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Martin Marietta Materials, Inc. (NYSE:MLM)

Q2 FY08 Earnings Call

August 7, 2008, 2:00 PM ET

Executives

Stephen P. Zelnak, Jr. - Chairman and CEO

Anne H. Lloyd - Sr. VP, CFO and Treasurer

C. Howard Nye - President and COO

Analysts

Arnie Ursaner - CJS Securities

Paul Betz - BB&T Capital Markets

Timna Tanners - UBS

David Macgregor - Longbow Research

Ajay Kejriwal - Goldman Sachs

Mike Betts - JP Morgan

Todd Vencil - Davenport & Co.

Trey Grooms - Stephens Inc

Clyde Lewis - Citigroup

Operator

Good day everyone and welcome to this Martin Marietta Materials Incorporated Second Quarter 2008 Financial Results Conference Call. Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to the Chairman and Chief Executive Officer, Mr. Stephen Zelnak. Please go ahead, sir.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Thanks for joining us today; I have with me Howard Nye, Chief Operating Officer; and Anne Lloyd, our Chief Financial Officer.

The second quarter was down laid by energy short which effected those cost and demand in our aggregates business. The unexpected rapid escalation and the price of diesel fuel, natural gas, liquid asphalt increased these costs by $18 million over the prior year period, which in turn reduced earnings by $0.26 a share.

Escalating construction cost particularly for liquid asphalt which was up 135% in the past year and about 75% this year through the second quarter cut demand significantly.

Infrastructure spending was impacted by cost escalation to reduce its purchasing power resulting in lower volume consumption. State departments of transportation were also affected by lower gas tax revenues and gasoline consumption declined due to higher prices, the focus on higher mileage vehicles and reduced behavior by the American public.

Volumes declined 9% during the quarter with the largest declines being in Indiana, North Carolina, South Carolina and North Georgia all of which were down more than 20%. The areas we expected to experience in those positive demands did so.

Even though Iowa was notably impacted by rain and flooding, volume was up 9%, we also experienced positive volume in Texas, Oklahoma and Arkansas.

In response to the weaker and expected demand we reduced aggregates production by 12%. Which impacted earnings by $24 million or $0.35 per share.

Beyond the impact of the energy and the impact of reduced production volume our operating management did an excellent job of controlling cost, demanding environment. Also our SG&A cost was down $2.3 million or 5% with SG&A as percent of revenue declining from 8.4% in the prior year quarter to 8%.

We continue to aggressively work on ways to manage our business in more cost effective manner.

More positive note we have record sales and earnings from our specialty products units with revenue up 14% to $45 million for the quarter and earnings from operations up 20% to $9.7 million.

Our sales of... declined to the steel industry are at the record volume level which is expected to continue through the year. In our magnesia chemicals business we continue to see growth in demand for our treatment products and flame retards along with specialized products used in the paper industry and for manufacture of LCD television screens.

Also our recent acquisition of the ElastoMag product line from Rolman Host [ph] has also did a very positive start.

During the quarter we completed an asset exchange with Vulcan Materials which added five quarry locations in the Atlanta area and one in Chad and in the Tennessee. The integration of these assets into our system was accomplished quickly and has been seamless.

During the quarter the North Carolina Legislature acted on the recommendations made by the 21st Century transportation committee. The most significant action was to provide sufficient GAAP funding to go forward with four previously approved tow road projects, valued at about $3.2 billion.

As a point of reference peak annual road spending in North Carolina has been about $3 billion. The first of these projects bargained at almost $1 billion is in the lorry area, and is expected to begin late this year with completion in 2011.

Estimated stone consumption is approximately 2 million tons. The two projects approved for the Raleigh area will start will start scheduled at 2009 and 2010.

Fourth project is a bridge in northeast of North Carolina schedule to begin in 2009. The total estimated 6.5 million tons of stones for these projects, Martin Marietta will be able to complete effectively about 85%.

North Carolina's 21st Century Transportation committee expects to present significant new revenue recommendations to the legislature by year end together with some likely additional toll road projects. This would obviously be a major positive step for North Carolina and our business in the state.

Looking ahead pricing has been remarkably resilient in the face nine consecutive quarters of down volume. We were successful in implementing some level of medium price increase in most of our markets. We believe there are 6% to 8% price increase in the year as achievable despite market conditions.

The key issues for the remainder of the year are aggregates volume and Energy cost with 2 billion cost relent. Given the significant impact of energy on second quarter aggregates volume we're lowering our volume forecast to minus 3% to minus 6% for the year.

In our Specialty Products business we affirm our prior expectation of operating earnings of $36 million to $38 million and in this context our range for net earnings per diluted share is $5 to $5.65 for 2008.

At this time I'd be pleased to take any questions that you may have.

Question And Answer

Operator

Thank you. [Operator Instructions] We'll go first to Arnie Ursaner, at CJS Securities

Arnie Ursaner - CJS Securities

good afternoon, Steve.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Hey, Arnie.

Arnie Ursaner - CJS Securities

First question I have relates to the, can you attempt to quantify the impact of flooding that had on you in Iowa?

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Yes I'll give you a wealth estimate and it gets really, Iowa combined with river system, because that water has to go somewhere, and where it went was in the river system in the middle of the country. If you take the two together obviously this is a wealth estimate, the impact is probably in the $7 million to $8 million range which is hard for share basis would be $0.10 to $0.12, we will have overlap into Q3 with carryover damage and disruption, we have a quarry in Cedar Rapids, Iowa which got a lot of publicity. Our quarry is under water, its a small quarry but, it filled up with 1.5 billion gallons of water and we we'll be popping that out probably through September may be in October. So disruption there we have disruption at same platform we are always and we have many other disruption on the river and some of that continues so that's where it is.

