little bit --?

Donald James

Well, I think on the margin, it matters. But, it is only on the margin and I think we believe that higher diesel prices, while they increase our cost, also increase our opportunity to get somewhat higher pricing in there, there is a pass through effect and then there is a delivery cost effect.

So I think on the margin that may have an impact, but certainly we haven’t built anything into our outlook for 2010 other than the cost impact, we haven’t built any volume or price impact from higher diesel fuel prices in [them].

Operator

Your next question comes from the line of Ted Grace - Avondale Partners.

Ted Grace - Avondale Partners

Just as a follow-up on the cost side of things. Hoping you can provide some more color on margins, specifically if you look at fourth quarter aggregate decrementals, kind of a market sequential degradation, on a reported basis they went from 40% decrementals to 48%.

If you were to just back out the improvement, sequential improvement in pricing you are probably looking at 55% decrementals just in the aggregate piece of the business. So wondering if there is an explanation that you could share, where or some one time items that were kind of hit the quarter or if there is a notable step up, just kind of walk through the puts and takes and similarly going to that same math on the asphalt and concrete side, where you saw something similar?

Donald James

I would say it is hazardous to try to compare Q3 cost to Q4. I think it’s much better to compare Q4 to Q4 because as we have said we not only everything we sell is consumed outside but everything we produce is produced outside and the fourth quarter is a tough production quarter as well as a tough shipment quarter.

I think when you -- it’s a much better to look at cost over the course of a year than from quarter-to-quarter or one or certainly when you start comparing first quarters and fourth quarters you can get distortions. Go ahead Dan.

Daniel Sansone

Maybe try to give you -- come out at a slightly different way. If you look at what we call our variable margin which is difference between average selling price and our variable cost and again the variable cost in our definition is all cash cost.

Whether you are looking at the fourth quarter or the full year in comparison to the same periods in 2008, what you see is our variable margin is basically flat. If you go a little deeper into the income statement and look at our cash margin, this is for aggregates -- look at our cash margin for aggregates and the difference there is it’s the selling price less our total cash cost.

So you are factoring in now the affect of what we would characterize as cash fixed costs. You see that the -- for the full year we had a 1.5 to 2 percentage point margin shrink and I mentioned earlier the phenomenon is that for the year our unit shipments were down 26% and our cash fixed costs were down about 14%.

So you have that leverage, that adverse leverage effect that’s really volume driven that being -- that’s offsetting the full effect of the average pricing increased and then of course if you go down to the gross profit as we reported just now, the big effect on margin there is going to be just much less absorption of the non-cash depreciation expense.

Ted Grace - Avondale Partners

Just in terms of the M&A landscape, any update on kind of what you're seeing there in terms of packages coming on the market, any recent transactions that - have anything notable on them and what's your expectation would be for kind of the first half of this year?

Donald James

There seems to be a lot of noise about M&A but almost no deals that are getting close. There is one that I believe is closed, I'll wait on the people involve to announce it if they intent to but.

So there's some activity that was not something that we had an interest in it overlapped several of our markets but - and there's a little bit of noise floating around but we don't see a whole lot of transactions that are likely to happen at least in the first half of the year.

We have sold one small non-strategic asset and may have one or two others that we will sell. We bought a couple of quarries in 2009 that we're in markets for us. So there’s some activity but it's not big. Now what happens going forward for the full year, I don't know at this point. But I don't see a whole lot of big deals happening.

Ted Grace - Avondale Partners

Sure, based on what you have seen or even just chatter, any sense for kind of where multiples are these days?

Donald James

I think for aggregates they remain very high, which is appropriate I think depending on the magnitude of the downstream products and the markets they’re in and that sort of thing, you can get a different EBITDA multiple.

But if you look in pure aggregates view, you have an EBITDA multiple for transactions, which is comparable to or better than the trading multiple, public companies that are aggregates focused.

So things are not getting cheaper, which would be silly for anybody to sell something that’s got good long term reserves and a good market at a low price. This too will pass.

Ted Grace - Avondale Partners

Sure, and then just a last thing on M&A, are you seeing new entrants? And I guess I've heard anecdotes of certainly much of private equity backed companies as well as some individuals, some of whom you probably knew well. Wondering how you could kind of shape the competitive landscape on them?

Donald James

Well, I think probably when it does clears, there will be a couple of acquisitions by private equity funded groups, they’re buying existing facilities. So in that sense it doesn't change the competitive landscape. I would expect private equity funded operations to be very disciplined from the standpoint of pricing and cash flow, which I think on balance, will be helpful.

So I don’t see it as a problem, I see it as probably on balance a plus, I don’t think you are seeing private equity funds trying to go out and (inaudible) Greenfield quarries, they are just buying ones that happen to be sale for one reason or another.

Ted Grace - Avondale Partners

I guess I've heard discussion that Bakers are out doing their own thing and is it true they don’t have a non-compete against Vulcan after selling Florida Rock?

Donald James

Well the individual members of the Baker family who do not work for Vulcan, do not have a non-compete, I think that’s correct. We have, we actually sold the Bahamas quarry to a, okay that’s one of the things that’s floating around out there. But I don’t know whether the Bakers had actually bought anything or not at this point, I'm not aware that if they have.

Operator

Your next question comes from Todd Vencil - Davenport & Co.

Todd Vencil - Davenport & Co.

