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Vulcan Materials (VMC)
Q3 2010 Earnings Call
November 02, 2010 11:00 am ET
Daniel Sansone - Chief Financial Officer and Senior Vice President
Donald James - Chairman of the Board, Chief Executive Officer and Chairman of Executive Committee
Keith Hughes - SunTrust Robinson Humphrey Capital Markets
Jerry Revich - Goldman Sachs Group Inc.
Timna Tanners - UBS Investment Bank
Trey Grooms - Stephens Inc.
Kathryn Thompson - Avondale Partners
Michael Betts - Jefferies & Company, Inc.
J. Keith Johnson - Morgan Keegan & Company, Inc.
Jason Brown - Keybanc Capital Markets
Todd Vencil - Davenport & Company, LLC
Adam Rudiger - Wachovia Capital Markets
Clyde Lewis - Citigroup Inc
John Kasprzak - BB&T Capital Markets
Garik Shmois - Longbow Research LLC
Previous Statements by VMC
» Vulcan Materials Q2 2010 Earnings Call Transcript
» Vulcan Materials Q1 2010 Earnings Call Transcript
» Vulcan Materials Co. Q4 2009 Earnings Call Transcript
Good morning. Thank you for joining this conference call to discuss Vulcan's third quarter results. I'm Don James, Chairman and Chief Executive Officer of Vulcan Materials. Joining me today are Dan Sansone, our Senior Vice President and Chief Financial Officer; as well as Ron McAbee and Danny Shepherd, our Senior Vice Presidents for Construction Materials.
Before we 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.
As you know, last night, after the market closed, we released our third quarter earnings. In the third quarter, our EBITDA was $150 million, and our net earnings were $13 million. Cash earnings were $116 million, up slightly from the prior year's third quarter and approximately $103 million more than our reported net earnings. This continuing contrast between our cash earnings and reported net earnings is primarily attributable to relatively high levels of non-cash DD&A charges contrasted with lower levels of production. The higher levels of DD&A come from two sources: first, almost $101.3 billion in CapEx over the years just prior to the recession from 2006 through 2008, which added reserves, increased production capacity, replaced equipment and improved cost; and second, from the wind-up of the Florida Rock assets through purchase accounting.
One of the benefits of this higher CapEx in prior years is that we will be able to produce substantially higher tonnages of aggregates with relatively little additional CapEx above current levels. And one of the benefits of higher production levels going forward will be to spread this DD&A over more tons, which will leverage our GAAP earnings. Dan Sansone will give you more details on our CapEx spending toward the end of our remarks today.
Before I discuss segment results supporting these third quarter earnings, let me start by highlighting several underlying trends we are following that could benefit our earnings opportunities going forward. Shipping trends and aggregates continue to improve in the third quarter. Trailing 12-month aggregate shipments have been increasing since February, and asphalt and concrete trailing 12-month shipments have been relatively stable since May and February, respectively.
Our continued focus on controlling costs and managing production levels to current demand contributed to lower cost of sales and aggregates excluding energy cost, through sequential improvement in material margins for asphalt, and to a reduction in selling, general and administrative costs. Some aspects of our cost structure are outside our control in the short term, such as energy and the impact of lower demand levels on production costs. However, we believe there's always room for improvement and controllable cost. Overall, we're pleased with our continuing progress in managing our costs, our inventory levels and our cash earnings.
Third quarter segment earnings in aggregates were $125 million compared to $133 million in the prior year. Aggregate shipments declined 2.6% from the prior year's third quarter, accounting for most of the year-over-year decline in segment earnings. All of the decline in shipments can be attributed to a strike in July in Chicago, affecting our customers' employees for most of that month.
Aggregates pricing in the third quarter was in line with the prior year, reflecting mild variations across Vulcan-served markets. Many major market realized price improvement from the prior year's third quarter. Other markets have remained challenging due to competitive pressures arising from reduced demand, higher transportation cost and in some cases, from mix shifts.
Excluding the impact of higher energy cost, unit cost of sales for aggregates declined 2% from the prior year, demonstrating continued focus by our employees in running our plants in the most efficient manner possible and the cost benefit of production levels that are now matching sales volume levels.
The cumulative effect of reducing aggregates inventory levels over the past two years allowed us to match production levels with sales levels in the third quarter, which contributed to the reduction in aggregates cost of sales. The average unit cost for diesel fuel increased 17% in the quarter reducing pretax earnings $4 million. Segment earnings in asphalt were $8 million lower than the prior year, due in part to a 14% increase in unit cost for liquid asphalt and lower selling prices. The year-over-year increase in liquid asphalt cost reduced asphalt earnings $6 million. Selling prices decreased 3% from the prior year, reducing segment earnings approximately $4 million.
Selling prices for asphalt mix generally lagged increasing liquid asphalt costs that were held in check due to competitive pressures. On a sequential basis, unit material margins for asphalt had been improving since the first quarter due to some improvement in pricing and a relatively stable liquid asphalt cost.