Arnie Ursaner - CJS Securities

According the operations of your business it sounds like feels like you are dramatically almost hit the break somewhere in the middle of the quarter your production volume guess was down 12% which is much greater than the volume reductions you are seeing for the industry is it fair to say in fact 10 very aggressively taken actions to reduce productions and are you also taking actions like perhaps pulling down the number of hours you work at some or the other facilities what other steps are you taking better balance your inventories are going in for the slower fund decision.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

It's a good question and certainly highly relevant and very much on alliance as a starting point we're not really interested in tying up working capital sitting on the ground. Just admired and as it became clear that volumes were not going to be what we had expected we did put breaks on and if you look at that difference its 12% reduction in production volume as you noted and that compared to 9% pull back in sales.

If you take year-to-date and actually we have been working this year-to-date just more aggressively in Q2. We've got 11 million tons less productions as compared to that 7.4 million tons lower sales. So we just decided we are not going to get ourselves out of balance we're not going to see that how we can make the stock balance and what it does is it, it does conserve working capital but it also puts you in a better mode to run when you get some pick up. So -- but you're not working off inventory over hand. So we took a previous hit and that was intense. We just thought it was the right and prudent thing to do.

With respect to cut backs, cut with metrics it might be interesting. First of all with respect to number of employees that are employed in our aggregates business, and obviously specialty products is going great. We've added a few folks there. But in our total aggregates business if you compare in the second quarter this year into the second quarter of last year. So you've got the seasonal impact in it. The number of people is down about 6%.

If you adjust for the acquisition that we made from Vulcan and in the asset exchange where we also put quarry in their hands. We picked up about 75 additional people where it gives you some on same that numbers closer to 7.5%. If you look at reduction of ours worked year-to-date that numbers is about 9% in the second quarter, 10%. And in the second quarter we reduced overtime hours that 23%.

And just to give you flavor for what this is all about. First of all our climate didn't since on note of rocket story that hasn't been around longest. This is clearly to toughest time since the early 1980s. And we are having to react accordingly.

The big things you focus on in, you go after... I mean we are at a point now where we are scrubbing very hard at what time the shipments take place in each quarry can we adjust the working time by 15 or 30 minutes or even an hour. You get some more labor cost out without disruption of sales.

If you go around our quarries all of our guys know what CFL light bulbs are now. And we are replacing conventional light bulbs into CFLs and how to use applications. It's not huge money, but the point is we're just nibbling everywhere there is an opportunity. Because in doing that, you get yourself setup. The first time you take some of the volume it's going to be incredibly attractive. So that's where we are.

Arnie Ursaner - CJS Securities

One very quick final question if I may, in your guidance for the up coming year, two questions. One is, in the quarter you had $0.13 from the discontinued operations, is that included in your guidance? And also what fuel costs is embedded in your guidance?

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

The guidance does include the $0.13. And fuel cost assumptions... actually the assumptions are basically flat slightly up. And as you know we are getting a down trend. And the way we get to the upper end of the range is to have that downward trend continue. That would be important.

Arnie Ursaner - CJS Securities

Thank you very much.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Sure.

Operator

We'll go next to Jack Kasprzak BB&T Capital Markets.

Paul Betz - BB&T Capital Markets

Hello, actually this is Paul Betz for Jack. My two questions on guidance was answered. But the interest expense kind of went up this quarter. I know you've done some activity there. Do you have a run rate that obviously for the year or a quarter that we could we use in our modeling assumptions?

Anne H. Lloyd - Senior Vice President, Chief Financial Officer and Treasurer

Yes Paul this is Anne Lloyd. We... interest expense is expected to be about $74 million this year. Obviously it's up in the second quarter because of the advance funding we did $300 million of net we issued in April. That run rate include also the amortization fees provided for that to the offering.

Paul Betz - BB&T Capital Markets

Okay, thank you. So $72 million gain that is in your... from the asset exchange that's in your continuing operations. You said it was split between the west and the Mid-East. Do you know the number for... how much went into each region?

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

First of all 7.2 is not 72. We would love to just say. But we would get it.

Paul Betz - BB&T Capital Markets

I'll get that number for you Paul.

Anne H. Lloyd - Senior Vice President, Chief Financial Officer and Treasurer

Okay. Lastly the... you said the Augusta Georgia quarry is opening sooner than you expected in this year. Does that do anything with your CapEx outlook for 2008?

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

For 2008, it's going to make it a little bit heavier than we would have expected. When we get to 2009, we get the benefits of that.

Paul Betz - BB&T Capital Markets

Okay

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

And earlier expectation for 2009 is that CapEx is going to be down significantly. We have other large projects, but it starts with later end of the year. So I think we're going to see a major CapEx reduction in 2009.

Paul Betz - BB&T Capital Markets

And 2008.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

We'll see a reduction in 2008, estimate for 2008 is $240 million, could be as much $250 million. And when we get to 2009, we will quantify later. But you should expect to see a significant reduction.

Paul Betz - BB&T Capital Markets

Okay. Thank you very much

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

okay.

Operator

We'll move next to Timna Tanners of UBS.

Timna Tanners - UBS

Yes, hi. Really just two questions as well. One was just to make so understand and to think about your pricing on two similar end of your 6% to 8 % pricing we are going have to see probably continued pricing from what you saw in the second quarter and actual little bit of an up-tick. So are you continuing to pass on price increases and are you seeing anything like what CXI talked about in terms of the energy surcharging plan to follow that initiative?