On the price in the shift and mix, in the move to more highway construction, so Don, you understand that the shift was more towards the asphalt stone as opposed to base material both of which would be used in building a road, but one of which is more expensive and the other is pretty much non expensive, right?

Donald James

Well, there is a difference in the price because there is a difference in the production costs. There is certainly a difference in the competitive environment with respect to high spec surface mix, lets say, for over (inaudible) highways compared to base material that go under the highways. So yes, that’s (inaudible).

Todd Vencil - Davenport & Co.

So, as you’re looking forward to 2010 and looking at additional highway work from the stimulus as a tailwind on price with regard to the way the mix goes, that would imply that you’re looking for more overlay type stone and not a big increase in base. Is that a reasonable takeaway there?

Donald James

It is to some extent, although, if you look at the projects being built in some of the states that were slow to get started, like Florida, Florida is doing less overlay and more lane additions. And, lane additions use base, whereas overlays don’t.

So, there are a lot of variations by project type, by state and where they are in their spending. So, it’s not to say that every project that will be built in 2010 is an overlay project.

There will be some other work, some of which will use base. But I think your premise is largely correct that asphalt will be in significantly greater demand relative to other types of material that we produce.

Todd Vencil - Davenport & Co.

So, say a little bit longer term, not focused on 2010, but I mean are we setting up at some point for a real sort of snap back in terms of days coming back as a larger part of the mix, where we get back to kind of a maybe a more normal highway market, if such a thing can be considered to exist anymore.

And when that happens, I mean do you think that has a potential to really be a drag on reported prices?

Donald James

I don’t think so and I’ll refer you back to prior periods in which the economy has come back or the renewal of a multi-year Federal Highway Program which gives the DOTs the opportunity to do bigger projects which use more base as they drill either new lines or new construction.

In those markets we get much stronger price increases than we are projected to get in 2010. So while there is a mix shift the overall growth in demand really helps our overall pricing opportunity.

Daniel Sansone

And it helps our production cost as well because it, a normalized product mix of asphalt material, concrete stone and base material becomes more plant production friendly than the environment we are in right now. So it’s easier to set up the plants and you’ll enjoy better productivity.

Donald James

So if you are concerned that a return to normalized highway construction activity will result in declining pricing for Vulcan I believe that concern is misplay.

Todd Vencil - Davenport & Co.

Okay, and I was sort of going to lead back around the margin question that Dan just answered, which is that, both in terms of productivity that’s going to help, but to what extent do you feel like you have low cost inventory of base loaded in right now.

Is it been kind of a perceptible shift downward in your -- in the cost per ton of the base in your inventory at this point?

Donald James

I don’t think so I mean we’ve been trying to produce less base, but…

Todd Vencil - Davenport & Co.

You guys stop capitalizing this cost at a certain point?

Daniel Sansone

Well, if there is a substantial excessive quantity of one particular size, yeah our procedures well, are such that we will not capitalize those costs, but at the end of the day we as Don mentioned earlier we have not had a dramatic impact on our reported cost to earnings this year as a result of that.

And when you are not cost individual sizes separately, so there is, we cost all stone at the same at the same unit value.

Todd Vencil - Davenport & Co.

In the quarter there was a gain on sale to PPNE, can you tell me what was in there?

Daniel Sansone

Well, we tend to fund our charitable foundation with contributions of appreciated real estate that is a significant tax benefit to do it that way. I think we had about a $8.5 million of fair market value of real estate contributed to our foundation on the fourth quarter compared to about $5.1 million. I think a year ago.

The way that works is that the fair market value of real estate becomes an SAG expense and then the gain between the book value of the donated real estate and the fair market value becomes a gain on sale.

So you've got both those things running through there which really essentially offset each other. So there's really not a net gain from those kinds of transactions --

Donald James

If you eliminate, if you skip out the donations that are recorded in the gain on sale line in the fourth quarter of 2009 there is only about $6 million or $7 million of other gains and most of that is represented by a single property sale in one of our divisions, the rest are just miscellaneous items.

So I think the point is, you shouldn't look at property gains and subtract those some earnings unless you also subtract the SAG expense associated with that contribution, so it's almost a watch.

Todd Vencil - Davenport & Co.

There was also some asset sale for sale on the balance sheet on the balance sheet is that same theme?

Donald James

Well, I mentioned we got - we're looking at non-strategic assets and that's one of them.

Operator

I will like to turn the call over to Mr. Don James for closing remarks.

Donald James

Thank you very much for joining us today. I think the message in the fourth quarter and for full year is, markets are weak, Vulcan's management team is focused on doing what we can to generate cash and manage our business effectively and position ourselves to be able to respond very positively when there is some increase in overall demand as we look forward to 2010 that is most likely to come from public infrastructure projects particularly stimulus projects with some kicker for hopefully improvement in housing construction. Private non-res continues to be weak.

Overall I think we are well positioned to benefit significantly once we start seeing some overall volume growth. Hopefully we will see that when we report earnings at the end of 2010. But that’s -- the real key to earnings recovery and earnings growth for Vulcan is some recovery in volumes in our markets.

We are working hard to both manage our production operations, our sales and marketing strategy and in this climate our government relation's efforts to try to get some stability in federal highway funding.

So thank you very much for your interest in Vulcan and your attendance today in this conference call. Have a good day.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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