C. Howard Nye - President and Chief Operating Officer

With regards to console of DXI on their prices in here up lastly an implementation we'll do our own thing. We have a much more successful round of visual increases than we had earlier anticipated. And not that they are big but they would much more wide spread. And in fact in virtually all of the year is in coupling, we get certain type of mid-year increase not necessarily on our all sizes, not necessarily at every quarry. But we did get far more than we expected. So that's where the optimism comes to 6% to 8%. And we feel quite comfortable with that based on what we are looking at, that has already been implemented. So it's pretty in place.

Timna Tanners - UBS

Okay, great. And the other question was about buybacks, you did a small amount during the quarter. And just want to get your philosophy on stock buyback.

Anne H. Lloyd - Senior Vice President, Chief Financial Officer and Treasurer

We haven't done any of the buybacks during the quarter--

Timna Tanners - UBS

Sorry I miss read you there. Okay.

Anne H. Lloyd - Senior Vice President, Chief Financial Officer and Treasurer

The other thing we've done this year is we had $24 million of cash that was paid out the first in the year to settle four quarter with seven buyback. So we haven't acquired any additional shares.

Timna Tanners - UBS

Okay. So then the question is how you think to do that then?

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

The way we think about it is first of all we did the very large deal, for with Vulcan. And we took on additional debt to take care of that plus we did pre-funding of a debt maturity that comes up at the end of the year. But we're actually quite pleased we did that pre-funding. We think that's advantageous.

The objective between now and the end of the year is to pay down debt. We have a defined target range and it was done far full yet, of being between two times and two and a half times debt-to-EBITDA. Expectation by the end of the year is it would be somewhere in the middle of that and get debt down on the $100 million or so on quarry.

So the focus would be on debt repayment first and foremost right now. We always try to keep ourselves in balance, not that we don't like share price, we do, we love it. Chance of being of course it would be foolish in our view, not to take care of our balance sheet and also we need to take our debts, keep our balance on that

Timna Tanners - UBS

Okay. So the focus of uses of cash in the near term is the pay down on $100 million to $125 million by year in that.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Yes.

Timna Tanners - UBS

Okay, great. Thank you.

Operator

And next we go to David Macgregor of Longbow Research.

David Macgregor - Longbow Research

Hi Steve, Ann, Howard.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Hi David.

Anne H. Lloyd - Senior Vice President, Chief Financial Officer and Treasurer

Hey Dave.

David Macgregor - Longbow Research

I guess couple questions, first of all on the infrastructure one of your competitors were talking on the recent call about highway trust short fall and the fact there is a build for congress right now they are trying to address that, I guess the question is if bill passes in the next month or two, when we actually see the benefiting your P&L, in terms of these infrastructure projects?

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

It will be 2009 before you will get anything notable that will happen there, based on what has been proposed it's not huge money. But it could be very interesting. The typical flow on that money is it roughly 27% of it flows in the first year., mid 40s in the second year and then it stretches out on that. The state DoT would be the ones to decide which projects they are going to apply to I don't think there is any shortage of projects that have already been engineered and ready to go. So I think they can get out of the gate reasonably quickly but even if they do cranking up projects of any size takes a lot of mobilizing and again to actually put stone on the ground, put asphalt down. So its 2009 I believe we are pretty strongly that give the ramp up in unemployment which I take is going to continue for a while, the fact that we got the national election coming up in November.

That it's likely that the Democrats are going to make infrastructure a priority, they seem to be doing it, and historically they have been very good for our industry. So it would not surprise me if they come forward, feel the walls kicking around right now is fairly modest program, under the characterise is stimulus with infrastructure being a component of stimulus.

Would not surprise me that they come back with something that is broader, they talked about bond guarantee program. I think it's a function of unemployment amount same people are feeling and as unemployment rate picks up towards 6%, pressure is going to grow up.

And given that that I think politics are leaning very heavily democratic, elections wise that their really going to carry the ball on this. So actually I'm fairly optimistic about that part of it.

David Macgregor - Longbow Research

Yes, two follow up questions, number one you said '09, before you'd see impact on the P&L, are we talking in first half '09, second half '09, and then on the stimulus package, what kind of numbers are being discussed with respect to the magnitude of that?

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Okay, with respect to I can't see it how we work that really get going typically until second quarter unless you are part of very warm climate. So, any impact you would see about that with the beginning second quarter. That's the earliest I think you would see it.

David Macgregor - Longbow Research

Okay.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

The infrastructure component, Senator Berg is the one it is carrying the water on this one right now. The infrastructure component of his stimulus package is roughly $7 billion and it is a variety of infrastructure components. But most of it would be aimed at roads and that's about a third of his total stimulus package. Anything that we're talking about with respect to bond guarantees or the programs would be beyond that, if you contrast his program... it's a long time certainly you're with that or Barbara Boxer [ph] in the house. Her program is a $50 billion program. And she's... she's pretty adamant about what she thinks needs to be done. So it will be interesting... take two averaging together, but he will tell you that the Democrats believe that there is additional stimulus needed. And they actually think that stimulating the U.S. economy as opposed to the Chinese economy would be a good thing.

David Macgregor - Longbow Research

Yes, agreed. Last question just with respect to gauging your confidence on pricing beyond 2008. What is the chance that you will see year-over-year pricing falling back to the low single digit levels that we saw in '82 through 2004?

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

It is always possible but we just don't see it right now. My pricing will always be less next year than they are this year. I think they could be but if there all are they would be at likely at or above the peaks that we saw for the last 20 years. And we're just in a completely different in all cannot be viewed that I'll give you something to think about that I think its pretty interesting in measuring where we are and how this industries reacting.

If you look at volume decline and you will annualized volume which the way you need to do it if you go back to the first quarter of 2006 which was the peak of the cycle. As a company we would talk in long in about 206 million ton annualized rate if you come forward to the second quarter just completed we are going to annualize the rate which was about 175 million tons and as a 15% decline in tonnage over that nine quarter period on an annualized basis.

And if you go back to 1991 which was the last deep recession in our industry, volumes were down 10% and we gave a third of our profit and this is public company based but we've stated this before. So volume down 10% we gave up third of our profit, volume is down 50% if you take the range that we just put out and take the middle of the range and compare that with what we earned in 2006 which was 529 your profits split was slightly up on a 15% volume decline.

I think it's pretty incredible we are in frankly you all will like that comparison with some of the other companies in the industry. But we have separated ourselves in that regard but it is an interesting way to look at it in my period what it says that we're positioned incredibly well from a cost structure standpoint and when we get a volume which will go with some better than historic pricing, your incremental are phenomenal.

David Macgregor - Longbow Research

Thanks, Steve.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Sure.

Operator

[Operator Instructions]. We'll go next to Ajay Kejriwal at Goldman Sachs.

Ajay Kejriwal - Goldman Sachs

Hi, just wanted to clarify on the EPS question as previously. So your guidance includes the entire $16.4 million or just the $0.13 of that $0.16?

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

It includes everything it's a total roll the numbers that we were reported at the end of the year.

Ajay Kejriwal - Goldman Sachs

Okay, and maybe some color on what's that 7.2 why would that be part of the operating income as that sustainable or how should we think about.

Anne H. Lloyd - Senior Vice President, Chief Financial Officer and Treasurer

There no properties that were operating properties and had not been classified as discontinued therefore it's just like its selling any other land or equipment that we have during the course of the year.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Which we do regularly and generate fairly significant income of it.

Ajay Kejriwal - Goldman Sachs

Okay all right moving to your volume guidance and if you back out what you did in the first half implies second half volume of what minus one to minus two lets see if my math is correct but does that sound right?

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

We think second half is going to be much better. The Midwest should be very strong volume some other disruption like flood. We think the Midwest is going to be extremely strong we are looking for a very robust agricultural land season out there. We have some very good project work in most parts of the company. We think we'll see positive volume in Indiana and Ohio in the second half.

Now I got to ask a question about working out the whether impact, I just concentrated on Iowa but the reality is that Indiana, Ohio, are getting the impacted pretty heavily too. And we guess that the compares in the second half and they came down very shortly, very early so the competitor, is getting easier. So we think that would be a positive, we think Texas will continue to be pretty strong, Oklahoma should be positive, Arkansas should be positive, the big worry is Southeast Carolina's North Georgia in particular, Atlanta area, if you look at the volumes in the second quarter in the Carolina as we're talking about all 25% which is far beyond anything, we would just thought it some loss of confidence people pulling back and in Atlanta you crossed 35% reduction when we subtract out that quarries the same on same take away the Vulcan quarries purchase so that markets being grew last and in fact this climbing it now probably is reversed sense to meet 1970s.

Ajay Kejriwal - Goldman Sachs

A good color did do you have data on shipments by end markets in the second quarter how did buckets do in terms of rays, non rays and infrastructure?

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

But we haven't calculated that to the year end we obviously keep tracker at money... reality is that risk continues to come down obviously to led lower base I will tell you that for the first time in probably 2.5 years I actually see a glimmer of hope in the residential sector. In looking down into the abyss, I think I could see a bomb, and I haven't been able to say that a long time. It would not surprise me that you begun to see some statistics, in fact you're seeing a few, that inter take that we're getting down towards the bottom, would not surprise me that you begun to see some positive statistics, as we get into in the middle of '09.

I think inventory has probably peaked in terms of lots of inventory which is about 10, would not surprise me that, that number would be closure to eight by the middle of next year. Major home builders have really pulled back sharply in terms of what their doing, and from the standpoint of our business, the interesting thing is that they are sub-divisions, even at lower levels of sales that pull back so sharply, That sometimes next year probably about in the middle of the year they will have to begin to develop property again. Which is where a lot of our stone gets consorted.

So clearly down more in the second quarter the infrastructure was the big pull back and it was... that was surprising but it was really driven by the price of liquid asphalt and the total construction cost. And I think the DOTs around the country get fluid when they saw asphalt anywhere from $650 to $850 a ton. And their view would be I can't buy much of that based on prices. I need to pull back because I have to but also expectation that that price level will come down. And I think they are correct in that regards.

So I would expect as pricing comes down for asphalt, then we will see more activity there. Plus there is lot of activity at the state level, in addition to what we talked about several level, states are very active in trying to increase the revenue. They have to do it. The land is overwhelming; the question is how we raise the funds. It's not going to be through the gas tags it's going to be through other 60s and walk over heads which we'd talked about before and some today.

Commercial work continues to be reasonably strong although we are seeing the pull back on retail. And we are seeing the pull back on office, which we've noted before. But capacity driven projects continue to go very strongly. So it's the least impacted sector right now, although in the leading indicators, certainly those don't get you excited. But I think that switch could flip back on pretty quickly because there are a lot of projects on the sidelines right now. The people are ready to go as soon as their confidence is up. So that's an anecdotal description of where I think we are.

Ajay Kejriwal - Goldman Sachs

Very good color there Steve. Maybe just lastly on transportation, are you seeing state DOTs as a plan for next year. Are they planning for similar amount of dollar funding? Or given what's happening with property taxes foreclosures, are you seeing lower spending main plan for next year?

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

We really don't really know yet. The DOTs hold that pretty close they're obviously assessing their in flows in gas tax, which is the primarily component of the revenue structure. And as you know that is being impacted you're seeing decline in consumption gasoline. And that is pushing them to go to other revenue sources. Not that a particular state is going to come back two years in a row. But what you're getting is sort of rotation right now. Where states are coming out. They are raising funds and other state does the same thing,

Iowa just came out with $140 million of new revenue, in Iowa that's big money. And that will flow into the back half of this year, particularly into '09 Oklahoma recently came out with something they are in the 150s. Earlier in the year you Louisiana and Minnesota. You are getting a lot of positives there.

The big ones of us its similar to what North Carolina does which is what highlighted in my remarks, very successful. And this recent succession and the constrain was there could be no new money. It had to be a reallocation of funds and we were successful in getting that done the legislature fund to be store that project because the needs just overwhelming. So they will have to put in front of them a very large basket that will be a 10 year program. I am going to guess that the numbers could be $8 million to $10 million of new money over 10 years. Resets what have been talked about now. And in addition potential toll road projects that might add another $6 million to $8 million or even more. So we would not talk it small change in North Carolina because in needs are driving it.

Unidentified Analyst

Great thank you.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Sure.

Operator

We'll go next to Mike Betts from JP Morgan

Mike Betts - JP Morgan

Yes, hi Steve. I had the three questions if I could. First one Steve if you could just talk a little bit about the Florida and what's happening to pricing now of these three quarries are open again?

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Okay. We don't compete down the sort of two in Miami. We've got a little bit of business down there but nothing notable. We do compete with those quarries by layers they try to ship that to Orlando and up to Jacksonville. There were visions of another $5 increase, and you can cross that open off. And I don't think that's going to happen. They are trying to do so rebuilding with volumes with the quarries that were shutdown.

Florida continues to have a pretty robust infrastructure program. The hurt has come on the concrete side as you can see with some excess of micro acquisition Small Rock. Interesting thing with the piece that we're involved in with... we look at internals of our South Georgia business because Florida because they are tied very closely together. If you take a piece of South Georgia that seems Florida our volumes were up in the second quarter and we picked up some price. Where the competition is for concrete business I'll tell you that has become very aggressive and we were seeing more aggressiveness down there between the players who, play that game, fortunately we're don't... we're not involved in significant piece of that. So we're not surprised either on the concrete side that, that's going to be a shoot out for a while.

Mike Betts - JP Morgan

First $5, the one that was going up over '07, is that as far as you're aware of is still, and I guess you've got some knock on benefit from that, you haven't seen any sigh if that diminishing?

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Not really, I'm mean its there in times of the starting point, list prices and what volume discounts would be to the bog customers, but there's some middling around the edges where people are seeking volume, because the volumes are all so dramatically, that people get to appoint where they really would like to steal the volume from their competitor

Mike Betts - JP Morgan

Okay. My second question, if I could was just on cost cutting. Hopefully we are reaching a trough in volumes. But if we did how further declines in volumes next year, is the further scope to that taking additional cost out of the business? Or have you done so much now that actually to be starting to damage the business for when things we recovered. I mean, now if you could just talk around that issue and give you some idea also maybe how much what you do is [indiscernible] since reactive on the cost cutting side?

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

We... obviously they are very aggressive in managing our cost a lot of prospect in the information systems we have which allow us to do things that we don't believe other producers can effectively did and react real time. If we were to have further significant volume decline in 2009 I think what you will see is us showing some plants working crews between two plants where we would run one crushing crew between two plates. And then we will have scale to load up people with the plates to keep them operating on it sales basis.

So they're the offerings that we can do it. We've already talked the capital coming down, we did like to capitalized. We've done a nice job of giving ourselves set up with noble equipment this suggestive plant coming on is a huge plus for us in terms of being able to move more product where the market continues to be pretty robust. And also by giving customers some longer term guarantees on supply to blocking on some volume and some agreements there so we don't see that volume decline significant... volume decline coming right now. But we've got a long way to go to the end of the year so we reserve judgment till we get there. But no we haven't done everything we can do, we will continue to re-adjust. The only thing you can't adjust for is the hard fixed costs that go with the plant. The depreciation part of it, you're not going to be able to adjust it.

Unidentified Analyst

And the earlier Steve, you've mentioned the 15% reduction in annualized volumes over two years. How much of employees or your... I mean ideally [ph] cough blankets employees is a good guide. How much of your employees that you dropped over... those of the two years? I mean you gave the 12 month which I think you said was 7.5%. Could we double that so that the two years that you were talking about earlier with a 15% drop in production?

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

It's not 15% but it's in the low teens.

Unidentified Analyst

Okay. Thank you for that. And then the final question Steve, which is on taxes given the importance of it... one your bigger states I mean obviously part of the growth we're seeing this year is because of a bad weather a year ago. But I guess my real question here is, is there any sign of any slow down yet there either on the housing market or the other markets?

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

The answer is yes I don't... other than the Farmville I'm not sure that the there is any place which really immune to some slow down. That common is driven in different way; if you look at housing statistics you're seeing San Antonio, Houston, and even Dallas/Fort Worth back off. They're backing off from very high levels and there still is a very solid housing market there compared to other parts of the country but you are seeing diminishment. And with that you begin to potentially to see some pull back on commercial or retail construction, Texas non-residential particularly strong as part what's driving.

The volume out there its not part of they are just a major component that's driving it. Infrastructure has been a mixed bag in Texas, a total side of the equation is going very well, the Texas DOT is funding challenge, shall we say, and they are pulling back accordingly to emerge expenditure to incoming cash so you are seeing something but certainly relatively strong compared to most of the parts in the contract. Stronger... less stronger in Southeast right now.

Unidentified Analyst

Okay, now this is just about the final question, I should no the answer but apologies if I don't, the states in local funding how much of that is reliant on the gasoline tax as against other sources of funding roughly?

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

I can't give you a precise number because we have never wrapped it up by the states but if you followed we were talking about number it federal revenue its all gas tax, when you get to the states its not unusual that numbers 75% or better gasoline tax and I will tell you what things going to happen and this is the trust of the changes that recently have been may you are seeing the increases term with respect to vehicle transport taxes, sales tax and you are seeing it with respect to registration fees, title fees, in other words fixed fees one of the things we are talking about North Carolina is a vehicle miles travel assessment.

And there is talk about that around the country we've got a construct we looking at its fairly straightforward, we think it easily collectible we are not on this political world implemented out, no but we are going to talk about it a lot we have not surprised me that we come forward with this recommendation over the next our views we are going to see a significant movement to fixed fees and vehicle miles traveled assessment gas tax simply weren't good.

Unidentified Analyst

Okay that's great thanks for those answers, Steve.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Sure.

Operator

We move next to Todd Vencil at Davenport & Company.

Todd Vencil - Davenport & Co.

Thanks, hi guys. Steve I think your guidance on the volume of down three down six that was played at the volumes net of acquisitions and divestitures when there is acquisition how much of the acquisitions you've done so going to in.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

The acquisitions are really moderate. You talked about partial year you were talking about 1% to over so change remember we divested too. I already told you what's up to the land market.

Todd Vencil - Davenport & Co.

All right. Okay thanks a lot and then I don't want to beat this gain I just want to make sure I understand it. Of the 16.4, 7.2 was continuing is that right it was split between those two groups?

Anne H. Lloyd - Senior Vice President, Chief Financial Officer and Treasurer

That's correct.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Yes it was--

Anne H. Lloyd - Senior Vice President, Chief Financial Officer and Treasurer

Land.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Land sale component which is part of our normal business.

Todd Vencil - Davenport & Co.

But I mean the income statement, the 7.2 is above the law and the 9.2 is below right?

Anne H. Lloyd - Senior Vice President, Chief Financial Officer and Treasurer

Correct.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

That's correct.

Todd Vencil - Davenport & Co.

And then turning the... turn of the price increases you said you're getting price virtually everywhere and then you came back and said roughly the same thing, is there any place that you're not getting it that surprisingly to you or you're just not getting anything at all.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

No I'm actually quite surprised that we're successful as we've been, that we're able to get some price relief, pretty much cost more, because when we started out, beginning of the year, we didn't think we would be able to that, in fact you're call come out first quarter, we bumped our flash range to 50 basis points up.

Todd Vencil - Davenport & Co.

Good work and congratulations on that, you talked about a couple of quarters about the fact that you were shipping mix away from some of you're long horn markets and maybe loosing some place just due to mix shift in terms of what the average was coming up to be, did you see that in the quarter.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

No, not merely to a signed agreement, geographic mix was a big piece of first quarter as was the transportation mix, transportation mix is more normalized. And geographic mix still as a negative for us in fact we go through the calculation as we had same geographic mix in the second quarter we had last year, we are not so share more.

Todd Vencil - Davenport & Co.

Okay, and couple housekeeping items, you talked about CapEx expense can you talk about tax rate and full year DD&A going to okay?

Anne H. Lloyd - Senior Vice President, Chief Financial Officer and Treasurer

Yes, Todd full year DD&A right around $165 million the tax rate should be 31 to 31.5.

Todd Vencil - Davenport & Co.

And you told that couple of times the cost and you guys are doing really going to pay out when you state before time we start to taking up volume you kind of easily with that on what you think the housing markets were engaged when do you think the time frame is going to be when you start to see some more volume?

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Well its certainly too early to be definitive, but if we begin to see a break housing market in the second half of next year and obviously that's a lead. My view of the non-res side is that it's going to respond much quicker. To what's going on in housing and in fact my respond definitive based on investor confidence because if you still look at if you go back and look at the non-res construction it continues to be behind the home building. So those two thing could move pretty simultaneously even at the near of the non-res could move in a positive manner quarter before res positively transparent.

But I think the key thing is going to be the infrastructure piece. I really believe we are at the state of the contract that with the politics or calling for significant change much more state of the country. And the democrats are articulating that very well and it's easily resonating with American public. And it will not surprise me for November they are going to make some promises but people don't hold it accountable for it will be positive for our industry. Being the customer... the way to take this industry forward is to have confidence structure. Because even with housing going back I mean lets be realistic I want it back to market rate of $2.4 million stats probably in the next two maybe three cycles.

Am going back to the annualized rate of $2.1 million you might get back to something to that's in the 1.7, 1.8 this sort of the peak rate, 1.5, 1.6 more likely. So if its certainly up more than it is right now. But its' not going back to where it was I don't think for at least two circles out. So it puts more emphasis on infrastructure and more emphasis on average opportunistic capacity driven non-residential projects. The America really has to rebuild its capacity be it transportation or other types of things that we produce.

Todd Vencil - Davenport & Co.

All right thanks for that.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Sure

Operator

We will move next to Trey Grooms of Stephens Inc.

Trey Grooms - Stephens Inc

Good afternoon. Quickly, you mentioned in the press release large industrial commercial jobs are these projects that you've already started, are they project that are in the pipe coming up or can you give us some color on that?

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

With respect to large commercial and industrial jobs we got those kinds of opportunities that are out there across country. A lot of energy driven. And if you were to go I mentioned Iowa was roughly robust farm economy. But Iowa is kind of a energy state and we continue to have a very robust business out there with Wind Farm projects ours number three producer of wind generated electricity and is ramping up sort of. So I think that's going to be a positive.

We talked previously about the expansion LNG terminals and refineries, we talked about steel mill expansion, we talked about foreign automotive expansion which we had recently announced plant that's going into Chattanooga, and you have the [indiscernible] plant in Mississippi, those are nice opportunities you've got all these appear to be big projects we're going to take well built out.

So they're going to give a stimulus to our business because whether we or competitors get that work and typically it was split up further. It serves the capacity in the market and keeps people busy which is always a plus chance to take pressure of people getting extremely price aggressive trying to seek volume for plants that just don't have any. So with this lies your key absolutely key you want.

Other positive note that I'll give you since I have talked toll roads which are four plus in North Carolina the letting took place this week on the new work I mentioned in Valley and there were two projects led. The first of those projects was a small one it has about a half million tons of aggregate on it. We have been told that we were first in aggregate the second project is about a million and half tons its a much larger project. We went out there for months there. But in expectation that we'll flush some portion to it. So that those kinds of opportunities don't come along all that often. Half million ton project is a very big project.

Trey Grooms - Stephens Inc

Great thanks. Thanks for that. And then also with the 24 million incurred to control inventory levels I think that this is kind of an ongoing initiatives can you take a step at what that impact might be in the third quarter or fourth quarter?

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

I think we are much better balanced. As we go forward through the year, I believe that we took our big hit in the second quarter, where we really jammed all the breaks hard. Expectation is that we are going to be fairly well at balances we go to rest of the year. So I'd say we might not have some fixed costs in the joint IPO, and surely. But I don't think it's going to be at the similar magnitude.

Trey Grooms - Stephens Inc

Okay, that's all I've got. Thank you.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Sure.

Operator

Next we go to Clyde Lewis with Citi.

Clyde Lewis - Citigroup

Hi, good afternoon Steve. If I may... I probably should know that the west region Cannon was the lowest price increase. Can you just sort of run through the reasons down that suspected for this an exchange but this time we are going to check on that.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

The mix changes so our preserve it your well material is being shifting within that region you have transportation mix which is improved. But if you look at the pricing will Texas was very strong and particularly the net of the quarter where we shift some very low price material we represent in the first quarter. So the expectation out there has not been on this we are going to get first of all starting point was we are not going to get the level of price increases we've seen and Southeast. And its just for economies we predict you get more competitors varies in to the... as high and the pricing reflects that for see we have some very low cost material and low priced material in and master card [ph] a cliché which we referred to before, which is a $2, $2.5 material. And the market for that is quite good right now. So that's really what's impacting

Clyde Lewis - Citigroup

Okay. Thank you. The other operating income, in two-twos, a very good number, I suspect it probably $ 1000, but can you give us a little bit of... and remind us what's in there and what's you're expectation you got from the folio.

Anne H. Lloyd - Senior Vice President, Chief Financial Officer and Treasurer

Again those are typically land sales, their probably the $7.2 million and there's land sales that we've deal in the bulk and asset exchange. You'll have some used equipment, that gets sold in there, the run rate element run anywhere from $12 to $15 million a year if you recover last three to five, and we are gaining different than that this year.

Clyde Lewis - Citigroup

Okay, so that's 7.2 is in not 7.6, topped up in the gross profit is it.

Anne H. Lloyd - Senior Vice President, Chief Financial Officer and Treasurer

Correct.

Clyde Lewis - Citigroup

Okay, okay and the other two obviously was slightly bigger picture on one was on sort of concrete roads versus sort of asphalt roads given the spike in natural prices or [indiscernible] prices, other DOTs consider turnarounds say well let's build concrete roads instead and taking around that market?

C. Howard Nye - President and Chief Operating Officer

We'd certainly look at it. The problem you have with concrete roads is liability, people where they take trips don't enjoy noise that typically is going with the concrete roads they don't enjoy the Sean joint, say you get into a liability issues which the consumer has a biased because the asphalt roads are much quieter and a smoother ride now the concrete industry is obviously working very hard to convince the DOTs otherwise.

But the DOTs are at the end of day they are political animals that they have to survive in that environment and if they are not pleasing the driving consumer then they have a problem and you can go around the country and it's not hard to find anecdotal situations where the DOTs left concrete in the major roadways and regret it and then soon they are after the fury of consumer complaints.

So economically it make all sense worldwide and it's cheaper initial build right now to build with concrete and certainly lifecycle concrete construction costs is far below that line crossed over to 2007 and it's heavily weighed to concert I think where you might see it where it really has an advantage, if you take parking lots if you are aware about and you are custom to putting down after all parking lot you pretty quickly going to ask the question why am I doing it versus putting an contract which is additionally cheaper and its going last being a long, longer so if the economics in the where and close proximity I think you are going to see a lot of non risk projects move away from parking lots to concert parking lots and that can happen very quickly.

Clyde Lewis - Citigroup

Okay. The last one I have is on margins I mean where are United and comes the Europe full of your 10 margin improvement out of those who have a favorable period I mean are you still hoping to get that by 2010 with this sort of more stable market in 09 and you think that's actually going to be pushed out into transfer the alignment 2012?

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Yes I think it's going to be pushed out. I think we have to be realistic about that risk. Now this thing is deeper and more pronounced in certainly than we expected, I am going to frame for you in a little different way, you talked more about this as we go if you go back to the period 2002 to 2007, we increased margins, 1,134 basis points and you can compare to our primary competitors and I think you will agree we did a pretty good job, if you take the period going from 2007 to 2012 for the next five year period, the expectation is even though we are moving backward right now, that we are going to do that again we are going be 1,000 plus basis points during that period.

From 2005 the different point we've been looking at to 2010, we are not going to get there simply because we should, but 2011 measured on that basis. I think we've got a shot at getting there. And being a statistical jerky, I like to look at these things and sort of break them apart. If you go back and look at 2002 to 2007, we essentially got that done in most of bulk of it in a 3 year period. And most of it at 2 years so it's not going to surprise me that the same thing plays out over the course of the next five years. You don't get a lot when volume turns margins are going to ramp very significantly.

Clyde Lewis - Citigroup

Okay. Thanks so much.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Sure.

Operator

Our next question comes from Jason Brown at KeyBanc Capital Markets.

Unidentified Analyst

Good afternoon. Just wondering how much your liquid asphalt costs have come down so far in this quarter.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Well first of all we are not big asphalt guys we are into the third quarter and not appropriate to speak in the third quarter and the second quarter at the first half of the year, liquid asphalt cost started the year and in most prices as a good average will be about $400 plus and by the end of the second quarter, those numbers were 650-700 with larger increases promise as people came into the third quarter and we interestingly whether not does stick, how long stick.

Unidentified Analyst

Okay. Thank you.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

We haven't seen any, we haven't getting any letters from anyone or any of our customers telling us with liquid asphalt has backed up.

Unidentified Analyst

Okay. And then the second question is just in Iowa and Iowa and the whole Midwest I would assume there has to be a lot of maintenance in rebuilding has to be done at to the flooding and do you expect to recover any of that volume in the second half or even first half of '09 and are you seeing any increased demands on that?

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Yes, I don't think there's going to be hugely impact for rebuilding tonnage you Cedar Rapids was most impacted and Cedar Rapids is not a large place the downtown area was pretty much destroyed and question is to whether or not to even rebuild that there or just relocate I think the economy out there is so strong that it was more of a disruption of what would have been an exceptional volume popper that was the issue and as we go into Q3 and Q4 we think volumes are going to be very strong there regardless what goes on within any reconstruction work I don't think reconstruction is going to be the driver, just going to be the stronger comment in there.

Unidentified Analyst

Okay. Thank you

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Sure.

Operator

And next we go to David Macgregor from Longbow Research.

David Macgregor - Longbow Research

Steve just a couple of quick ones, you had talked about CapEx being down next year, what is the maintenance CapEx number that we should be thinking about for amount merrier than today.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Well maintenance CapEx for us typically around DD&A and given you that number about 165, which is up, its inclusive of the acquisitions that we did predominantly the Vulcan pick up of the Vulcan coast

David Macgregor - Longbow Research

Okay. Can you quantify the mid-year price increase?

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Actually if I wanted to I could take you through our area and tell you exactly what they are, but I'm not going to do that for you.

David Macgregor - Longbow Research

No.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

They were modest single digit overall, they were some spots where we got some double digit, very selectively.

David Macgregor - Longbow Research

Okay.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

But that was unusual

David Macgregor - Longbow Research

Okay. And then--

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

At some places you just nibble that you got a very small single digit increase.

David Macgregor - Longbow Research

Okay, you talked about the Atlanta volumes picking up 35% which I guess is pretty extreme can you talk just a little bit about what happened in the placing in the phase of the 35% volume decline?

C. Howard Nye - President and Chief Operating Officer

Our market is become much more competitive, versus what it was. At the same time I will go back in time and look at this industry and if you had that kind of volume decline in another year everything in the industry was production oriented turn to cost it imported I think you would see significant pricing decline in that market. The fact is you are not seeing it. You're seeing a lost competitive pricing job by job, particular where there is volume.

But frankly you're not seeing what I would call financially irrational behavior in case you sit back and you do the analysis and given the put on out there you're not going to create in more tones and wind up but whacking your price of dollars, $2 a ton. So where in you can be covered and pick up little work from our competitor I'm sure everybody would like to do that but at the same time you don't want to destroy the pricing you've to have. So its fine line because you destroy the pricing structure by buck or $2 and all of a certain the land becomes in place where people are not making much money if they need at all.

David Macgregor - Longbow Research

Okay. Thanks very much

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Sure

Operator

And that does conclude today's question-and-answer session. At this time I'll turn the conference back over to Stephen Zelnak for any closing remarks.

Stephen P. Zelnak, Jr. - Chairman and Chief Executive Officer

Okay thanks for joining us a lot of questions and hopefully we've done a good job of answering them. We try to give you a lot of specifics and some antidotes to help you understand what's going on in the industry. It is a difficulty time we are working our way through it I think very effectively and we opportunity to taste the value of increase overall and that point things will get much enjoyable. If you have any individual questions feel free to call us and we look forward to reporting back to you at the end of next quarter. Thanks a lot.

Operator

And that does conclude today's conference, again thank you for your participation.

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Source: Martin Marietta Materials, Inc. Q2 2008 Earnings Call Transcript
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